Residential Real Estate Just Got a Bit More Complicated

By: Victor Normand

We have a dynamic economy in the US influenced by consumers, business interests and government actions. Housing is one of the largest sectors of the economy, comprising about 15% of our Gross Domestic Product. Sometimes changes happen at a slower pace that are easy to comprehend and manage, other times not so much. As we enter the spring market, Homeowners, Buyers and Sellers have big changes to consider.

The two significant areas of concern are accelerating home values (appreciation averaging around 6% annually) and the effects of the recently passed tax reform. Both come to bear regardless of where you might be in the housing market, even if you have no plans to change your circumstance at all.

As home values appreciate, you will feel more wealthy and tempted to spend (credit card balances are on the rise) or borrow against the new higher home value using a home equity loan (HELOC), That’s the up side for many of us. The down side comes from government actions to share in your new-found wealth by potentially increasing your local property tax bill, and taking away your ability to deduct interest paid on your HELOC on your federal taxes. And of course, your home is not the only one now worth more money; the home you may be hoping to up-size or down-size into, has also gone up in value.

Coping with rising home values is not completely new and we all know strategies to deal with that. What IS new and different is the new tax reform law. Here, the economic dynamics is very personal. In fact, it is so unusual, the IRS is requiring that everyone who receives a paycheck complete a new expanded W-9 with their employer. We will all be turning to tax accountants and lawyers to help us sort things out. Full disclosure, I am neither so take what I have to say as merely conversation starters.

On the upside, if you do not own a home, you do have a spouse and children and receive a pay check for your work, you will be getting more cash in the envelope. Of course because you do not own a home, you have nothing to appreciate and some of your tax cuts are effectively off-set.

If you have plans to move to a state with low housing costs and no income tax, the new tax law will be very good to you unlike your neighbor who stays in the big house, has no children, a HELOC and draws a big salary.

So, the big question for someone interested in buying a home, comes down to the ability to afford the monthly payments, taking into consideration debt servicing and tax benefits or lack thereof, along with the overall impact of the new tax law as it provides and diminishes various benefits. And then there is the market appreciation factor to consider and its ability to make a purchase worthwhile in the long run.

None of the above takes into consideration all of the other really good reasons for living where you live in a home you love. Hard to put a price on that. As always, you do not need to be alone as you navigate the emerging and confusing real estate landscape. Talk to a Resident Expertsm at Acton Real Estate, they are there to help you sort things out.

A Christmas Story

By: Victor Normand

Around the holidays, the real estate business slows down. For a while we put aside the tips on staging your home, decluttering advice, valuable home improvement suggestions and the like and we get a little sentimental. Thoughts turn inward to hearth and home, being with family and friends and memories of Christmas past.

Personally, I still believe in the spirit of Santa Claus though my faith was challenged one Christmas time when I was six years old. My cousin Donny, who was eight and considered himself more “in the know” came for a visit before the holiday with big news he shared only with me. He told me there was no Santa Claus, and more to the point, it was actually our Uncle Walter all dressed up.

My mother was the second youngest of twelve children of Adam and Mary Ruszczyx. Except for Joe who died during the war, all of my aunts and uncles along with all my cousins gathered for a traditional Christmas Eve meal at my grandparent’s place. Back then we lived a few blocks away in a tenement building on South Bridge Street in Holyoke. The whole family lived in Holyoke as well. Extended families should be so lucky these days.

After the meal was over, tables cleared and dishes washed, the main event would occur. Santa would arrive with big bags filled with gifts for all the children. As you can imagine, the run up to Christmas Eve was a much-anticipated event. As children, we felt doubly blessed to have this extra visit from Saint Nick, so Donny’s news was very confusing and of great concern to me that year.

It was a secret I could not keep to myself. I told my mother what my cousin had said; she assured me that his information was not correct. This put my mind at ease though I remained a bit unsure wondering why Donny would have said what he said.

Finally, the big night arrived, the meal consumed and everything made ready for the special visitor. We gathered in the living room in a big circle nervously waiting. The phone rang. It was Santa himself announcing that he was only a block away. The air was electric!

As I fidgeted in my seat ready to jump out of my skin, I noticed who was sitting right beside me – Uncle Walter! Then Santa came through the door; his jolly old self carrying big bags filled with toys and shouting out Merry Christmas as he handed out gifts to each child gathered around the room. When he got to Donny, the room grew quiet as he presented the unfortunate lad with a big plastic mesh stocking filled with charcoal.

Later in life my mother confessed to me that because of Donny’s misguided, though admittedly accurate information, plans for that night changed and my Aunt Jenny padded up and became the jolly old elf.

As for Donny, I can attest that he was not scarred for life though lessons were learned that Christmas Eve.

It has been a very long time since Santa stopped making his visit with the grandchildren of Mary and Adam but the memories of Christmas past live on, fondly in my heart.

Merry Christmas

Challenging Group Think

By: Victor Normand

According to the Urban Dictionary, the expression “Do the math,” means to figure something out. To come to a solution or conclusion based on other facts. But my training, going back to my earliest experiences in the world of work literally means to do the math. Whenever I read an article with numbers in it, I do the math often discovering that something just doesn’t “add up” or that the verbiage doesn’t match the math. Or that the numbers have become group think detached from reality.

Tax Reform

The latest disconnect between the word on the street and the math has to do with tax reform. The group think within much of the housing community, including the National Association of REALTORS® has to do with changes to the mortgage interest deduction “eviscerating” the program and bringing home sales down and endangering the economy.

First of all, nothing yet has been turned into a bill let alone passed into law, so injecting panic into the marketplace is chilling and ill advised.

Secondly, even considering the most severe reduction from $1.0 million to $5 hundred thousand in mortgage debt, the reality is it will affect very few new homebuyers, mostly those buying big houses with big incomes. The average mortgage debt nationally is less than $225,000 and even in high cost markets, having a buyer’s tax liability rise by a few thousand dollars is not likely to be the go or no-go metric on a home purchase.

Down Payment Requirement

This still keeps coming up. Common knowledge among first time home buyers, reinforced by the printed word is that it takes 20% of the purchase price in cash to qualify for a mortgage. One of the Agents in the office asked a friend why she thought that way. Her response was that every time she went to her favorite real estate website and checked in with a mortgage calculator, the assumed number for down payment was 20%.

In actuality, according to the National Association of REALTORS®, about 60% of first-time homebuyers put down less than 6% on a home mortgage and in Massachusetts, there are programs that allow even less for qualified buyers.

Student Loan Debt

Seventy-five percent of all student loans are government loans and government loans provide for re-payment based on income which means that monthly payments are not necessarily tied to the amount of the loan but rather as low as 10% of the borrower’s income.

Lenders make loans in part based on debt to income ratios though it would be more accurate to say debt “service” to income ratios. From the lenders perspective, the amount of unsecured student loans a borrower has doesn’t matter but rather how much they pay each month on those loans.

Challenge everything; it’s a good practice and you will be surprised at how often the numbers don’t add up. It’s not a grand conspiracy; perhaps the media or word on the street picks up on a small or partial truth and runs with it because it seems to make sense and it very well may sometimes. Don’t be satisfied until you can relate the information to your personal circumstance. While the Resident Experts(sm) are not lenders or tax accountants, they know when you should be talking to one.

Some Good News, please!

By: Victor Normand

Does it seem like all the news is bad lately? No matter where you look, something bad or very sad is happening. Natural disasters keep coming one after another, the political environment is chaotic and violence around the world is setting records. We can’t get away from very bad behavior by some of the powerful in society and millennials still can’t find good jobs.

To some extent, we find what we are searching for. Psychologically, we are wired to look for bad news as a matter of self preservation. We need to know what’s out there that threatens us, but are we being overwhelmed by bad news and is it affecting our behavior, dampening individual optimism in areas where optimism is justified? A recent article in Psychology Today found that negative news stories outnumber positive ones by seventeen to one.

But…there IS good news; you just have to look for it. Every day good things happen to people, so much good news in fact that most major news outlets have channels that post only good news, lots of it. Even Fox News has the site, http://www.foxnews.com/category/good-news.html where they keep the good news. There’s even a Good News Network. It’s interesting that much of this good news is segregated away from the Breaking News of the day.

But consider this, as in politics, good news is often all about the economy, and the economy doesn’t look bad at all. Writer Brian Sullivan included this list of good economic news in an article he wrote for CNBC last week:

  • The latest CNBC economic survey shows optimism in the American economy at a 10-year high.
  • Manufacturing activity is at a 13-year high.
  • Service sector activity is at a 12-year high.
  • There are a record 6.2 million open jobs in America.
  • Semi truck sales are out-of-control strong.
  • Intermodal rail traffic hit a record in the week that ended Sept. 23.
  • Despite talk of retail’s impending doom, nearly 700,000 people got hired in the sector during the past year.
  • The median home sales price rose more than 5 percent from last year.
  • Car sales data released last week showed a huge rebound, with GM sales up 12 percent and Ford rising nearly 9 percent.
  • Airlines are carrying a record number of people.

It would be a mistake to ignore the bad news, especially when there are things we can do to make things better for the future, but the sky is not falling and the Chicken Little in us has not overtaken our optimism.

As for our millennial children, we may be more worried about their future than they are. They are smart, well educated and living in one of the most open societies on earth. Despite our conflicts and uneven social progress, this country is still on the top of the list of best places to build a prosperous future.

The younger generation is moving at their own pace and in their own direction and that is very good news.

To Buy or to Rent, That is the Question…

By: Victor Normand

There are many considerations when trying to decide whether to buy or rent a home and there is no right answer that will suit everyone.  This blog will deal only with the economics of the decision using a realistic set of assumptions and current market conditions.  It’s a good place to start and allows for other life circumstances to inform the final decision.  Just under 65% of Americans are homeowners and a majority of those who do not own homes would like to some day, according to the National Association of Home Builders. It’s still a big part of the American Dream.

In order to conduct the analysis, a standard model was used to compare both the short term and long term costs and benefits of both owning and renting.  The specific numbers used to populate the model come from  recent sales and rentals as published in the local multiple listing service (MLS PIN). A time period of five years was chosen as the length of occupany for both the renter and the buyer. The metrics used for both the sold and rented units were:

We found 23 sales and 25 rentals that met these criteria.  The median sale price was $185,000 and the median rent was $1,550. The simple average was $177,661 and $1,541 respectively  The median was used because there are as many sales below that number as above, so extremes do not effect the selected values.

For the rental units, we assumed rental insurance of $240 per year and annual rent increases of 4% which seems to be the market for two bedroom units.

For the sold units, we assumed 5% downpayment, a 30 year mortgage interest rate of 5.0 (FHA),closing costs of $6,000, property taxes of $2,123 annually, condominium fee of $393 per month, mortgage insurance at .5% of the mortage amount, and condominium unit owners insurance of $240 annually.  Property taxes and condominium fees were also increased by 4% annually to be consistent with rent increases.

Based on these criteria, the total monthly cost to buy was $1,607 and the monthly cost to rent was $1,570.  Over a five year period of ownership, the cash paid out for the buyer would be $97,879 vs. $101,944 for the renter. So, if you are paying more than $1550 per month and you can find a nice condominium for anything less than $185,000, buying is your best economic option.

There are two real sweetners for the buy option.  Assuming a combined state and federal tax rate of 20%, a five year tax benefit of $10,752 would be realized by the homeowner.  Additionally, the homeowner would have paid down the mortgage loan by $14,361 and can expect the property to have appreciated in value by $40,081 over that time period.

As they say in investing, past performance is not necessarily an indicator of future returns.   The same holds true for real estate investing, including the purchase of a primary residence.  But unlike stocks and bonds, it’s easier to ride out the slow or down years simply because you need to have someplace to live.

So, if you’re secure in your job, have managed to save for a down payment and have a good credit score,(680 or above) a closer look at some available real estate may make sense at this time.  And as always, while formulas and rules of thumb are a good place to start, get a professional like a Resident Expertsm  to work closely with you on this journey.

Beware the Bubble

By: Victor Normand

My daughter Emily recently returned from a trip to Europe with a gift for her dad. It sits in front of me now as I write. A small brown paper bag with little holes punched on two sides so that the tulip bulbs inside can breathe, I assume they need to breathe. If this present of tulip bulbs and its long ago circumstances were described in a novel, its significance would eventually be revealed. Students of economic history may already have an idea of its place in this story.

Housing and real estate news have regularly of late, contained articles speculating on the growing signs of another housing bubble, especially in some red-hot markets. Not far from Acton, many communities closer to Boston and in Boston itself are seeing behaviors characteristic of a bubble in the making. Multiple and over-asking offers on homes are occurring with predictability, causing asking prices to rise ever higher.

The term” Bubble” dates back centuries and economic bubbles were occurring even before we had such a name for them. The term bubble derives from the prices paid for stocks that were inflated and expanded by nothing but air and are vulnerable to burst suddenly. Investors were most prone to be the victims of bursting bubbles though recent history has shown that ordinary home owners can get caught as well.

Bubbles form when the price of an asset, like a home, deviates substantially from its intrinsic value. Unfortunately, the intrinsic value is more often not revealed until after the bubble has burst. Most economists believe that bursting bubbles are a recurring feature of our modern economy. Models used to predict periods of irrational pricing rely on analyzing the expected stream of income or dividends, which is no help to buyers of single family homes.

The maddening aspect of bubble formation is that they present profit opportunities for investors who are in early and most importantly, out before the bubble bursts. These Ponzi scheme participants manage to find a chair before the music stops.

The key element for home buyers who are in the market during times of hyper price escalation is to expect a bubble. However, if the target property is in the right location, fits the buyers needs and desires and most importantly, occupancy is expected for an extended period of time, it’s right to make the buy. Home equity lost during the Great Recession of 2008-2009 has returned to most markets across the country. And here at Acton Real Estate, our “Resident Experts” have had lots of experience in all markets and can help you make those decisions.

As for the tulip bulbs Emily brought back from the Netherlands, in the Fall I will be planting them and thinking about how investors were paying a small fortune, as much as 5,500 guilders for a single bulb! That was enough to buy a small house in Amsterdam at the time. Tulip Mania of 1636-1637 is often said to be the first true economic bubble in history. As for my bulbs, I have assessed their intrinsic value based on having a loving memory of my daughter’s thoughtfulness.  Having said that, 5,500 guilders IS a lot of money!

Disruptive Innovation

By: Victor Normand

As I write this it is easy for me to imagine that countless technology innovators around the globe are hard at work crafting apps and programs to basically accomplish everything. If you name a product or service, you can be sure someone is out there trying to be successful doing it better, cheaper or faster.

In business it is called disruptive innovation and it really isn’t a new concept.  Think stone tools, fire or the wheel to begin with, everything that creates new value that replaces an existing good or service is disruptive, and that’s a good thing usually, in the long run. Not all innovation works out as intended, for example the dirigible had its draw backs. Things that are costly and widely used attract the most attention from innovators, like real estate brokerage.

Internet technology has opened the innovation door wide and has caused whole industries to change dramatically in an ever accelerating fashion. A friend from college thought she had an enduring career in travel and another of my friends once owned a bookstore. Uber now accounts for 40% of all business travel in 108 countries and Airbnb is giving the hotel industry heartburn. But for many reasons, the disruptive innovators have not been able to break the back of the real estate brokerage.

About 90% of all home sales still involve real estate brokers and that percentage has actually increased over the past 20 years. And a significant percentage of the balance, are transactions between close friends and family members. While technology has changed the industry, the traditional commission based model remains in place despite many well funded attempts to change the way residential real estate is bought and sold.

One west coast based real estate technology company that once thought the buying and selling of homes could be transacted almost entirely on line and has operated in markets across the country, never made money and burned through over $600 million in venture capital. They’ve effectively become a discount brokerage, a business model that has never been successful.

Residential real estate is not a commodity. If it were, Amazon would have figured out how to retail it. Actually, Amazon is beginning to offer referral services like Google and Facebook, recognizing the important role of the real estate professional in the buying and selling process; a role that has become increasingly more complicated as more and more information about properties and markets becomes available. To a great extent, the internet has made buyers and sellers more aware of how complicated a real estate transaction can become.

The real estate commission remains the big prize for disruptive innovators. But eliminating the commission expense from the sale of a home does not necessarily mean the actual sale price does not change. Since almost every home sale involves a commission, the commission is in fact baked into the sale price of all homes. Unless a brokerage is buying sales volume by operating at a loss, which always ends unhappily for that brokerage, commissions offered will reflect the effort required to provide service.

Someday a machine will write blogs like this and be read by a generation born into the world of artificial intelligence, until then the debate rages on.

The White House

By: Victor Normand

I have been thinking a lot about the White House lately and thought I should write a blog about it, so here it is. George Washington never lived there, the only President (the title he chose for himself over king), who did not, though the responsibility for its creation fell to him completely. Once the Constitution was adopted in 1788 and the first election of a leader was completed, it seems most of the Founding Fathers vacated the scene. As expected, and hoped for, George Washington won the election with all 69 of the electoral votes cast. He had done great things for the new country, and was about to add first time home buyer for the nation to his list of accomplishments. The task of finding the right location in the right part of the country and building a suitable home for its leader fell to him.

In 1789, no country on earth was ruled by someone who was term limited and George Washington was determined that the United States of America was to be the first. And that was not the only egalitarian distinction he was going to bring to his new charge. While he felt strongly that the President should reside in a substantial residence, he rejected city planner L’Enfant’s vision for a grand elaborate palace and settled on a house one third as large, yet grand for its time in America. Bigger homes would not be built until after the Civil War during the Gilded Age.

Capital cities in Europe were recognized for the wealth and commerce they attracted so it was not surprising that New York and Philadelphia, Americas two largest cities, competed for the chance to become the nation’s capital and home to the President, but Washington felt that it was important to locate the seat of government and the “Executive Mansion” in a more central location. He signed legislation in 1790, designating land not more than 10 miles square along the Potomac River at the Maryland/Virginia border to be the Federal City. Washington personally selected the “practical and handsome” design by James Hoban from among nine competing submissions. The cornerstone was laid in October of 1792 and Washington was present to oversee the construction of the house. He would not live to see his vision realized when the house was completed in 1800.

The White House is 185 feet long, 85 feet wide with two basements and four stories above grade for a total of 55,000 square feet of living area. It has had its share of challenges requiring upgrades including being set afire by the British in 1814, a major house fire during the Hoover administration in 1929, and near structural failure when Truman was President. The nation has never failed to respond to the needs of the White House, which only became the White House in 1901 when Theodore Roosevelt began using the nickname on his engraved stationary.

The White House cost about $3 million in today’s dollars. It was a great expense for the new nation, but Washington knew how important it was to show confidence to the world that our democracy would endure. No matter what your politics are, it is hard not to be anxious these days, but we can take some comfort in the permanence and beauty of this old house.

Student Loan (IBR) and Mortgage Qualification

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?

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!