About Dan Krell

August 27, 2015November 23, 2021

Will stock volatility spill into real estate market

After a few days of steep stock market declines, I, like others, wonder if there will be spill over into the real estate market. Many have forgotten the consequences of the dot-com crash of the late 1990’s, and the brief housing market slowdown that followed in 2000. One thing is certain – there is no consensus from the financial talking heads about the meaning and impact of the equity markets on the economy; some are optimistic, while others caution for rippling effects across other sectors.

MarketWatch’s Steve Goldstein estimated that $1.8 Trillion have been lost in the market over the past week (Households just saw $1.8 trillion in wealth vanish as stocks fall; marketwatch.com, August 24, 2015). And because many rely on their 401k and other equities investments for down payment funds on their home purchase – housing may be impacted. If mortgage rates increase, as anticipated earlier this year, combined with a lack of down payments; home prices could be pressured downward.

In the face of a stock market meltdown, the good news is that the housing market has been gaining momentum, such that existing home sales are as strong as just before the housing decline! According to a National Association of Realtors® (realtor.org) August 20^th press release, existing home sales “are at the highest pace since February 2007.” July existing home sales increased 2%; which is the tenth consecutive month showing year-over-year gains. Additionally, median home prices increased 5.6% compared to the same time the previous year.

Pending home sales, a forward looking indicator of homes under contract, have also been strong. An NAR July 29^th press release indicated that pending home sales increased 8.2% year-over-year during June; which is the tenth consecutive month for such an increase. Lawrence Yun, NAR Chief Economist, surmised that “Strong price appreciation and an improving economy is finally giving some homeowners the incentive and financial capability to sell and trade up or down…”

Locally, the Greater Capital Area Association of Realtors® (gcaar.com) reported that Montgomery County single family home sales increased 13.3% year-over-year during July; while pending home sales increased 13.2% year-over-year. However, July’s median home sale price for Montgomery County single family homes dropped slightly, from $460,000 to $458,000.

An interesting detail is that although home sales continue to increase, the NAR August 20^th release reported that some buyer pools are shrinking; first time home buyers, cash buyers, and individual investor buyers have decreased compared to the same time the previous year. In light of this, some are beginning to question the validity of NAR’s recent existing home sales data reporting. In addition to dwindling home buyer pools, ZeroHedge pointed out a data discrepancy between increased home sales and decreased mortgage applications by (rhetorically) asking the NAR, “where are the buyers coming from… and how long is this sustainable?” (Existing Home Sales Extrapolation Surges To Highest Since Feb 2007; zerohedge.com, August 20, 2015).

ZeroHedge alluded to NAR’s history of predictions of strong home sales and rising home prices through 2006. Of course, the NAR announced in 2011 of about five years worth of home sale data revisions, calling it “re-benchmarking.” According to the NAR, “data-drift” was revealed in existing home sales data compiled from MLS boards; that was due to a number of factors, including: double listings, and inconsistencies.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

August 21, 2015September 1, 2019

Homeowners do better than renters

Many years ago, buying your first home used to be a rite of passage that usually coincided with starting a family. Your first home was not just a place to live; but was considered an investment that was expected to grow and provide a “nest egg” for your later years.

Several generations later, a lot has changed. We view investments differently, and have become amateur number crunchers trying to get the most of our money. But what was once considered a sound long term investment has now been deemed as poor judgment.

Of course to real estate investors, housing is a commodity; they take risks to reap rewards. Short term real estate investors (“flippers”) are often viewed as opportunists, buying homes at a discount and selling at retail value. The flipper’s goal is to have a quick turnaround between the time of acquisition and resale (flip), avoiding as much carrying cost as possible. The risk for the flipper is very high, especially in fickle markets; but the payoff can be very rewarding. It is not unusual for a flipper to lose money on a project because of delays, unexpected costs, and/or poor timing.

Long term real estate investors acquire homes to be used as rental properties, banking on the properties’ appreciation when it comes time to sell. Although the financial reward for this investor is long term, the risk is considered to be leveraged over time as well. However, unexpected costs and loss of rent can make such an investor rethink their plan and cut their losses.

For the rest of us, however; housing may not be such a great investment after all, according to many financial pundits. One such pundit, Morgan Housel (of Motley Fool fame), wrote about his meeting with Robert Shiller (of Case-Shiller fame) to give some telling insight about home values (Why your home is not a good investment; usatoday.com; May 10, 2014). Shiller told Housel that the housing market is “a provider of housing services” and “not a good provider of capital gains.”

According to Shiller, home prices from 1890 to 1990 (adjusted for real inflation) are “virtually unchanged.” Housel further added that home prices between 1890 and 2012, adjusted for real inflation, “went nowhere;” and decreased 10% from 1890 to 1980, when adjusted for real inflation. Shiller even suggested that “real” home prices could decrease over the next 30 years, due to a number of factors including obsolescence and advances in construction techniques.

With all the stats and figures, are those who touted the investment value of long term home ownership – wrong? Not necessarily. The consensus is that home ownership offers stability as well as many other benefits including: a place to live, a place to raise a family, and belonging to a community. These intangibles may be responsible for the research conclusions by Harvard University’s Joint Center for Housing Studies, that indicated there is an association between home ownership and growing wealth; where home owners fared better than renters (Herbert, McCue, and Sanchez-Moyano; Is Homeownership Still an Effective Means of Building Wealth for Low-income and Minority Households? Was it Ever? Joint Center for Housing Studies Harvard University, September 2013).

Is buying a home a bad investment? Housel pointed out that even Robert Shiller owns a home, and (at the time of the interview) indicated he would buy a home if he were in the market.

by Dan Krell
Copyright © 2015

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August 13, 2015November 23, 2021

The shared economy under pressure – localities put the squeeze on Airbnb

Are you interested in cashing in on the “Airbnb” trend? Make sure you are in compliance with local zoning code and other legal requirements.

What started out as a web platform in 2008 to help people advertise their short term rentals during tough economic times, has become what seems to be a glamorous business. Besides becoming a phenomenon of the shared economy, Airbnb has also become vernacular – where the use of “Airbnb” refers to anyone offering a short term rental.

Rooted in the sharing of underutilized resources, the shared economy has become big business. People are creating incomes from sharing their homes, sharing their cars, and even sharing talents and skills one project at a time.

It may have been subtle in its growth, but the shared economy has become substantial. And considering that wage growth has been a letdown since the great recession, and the labor force participation rate is the lowest it has been since 1977 (bls.gov); it’s no accident that the popularity of Airbnb and other components of the shared economy (also known as “peer to peer” economy and is often mentioned in combination with “gig economy” or “online economy”) have become part of our daily lives. As the economy struggled the sharing economy grew; and entrepreneurs have grasped at the opportunity to create the likes of Uber, Fiverr, and Airbnb that established specific internet platforms that bring consumers and sellers together.

And as some blame the shared economy for taking away from traditional businesses, the Airbnb phenomenon has been criticized for adding drag to a struggling housing market (consider that the fourth quarter 2014 home ownership rate is the lowest since 1995) by keeping would be home owners renting. But the reality is that the shared economy has always existed; and expands during times of economic uncertainty (you can look at the growth of boarding homes in the 1930’s during the Great Depression). The growth of shared housing is not necessarily the choice that most would consider a preferred lifestyle, as much as it is a personal response to current economic conditions and opportunities.

And while the popularity of temporary shared housing has become a glamorous trend for some, many are trying to cash in. In addition to renting out empty rooms in their homes, some are even buying homes to be used as short term housing. Today’s boarding home is an alternate option for business-persons and tourists visiting cities where hotel rooms are expensive or in short supply.

Although operating an Airbnb would not necessarily attract protest the likes that Uber has seen, it does have the attention of local governments. Although San Francisco and New York were the first to regulate Airbnb’s, Santa Monica CA has recently implemented some of the toughest regulations on short term rentals. Andrew Bender reported (New Regulations To Wipe Out 80% Of Airbnb Rentals In California’s Santa Monica; forbes.com; June 15, 2015) that the new regulations could wipe out 80% of Santa Monica’s operating Airbnb’s by requiring the owner to: stay in property with renter; obtain a business license; and collect an occupancy tax.

Locally, Montgomery County is also trying to grasp the idea of the Airbnb. Changes to the zoning laws earlier this year prohibit such activity in a home, and yet recently enacted legislation regarding room rental and transient tax provides for taxation of short term rentals in homes.

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August 7, 2015July 7, 2019

Radon is everywhere – not just in your home

A recent bill introduced in the County Council local to me reminded me of a column I wrote almost ten years ago about radon. In line with some other “consumer oriented” bills adding burdens on the home seller, Montgomery County Council Bill 31-15 has home sellers conducting radon tests and providing the results along with estimates to reduce actionable levels before entering into a sales contract.

According to the Montgomery County Department of Environmental Protection (montgomerycountymd.gov/dep): “Radon is an invisible, radioactive gas created during the natural breakdown of uranium in rocks and soils. It is found in nearly all soils. Radon typically moves up through the ground and into homes and buildings through cracks and other holes in the foundation, although there are other radon sources.” Radon is naturally occurring and everywhere; however, it becomes problematic when the gas builds up in enclosed areas. If your Montgomery County home was built after 1995, chances are that you already have a passive radon mitigation system built in, as required by code. However, a passive system may not be enough, and older active systems may need additional venting as radon concentrations may change over time. The only way to know if there is a radon problem in your home is to test for it.

In January 2005, then Surgeon General Richard Carmona issued a warning on radon (surgeongeneral.gov/news/2005), saying: “Indoor radon gas is the second-leading cause of lung cancer in the United States and breathing it over prolonged periods can present a significant health risk to families all over the country. It’s important to know that this threat is completely preventable. Radon can be detected with a simple test and fixed through well-established venting techniques.“

According to the Maryland Department of the Environment’s “Radon Gas” fact sheet (mde.maryland.gov), home owners in all counties and Baltimore City have reported high levels of radon in their home. Some have reported test results that indicated levels of 200 picocuries per liter, which is 50 times the EPA action level. The risk of lung cancer spending a lifetime in a home where the radon level is 10 picocuries/liter is similar to smoking a pack of cigarettes per day.

The U.S. Environmental Protection Agency offers a “Home Buyer’s and Seller’s Guide to Radon” (epa.gov/radon/pubs/hmbyguid.html). Testing is relatively easy. There are two types of tests: Passive testing devices are not powered and are sent to a lab for analysis after exposure (these devices can be purchased at most hardware stores); Active testing devices are powered and continuously measure and record the amount of radon decay in the air (these devices can detect test interference). The EPA recommends taking action when existing radon levels are at 4 picocuries per liter or higher; however, exiting levels between 2 to 4 picocuries per liter may still pose a risk.

Although most warnings we hear about radon refers to our homes, actionable levels of radon can exist in any building – public or private. According to the EPA, a nationwide survey of radon levels in schools revealed that 1 in 5 has at least one schoolroom in use with radon above the action level of 4 picocuries per liter (epa.gov/radon/pubs/schoolrn.html). Former National PTA President Kathryn Whitfill was quoted to say, “EPA’s national survey of schools produced some alarming results about concentrations in our children’s classrooms. Public awareness must be raised about the hazards of radon…All schools must be tested to determine if there is a problem, and schools must inform parents of the results. We cannot ignore this problem.”

By Dan Krell
Copyright © 2015

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August 1, 2015November 23, 2021

Mortgage fraud persists and is local

Mortgage fraud persists and may never go away. Frankly it seems as if the fraudsters are becoming increasingly creative and brazen. The 2014 LexisNexis® 16th Annual Mortgage Fraud Report (lexisnexis.com) seems to agree with the sentiment, saying: “The reduced volume of consumers who are able to qualify for mortgage loans has led to a fiercely competitive and, in some ways, familiar Fraud for Profit marketplace… Ultimately, fraud and misrepresentation, especially in the mortgage application process, is likely to remain a serious and ongoing national problem.”

Looking into why mortgage fraud persists, the LexisNexis® Mortgage Fraud Report indicated that 74% of reported loans in 2013 involved some form of application fraud or misrepresentation. The increase included the misrepresentation of credit information, including credit history and references. Appraisal fraud was reported to be at a five year low; which is most likely due to the implementation of the appraisal Home Valuation Code of Conduct that reformed the relationship between the lender and the appraiser.

Mortgage fraud persists throughout the country. Although the LexisNexis® Mortgage Fraud Report ranked Florida and Nevada number 1 and 2 respectively for mortgage fraud during 2013, don’t think that other regions are immune from scammers and schemers. Mortgage fraud can pop up anywhere. For example, I am local to the Maryland area, which is ranked 9^th in mortgage fraud; which has a Mortgage Fraud Index of 110, that indicates there was more fraud than would have been expected from the number of mortgages originated.

Mortgage fraud persists and is local.

A July 21^st news release from the Maryland District of the U.S. Attorney’s Office (justice.gov/usao-md) reported that a Bethesda MD man pleaded guilty to conspiracy, wire fraud, and aggravated identity theft that stemmed from a mortgage fraud scheme. The scheme defrauded lenders to the tune of $3.8 million by using the names of immigrants and students, as well as false financial information, to buy almost three dozen row houses in Baltimore – all are in default or foreclosure.

The scheme used “straw purchasers” to purchase the homes. The defendant told them that he would prepare mortgage applications, manage the property after purchase, and promised 80% of proceeds of a future sale. Besides paying the straw buyers cash after buying homes, the defendant also paid them for referrals of other potential straw purchasers.

In another case, a former Maryland real estate agent was recently sentenced to 57 months in prison and ordered to pay $2,482,856.05 in restitution for conspiracy to commit wire fraud and aggravated identity theft that stemmed from a mortgage fraud scheme. According to a March 31^st news release from the Maryland District of the U.S. Attorney’s Office, the defendant and his co-conspirator help straw buyers obtain mortgages by “using stolen or false identities, false documents – including W-2 forms, earnings statements, and bank statements – and false credit information…” Straw buyers’ credit worthiness was fraudulently enhanced by creating fictitious lines of credit. The scheme also included inflated appraisals and false contract addenda to direct payments for repairs that were never made.

And it’s not just the usual suspects who are the perpetrators. The MERS scandal that erupted in 2010 not only let us see behind the wizard’s curtain of mortgage lending, but it also brought to light the notion that mortgage fraud can occur at any level. An asset manager, of a commercial mortgage special servicer located in Bethesda MD, pleaded guilty to wire fraud “in connection with a scheme to steal over $5 million from his company,” according to the Maryland District of the U.S. Attorney’s Office. The April 22^nd news release described how he redirected funds intended to be applied to defaulted commercial mortgages.

Original published at https://dankrell.com/blog/2015/08/01/mortgage-fraud-persists-and-is-local/

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