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.

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.

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!

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.

Decisions, Decisions, Decisions

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.

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.

Thinking About Real Estate

By: Victor Normand

PhiladelCampaignHessianMapAn article entitled, Obama After Dark: The Precious Hours Alone appeared recently in the New York Times.  It caught my attention because I imagined that the President of the United States probably gets very little quiet time. Turns out President Obama gets his quiet time late every evening, undisturbed in his private study where he stays up late before getting his usual five hours of sleep. It’s comforting to know that Mr. Obama does take time to be alone with his thoughts.

Rahm Emanuel, Mr. Obama’s first chief of staff said in the article “You can’t block out a half-hour and try to do it during the day. It’s too much in-coming.” He talked about how the self-described “night guy” uses late nights to put aside interruptions and focus.

Carving out a large block of time to think wasn’t always that hard to do. Consider how long it used to take to travel anywhere by foot or by horse and there you have your time to think. In the beginning of his book about John Adams, David McCullough describes the journey the delegate to the First Continental Congress took in 1774 from Braintree to Philadelphia on horseback. He traveled with others and made many stops along the way during the three-week trek (it would have taken only eight and a half days straight through). But he still had plenty of time to think; he wrote in his diary “I wander alone, and ponder. I muse, I mope, I ruminate.”

Today, travel is speedy and hardly quiet, technology has seen to that. In fact not only does quiet not exist as a naturally occurring event during any part of our daily lives, but the demands we place on our weary brains during every waking hour is daunting. Even though our brains are not wired to multitask, we attempt it routinely and we expect it of others.

Earl Miller, a neuroscientist at MIT was recently quoted in Neuroscience Magazine on the subject of multitasking saying, “When people think they’re multitasking, they’re actually just switching from one task to another very rapidly. And every time they do, there’s a cognitive cost in doing so.”

So, what’s this talk about quiet time and thinking doing in a real estate blog? It just seems to me that in this DIY, HGTV, FSBO, Big Data world, we have managed to reduce home selling and home buying to a simple task to be mastered by technology alone without much need for quiet time or deep thinking.

Our lives are busy and most of us need to find quiet time first for our families and also, our professions. A house is not a commodity and a real estate transaction does not respond to a bar code. The principals in the deal will always have to make the big decisions, but much of the heavy lifting that must be done thoughtfully and efficiently when buying or selling a home, should be the quiet work of a Resident Expert(sm).

Yes in My Back Yard

By: Victor Normand

One sure way to lower the cost of housing for first time buyers and increase the supply of smaller homes for those who want smaller homes, including downsizers, is to suspend all zoning bylaws, along with building codes, energy codes, historic preservation restrictions and the like. That’s never going to happen, nor should it, but it’s easy to imagine what would happen if all you needed to do was start building on whatever piece of land was handy. Look around, there seems to be lots of places to build and without needing to get permits of any kind, we could start solving our housing shortages right away.

A movement in that direction exists. As reported recently by the PBS Newshour, an organization in the San Francisco Bay area that calls itself “Yes in MY Back Yard” (YIMBY) is advocating for government action to increase the supply of housing. The YIMBY folks are critical of both the political left and right for their respective positions on housing policy. Affordable housing advocates use the lengthy public approval process to slow and often kill new urban housing developments in their battle against gentrification. And property rights advocates on the political right, rely on restrictive zoning to keep out any housing development in suburban areas.

The YIMBY folks have taken the position that everyone should support the development of more housing at all levels, including luxury housing. And from an economic perspective, they would be correct. Increasing the supply of housing beyond demand will cause prices to fall. If the supply of larger more expensive homes exceeds demand, prices will fall enabling more buyers or renters from lower price points into that market, and so on, eventually effecting all buyers or renters.

But that is not the main focus of the movement. Their first point is that over-regulation has an effect on housing development at all levels; it adds cost and increases approval times which also is a cost. A careful review of all building and health and safety codes with a view toward eliminating antiquated sections or codes that have minimal benefit to society, will help to speed up the development process. Building codes address a broad spectrum of issues affecting safety and comfort, but they do not focus on creating an efficient system for housing development.

And there are often conflicting social goals that effect housing supply. Take the Community Preservation Act, which allows communities in Massachusetts to dedicate tax revenue to purchase land for conservation and also allows funding for affordable housing. The micro economic effect of these two undertakings is clearly beneficial to the community, but from a macro-economic perspective, every acre of land that is placed in conservation increases the price of every acre of land not in conservation. As the old saw goes, God is not making any more land.

The second area of concern is zoning. Unlike building codes which come under the jurisdiction of states, including Massachusetts, zoning is a local matter. Super local zoning, as it is referred to in the Newshour story, makes it hard to adapt to changing conditions. The link between where you live and where you work was weakened or in some cases, broken a long time ago. The imperative for one town to change zoning to allow for smaller homes and denser neighborhoods vanishes when the attitude is “not in my backyard”. Linking local aid to cities and towns based on regional economic growth and the demand for more housing might be an answer.

As the economy grows and populations increase, a smart look at all aspects of housing development needs to happen. At some point in all our lives we are all affected by the lack of choice in the available housing stock. Yes in My Back Yard should be a starting point for all of us as we work to solve our housing issues.