home values Archives - Page 6 of 7 - Real Estate News and Commentary

November 30, 2011November 11, 2012

Will inflation help the housing market: how real estate is affected

by Dan Krell
© 2011
DanKrell.com

Many people believe that as inflation increases, home values decrease. The argument put forth is that as purchasing power decreases, so do the value of your assets. However, some economists say that it is flawed thinking to assume that housing, like other goods, decline in value as inflation increases.

Collin Barr reported that Yale economist Robert Shiller (coauthor of the Case-Shiller Home Price Index) has spent years collecting data that indicates “that house prices over time tend to rise more or less in step with inflation” (fortune.com: Why house prices will keep falling; March 29, 2011). That’s all well and good, except that home prices far exceeded the rate of inflation during the recent “bubble years;” and is reported as still having a 25% gap from baseline. So, unless we see an increasing rate of inflation, some believe that home prices drop another 20%.

Brian Summerfield, Online Editor of REALTOR® Magazine, describes (in an April 5th Realtor.org blog post) a scenario of how inflation can lift the current housing market. By highlighting affordability, he explains the cost of housing is currently cheaper to own a home (compared to renting). Additionally, as inflation creeps up and eats more of the family budget by decreasing buying power, the a person’s housing budget will be pressured by rising rents and buying a home will be increasingly more attractive.

Of course, Mr. Summerfield’s scenario is hinged on several “caveats”: interest rates will have to remain relatively low (he says no higher than 7%); implementation of “accessible” 30 year fixed mortgage programs; housing supply will have to remain low; and no additional economic crises.

In several Realtor.org blog posts, Lawrence Yun, Chief Economist for the National Association of Realtors®, discussed inflation and housing. In an April 18th post he explained that “Unexpected inflation” does erode savings, however actually benefits borrowers. Additionally, in a September 15th post reporting that housing starts are the lowest since World War II, Yun explains that some investors are returning to undervalued real estate as a hedge against inflation. Since new housing is not on track with population growth, some believe there will be a housing shortage that will cause increased demand in coming years.

The reality is that although there is a relationship between home prices and inflation, it does not signify causality. In other words, although one may have an effect on the other, housing and inflation are independent. Even in Brian Summerfield’s scenario, he is cautious to provide conditions to bring his vision to reality. And no one has talked about the affects of stagflation.

When talking about a recovery, the typical homeowner should remain cautious- especially in espousing a view that a home is an investment vehicle. Even though our consumer oriented society has encouraged people to pay for their lifestyles with their home’s equity, it’s now widely decried as irresponsible.

In light of the current economic conditions, many potential home buyers are becoming more pragmatic as well. Even though the basic benefits of homeownership include affordability, community, etc, many potential home buyers view owning a home as anchor that will keep them tied to a specific area. And in a time when jobs are scarce, many people want the freedom of mobility in case they have a career opportunity elsewhere.

Will inflation help the real estate market? We will only know in hindsight.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 28, 2011. Using this article without permission is a violation of copyright laws. Copyright © 2011 Dan Krell.

August 11, 2011July 28, 2019

Financial Crisis Déjà-vu

Although it may feel as if you’re experiencing one, no – you’re not having a déjà-vu. Wall Street and other world markets are once again in crisis mode. However, unlike the crisis of 2008 that was caused by a credit crunch; this week’s crisis is characterized as a debt crisis.

Sure, crises shock the public and economic systems. And much like other crises, we are stunned, worried and confused. However, this crisis is a bit different. Although the imminent effects are yet to be seen, this crisis has been openly brewing for months; and the public has been primed leading up to the debt debate and subsequent debt deal that seemed to satisfy no one – especially Standard & Poor’s. As you already know, S&P downgraded the credit of the United States of America on August 5th (You can read the downgrade report along with the rationale on standardandpoors.com).

As a home owner, you might think that home values are once again in peril. However, a sharp decline in home prices that was characteristic of the housing downturn from 2007 to 2009 is unlikely. In retrospect, the housing bubble lost its turgidity and home values started to erode before the credit crunch of 2008 (one could argue that the credit crunch was caused by the foreclosure crisis). Unlike today’s housing market, the market downturn in 2007 and home prices were mostly affected by the tsunami of distressed properties that swelled the active inventory for over three years. As inventory decreased, home prices seemed to rebound indicating the beginnings of a very modest housing recovery.

Although nationwide home prices may continue to roller coaster until economic stability is achieved; a hyper-local analysis may indicate that neighborhood home values will vary.

As financial markets “correct” themselves, consumer sentiment of home ownership may not be initially or directly affected by the current crisis. It is more likely that most home buyers may initially continue their home search unabated. Home sellers, on the other hand, are more apt to pull their homes from the market if indications are of a slowdown.

Of course there will be consequences. Intuitively, one might have expected mortgage interest rates to increase on the heels of a U.S. credit downgrade. However, at least initially, interest rates decreased. The rationale is that although the U.S. credit was downgraded, investors looking for a “safe haven” for their money view world markets in turmoil; there is fear of a worldwide recession as Europe is dealing with an ongoing debt crisis, while China is coping with inflation and their version of a real estate bubble. Notwithstanding, the long term effects on mortgage interest rates remain to be seen.

Additionally, the short term evaporation of savings and capital in the financial markets can affect the ability of home buyers’ down payments; savings are the most common source of downpayment as indicated by the National Association of Realtors® Profile of Home Buyers and Sellers 2010 (realtor.org). The end result may be a bifurcated housing market, evident by the financial disparity of home buyers. Home buyers who are financially better off will have cash for their downpayment as well as be able to afford the potential higher interest rate mortgage.

As we move forward, uncertainty is felt about the immediate effects of a combined global crisis and/or possible recession. However, like all crises – this too shall pass in time.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

February 16, 2010October 5, 2019

Hyper-Local Real Estate: understanding your home’s value

The good news is that homes are selling. However, many wonder how sales data will be expressed within their neighborhoods. Unfortunately many are finding out that, much like weight-loss infomercials, individual results may vary. As the economy shifts, homeowners are looking to their own neighborhoods for viable and meaningful data; an awareness of hyper-local real estate has emerged.

The National Association of Realtors (Realtor.org) reported on February 11th that home sales increased from the third quarter in most states; the caveat is that thirty-two percent of the sales were for distressed properties (i.e., foreclosures and short sales). Preliminary figures for 2009 indicate that about a third of the metropolitan areas experienced an increase in median sale prices from the fourth quarter of 2008.

Regional data for Maryland and Washington, DC indicate a “warming” trend. Quarterly data indicate that home sales progressively increased through the second, third and fourth quarters of 2009. The NAR calculated an annual increase of home sales of 47.9% for Maryland, and 56.3% for the District. Area home prices have seemed to appreciate as well; the NAR calculated an annual increase of 3.8% in median home prices for the Washington, DC metropolitan area (including suburban Maryland).

Locally, data reported by the Greater Capital Area Association of Realtors (GCAAR.com) indicated increases of sales (settlements) and ratified contracts of single family homes in Montgomery County during December 2009. Compared to the same time period in 2008, the number of sales increased 12.5%; while the number of ratified contracts increased 15.4%. Additionally, the year-to-date data indicate increases for sales (up 20.7% from 2008) and for ratified contracts (up 26.4% from 2008).

Differences in regional markets are due to a wide range of factors impacting each area. For example, differences between the real estate markets in the Washington, DC metropolitan area and the greater Los Angeles area can be explained by differences in economic influences (which include but are not limited to employment, commercial, and industrial influences).

Although, the adage that real estate is regional still holds water; however, some have cast a skeptical eye towards the expression of the data to their neighborhoods. It seems that neighborhood data within a region can vary significantly. Comparing specific zip codes within a region can demonstrate that regional gains or losses may not be the trend for all neighborhoods. Take for example the comparison of several Silver Spring zip codes for December 2009 (as compiled and reported by the Metropolitan Regional Information Systems, Inc.):

The number of units sold during December 2009 increased compared the same time in 2008 for the zip codes: 20910, 20902, and 20903; the number of units sold decreased during the same time period for the zip codes: 20901 and 20906. The average sold price decreased in December 2009 compared to the same time in 2008 in the zip codes 20901, 20902, 20903, and 20910; while the average sold price increased in the zip code 20906.

Specific subdivision data could further demonstrate such variances; some of the data possibly revealing extreme deviations (positive or negative) to zip code and regional data. Hyper-local real estate is not only useful to home owners, but increasingly used by home buyers as well. Hyper-local real estate is not a fad, but essential for understanding your home’s value in a meaningful way.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 15, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

November 12, 2009July 25, 2019

It’s all about the perception of value (or how to possibly solve the perception of devaluation)

A recent Move.com survey reported that only 5.4% of consumers surveyed indicated they intend to purchase a home in the next 12 months. Additionally, the survey suggested that not enough is being done to stabilize the real estate market (nar.realtor).

The survey underlines a key issue that has bubbled throughout the foreclosure crisis that has kept many home buyers on the sidelines- the home buyer sentiment “that home values will continue to fall as the number of distressed properties continues to increase” has diminished the value attributed to home ownership.

Fannie Mae’s new “Deed for Lease” program is a step in the right direction as a way to forestall distressed properties from entering the market (which may be one cause of lowering home values). Certainly, any further and immediate action is welcome to reduce future distressed property inventory. Maybe it’s time to re-examine the property disposition process that attempts to sell distressed properties piecemeal, only to languish on the market (sometimes for months).

Rather than attempting to sell foreclosures piecemeal through the slow and methodical process that currently exists, why not consider the bulk foreclosure sale process for quick dispositions to allow those with resources transform distressed properties into neighborhood showcases? Rhonda Rundle wrote about the pros and cons of bulk REOs in her Wall Street Journal piece “Online Marketplaces Vie to Offer Bulk Sales of Foreclosed Homes” posted November 26, 2008 (http://online.wsj.com/article/SB122765299132257847.html). Rather than being a “market of last resort,” as Ms. Rundle reported, lenders and servicers should consider the potential of bulk REOs as a primary market for rapid property disposition- and possibly assist in home value stabilization.

November 10, 2009October 5, 2019

A two pronged stopgap for real estate

Last week was indeed historic for events in Washington, DC. However, two important developments that directly affect real estate should be highlighted. You may have already heard that the home buyer tax credit was extended and expanded. However, you may not have heard that Fannie Mae announced another program to assist home owners facing foreclosure.

On Friday November 6th, the President signed HR 3548 into law which extends the home buyer tax credit through next year; home buyers must have a ratified contract for a principle residence (up to a purchase price of $800,000) by April 30th 2010 and close by June 30th 2010. A tax credit up to $8,000 will continue for first time home buyers who purchase their home before the sunset date; other home buyers who purchase their home before the deadline may be eligible to receive a tax credit up to $6,500. Home buyer income limits have also been increased to $125,000 for individuals and $225,000 for those filing joint returns (prorated amounts may be available for those who earn more than the stated limits). For additional qualifying information, please refer to the guidelines posted by the IRS (www.irs.gov/newsroom/article/0,,id=206293,00.html).

Additional good news came last week from the mortgage giant Fannie Mae, which issued a press release announcing the “Deed for lease” program. The “Deed for Lease” program is designed to assist struggling home owners to stay in their homes by allowing them to pay “market” rent. The program requires home owners facing foreclosure to give the home to their lender via a “deed in lieu of foreclosure” (also known as a friendly foreclosure).

The rental period for the “Deed for lease” program may be up to twelve months. The program may also be available for investment properties that are currently occupied by tenants. A rental application fee of $75 per unit is required. If the home is occupied by tenants who want to stay in the home, those tenants must cooperate with the property manager through the process. Any disruption of the process may result in disqualification from the program. Once initiated, the home owner may not be eligible for the ”Cash for Keys” program (a relocation assistance program for those who are forced to leave their homes). Eligibility requirements and further assistance can be obtained from your Fannie Mae servicer (www.efanniemae.com/sf/servicing/d4l/).

This two prong approach may stem further eroding residential real estate values, which may be due to foreclosures, by increasing demand while reducing inventory. Providing incentives to all home buyers will add additional home buying activity, while allowing home owners facing foreclosure stay in their homes may decrease the negative events associated with foreclosure, such as: lowering the number of displaced home owners who are forced to move, reducing the number of vacant homes; and decreasing the inventory of distressed properties that have the potential to lower neighborhood values.

Alone, programs such as these have drawn criticism pointing out statistics indicating that the money is wasted. However, increasing demand through incentives, while decreasing distressed property inventory may be the combination needed to hold off further eroding home values while strengthening the overall economy. Time will tell if the one-two punch is successful and if there is a need for further expansion of one or both of sides of the equation.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 9, 2009. Copyright © 2009 Dan Krell