Student Loan (IBR) and Mortgage Qualification

By: Victor Normand

Last month we discussed the very large problem of ever increasing student debt and its effects on first time home buyers. It’s clear that something needs to be done to bring higher education costs down and at the same time introduce some form of underwriting into the process of qualifying for a student loan. While there are differences between the sub-prime lending crisis and a student debt crisis, there are dangerous similarities as well.

In the meantime, there are many individuals and families who would otherwise be active in the housing marketplace but for the need to manage student debt. For good or bad, the debt is there and often perceived as an insurmountable barrier to home ownership. But there are options for those willing to seek them out.

For some, paying off college loans is paramount, and delaying home ownership and even marriage and starting a family will just have to wait. But the standard term of college loans, (10 years) is a long time to wait before the debt to income (DTI) ratios will be good enough to allow for a mortgage. Then there is the matter of a down payment and how that happens when there is no discretionary income.

The alternative for many with student debt is Income Based Repayment (IBR). This option is available to those with federal student loans, which is more than 75% of the $1.4 trillion in outstanding loans. These programs extend the repayment period for qualified borrowers to as long as 25 years. As you can imagine, the amount of interest paid under these programs relative to the original debt is substantial.

Qualifying for these programs involves calculating “discretionary income” which is the difference between adjusted gross income and 150% of the annual poverty line based on family size. Depending on when the loans were taken out, monthly payments are either 10% or 15% of that amount. A recent graduate with $60,000 of student debt who earns $40,000 annually could see their monthly payment decreased from $650 to as low as $180. There are many variables associated with IBR programs, but such decreases are not uncommon.

With discipline, someone taking advantage of an IBR could accumulate the cash needed for a down payment on a modest house or condominium. Making payments on time under an IBR program should reflect just as well on a credit score as payments under the original repayment plan. Loan underwriters and some of the Government Sponsored Enterprises (GSE’s) however do not look favorably on IBR plans.

Presently, some conventional lenders, FHA and USDA programs consider an IBR a temporary deferral and require underwriting to use the original loan terms or 1% of the loan balance, whichever is lower, to qualify a borrower. All IBR programs require annual re-certification, but they remain in place for as long as discretional income remains low and the borrower wants to participate. Fannie Mae and Freddie Mac will use IBR plans to meet their loan standards.

An added feature to some IBR programs is loan forgiveness. A graduate with high debt who is employed in a low paying profession, will have any balance remaining on their debt, forgiven at the end of the 20 or 25-year term. This may have tax consequences for the borrower, but it is something to consider. Of course, higher incomes than expected can always be used to pay down or pay off student loan debt at any time. And with home ownership, comes opportunities to use accumulated equity to pay down debt at lower rates of interest and greater tax deductibility options than student loan debt.

In conclusion, if those with student debt have a tolerance for making very high interest payments, especially during the early years of repayment, are willing to spend the time to learn more about the benefits and drawbacks of the IBR program and inclined to seek out a lender familiar with IBR, home ownership might just happen.

Area High Schools to Offer Associates Degrees?

By: Victor Normand

Now that I have your attention, you should know that this blog is about first time home buyers, or to be more specific, the lack thereof, caused in part by student loan debt. The national rate of home ownership is at a 50 year low, partly as a result of a housing market still not fully recovered from the sub-prime mortgage crisis and ensuing recession, but also because buyers in their 20’s and 30’s are not entering the market as they have done in the past. We know those buyers as millennials.

Seventy percent of those 54 million millennials in the workforce have student loan debt and that debt, $1.3 trillion in total, an amount greater than any other type of consumer debt other than home mortgages, is making it very hard to save for a down payment and support a mortgage. According to a survey of borrowers done by American Student Assistance (ASA) done in 2015, 1 in 5 millennials reported postponing marriage and more than half said their student loans were delaying the decision to buy a home.

Residential real estate is a significant contributor to our economy. The economic impacts resulting from this dearth of first time buyers are widespread, everything from construction spending to the purchase of home furnishings is affected as is the ability of existing homeowners to find buyers so that they can move up or out of their homes. But the more frightening aspect of this situation, a crisis in the making, is that the trend shows no signs of abating as demonstrated in the above graph.

Borrowing has gone up for two reasons, the high cost of a college education and the ease with which money can be borrowed to fund those increases. According to the Bureau of Labor Statistics, between 1980 and 2014, the price of a college education increased by 260% while the Consumer Price Index for all consumers only increased by 120%. We need to deal with both issues.

As our economy has changed from manufacturing to service/intellectually oriented, so has the demand for a more highly educated and specialized workforce. Why not recognize this need within the context of our local public education system? Why not add grades 13 and 14 to high schools and have those two grades accredited as associate degrees? Many high schools now offer college level courses so crafting a full curriculum leading to an associate’s degree is not unrealistic. There could be many other advantages to this scheme, not the least of which is a better utilization of our school buildings.

The underwriting of student loans however, may be the real problem that needs to be addressed. Consider a lending environment where borrower income is not considered, nor are borrower assets, nor the underlying value of what borrowed funds would be used for. Consider if this were how home mortgage loans were made, actually, there was a time not that long ago when that was exactly how some home loans were made and we all know how that turned out!

Not the Oldest Profession

By: Victor Normand

Rudyard Kipling began the following discussion of professionalism when he wrote a story in 1888 and spoke of a woman named Lalun as belonging to the most ancient profession in the world. Notwithstanding Rudyard’s declaration, Medieval and early modern regard for the professions was short listed to include only Divinity, Medicine and Law. Over time, occupations ranging from Accountants to Librarians were added to the list and the likes of George Washington, Thomas Jefferson and Abraham Lincoln can be credited with adding surveying, which they all did, to the ranks of professionals.

Early real estate agents did not enjoy much respect. Brokering the sale of Manhattan Island to Dutch developers for $26 did not help with public opinion. In 1908, the National Association of Real Estate Exchanges, predecessor organization of the National Association of Realtors, was founded in an attempt to raise the status of the occupation so that mothers of lawyers could feel that their other son (or daughter) was just as important.

As time passed, more and more states required that real estate agents be licensed and trained, though the educational requirement has never risen above the high school level anywhere. Work performed by real estate agents has become more complicated as home ownership increased from only 25% in 1900 to close to 70% today. Still, many regarded the work of agents “as a job”…. like holding the first “Open House” at Levittown in 1947, and not a profession.

Most committed real estate agents strive to be regarded as respected professionals who earn their compensation for what they know and have experienced, as much as for what they “do.” Also, because of ever increasing regulations at all levels of government accompanied by significantly more sophisticated internet enabled consumers, the days of the part time real estate agent are coming to an end as specialization becomes the norm.

The internet and associated technology have had many effects on the real estate profession. The quantity and availability of information has empowered consumers to a degree unimagined even a decade ago. And technology companies have been aggressively trying to disrupt the old agent/consumer model by developing agent eliminating algorithms that aggregate large amounts of information for consumers to buy and sell on their own.

So far that has not worked nearly as well as the internet technology being used to disrupt retail (Amazon), hospitality (Airbnb) and transportation (Uber). While Millennials and Gen X’ers spend inordinate amounts of time on the internet, according to Inman News, 90% of them still eventually use a real estate agent to do their deals. This practice clearly goes to the heart of the job versus professional distinction where the real estate agent is valued for their ability to dissect information and apply their local market insights to transactions.

Finally, internet technologies have given everyone, including real estate agents, the ability to market themselves extensively.  I recently interviewed a millennial couple who were as interested in learning as much about individual agents using social media platforms as they were about all of the details available conducting their property searches.  In 1888, one would need to completely rely on Rudyard Kipling to learn everything about Lulan. Today she would most certainly have her own Facebook page and Instagram account and of course, one could always Google her.

Decisions, Decisions, Decisions

By: Victor Normand

Buying or selling a home is a big decision for most of us. Some people labor over the decision, some not so much. As an objective observer and professional real estate Agent hired to assist in either process, this path to the end is often a long and winding road and can at times, defy logical explanation.

You would like to think that there always exists a set of rational facts that when gathered together and organized properly, lead to a logical conclusion. This should hold true whether you are making the decision or helping someone else through the decision making process. It is not always easy to gather those facts. Finding a sufficient body of knowledge surrounding any given decision is not so easy but nonetheless, we all believe that those relevant pieces of information exist.

As we move forward in the process, we often come across the eureka moment when we are sure of the right decision. Suddenly, all is clear and apparent so time to move forward, right? Or have our emotions interfered with the thought process and are we about to make an irrational choice?

Is it possible to strip away emotion so we can know what is TRULY the right thing to do? Is there someone out there, some clear thinking real estate agent strong enough to tell us if we are in fact making the wrong decision because of our emotional state?

If you struggle to strip away emotion from the process, you are likely to be struggling for a long time and not getting any closer to knowing the right course of action. Emotions by definition, are powerful feelings that existed in the human brain BEFORE the ability to reason came along. Scientists have observed that reason and emotion are linked in human behavior and now believe that both functions don’t just co-exist but rather are a singular process.

Neuroscientists studying brain chemistry have found that the decision making process requires both reason and emotion to work. Now you know for certain that Dr. Spock is not of this planet……if you ever doubted that. Neuroscientist Antonio Damasio writes about a patient who underwent brain surgery to remove a tumor and lost the orbital frontal cortex which connects the rational frontal lobes with the emotional or limbic system and as a result, lost the ability to make decisions.

There is no sense trying to remove emotion from the decision making process, nor should we try less we unleash dire consequences. For clients and real estate agents alike, it’s important to recognize that the decision to buy or sell a home requires both a reasoned and emotional commitment. Even though life’s circumstance may point to a change in the size or location of a residence, it may be necessary to wait for the emotion connected to the change to catch up.

As professional real estate Agents, we commit ourselves to observing and listening to the needs and wants of clients. That process needs to include using emotional intelligence: the ability to identify and manage ones own emotions and the emotions of others. It may sound complicated, but it is after all, how we have evolved.

The Very High Cost of Housing Regulation

By: Victor Normand

We count on government to do many things like keeping us safe, protecting the environment and making sure the economy is run well. Our elected officials pass laws for the common good, then hand them over to bureaucrats who write the regulations to make the laws work. Every law in its implementation has a cost, though not always apparent for an individual regulation and eventually, those costs add up.

The National Association of Home Builders (NAHB) did add up those costs last year and determined that the cost of regulation at all levels of government accounted for almost 25% of the cost of a new home nationally. The breakdown is 14.6% of the final price to produce a finished lot and 9.7% for meeting requirements associated with actually building the house. Separately, in a 2015 study by the Pacific Research Institute, Massachusetts ranked 34th for its regulatory burden on small businesses; one being the least burdensome. So, it is safe to assume that regulation adds even more to the cost of new housing locally.

Here’s how the regulatory percentages translate into the actual cost of a new home sold in Acton in 2016:

Who can say whether all of the regulation is truly needed, but it seems that the cost benefit may not be present here. In the 1960’s, highway deaths averaged around 50,000 each year. Regulations requiring seat belts, air bags and other safety features have resulted in today’s average of around 30,000 deaths each year, one third of which are attributable to speeding. So, we could regulate speeds, not to exceed 5 or 10 miles per hour everywhere and possibly save lives, but how reasonable is it to think that we can make the world safe for everyone all the time?

And then there are regulations that are patently ridiculous. On the commercial real estate side, our new office is about 1,700 square feet. It is open concept with glass walls and doors, yet required to have no fewer than 8 fire alarm/strobe devices, any one of which could be heard or seen from anywhere in the office.

Compliance is another issue. The cost or effort to comply with building regulations places a disadvantage on smaller home construction businesses that are forced to hire outside consultants to fully comply with regulations. Most home contractors employ fewer than 10 workers and build fewer than 10 houses per year. Larger companies have compliance personnel on staff.

Because compliance is universal, the cost to comply is passed on to the consumer. This applies to renters as well because multi-family construction is impacted even more than single family housing, making the cost burden disproportionately greater on lower income individuals and households, as well as first time buyers.

So, what’s to be done? In addition to the NAHB, state and national housing associations and other trade associations do monitor new legislation and raise their voices, urging reasonable responses to safety and environmental threats. Individuals as well should make their opinions known.

It is important to make our homes safe, build them in appropriate locations, and keep their energy consumption efficient. But there are reasonable, cost effective limits to what should be required from new laws, and reviewing outdated laws and regulation is not a bad idea either. Let’s not get to the point where only the wealthy can afford new homes that are built by only the biggest home builders.

Wisdom from a Petting Zoo for the Holidays

By: Victor Normand

The merchants and businesses in West Acton Village held their annual Holiday Stroll recently to the delight of children and adults alike. There was music in the air, decorations everywhere, a scavenger hunt and a charity gift basket raffle. And of course, Santa and Mrs. Claus made a special appearance. Smiles were evident wherever you looked.

The strollers were treated to cookies and hot chocolate as they went from shop to shop, including a special holiday market opened just for the event. A small forest of decorated Christmas trees was set up at Villageworks where Santa and the Mrs. held court.

There were also animals present for the celebration, including a beautiful horse drawn carriage offering rides around the village and a little petting zoo for youngsters and us older folk with sheep and goats, a llama and a donkey. It was the donkey that made my day.  Unlike my cockapoo Edward, this donkey genuinely appreciated being petted. He just stood there motionless for as long as I was touching him. The other small animals roamed about in the enclosed area, but not my new four-legged friend. I truly felt a connection.

donkey

It was a connection that belonged to the season. My first thought in response to the undivided attention I was receiving went to imagining that this poor fellow, despite his involvement with a petting zoo, did not regularly get paid much attention, that after the day’s gig, he would be heading back to his lonely stall in a lonely barn on a lonely farm. In reality, I’m sure this creature has as happy a life as any donkey can expect to have and that he is treated very well.

By now I am feeling guilty that it took this unintended little act of kindness on my part toward this docile creature to make me realize that there are human beings in my world who could use little random acts of kindness as well.

We had a drop off station in the office for donations of food items for the Acton Food Pantry and families in need were the beneficiaries of the gift basket raffle. And in general, many of the organizations we support, pay special attention to the needy at this time of year, but the need for a gentle touch may often be much closer to home.

We should all be on the lookout for those around us, family, friends, co-workers who might be unhappy especially at this time of year when happiness might seem to be happening to everyone except them. Take a chance, show some love and kindness to everyone you come in contact with, you just might be surprised by how long they stay around for your touch.

Housing and the Silver Certificate

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Source: National Numismatic Collection at the Smithsonian Institution

When I was a boy, every once in a while, I would come across a one dollar Silver Certificate. Because they were different they did not get spent, usually. I spent my last Silver Certificate on a haircut.  It was the only money I had and I planned on keeping the next one I came across for good, which, sadly, hasn’t happened yet.

These one dollar bills looked like every other one dollar bill except for some different and additional text on the face of the bill. Instead of FEDERAL RESERVE NOTE at the very top, these bills said SILVER CERTIFICATE, and below that and above THE UNITED STATES OF AMERICA in a much smaller font was the phrase THIS CERTIFIES THAT THERE IS ON DEPOSIT IN THE TREASURY OF, and at the bottom of the bill beneath ONE DOLLAR it said IN SILVER IS PAYABLE TO THE BEARER ON DEMAND.

It was rare to come across these bills, but they did show up now and then. Being a curious lad I asked my father to confirm that someone somewhere would in fact give me silver in exchange for the bill. He said the government would, which was correct back then, though today if you show up at the Treasury the law now says that your one dollar Silver Certificate will get you a one dollar Federal Reserve Note.

My father’s explanation made sense to me; actually, it made more sense than the fact that all the rest of paper currency seemed not to have anything of value offered in exchange for it.  “So what makes every other bill in every other denomination worth anything?” I asked. My father, who was a man of the machine age, literally; he was an industrial engineer in post war America when industry was all about mechanical manufacturing. He was no economist, but he was always able to describe the world to me with precision and efficiency. “The value behind our money is our houses,” he said.

What my father was describing back then was what we most recently know as “Quantitative Easing.” In dramatic fashion, up until very recently, the Federal Reserve was printing up hundreds of billions of dollars and using them to buy mortgage backed securities. The fact that the dollar suffered no loss in value because of this is confirmation of my father’s lesson.

Moving money in and out of circulation is far more complicated than this “Quantitative Easing” exercise suggests, and our money is backed up by the entire American economy, but housing is a large and important component. For most Americans, the single largest component of their wealth is in home equity and for the economy as a whole, housing and housing services accounts for over 15% of the Gross Domestic Product. While homeownership has suffered since the Great Recession, it has been increasing lately and is still nearly 65% of all households.

So, my father was right about what makes our paper money valuable, and I was wrong to use my last Silver Certificate for a haircut. Today that certificate would be worth $139 to a collector!

Am I a Luddite?

By: Victor Normand

ludditeA recent Time Magazine article by Lisa Eadicicco and Matt Vella exposed the struggles of smart home technologies to capture consumer interest. Devices to control air conditioning, lighting, pantry and refrigerator inventories, home security and the like using internet connectivity seemed like the next big innovation. But it has not happened. Various technical reasons were cited, but mostly the failure to establish a basic rationale for having such technology in the minds of consumers seems to be the problem. It will no doubt come about in the fullness of time, but for now I find myself cheering for the consumers who just said “no thanks.”

So now I began to wonder have I reached the point in my life where new technologies need to be stopped or at least slowed down? Is there a movement out there that I should join as a modern day Luddite? The Luddites belonged to a protest movement opposed to the advancing machine age in England, early in the nineteenth century. General Ludd, as he was known, inspired the movement that saw weaving equipment smashed and factories burned in protest to jobs being lost to technology. Though Ludd himself apparently never existed, his name if not his actual cause carries on.

For some reason, the rejection of smart home technologies made me feel good. Even though I’ve known since the third grade that you cannot stop progress and most often change is good, if not inevitable. My third grade experience came to me in the form of a story told by Miss O’Leary to her class about an elderly aunt who passed up an opportunity to trade in her stocks in a Westfield buggy whip company for stock in a mostly unknown company called “International Business Machines.” Her aunt reasoned it was anyone’s guess who knew what business machines were all about, but surely there would always be a need for buggy whips!

Miss O’Leary’s story may have been apocryphal, but of the 40 buggy whip companies then in Westfield (still known today as “Whip City”) only one exists. This shows of course, that despite the decimation of an industry by technology, it is possible for the old ways to carry on, in a fashion. Nonetheless, the story obviously made an impression on me. And the truth is, the Luddites were not wholly against weaving machines. Their protest was against manufacturers who used machines in a “fraudulent and deceitful manner” to circumvent standard labor practices. They too recognized that technological change was unstoppable.

So, my rant against technology is in fact using technology to make the point. Also, it has been suggested that the ultimate intent of the Luddite movement was to make a machine to destroy other machines.  When you think about it, mashing a weaving machine is a much easier concept than attacking the “cloud,” or is it? Protest is good and technology has its place, prominent as it is, but I for one have no problem maintaining a paper grocery list.

Hominis Ambulantes

By: Victor Normand

Acton Real Estate_092814-4803I walked to the hardware store last week. For me, and I believe I am not alone, this was not an expected mode of transportation; the hardware store is 1.1 miles from the Acton Real Estate office, my point of departure. I need to get more exercise and the idea to take this walk came to me earlier in the week and actually became a bit of a compulsive event. Once I decided to do it, there was no turning back. Of course, I have taken my share of nature walks, but to forgo my car for such a trip as this during a workday was uncharacteristic and the idea could easily have been set aside.

On the appointed day I had prepared for the journey by wearing comfortable shoes and I assessed good weather conditions. I told no one of my trek ahead of time for fear that it would not be fulfilled. Out the front door I went with the simple comment “I need to run an errand.” I had previously determined that there would be sidewalks available to me throughout my mid-day walk. For the entire distance back and forth, I passed only two other pedestrians, though several young bikers did zoom past on occasion. I have to admit to feeling self-conscious. More so on my way to the store when I had the companionship of neither man nor beast, and I was emptied handed. Returning with my purchase, a trivial item of no urgency for the office, I felt comfortable with an answer to the question “What could that walking man, wearing business clothes be up to?” which I imagined every motorized passerby to be asking themselves.

The total elapsed time for both the walk and the shopping was just under one hour; which would have been twenty minutes by car. This effort helped my heart and lowered my carbon footprint, but cost me 40 minutes. To be honest, my work product for the day did not suffer.  Walking around eschewing the automobile is not practical or even possible for most of what we do these days, but it is becoming more popular and, from a real estate perspective, more desirable.

In a way, we seem to have come full circle in the relationship between housing and transportation. Until the middle of the nineteenth century when rail transportation emerged on the scene, (Acton had no less than three lines passing through town) most folks needed to live within walking distance of work and commerce. The automobile changed all that of course and we began to spread out. And indeed we did, building homes further and further away from where we worked and shopped, adding more roads and highways to accommodate the migration until we found ourselves at the practical limits of time and road capacity. So we are coming back to the rails and the “walkable” environment.

We are building houses closer together, though not necessarily any smaller, embracing infill locations and increasingly finding urban and town center locations more desirable. As it gets more and more stressful to drive anywhere (does the Sunday drive exist anymore?) I am happy to be evolving as a walking man.

Unintended Consequences

By: Victor Normand

Alternative_EnergiesRecently the Massachusetts legislature passed and the Governor signed a new energy bill H4568, “An Act to promote energy diversity.” Most of the bill had to do with expanding the Commonwealth’s efforts to encourage alternative energy sources by using offshore wind farms and hydropower to generate electricity.

The bill keeps Massachusetts ahead of most other states in the areas of energy conservation and the use of alternative/clean energy sources. It is innovative in its advocacy of off shore wind power generation, challenging in its intent to double the amount of electric power generated by clean sources, and most importantly, it is proactive in its scope as it anticipates the not-to-distant future when local utilities will no longer have the use of nuclear power plants.

The Great and General court is to be commended for bringing forth such an important piece of legislation, hailed by most conservation and clean energy organizations as a very good bill. But not everyone is pleased with the law, most notably, the Mass Energy Consumer Alliance and many State Senators, including Senate President Stan Rosenberg who favored a more expansive bill.

One of the sections that passed in the Senate and was stricken from the legislation by the conference committee and not included in the final House version of the bill would have required that every home sold in the Commonwealth have an energy rating before it could be listed for sale and an energy audit before closing. This idea, similar in principal to gas mileage ratings on automobiles, has benefit for consumers, but major pitfalls for most homeowners.

Last year nearly 50,000 homes were sold in Massachusetts. Newer homes in many communities did come with a very sophisticated energy rating, called a HERS rating (Home Energy Rating System), but that was only 6% of the market. Even though implementation of the bill could have taken years, the broad scope of the rating requirement would be overwhelming.

Implementing new laws and regulations is nothing new to the real estate industry, lead paint certifications, home inspection notifications and closing disclosures for example. It is the significant unintended consequence such a rating and audit requirement would have on owners of older homes; homes more often concentrated in lower income, urban neighborhoods that would be problematic. Especially since Massachusetts has the second oldest housing stock in the country with a median age of 54 years.

There would be a cost associated with both the energy rating and the energy audit, and a time factor to get them accomplished to be considered. The burden to implement this would fall on the home seller, who would be under no obligation to make energy improvements.  But as a practical matter, home buyers would be looking to sellers to make identified improvements or in the alternative, to discount the sale price. Even home buyers who are in the market for an older home who are prepared to live with the added cost and discomfort of a less energy efficient house would be well advised to take advantage of the situation in preparation for the day when they will find themselves in the home sellers shoes.

The Massachusetts Association of Realtors lobbied to get the energy rating section of the bill removed. Their economic and social arguments were effective this time, but the advocates will be back next year. So, it is not enough to rely on lobbying efforts alone. Those of us in the real estate business need to continue to take energy conservation seriously by making sure potential home sellers include energy saving efforts on the list of important worthwhile home improvements. The unanimous vote of the State Senate in favor of this measure in the just ended legislative session is not insignificant.