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.

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!

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.

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.

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.

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.