Individual mandates and housing

by Dan Krell © 2012
DanKrell.com

rowhousesThis week, the Supreme Court (SCOTUS) heard arguments for and against issues surrounding the Patient Protection and Affordable Care Act of 2010 (PPACA). The arguments don’t have much of anything to do with providing healthcare, but rather the arguments are about certain elements of PPACA and the Constitution. In fact, Tuesday’s arguments about the individual mandate could be applied to anything – even the housing market.

The individual mandate portion of the PPACA basically requires certain individuals to purchase healthcare insurance or pay a penalty. Individual mandates are not new, and have been enacted in the past. For example, military drafts and income tax have been mandated (the initial enactment of an income tax was found unconstitutional- so the Constitution was amended which resulted in the sixteenth amendment).

I’m not an attorney, and I’m sure that I don’t begin to scratch the surface of the issue; however, the arguments for and against the individual mandate can basically be summed up as follows: Those that oppose the PPACA individual mandate argue that this mandate is different from others such that it regulates commercial inactivity (e.g., levying a fine when a product or service is not purchased); while those in support of the mandate argue it is not a fine for non-participation, but rather a tax.

Regardless, which way you approach the mandate, some contend that a mandate is only one way to have the public engage in commerce. In an editorial that appeared in the New England Journal of Medicine, Einer Elhauge, J.D. described the individual mandate as an alternative to providing subsidies (Elhauge, E (2012). The Irrelevance of the Broccoli Argument against the Insurance Mandate. The New England Journal of Medicine 366, e1. published on December 21, 2011). Putting aside Elhauge’s reasoning and opinion of the SCOTUS case; he points out that the Government has many ways to affect industries and commerce. Typically, the Government attempts to persuade us to engage in specific businesses industries by providing incentives and subsidies, such as tax credits to industry participants or purchasers of specific products. However, rather than persuading economic activity, the PPACA individual mandate is historic in that it requires participation and fines those who do not participate.

rowhousesLike other industries, the housing industry is subsidized to encourage participation; home ownership is encouraged through the mortgage interest tax deduction and low interest rate mortgage programs (and for a brief time- first time home buyer tax credits). However, it is not implausible to think that if SCOTUS upholds the individual mandate, Congress could require people to make home a purchase, renovate, or retrofit their homes with green technologies (in an effort to increase economic activity in those industries).

There are some that argue that subsidies are bad enough for the housing market; one argument is that the mortgage interest deduction has artificially elevated home prices. However, some subsidies may only influence the timing of purchases rather than value: recent data suggests that the brief first time home buyer tax credit created short-term spikes of home sales that would have likely occurred over a period of time.

On the face of it, the housing market has little to do with health care. However, this week, housing and other industries may be affected by the SCOTUS decision regarding the healthcare individual mandate. Subsidies verses mandates- it may ultimately be about semantics and interpretation.

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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 March 26, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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Finding a rental in a tight market

by Dan Krell © 2012
DanKrell.com

AparmentIf you’re looking for a rental, you’re not alone. In fact, according to an October 28th (2011) commentary from National Association of Realtors® Chief Economist Lawrence Yun, there was an increase of 1.4 million renters in from the fall 2010 to the fall 2011; and as of the second quarter of 2011, there were about 38 million renters. As the economy and foreclosure crisis added to rental demand; Dr. Yun pointed out that the lack of multi-family construction (e.g., apartments) in the first decade of the new millennium also added to the falling vacancy rates (“Falling Rental Vacancies”; realtor.org).

Of course, as rental vacancies fall- rents increase. According to the National Association of Home Builders (nahb.org), the Multifamily Vacancy Index (MVI) fell in the fourth quarter of 2011 indicating fewer rental vacancies. Additionally, the Multifamily Production Index (MPI), which measures builder and developer sentiment about current conditions in the multifamily market, is at its highest since 2005. Furthermore, the MPI component gauging developer sentiment for market-rate rentals is at an all time high!

But don’t worry too much. Consider that while some have described falling nationwide home ownership rates and rental vacancies, the U.S Census data indicates that home ownership rates for the Washington DC region has not significantly changed during 2011. Additionally, rental vacancies increased throughout 2011 to rebound from some of the lowest vacancy rates in about ten years (census.gov).

So what does all this mean for you, the renter? First consider your budget, and then decide on your needs and preferences for your rental home. Since size, location, and amenities are some of the factors that dictate rent, you might be able to lower your rental costs by deciding which factors are more important to you. For example, renting a studio apartment close to a metro stop may be less expensive than renting a four bedroom bungalow about the same distance to the metro stop. However, if you want the four bedroom home, the rent may be less expensive as the distance from the metro stop increases.

The internet age has made finding a rental easier than ever, many apartment guides and MLS rental listings are now at your fingertips. Some apartment guides even provide virtual tours of available floor plans and amenities. The internet has many rental tools as well; one such tool is the “rentometer” (renotmeter.com), which can help you determine if your rent is in line with other area rentals. While hunting for your rental online- be careful of internet scams; Craigslist posts some very good safety tips for online home searching (washingtondc.craigslist.org/about/scams).

You might even consider hiring a real estate agent to assist you in your search. While some agents only focus on MLS rental listings, others may assist you in negotiating a rental rate and terms with rentals found outside the MLS. It should also be noted that some rental management companies also specialize in executive rental placements.

Once you found a suitable rental, be prepared for the rental application- which may include a credit check. If you’ve had financial challenges, such as a job loss or foreclosure, don’t be afraid to explain your situation; as some landlords may be willing to work with you if they have a vacancy.

As the housing market struggles to gain a foothold, the rental market remains strong. Finding your perfect rental may take a little time and effort.

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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 March 19, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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Housing takes a backseat in election year politics

by Dan Krell ©2012
DanKrell.com

votingIt’s an election year and the spin is increasing. As the Republican primaries are focusing on economics and jobs, there has not been an honest discussion about the current state of the housing market and how to revive it. As the election cycle heats up, expect to hear increased rhetoric and spin about housing from pundits and candidates.

One hotly debated issue is government involvement in the housing market. The roles of Fannie Mae, Freddie Mac, and FHA in the housing bubble and recovery will undoubtedly become part of the election debate. However, the talks of winding down Fannie and Freddie’s operations continue, while secondary markets continue to rely on the mortgage giants for growth and stability.

Another issue that is certainly a hot potato is the mortgage interest deduction (MID). Argued by some as a government subsidy, the elimination or limitation of the MID has been recommended by the likes of the Congressional Budget Office and the National Commission on Fiscal Responsibility and Reform (also known as the President’s Deficit Reduction Commission) to reduce government budget deficits.

The fight to save the MID has become a local issue as Governor Martin O’Malley’s recent budget proposes to limit the deduction. Commenting on the Maryland MID limitation, Mary C. Antoun, Chief Executive Officer of the Maryland Association of Realtors® stated in a recent press release that, “Maryland is one of the most real estate tax dependent states in the country”… “The state has one of the most aggressive real estate tax structures in the country, ranking 11th among all states in terms of total real estate tax burden. And taxes on real estate are the primary source of revenue for Maryland’s local jurisdictions.” She added, “If tax deductions are capped, as proposed by the Governor’s budget, many Maryland homeowners will lose some of the value of their mortgage interest deduction and the deductibility of state and local property taxes…”

votingAs the benefits of homeownership are questioned, the MID has remained a major home buyer incentive; as demonstrated by a survey commissioned by the National Association of Realtors®. The 2010 Harris Interactive survey indicated that of the nearly 3,000 homeowners and renters who responded, about three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.

Will the recent positive and optimistic housing figures recently released by the National Association of Realtors® (Realtor.org) and increased new home builder activity put the housing market in the back seat to other issues? Maybe, but positive housing news has been reported throughout the financial crisis and recession. Increased home sales were reported in the summer of 2008, which combined with optimistic housing and financial reports from many sources gave hope to a housing recovery. Likewise, positive housing reports in the fall of 2009 indicated increased activity with expiring home buyer credits. Optimism for housing in 2010 and 2011 was also reported because of activity spikes.

Traditionally, housing has been a major component of an economic recovery. This recession has been different such that housing has remained a drag on the economy. And even though our region has boasted impressive housing numbers compared to the rest of the country, issues remain (such as sliding home values, underwater mortgages, vacant homes, etc).

Yup, it’s an election year. Will we hear a viable solution to improving the housing market?

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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 February 27, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Housing shortage concerns; supply and demand

by Dan Krell © 2012
DanKrell.com

New HomesExactly two years ago, I wrote about the possibility of a housing shortage. In February 2010, Montgomery County’s housing inventory of homes for sale hit a two year low and was almost cut in half from the previous year; most likely due to a respite in the foreclosure tsunami. However, home inventories remained relatively low through 2011; as some looked forward to a renewed seller’s market, if not a balanced market.

So here we are in February 2012, and home inventory in the county is just about where it was in 2006- which is the consensus peak of the housing market. You might think that because home inventories are at a five year low, it might be a good time to jump into the market and list your home for sale.

Not so fast. Consider that the average time it took to sell a home during the peak of the market was no more than two months; much sooner in many cases. However, the current average time on the market is almost 30% longer today than what it was at the peak; much longer in many cases. Additionally, even though home inventory is similar to the peak market, the number of units sold compared to that time is about half; and keep in mind the average home sale price continues to fall.

For a home owner thinking of selling their home, it’s still a precarious market regardless of the reduced inventories. Although eager home buyers lament the limited choice of homes for sale, they are still demanding and selective. For home owners preparing their home to sell, the market is still about price and condition; make your home look its best. Keep in mind that about one-third of the home buyers in the market are first-time home buyers looking for their “perfect” home.

As I concluded two years ago, it’s not so much of housing shortage, but rather a market seeking equilibrium. Clearly, a market shift has taken place- but where?

As the number of single family homes listed for sale declines, the number of single family home listed for rent increases- as does the average rent. Supply and demand; another option for home sellers may be renting their home.

Homes for saleThe up side of leasing your home is that you can move on and have cash flow from the rental. To assist in determining an appropriate monthly rent, your Realtor® can provide neighborhood rental data. You should also consult with your accountant to make sure that leasing your home is an option; considerations in calculating rent may include (but is not limited to): tax implications, your mortgage payment, HOA/condo fees, property taxes, insurance, and maintenance.

Of course, solving one issue opens the door for others; there are disadvantages to renting your home as well. Other considerations might include (but not limited to) daily rental management, what to do if the tenant does not pay, and cost of repairs after the tenant vacates. Also, if you plan to rent your home to buy another home, don’t commit mortgage fraud; your lender may require extensive documentation on the rental – including an established rental history.

Although a balanced housing market may include increased rental inventory; do your due diligence before you decide to rent your home, and make sure it’s right for you.

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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 February 20, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Post-crisis real estate: What’s in store for the housing market?

by Dan Krell
© 2011
DanKrell.com

It is often said that history repeats itself. If we want a glimpse of our future, we should look to the past; if we want to see how a post-crisis housing market looks like, we should look to see how a previous housing crisis ended.

According to the Census Bureau (census.gov), the last time homeownership rates declined was 1980-1990. Recent seasonally adjusted homeownership rates have been declining slowly from the all time high of 69.2% reached in the first quarter of 2005. The current seasonally adjusted homeownership rate (for the third quarter of 2011) is 66.1%, which is similar to the homeownership rate of 66.2% reported by the 2000 Census.

Although the country is dealing with some of the same economic issues that was problematic during the early 1980’s; the current real estate market is more akin to like the post S&L crisis of the late 1980’s and early 1990’s, when the market was flooded with foreclosures and a coinciding recession impeded an already difficult housing market. Some may remember that during that time home prices decreased and, not unlike recent events, many home owners walked away from their homes (some lenders were sent the keys of recently purchased homes).

Then like today, resulting legislation changed the lending landscape in an effort to ensure such systemic abuse and failure would not happen again. The Census reported that the homeownership rate in 1990 was 64.2%, just shy of the 64.4% homeownership rate reported in 1980.

Additionally, mortgage interest rates were “normalized” post the S&L crisis, making homeownership more affordable than the previous decade. Then, like today, low mortgage rates are touted to make owning a home more attractive than renting.

Also, like that time, the real estate business was changing. Besides changing business models (buyer agency was becoming recognized across the country), large real estate brokers downsized and/or absorbed brokers wanting to get out of the business. Today’s real estate business models have changed to accommodate technology and a vast array of information; additionally, national and regional brokers may begin to see their market share change with the marketplace.

Demographics are always changing. Current demographics indicate a shrinking pool of willing home buyers and sellers. As home prices have dropped over the last several years, many baby boomers who planned to downsize cannot afford to sell their home; additionally, “move-up” home buyers have also decided to make do with their current home longer than they planned as they find that their home’s equity has diminished. Many renters are choosing to continue renting as homeownership is viewed as an anchor; they prefer to be more mobile and not tied down by homeownership until they become more established in their careers.

Before home prices can stabilize, many expect average home prices to drop another 20%. Home prices have (more or less) historically returned to an established “norm” after a housing boom. Home prices are about 26% higher than the “norm” adjusted price, which was established in 1890 as reported by Robert Shiller (Irrational Exuberance; Broadway Books 2nd edition, 2005).

As we move forward, economic and industry related barriers continue to prevent a recovery in the real estate sector. It may be several years before these issues may be managed; however once addressed, confidence in homeownership may begin to increase once again instilling pride and sense of community.

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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 December 12, 2011. Using this article without permission is a violation of copyright laws. Copyright © 2011 Dan Krell.