Real Estate News and Commentary

November 17, 2010October 5, 2019

National Flood Insurance Program; extension and reform

On September 30th, the National Flood Insurance Program was extended for one year, as President Obama signed S.3814; the “National Flood Insurance Program Re-extension Act of 2010”. The one year extension is the longest over the last two years, when the program has been extended for multiple brief periods. Delays in program funding have mostly been due to debates over the program’s financial status

After hurricane Betsy ravaged the gulf coast in 1965, Congress realized that there was a need for affordable, widely available flood insurance. Since 1968, the National Flood Insurance Program (NFIP) has been offering insurance coverage for home owners, renters and businesses. The NFIP offers coverage for floods that are associated with hurricanes, tropical storms and heavy rains, which is often not included in a standard home owner’s insurance policy.

Although not every home owner chooses to purchase flood insurance, mortgage lenders will require home owners to be covered if their home is located in a flood plain. Insurance experts recommend all home owners to be prepared by assessing risk and consider purchasing flood insurance; affordable coverage can help reduce the heartache and financial loss in the event of a flood.

Unfortunately, many area home owners wouldn’t think twice about flood insurance because flooding is not often seen as a threat. However, some home owners will often seek to purchase coverage when it is too late – when a weather emergency is imminent. For many Rockville residents, memories are still fresh of evacuations due the danger of Lake Needwood’s Dam breaking.

Without the NFIP, many home owners who live in flood plains would be exposed to additional risk while home purchases in those areas would be significantly curtailed. The debate over the beleaguered program’s financial viability is at the heart of the reform debate. The NFIP has been financially stressed since the hurricane season of 2005. The last reform of the NFIP was undertaken in 2006 at the heels of Hurricane Katrina and Rita’s devastation of the Gulf Coast, when NFIP combined claims from Katrina and Rita exceeded the total NFIP claims prior to those hurricanes.

Industry groups such as the National Association of Realtors (NAR) and the Property Casualty Insurers Association of America (PCIAA) have been calling for reforms to the NFIP. While both the NAR and the PCIAA are calling for increased coverage (to increase home owner involvement and contribution to the program), the PCIAA is also calling for modern flood maps, subsidy phase outs, sensible rates, among other program modifications.

FEMA, the federal agency that administers the NFIP, has been undergoing a three phase plan to reform the program. To involve concerned groups such as NAR and PCIAA, FEMA announced public meetings to be held on December 2nd in Washington, DC and December 9th in Denver, CO. The meetings will provide an opportunity for interested parties to hear reform policy and updates, as well as ask questions and offer feedback.

Since its inception, the NFIP has not only provided home owners and businesses with an alternative to disaster relief; it has also engaged communities across the country (including many local communities, towns, and cities) in flood plain management and flood awareness and preparation. You can visit smartflood.gov for more information about your flood risk and preparation recommendations.

Comments are welcome. 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 15, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

November 10, 2010October 5, 2019

The next real estate boom is already here

by Dan Krell © 2010

A couple of years ago, I wrote an article about a future real estate boom that would occur as suburbanites would seek out urban homes. As I discussed in my May 2008 article, peak gasoline costs and increased traffic compelled many to seek housing closer to their employment; as well as being close to metro and mass transit. A recent Brooking Institution report appears to agree with my premise, and expands on the idea of urbanite living with a focus on sustainable and walkable neighborhoods.

The November 2010 article titled “The Next Real Estate Boom” (Leinberger & Doherty; The Brookings Institution) discusses how baby boomers and their children have been increasingly seeking out housing that is close in vicinity to commercial spaces, mass transit, and easily traversable by foot (walkable). The article discusses how the development of high density neighborhoods will once again spur on real estate growth, and ultimately forge a new economy in the United States.

Although, Leinberger & Doherty proclaim that the great recession was the climax for the change from suburban to urban lifestyles; the trend has been increasing for the last two decades, but actually had roots much earlier with planned communities such as Columbia and Greenbelt (MD). And although his first planned walkable community of Cross Keys (in Baltimore) came to fruition in the 1960’s, there is no mention of James Rouse in the Leinberger & Doherty report. It must also be pointed out that recent planned local communities such as King Farm and the Kentlands were built in the spirit of walkable and sustainable communities.

The trend, as Leinberger & Doherty discuss, is toward shifting from sprawl to revitalization. However, urban renewal has gone through many cycles and forms of re-development in many cities; from the revitalization of New York City in the 1950’s, by Robert Moses who seemed to transform the city single handedly, to the revitalization of Baltimore’s Inner Harbor in the 1970’s;

Notably, the May 20th signing of the Sustainable Communities Tax Credit by Governor O’Malley highlights the focus on revitalization. The tax credit expands the current tax incentive beyond historic properties so development is encouraged to renew and revitalize existing local communities.

A prime example of what Leinberger & Doherty describe is the redevelopment of the North Bethesda corridor along Rockville Pike (MD 355). The White Flint Partnership has been advocating and promoting the revitalization of this community to become one of Montgomery County’s newest walkable and sustainable neighborhoods. The project is transforming the area into high density living with adjacent commercial development that is described by the developers as sustainable, accessible, safe, connected, and containing an abundance of green spaces.

Additionally, market demands have and will transform existing neighborhoods to become the walkable and sustainable communities that are becoming vogue. And it may be that suburban renewal will become the trend in the near future, as isolated sprawling communities will eventually transform into smaller versions of Leinberger & Doherty’s vision.

Maybe the point is not to transform all communities into the high density, walkable communities that exist in mid-town Manhattan, but aim higher in community planning. Their description of a high density urban utopia appears healthy for residents, due to increased physical activity (i.e., walking); and healthy for the environment, due to green and sustainable buildings as well as reducing car emissions.

Comments are welcome. 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 8, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

November 3, 2010October 5, 2019

Home sellers and sale prices; what is the data saying?

by Dan Krell © 2010

As the housing market goes into a third year of turmoil, you have to wonder how area home sellers are coping with a prolonged challenging housing market. One indicator to consider is the home seller’s price expectation versus what home buyers are willing to pay; which is the list price as compared to the actual sale price of a home.

Before we check out the percentage of list price received at settlement, let’s review how home sellers may have become used to consistent and significant home price appreciation. One indicator to consider is the House Price Index (HPI), which is used by the Federal Housing Finance Agency (FHFA) to indicate changes to residential home prices. The HPI is the percentage home value change relative to the prior year; the HPI indicated in this column is for the local Metropolitan Statistical Area (MSA) of Bethesda – Rockville- Frederick.

During the 1990’s home price appreciation was sluggish at best and did not have significant quarterly appreciation until the late 1990’s. The HPI indicated that area home prices depreciated in Q4 1990 and Q1 1991. However through Q3 1992 to Q3 1997, home prices were mixed; there were eight quarters of depreciation and ten quarters of appreciation of less than 1%. The last two years of the decade showed increasing appreciation when the HPI ranged from 2.25 to 3.63; then a significant appreciation for Q3 and Q4 of 1999 when the HPI exceeded 5.

But oh the 2000’s! If you compare the sluggish housing appreciation in the 1990’s to the seemingly ever increasing market in the 2000’s, it appears to be a stark contrast. The 2000’s saw quarterly appreciation through the second quarter of 2007. During the beginning of the 2000’s, the HPI increased the first eight quarters from 6.76 to 13.82. Then from Q4 2003 through Q2 2006, the HPI did not fall below 12 and had four quarters when the HPI was above 20 (yes, there was annual appreciation over 20%)!

Historically, area housing prices have not been affected by economic turmoil as much as it has recently. Even during recessionary periods in the 1970’s and the 1980’s, the HPI was negative for no more than four consecutive quarters (for example: Q4 1982 to Q3 1983). Unfortunately, recent housing prices have had a negative HPI for thirteen consecutive quarters (since the second quarter of 2007).

Thirteen consecutive quarters equates to just over three years of home price depreciation for the local MSA. So, just how well are home seller’s acclimating to the new housing market?

According to single family home data collected and reported by the local MLS, Metropolitan Regional Information Systems, Inc. (MRIS), Montgomery County home sellers received a price shock in 2007 and 2008; sellers received about 92% of list price in 2007 and about 89% of list price in 2008. Since then, Montgomery County home sellers seem to have adjusted to the market as indicated by more recent percentages of list price received at settlement, which appears to have returned to pre-crisis levels (about 94% or more of list price).

Now that the housing market changes are no longer dramatic, most home sellers have accepted the nature of the housing market and price their homes accordingly. For those who haven’t yet accepted the new housing market, you may be in for a (price) shock.

Comments are welcome. 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 1, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

October 27, 2010October 5, 2019

A developmental theory of home buying

The average number of lifetime home purchases by a home buyer.

Recently, a home buyer told me that it will take him time to find his “perfect” home. You see, he is looking for the perfect home because, as he put it: “I only have one more move left in me…” Although no one has ever calculated the number of homes an average home buyer purchases over their lifetime, someone once decided that people typically purchase a home every five to seven years. Keeping this rule in mind, he has at least two moves left.

Interestingly, with all the life planning people maintain for their finances, career, and estate, most people do not say things such as, “I will own four homes in my life…” For many, home buying and selling tend to revolve around life events and personal preferences that change during a person’s lifetime. Of course some people contently live in one home for their entire lives, and some never become a home owner.

If the National Association of Realtors® data regarding first time homebuyers is correct, then it very well may be that the average person may have three home purchases during their lifespan, notwithstanding life or financial crises or job relocation. According to the National Association of Realtors® Home Buyer’s Home Preferences (published by NAR, 2007), most people tend to move within a fifteen mile radius from their previous home; a majority of these moves are within five miles. These three moves may actually parallel the adult stages of Erik Erikson’s theory of human development.

The National Association of Realtors® Profile of Home Buyers and Sellers (published by the NAR, 2008 and 2009) states that a majority of first time home buyers fall into the 25 to 34 year old range with a median age of 30 years old. This is a time period that coincides with Erikson’s Intimacy vs. Isolation stage (ages 20 to 34) when people are forming commitments; people are beginning in their chosen careers and formulating family plans.

A person’s second home is purchased for various reasons. However, the National Association of Realtors® Home Buyer’s Home Preferences (NAR, 2007) states that most home buyers prefer newer homes; and of those home buyers, the greatest majority desire a newly built home. This time period may coincide with Erikson’s stage of Generativity vs. Stagnation (ages 35 to 65); when a person focuses on their societal contributions and their growth in public prominence.

Erikson’s final stage of Ego Integrity vs. Despair may coincide with a person’s third home purchase because it is a time when people begin to define their life and accomplishments. The third home purchase may be the “reward” for working many years; often focusing on amenities and luxuries. Even though many downsize during this stage, the home tends to be focused on making them comfortable; not only having home features that are a luxury to them but also convenient to local services.

So the buyer proclaiming having only “one more move” in him, may in due course decide he was wrong. Although he may be anticipating how the buying and selling process relates to his life, he is certainly looking for a home he will not outgrow. However, it may be that in seven to ten years I may again hear him proclaim, “I have only one more move left in me.”

Comments are welcome. 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 October 25, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

October 20, 2010October 5, 2019

The Good, The Bad, The Ugly; Lender foreclosure crisis

by Dan Krell ©2010

The current lender spawned foreclosure crisis is complex and could have far reaching consequences. As additional allegations of foreclosure fraud are brought about, a wider net that appears to be entangling lenders, attorneys, and others involved in the foreclosure process; some are now speculating that we can undergo something similar to what we experienced during the fall of 2008 when the financial crisis hit its peak (with the failure of Lehman Brothers) – if the worst case scenario is realized. The next several months will reveal how the mortgage industry will handle the legal aspects of the foreclosure process as well as how the court system and home owners respond to lenders. Of course, it might not turn out as bad they say either.

To understand the legal scope of the problem, you need to talk legal experts. And that’s just what Citigroup analyst Josh Levin did when he hosted a conference call (now made famous by bloggers and a few news outlets). Underscoring the impact of this crisis, the conference featured Georgetown Law Associate Professor, Adam Levitin. Professor Levitin’s comments were the focus of an article in a Wall Street Journal blog by Dawn Wotapka (“Are We Headed for Housing Armageddon?”). The professor’s comments highlighted three scenarios that are tantamount to the good, the bad, and the ugly.

The good situation occurs if the alleged foreclosure processing irregularities are dealt with promptly and does not impact the foreclosure process going forward. Even in the best case scenario, many in the industry agree that the housing recovery will be delayed for at least one to two years.

The bad situation occurs if the foreclosure process gets bogged down in the courts, prolonging the foreclosure process in some cases for years, adding additional angst to the economy and consumer confidence.

The ugly situation occurs if allegations and investigations reveal widespread problems within the mortgage industry and cause title insurers to begin declining coverage as well as some claims. This would have a freezing effect on the greater part of the housing market and would cause what Professor Levitin called “Housing Armageddon.”

The state of the problem at present appears to be a little of all three scenarios; however, we creep closer to the ugly as new revelations occur. At first, foreclosure processing fraud was given most of the attention, as allegations are prompting investigations of lenders, law firms and others involved in foreclosure processing.

Attention is shifting to “wet ink” signatures. Lenders are being pressed to provide the “wet ink” signature notes (which is the mortgage note with the actual pen signed signature as opposed to a copy) showing ownership of the mortgage. The fact that an increasing number of foreclosure cases are being dismissed because the lack of “wet ink” signature notes, has more home owners challenging lenders; and some home owners are questioning the validity of their mortgage servicing, which may lead to home owners challenging the payment of the mortgage.

So, how does this affect you? Surely, an increased glut of distressed homes sitting idle will further affect home values. Additionally, communities will suffer due to the suppressed collection of property taxes and HOA dues on those empty homes.

If you are in the process of being foreclosed, or if you have questions about your mortgage documents and/or loan servicing, you should consult an attorney.

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 October 18, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.