real estate Archives - Real Estate News and Commentary

December 6, 2022December 6, 2022

What’s driving the housing market?

The November 30^th National Association of Realtors press release indicated that the Pending Home Sale Index receded 4.6 percent in October from the previous month. This is the fifth straight month of declines for the forward looking indicator. The index has declined about 37 percent from the same time last year. What is currently driving the housing market?

Many are blaming mortgage interest rates for the sharp declines. NAR Chief Economist Lawrence Yun stated, “October was a difficult month for home buyers as they faced 20-year-high mortgage rates…The upcoming months should see a return of buyers, as mortgage rates appear to have already peaked and have been coming down since mid-November.”

Declining Existing home sales

As for existing home sale stats, the NAR’s November 18^th press release indicated that existing home sales declined for the ninth straight month. Sales slipped 5.9 percent from the previous month, and dropped 28.4 percent from the same time last year.

Increasing home prices

Despite, the slipping sales, median home prices continue to increase. The median existing home sale price increased 6.6% from the same time last year. Although the hedge funds and main stream media talk about huge home price declines in 2023, the reality is that most experts expect home prices to maintain if not increase. If the housing market were really in trouble, existing home sale prices would have already started to recede, but home sale prices actually increased! This is probably why the FHFA announced in a November 29^th press release that conforming loan limits are increasing in high price areas from $647,200 to $726,200.

Inflation and the economy are on everyone’s mind. Zillow chief economist Skylar Olsen stated in a December 1^st press release that the economy and affordability will drive the housing market in 2023. “Affordability is going to be the biggest factor in housing for 2023, but there’s room for optimism on that front if mortgage rates recede.”

Lack of home sale inventory is currently driving the housing market

The reason for declining home sales and increasing home prices, that no one is really talking about, is the existing home sale inventory. The NAR reported that home sale inventory continues to decline. The current level of inventory is equivalent to 3.3. month’s supply, which is indicative of a sellers’ market.

On the surface, home sale stats may seem disastrous. However, keeping perspective, remember that the current housing market is being compared to the previous year of record setting home prices and sales. Also keep in mind that although home sales have slipped, home prices continue to increase. Mortgage rates seemed to have plateaued. However, unless existing home sale inventory increases significantly, expect subdued existing home sales and higher home sale prices.

By Dan Krell
Copyright © 2022

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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 5, 2022December 13, 2022

Outperforming the housing market

In 2011 I wrote an article exploring the question of outperforming the housing market by attempting to time real estate transactions. The question was then aimed at home buyers and sellers. New research published in the Journal of Real Estate Research reveals more interesting data as it relates to real estate investors.

In my 2011 analysis of research and data, I discussed why attempting to “time the market” as an owner occupant wasn’t very favorable. It appeared as if attempting to time a purchase or sale didn’t yield the desired result. The conclusion was that long term home ownership was probably better than speculating on buying and selling homes on the exact bottom or top of the housing market.

Likewise, home sellers waiting for the housing market to rebound before making a move probably missed an opportunity as well. So, who is outperforming the housing market?

A recent article published by Wong, Deng, and Chau in the Journal of Real Estate Research (Do Short-Term Real Estate Investors Outperform the Market?; 2022, Vol. 44 Issue 2, p287-309) reveals an interesting conclusion.

The study attempted to further look into the incentives of short-term real estate investors, specifically how various market conditions affect short-term real estate investor performance. The study analyzed real estate transaction data from Hong Kong and found that three economic conditions were favorable to the investor’s performance that seem to mimic the current low-inventory market we are experiencing here. The three items that help the investor performance are: 1) having few sale comparables; 2) having sale prices of the comparables dispersed; and 3) market prices go down. The study’s conclusion is that buying and reselling withing three months generates a gross return that is 6 percent above market appreciation. The authors caution that their study is limited such that there are multiple investor strategies that need to be studied as to the effects on short-term real estate investor performance. They describe short-term real estate investors as engaging in arbitrage, which by definition is basically “home flipping.”

By Dan Krell
Copyright © 2022

October 25, 2022October 25, 2022

Perception of a housing crisis

If you’ve watched the news lately, you might get the feeling that the housing market is imploding. Unfortunately, the talking heads are reporting the titles of the news releases, such as the October 20^th National Association of Realtors press release headline “Existing-Home Sales Decreased 1.5% in September,” without delving into the details. Like anything else that’s reported, just parroting a headline doesn’t tell the entire story. Get the big picture and avert the perception of a housing crisis.

Here are the highlights of the NAR report: “Existing-home sales sagged for the eighth consecutive month to a seasonally adjusted annual rate of 4.71 million. Sales slipped 1.5% from August and 23.8% from the previous year. The median existing-home sales price increased to $384,800, up 8.4% from one year ago. The inventory of unsold existing homes declined for the second straight month to 1.25 million by the end of September, or the equivalent of 3.2 months’ supply at the current monthly sales pace.”

The takeaway is that yes, existing-home sales have been sluggish (eight consecutive months), however does that mean a housing crash? No. Consider the other important data points included in the news release: the median existing-home sale price increased 8.4 percent year-over-year, AND the inventory of unsold homes continues to decrease.

What’s your perception of a housing crisis ? For many, the memories are still fresh of the housing crisis of 2007 and subsequent foreclosure crisis. So, it’s not surprising that the media’s alarms go off when existing-home sales drop as they did recently. However, the fundamentals of today’s housing market are much different than that of 2008-2010. During the housing crisis of 2007, home sale prices plummeted when home sales dropped. Additionally, inventories of unsold homes swelled to record levels.

Today’s housing market is much different and looking at the entire picture, the stats tell a different story than what is being portrayed by the media. NAR Chief Economist Lawrence Yun chalks up the decline in sales to increasing mortgage interest rates, which are approaching the accepted historical average of 7 to 8 percent. He also points out “…Despite weaker sales, multiple offers are still occurring with more than a quarter of homes selling above list price due to limited inventory… The current lack of supply underscores the vast contrast with the previous major market downturn from 2008 to 2010, when inventory levels were four times higher than they are today.”

By Dan Krell
Copyright © 2022

October 4, 2022October 4, 2022

Report mortgage fraud

The real estate industry, like other financial industries, has its issues with scammers and fraud. The appearance of new scams and new versions of old scams make mortgage fraud a continuing problem for the industry.

It’s not a victimless crime. You might think of those who are involved in a mortgage fraud scams as cheaters and criminals. However, it is not uncommon for innocent consumers to get caught up in a mortgage fraud scam. In the past, home flipping schemes ensnared unwitting consumers. During the great recession, mortgage modification and foreclosure rescue scams targeted unknowing homeowners.

The Federal Bureau of Investigation (fbi.gov) wants you to report mortgage fraud. The FBI describes mortgage fraud occurring “when someone lies to influence a bank’s mortgage decision or if a distressed homeowner is the victim of a fraud.” There are two types of mortgage fraud, fraud for profit (such as home flipping schemes), and fraud for housing (such as mortgage application fraud).

Application fraud is likely the most common mortgage fraud, as it can occur by any material misstatement, misrepresentation, or omission in relation to getting a loan. “Occupancy fraud” is when a borrower lies to get a better interest rate by stating they will occupy the property when it’s intended to be a rental property. “Employment fraud” is when a borrower lists an employer they don’t work for. “Income fraud” is when a borrower misrepresents their income to improve their profile for underwriters.

Among the many types of mortgage fraud, one takes advantage of seniors with home equity conversion mortgages (also known as reverse annuity mortgage). The FHA underwrites a HECM for borrowers who qualify when they become 62 years old. The HECM provides homeowners access to home equity without payment until the borrower moves or dies. Scammers obtain a HECM in the name of a recruited homeowner to convert equity in the homes into cash. The scammers keep the cash and pay a fee to the senior citizen or sometimes just take the full payout. Sometimes, appraisals are inflated. This type of fraud is more difficult to detect because the lender usually doesn’t discover something is wrong until the home owner dies.

The FBI works with partners to investigate mortgage and financial institution fraud cases. Report mortgage fraud to the FBI (https://www.fbi.gov/investigate/white-collar-crime).

By Dan Krell
Copyright © 2022

September 14, 2022September 14, 2022

Get the necessary permits

Are you planning any home improvements in the near future? Get the necessary permits. I can already hear some of you grumbling about it, complaining that it’s just a money grab, but the truth is that the permitting process has a purpose.

The permitting process assures that buildings, land and home improvements adhere to the building and zoning codes within your locality. Building and zoning codes exist to ensure that homes and other improvements are safe, structurally sound, and help maintain health standard. If you think you’re savvy for avoiding the permitting process on your home improvements, read on.

If you’ve circumvented the permitting process when building your improvement, chances are that there will be consequences in the future. If you’re lucky, the permitting inspectors will catch up with you during your construction project. If you’re still in the process of your construction, you’ll likely get a notice to cease the project and go through the permitting process. However, if your required to reconcile with your local permit office after the improvement is completed, the process can vary depending on your local permit office and the age of the improvement.

Unpermitted improvements are red flags for home buyers and their agents. When you decide to sell, there’s a good chance that home buyers will ask you about permits on your improvements, especially if it is touted in the listing. Don’t think you can hide it, permit info is typically readily available online or calling the permit office. Your home sale price can be affected, depending on the size and scope of the unpermitted work.

Unpermitted improvements can also be a potential problem for your insurance company. For example, any claims that concern an unpermitted improvement could potentially be denied.

A common issue I come across more than you think is that although permits were issued, there was never a final inspection by the permitting office. Many contractors also fail to follow through to the final inspection. The consequences of not passing a final inspection could potentially have the same effect as not having a permit at all.

Regardless of the type of home improvement project you do, make certain the appropriate permits are obtained and finaled. The same applies when you hire a licensed contractor, make certain the appropriate permits are obtained and finaled.

By Dan Krell
Copyright © 2022