Next Market Downturn

The next market downturn (infographic from keepingcurrentmatters.com)

The current US economy just hit a milestone by becoming the longest stretch of economic growth in our Nation’s modern history.  The expansion is now in the 121st month.  The previous expansion record was 120 months, and occurred between March 1991 and March 2001. Most attribute the dot-com bubble as the precipitating event that ended that period of expansion.  Many have been anticipating the end of the current expansion for several years.  And they will eventually be correct when this period of economic growth inevitably ends in a downturn, recession, or correction. To prepare, experts suggest to start saving for the next market downturn.

Earlier this year, I wrote about housing market mini-cycles are different from a full-blown recession.  Then (and now), housing indicators are mostly positive.  Although the next next market downturn is unlikely to be caused by another housing crisis, it doesn’t mean that the housing market won’t be affected by other economic factors. 

Whatever triggers the next recession will undoubtedly become an economic contagion that will spread across many industries, including housing.  The chain of events are generally characterized as: consumer sentiment drops which causes people to spend less money which causes businesses to slow which results in unemployment.  Home owners who lose their jobs may have difficulty in repaying their mortgages, and are at risk of default or losing their homes. 

Lessons for the next market downturn

Economic and financial lessons are learned with each recession.  The dot-com bubble recession in 2001 made many rethink the policy of raising interest rates when markets are signaling trouble.  Many are still studying the Great Recession, but one of the take-aways is that job creation is key in economic growth and prosperity. 

How will the next market downturn affect housing? The housing market typically responds to a recession through home price reductions.  A NAR Economist’s Outlook from October 23, 2018 (How Do Housing Market Conditions Compare in 2004 and 2018?; nar.realtor) suggests that home prices will likely fall but not as sharply as we experienced in 2008.  This is mostly due to home sale inventory and home prices.  The housing market is much different than it was prior to the last recession.  According to the latest NAR press release on existing home sales (nar.realtor), the median existing home sale price during May increased 4.8 percent.  This is the 87th consecutive month of year-over-year gains.  Additionally, home sale inventory remains at historic lows.

Start saving

A recent press release from the JPMorgan Chase Institute indicates that the conventional wisdom about mortgage default may be incorrect (jpmorganchase.com).  The institute’s study was published in report “Trading Equity for Liquidity: Bank Data on the Relationship between Liquidity and Mortgage Default.”  A major conclusion is that having three months of housing costs in reserve can save your home in the event of recession and job loss.  This is counter to the conventional wisdom of the post-recession era policies of home buyers having “skin in the game” by making larger down payments.  Having home equity is also not a guarantee of making mortgage payments.  Home equity is relative to the housing market and home prices.  The study concluded that “liquidity is a more useful predictor of mortgage default than home equity, income level, and payment burden—especially for borrowers with limited liquidity at closing.” 

Even though the Great Recession officially ended ten years ago, the memories are still fresh.  There will be eventually a recession or market correction. And the main concern for most home owners is how to prepare.  Unfortunately, we can’t predict the exact timing and severity of a recession.  However, most experts suggest saving and having several months of reserves in case of job loss.

By Dan Krell
Copyright © 2019

Original located at https://dankrell.com/blog/2019/07/12/next-market-downturn

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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.

 

Downsizing myths debunked

Downsizing
Rethinking downsizing due to generational trends (infographic from nar.realtor).

Downsizing was once thought of as a rite of passage for empty-nesters and retirees.  It was considered the next stage of homeownership after enjoying the big house and puttering in the yard.  But everything you thought you knew about downsizing is probably stereotyped and incorrect. Housing and generational trends has everyone rethinking their downsizing plans.

Results of a recent survey that was conducted on behalf of Del Webb, a developer and builder of active adult communities, revealed that a majority of 50 to 60-years-olds are not planning to downsize (pultegroup.com).  A majority of the survey’s respondents who are planning a future move indicated that they don’t intend to move into a smaller home. 

Many older adults are actually are looking for a larger house! In fact, 71 percent who plan a future move want a single-family home, and 63 percent desire a home with three or more bedrooms.  These results may be due in part to multi-generational and cohabitation housing trends.  Many of the 50-year old’s who took part in the survey indicated they planned to buy a home that can also house their parents.

Jay Mason, vice president of market intelligence for PulteGroup, the nation’s third largest homebuilder and owner of the Del Webb brand, stated in the press release, “Rather than staying put, today’s 50- and 60-year olds are thinking ahead to their next big move.  While millennials seem to make the headlines, there are over 140 million Generation X and baby boomers in the United States, many with the means, confidence and desire to stay active in the housing market.”

Mason described a majority of GenXer and baby-boomer respondents as “looking for a different quality of life when considering their next move.”  Of those planning a move, 87 percent are leaning towards a suburban or rural area. More specifically, 60 percent described their next home as a “quiet, tranquil place where they can slow down and get some peace.”

Downsizing is a housing trend that is building momentum in younger generations as well.  Many home owners who thought of having a large home and yard are rethinking their lifestyles.  By reducing the time and costs of maintaining a large home and yard, they are able enhance their daily lives.

A major consideration is that downsizing doesn’t always reduce housing costs.  It is possible that the newer condo (or house) you’re considering to purchase may actually cost more than the sale price of your current home.  Besides the actual cost of the home, there are also associated costs of homeownership.  For example, the property tax of your new home could be more than what you’re currently paying.  Additionally, it is likely that your new home may have the additional cost of an HOA or condo fees.

Downsizing also doesn’t mean that you have to buy your next home.  A Realtor Magazine news article (More Older Home Owners Choose to Rent; magazine.realtor; January 12, 2016) cites US Census data that indicates half of the home owners aged 55-64 are either staying in their current homes, or deciding to rent instead of purchasing another one.

Are you thinking of downsizing?  Downsizing requires planning, not just about where to live but also considering the disposition of your current home.  To help you decide if downsizing is in your future, consult with your CPA and/or financial planner to help you understand the costs of downsizing.  To understand the current housing market and sale prices in your neighborhood, consult a local Realtor.

Original located at https://dankrell.com/blog/2019/06/24/downsizing-myths-debunked/

By Dan Krell
Copyright © 2019

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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.

After you move in

after you move in
After you move in

Moving into your new home is exciting.  You just went through an intensive process that tested your character.  You feel a sense of relief it’s over.  But the work is not over, it’s just beginning.  What you do after you move into your new home can help maintain its value. It also can save you time, money, and keep your home functioning.

Of course, there are the standard items that needs immediate attention after you move in.  Changing the locks is the number one item on the new homeowner list for obvious reasons.  Deep cleaning the home is a task that is also performed, especially if the previous owner had pets.  Keep all warranty information, including a home warranty policy (if you have one), in a safe place so you can find it if you need it.  Make sure you know where the water shut off valve and the main electrical breaker is located in case of an emergency.  Change of address forms from the USPS need to be completed to ensure you receive your mail.  A visit to the DMV is necessary to change the address on your driver’s license. 

But what else can you do after you move in to make life easier in your new home?  Revisit your home inspection report.  If the home seller made repairs, make sure you keep those invoices (your agent should have asked for those receipts prior to closing).  If there is a problem with any of the repairs, you can call the associated contractor to reinspect the repair.  However, it’s likely that the seller didn’t repair everything in the inspection, or maybe they didn’t repair anything.  Review the report to see which items require your immediate attention, or may require attention within the year.  Make sure you install any missing safety items (such as smoke and carbon dioxide detectors).  Taking care of the urgent items immediately will likely prevent expensive repairs down the road.  Keep the list of items likely needing attention in the future, so you can check them when you conduct regular maintenance.

Next on the list , after you move in, is to create a maintenance schedule.  For most new home owners, maintenance seems to be a dirty word.  After all, you just moved in and the last thing you want to focus on is “upkeep.”  But putting off repairs can make the likelihood of damage to your home and repair expense increase over time.  Research has even verified that deferred maintenance lowers your home’s value.  Your home inspection report also should have information about maintaining systems such as (but not limited to): HVAC, electric, plumbing, roof, and exterior.

If you haven’t yet created a maintenance budget, do it now.  Some of the systems may need replacing sooner than others.  Check your home inspection report for the systems’ age and average life expectancy.  Start saving to replace systems (HVAC, roof, etc.) so it’s not as much of a financial burden when the time comes to replace them.

Life happens and so does the occasional surprise.  It is not uncommon for maintenance and other “surprises” to occur your first year in the home.  Although it may seem correct to blame the home inspector, they are not perfect.  They are limited to what they can see.  “Surprises” often occur in a system or area that was not observable during the time of the inspection.  It is my experience that home inspectors make themselves available within the first year of ownership to answer questions relating to their report.  Some will even reinspect the item in question. 

Original published at https://dankrell.com/blog/2019/04/09/after-you-move-in/

By Dan Krell
Copyright © 2019.

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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.

Climate change and your housing budget

climate change
Climate change and your housing budget (infographic from energystar.gov)

Saving the planet and acting environmentally ethical is good.  But there is a truth that human behavior is unpredictable.  Even in the face of the speculative disastrous effects of climate change, consumer demand for housing in effected areas is resilient.  Rapti Gupta pointed this out when raising the alarm in his RealtyToday article (The Looming Global Warming Catastrophe and its Effect on Real Estate; realtytoday.com; November 11, 2013).

If consumers won’t embrace climate change, government will. Making your home “green” seems to be going to another level these days.  Home owners have responded by voluntarily upgrading and conserving to help according to their belief. And although it’s not the first time, there is a nationwide push for local climate change legislation that is likely to impact your housing budget.

It’s been ten years, but you probably forgot about the American Clean Energy and Security Act of 2009.  The bill, also referred to as the “cap and trade” bill, not only focused on commercial properties but residential properties as well.  The bill would have established National Energy Efficiency Building Codes for commercial and residential buildings.  Additionally, it intended to retrofit all existing buildings to meet new standards.  Enforcement would have been through regular government inspections.

Climate change, CCA’s and your energy bill

Since the bill (and others like it) was not enacted, local communities have picked up the ball to make their communities “greener” through Community Choice Aggregation programs.  Although CCA’s have been implemented in some states since the 1990’s, the idea is gaining steam in others.  Montgomery County Executive Marc Elrich recently testified in support of CCA’s and the legislation (HB0730/SB0660) that is making its way through the Maryland General Assembly.

What is Community Choice Aggregation?  According to the EPA (epa.gov), “Community choice aggregation (CCA), also known as municipal aggregation, are programs that allow local governments to procure power on behalf of their residents, businesses, and municipal accounts from an alternative supplier while still receiving transmission and distribution service from their existing utility provider. CCAs are an attractive option for communities that want more local control over their electricity sources, more green power than is offered by the default utility, and/or lower electricity prices. By aggregating demand, communities gain leverage to negotiate better rates with competitive suppliers and choose greener power sources.

However, Severin Borenstein’s blog post for the Energy Institute at Haas (haas.berkeley.edu) points out the pros and cons of CCA’s (Is “Community Choice” Electric Supply a Solution or a Problem?).  Borenstein points out the local utility still does all the work of supplying and metering customers, and bills customers for their services. 

However, the CCA is contracting to purchase electricity on your behalf (supposedly from renewable sources), promising a better price.  But Borenstein points out that policy makers learned that “electricity is not always like other markets,” pricing and fees can be complicated.  He also pointed out that because of regulatory standards, the CCA buying of energy contracts from renewable sources doesn’t mean that the grid’s “total” green energy increases or that it will decrease greenhouse gases.  He states, “green energy claims deserve close scrutiny.

Borenstein concludes by saying that “Regulated investor-owned utilities are flawed organizations that operate under a distorted set of incentives. But local governments are also flawed organizations subject to their own set of distortions, a fact that is often less appreciated by the local government leaders who are promoting the CCA.  If your community is considering a CCA, you need to think about which organizational structure is most likely to have the sophistication and the incentives to serve you best.

Original published at https://dankrell.com/blog/2019/03/04/climate-change-housing-budget/

By Dan Krell
Copyright © 2019.

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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.

Home sale renovations

home sale renovations
Interior Home Sale Renovations (infographic from nar.realtor)

According to the National Association of Realtors (nar.realtor), the average time a homeowner stays in their home is ten years.  This is higher than the seven-year average prior to the great recession (but is less than the thirteen-year average immediately following the recession).  Needless to say, many homeowners are approaching (or have exceeded) their ten-year stint, and are likely selling their home during the spring and will likely be doing home sale renovations.

Any home sale preparation in today’s housing market should include some home sale renovations.  If you haven’t replaced the home’s systems (such as the roof or HVAC) while you lived in your home, there’s a good chance that they are approaching or have exceeded their average life expectancy.

Additionally, the décor and fixtures in your home are likely outdated.  The home sellers who make the mistake of not updating or renovating before they list inevitably face home inspection issues.  They ultimately find that the home takes longer to sell at a reduced price.

Let’s face it, remodeling can be expensive and overwhelming, especially when it’s for home sale renovations.  According to the NAR’s 2017 Remodeling Impact Report, about $340 billion was spent on remodeling projects in 2015.  Although a majority of homeowners would remodel their home themselves, thirty-five percent would prefer to move instead of remodeling their home.

The Report cited functionality and livability as the top reasons for home sale renovations.  It’s a no-brainer that home buyers prefer homes that are functional, comfortable, and sustainable.  Aesthetics is not enough for a home to be appealing to today’s home buyer, it has to fit their life style.  Additionally, home buyers want efficient systems in their new homes that can help save on utility costs.

Home sale renovations should focus on functionality and livability

What projects will get buyers who will pay top dollar into your home?  It should be no surprise that the number one interior project, listed by the 2017 Remodeling Impact Report, is a complete kitchen renovation.  Other essential interior projects include renovating bathrooms, installing new wood flooring, creating a new master suite, replacing the HVAC system, and finishing a basement or attic.

It also shouldn’t be a surprise that the Report listed replacing the roof as the top exterior project. Other exterior projects in high demand include new windows, new garage door, new siding, and installing a new front door.

If you want to add value to your home, even if it’s not for home sale renovations, check the 2018 Cost vs. Value report (costvsvalue.com).  The report can give you insight to which remodeling projects are the most popular, and estimates how much of the cost you can potentially reclaim when you sell your home.

There’s no doubt that renovating your home can be expensive.  Although the costs of home sale renovations can tempt you to cut corners, don’t.  Cutting corners on renovation projects can actually cost you more.  You may have to repair, or even re-do the project if not finished adequately.  Home buyers are savvy, and can spot low quality materials and poor workmanship.

Also, make sure to get permits when required.  If the home buyer doesn’t ask you, the home inspector will likely recommend that the home buyer check for permits.

Although many homeowners don’t mind a DIY project, many hire home improvement professionals.  When hiring home improvement professionals, check with the Maryland Home Improvement Commission (dllr.state.md.us/license/mhic) to ensure they are licensed contractors.  You should also ask for proof of their insurance, including Workman’s Comp insurance, in case there is an accident on your property while completing the project.

If you hire a contractor who will accept payment when the house sells, read your contract carefully and thoroughly. Do your due diligence.  There may be provisions in your contract that you may not be aware of, such as added costs, charging interest, and setting/lowering the sale price.

Original article is published at https://dankrell.com/blog/2018/11/17/home-sale-renovations

By Dan Krell. Copyright © 2018.

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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.