Real Estate News and Commentary

November 30, 2018April 25, 2019

Next housing crisis and appraisals

Are government agencies setting up the next housing crisis? A November 20^th proposal from the FDIC, the Fed, and the Office of the Comptroller of the Currency, has some consumer advocates suggesting just that. The joint proposal from these agencies would have the threshold for a (1-4 unit) residential mortgage appraisal increased from $250,000 to $400,000. This means that an appraisal would not be necessary for homes valued less than $400,000. However, this rule would not apply to mortgages insured or guaranteed by federal agencies, such as FHA or VA mortgages.

Contrary to causing the next housing crisis, the rationale given for the appraisal rule change is to reduce mortgage processing delays. The change is also supposed to reduce costs to both financial institutions and consumers. The proposal states:

“The agencies believe that the proposed increase to the appraisal threshold for residential real estate transactions would reduce burden in a manner that is consistent with federal public policy interests in real estate-related transactions and the safety and soundness of regulated institutions.”

However, the Appraisal Institute (appraisalinstitute.org) is in strong disagreement. AI president James L. Murrett, MAI, SRA stated in a press release that the rule change could potentially harm consumers by undermining “crucial risk mitigation services.” Murrett commented,

“The Appraisal Institute anticipates that [the increase] will result in a return to the loan production-driven environment seen during the leadup to the financial crisis, where appraisal and risk management were thrust aside to make more – not better – loans. Apparently, the FDIC has learned nothing from that experience.”

The Appraisal Institute is not alone in rejecting the rule change for residential mortgages, as opposition is being voiced from various consumer organizations. But the proposal should not have been a surprise. Changing the appraisal thresholds, which has not been adjusted since 1994, has been in the works for several years. And rumor of an imminent rule change was reported in January by Patrick Rucker for Reuters (U.S. regulators ready to ease check on property values: sources; Reuters.com; January 28, 2018). Mortgage Bankers Association supported a threshold increase because of appraiser shortages, especially in rural areas. However, consumer advocates are concerned of triggering a new housing crisis because improperly inflated home values contributed to the last crisis.

Interestingly, although this appraisal rule was considered earlier this year, a threshold change was only made for commercial mortgages. The final rule dated April 9^th raised the threshold for commercial appraisals from $250,000 to $500,000.

Some industry associations, such as the National Association of Realtors, have yet to comment on the recent proposal to increase the residential appraisal threshold. However, the NAR did issue a statement April 5^th supporting the commercial appraisal threshold increase.

Curiously, NAR’s recent support for increasing the commercial appraisal threshold is counter to their 2016 statement in favor of maintaining a $250,000 threshold. The 2016 letter sent to the Federal Financial Institutions Examination Council stated:

“NAR believes increasing the appraisal threshold levels would undermine the health of the real estate lending industry as a whole. As NAR states in its Responsible Valuation Policy, a trustworthy valuation of real property ensures the real property value is sufficient to collateralize the mortgage, protect the mortgagor, allow secondary markets to have confidence in the mortgage products and mortgage backed securities, and build public trust in the real estate profession.”

It remains to be seen if NAR’s position on “building trust in the real estate profession” will completely change to also support an increased residential appraisal threshold. Or if not requiring appraisals for homes under $400,000 will cause the next housing crisis.

Original published at https://dankrell.com/blog/2018/11/30/next-housing-crisis-appraisals/(opens in a new tab)

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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.

November 21, 2018April 25, 2019

Real Estate Thanksgiving

Thanksgiving is a time to take stock and be thankful. Although the original Thanksgiving may have had a religious purpose, today’s secular holiday is about traditions. However, it seems as if the tradition of enjoying a peaceful meal with family and friends has been increasingly difficult over the past few years. But since the election is over, let’s try to talk about something worthy of discussion (at least until the next election cycle begins), such as real estate and housing. Yes, it’s a “Real Estate Thanksgiving.”

Why shouldn’t we focus on something we all can get behind? There is a good chance that your dinner guests will include someone will be moving next year. Whether they are buying, selling, or renting a home, someone at the dinner table will be affected by such issues as housing affordability, mortgage rates, and availability of homes.

Things to talk about during your Real Estate Thanksgiving might be about mortgages, home sales, home prices, rent, maintenance, etc. The topics are seemingly endless.

Talking about mortgages during the Real Estate Thanksgiving. The current news is about mortgage interest rates. How high will mortgage rates go? Housing experts agree that mortgage rates will likely be about 5 percent next year (although the Fed just announced they may hold off on interest rate hikes after spring). Paying more interest on your mortgage may not be your idea of positively affecting home sales. However, increasing mortgage rates typically moderate home price growth because of affordability. Another silver lining of increasing interest rates is a stimulated lending environment. As a result, mortgage companies will likely further loosen lending requirements, which will increase the home buyer pool.

Real Estate Thanksgiving and home sales could focus on the reasons for the fall slowdown. Will home sales rebound this spring? You’re probably aware that home sales have dropped off during the fall. Major media outlets have grasped the news and created the meme depicting “housing bubble 2.0.” You can’t really blame them because there are many economists who are projecting bleak home sales to continue through spring.

The main reason for a disappointing 2019 forecast given by many industry insiders is affordability. I contend that this rationale is shallow and one-dimensional. There is no doubt that rising interest rates and increasing home prices are on the minds of home buyers. However, the lack of home sale inventory is a dimension that is often forgotten when discussing home sales and rentals. The lack of available homes for buyers and tenants to choose has forced many into fierce competition. The result has been upward pressure on home prices and rents.

You have to also consider the economy at your Real Estate Thanksgiving. The strength of the economy is an aspect affecting the housing market that many haven’t discussed. Whether you want to admit it or not, the economy is the strongest it has been in decades. Consumer outlook is optimistic. Home buyers and renters have expressed confidence about their job prospects too. Employers are competing for talent, influencing the highest wage increases in over a decade.

Commenting on the economy, First American chief economist Mark Fleming believes that the economy will be a major force in the housing market (How Will a Potential September Rate Hike Impact Existing-Home Sales?; blog.firstam.com; September 18, 2018). One of the features of his analysis for 2019 is “It’s the Economy and First-Time Home Buyer Demand, Stupid.” He described a pent-up demand from a wave of millennial of first-time home buyers who will be in the market next year.

Fleming explained that home sales slump during an adjustment period that home buyers undergo when interest rates increase. The same thing occurred in 2010 when rates increased from 4.5 to 5 percent. However, the economy was struggling at that time, and home sales were stagnant. Fleming described First American’s positive housing forecasts overcoming rising interest rates, saying,

“According to our Potential Home Sales Model, the boost from the strong economy and first-time home buyer demand should overcome any downward pressure from rising rates on home sales.”

Original article is published at https://dankrell.com/blog/2018/11/21/real-estate-thanksgiving/

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November 17, 2018April 25, 2019

Home sale renovations

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

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November 9, 2018December 13, 2022

Municipal infraction and your home

A common home buyer preference is to buy a home that is not within the confines of a HOA or condo association. Maybe the home buyer’s impression is that HOAs and condo associations bully home owners. But the truth is that HOA and condo association rules are created for a number of reasons, which include health and safety. If you don’t comply with the community rules, they can compel you do so. But even if you don’t live in an association managed community, it’s your civic duty to comply with county and/or municipal ordinances to maintain your home. Disregard for civic responsibility may result in a municipal infraction.

Believe it or not, regardless of where your home is located, your home has to satisfy health and safety standards that are enforced by your municipality (e.g., Montgomery County, City of Rockville, City of Gaithersburg, etc.). Deferred home maintenance can surely affect the value of your home. However, if it is found that your home doesn’t meet code standards, you can receive a notice of a municipal infractions.

Municipal infractions are also another name for code enforcement. In his manual Municipal Infractions and Code Enforcement, Practice and Procedure for Municipalities in the State of Maryland, Frank M. Johnson stated the need for having such procedures by saying:

“Most persons will follow the law voluntarily, but the reality is that when a law isn’t enforced, it becomes less effective for everyone. Even those who voluntarily comply are less likely to take a law seriously when it’s known the law won’t be enforced. In addition, steps to enforce the law often involve the most serious violations which, if not corrected, can lead to results which have a significant community and neighborhood impact.”

Mr. Johnson’s manual was originally written for the City of Gaithersburg, but was also adopted by the Maryland Municipal League (mdmunicipal.org), which is a statewide non-profit association that promotes municipal administration. What started as a local handbook describing the entire process of municipal infractions (from complaint to enforcement), became a statewide template in code enforcement.

Municipal infraction and your home

If you ever received a notice of municipal infraction, or just wondered how the process works, check put the manual. The manual describes why you’re receiving the citation, and how it can be enforced. It also describes the appeal process, as well as what can happen if you don’t comply.

Typically, the municipal infraction process begins by a complaint that triggers an investigation. The investigator will inspect and witness any code violations. If there are violations, the investigator will notify you and attempt to resolve the issue(s). Most home owners resolve the issue(s) with the first notice. However, if you don’t comply (or attempt to comply) with the first notice, you will likely be fined. The court can also order you to correct the issue(s), which is called an “abatement order.” If you don’t comply with the abatement order, your municipality can go on your property (and inside the home if necessary) to fix the issue(s) and send you the bill! If you don’t pay, a lien will be placed against your home, while collection actions are implemented.

What Caused You to Get Cited For a Municipal Infraction?

Montgomery County’s Department of Housing and Community Affairs (montgomerycountymd.gov/DHCA) also publishes valuable information about the process. The Housing Code Enforcement Handbook, is written for the public to understand housing code enforcement in the county. The DHCA states that seasonal issues are the most common code violations reported, such as overgrown grass and weeds, dead trees and snow-covered walkways.

Original published at https://dankrell.com/blog/2018/11/09/municipal-infraction-home

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November 1, 2018July 21, 2019

Buyer and seller attitudes about real estate market

Economists are officially pessimistic about the housing market. This is the general sentiment following another month of declining home sales. Experts are pointing to a number of factors for the slowdown, including increased interest rates and housing affordability. But what are home buyer and seller attitudes about real estate? The National Association of Realtors’ most recent Housing Opportunities and Market Experience survey hints at a busy spring!

Economic attitudes about real estate market

An October 19^th NAR news release (nar.realtor) reported that September’s home sales were the weakest in several years. The nationwide trend affected all regions. NAR chief economist Lawrence Yun stated:

“This is the lowest existing home sales level since November 2015…A decade’s high mortgage rates are preventing consumers from making quick decisions on home purchases. All the while, affordable home listings remain low, continuing to spur underperforming sales activity across the country.”

First-time-home-buyers are finding the housing market increasingly challenging. This segment’s participation needs to be strong for a healthy home sales. September’s low thirty-two percent first-time-home-buyer participation is attributed to rising interest rates and home prices.

But low housing inventory is also an issue. September’s housing inventory decreased to 1.88 million existing homes available for sale (from the 1.91 available during the previous month). NAR President Elizabeth Mendenhall stated:

“Despite small month over month increases, the share of first-time buyers in the market continues to underwhelm because there are simply not enough listings in their price range.”

Economists at Fannie Mae believe that the housing market will continue to disappoint. In an October 18^th press release (fanniemae.com) Fannie Mae Chief Economist Doug Duncan stated:

“Our expectations for housing have become more pessimistic. Rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019. Meanwhile, affordability, especially for first-time homebuyers, remains atop the list of challenges facing the housing market.”

But what do economists really know about the future? Let’s hear it directly from the consumer!

Home buyer and seller attitudes about real estate

NAR’s Housing Opportunities and Market Experience survey tracks opinions from renters and homeowners about homeownership, economy, and the housing market. The release of their third quarter 2018 survey indicates that sixty-three percent of respondents strongly or moderately believe that it’s a good time to buy a home. Although optimism is somewhat diminished from the second quarter’s survey, there continues to be a positive sentiment about buying a home. The survey’s positive sentiment continues even though a majority of respondents believed that home prices will continue to increase in the immediate six months. Additionally, a majority of respondents believe that qualifying for a mortgage may be an obstacle to a home purchase.

The survey also concurs with other metrics indicating high consumer sentiment for the economy. In light of the recent slide in home sales, NAR’s recent Housing Opportunities and Market Experience survey reveals “a near-record high of sixty percent of households believe that the economy is improving.” Adding to the strong sentiment is the survey’s increased monthly Personal Financial Outlook Index, which indicates that respondents believe that their financial situation will be better in six months.

The survey also indicates a record high of home sellers who believe it is a good time to sell a home. But given the seasonal decline of housing inventory, it is likely this will translate to a surge of home listings in the spring. The added inventory combined with high consumer sentiment will boost the housing market. So sayeth the consumer.

By Dan Krell
Copyright © 2018.

Original located at https://dankrell.com/blog/2018/11/01/attitudes-real-estate-market/

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