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.

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.

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 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!

Do You Need a Real Estate Agent?

By: Victor Normand
Published: May 2015

Donald Trump was recently asked why he thought he would make a good President. He answered “because I know all the right people.” And that’s not a bad answer. Engaging a good real estate agent makes YOU smart. While tapping into their knowledge and experience is a very good thing, having access through them to their local office support and to their list of other housing professionals is important and indispensable.

Referral networks are increasingly popular these days. One of the major benefits of social media allows participants to share their experiences with others. Real estate agents have always valued referrals as the most effective way to build their business. Getting started on a real estate adventure is easy going at first, but it rarely stays that way; ask anyone who has just completed a deal. Testimonials are a good way to learn about an agent and often a window into some of the complicated situations that often arise on the way to a closing.

What about deciding against using a real estate agent? In an attempt to “save” that commission expense, whether or not you save money buying or selling a property is not so certain. You can search on line for legal or medical advice and save those professional fees as well, but that might not be cost effective either. It’s all about believing that your agent represents a value proposition.

A buyer more focused on using commission money as part of negotiating a purchase by dealing directly with a seller or seller’s agent may succeed, but their negotiating success may be limited. A buyer agent brings knowledge of the local market and practical experience to every transaction. There is a vast difference between someone who does a real estate deal once every seven to ten years and someone who may have done more than seven to ten deals in the past year.

There might be comfort, if not safety, in believing that “you don’t know what you don’t know.” But, that is no defense in situations involving discrimination, home inspections, lead paint notifications, legally binding agreements and a host of other legal requirements that are a part of every real estate transaction. Whether you are a buyer or seller, full disclosure and knowing your rights can help protect you from financial difficulties, wasting time and preventing extended periods of stress and anxiety.

The Board of Registration of Real Estate Brokers and Salespersons enforces existing licensing laws and regulations on behalf of consumers. Real estate agents are required to maintain active licensees and regularly participate in continuing education. In addition, many real estate agents, including all of the Resident Experts sm at Acton Real Estate are REALTORS®, members of the Massachusetts Association of Realtor and the National Association of Realtors. As members, REALTORS® must abide by a strict code of ethics, which is also subject to continuing education requirements.

So, when you know a Resident Expertsm who is also a REALTOR®, you know the right people.

Contrary Thinking

By: Victor Normand
Published: September 2014

It is said that the best time of the year to sell a house is in the spring and that’s when the buyers are out. So says conventional wisdom and conventional wisdom is both wise and self-fulfilling, usually. But, is going along with what everyone else seems to be doing always what one should do?

There is an investment school of thought called contrary investing which challenges conventional wisdom. It’s a version of “buy low, sell high” where they actually try to do just that. Contrarians begin every day by questioning conventional wisdom.They live in a world that believes that there is always a point in time when conventional wisdom reverses itself and they want to anticipate that moment and make money because they got there first.

This sound like a good investment strategy but like most things that sound too good to be true, contrary investing really involves staring into a crystal ball and understanding what you are looking at. You have to know the signs and have confidence in them before you polish up the ball for gazing.

Timing a real estate move can also benefit from a little contrarianism. We took a look at the real estate market in the Acton area for the year 2013 to see how well conventional wisdom holds up when it comes to the best time of the year to act. We used as our measure, days on market and the ratio between the original list price and the actual sale price. And we looked at sales that would have gone to contract (P&S) in either June or September and closed two months later. What we found was that for three of the towns, Acton, Harvard and Boxborough, sales originating in the spring had spent fewer days on market and had a higher sale price to original list price ratio. But for Concord, Littleton, Maynard and Stow the reverse was true (see the chart below).

blog chart
The point here is that while it is important to be aware of what everyone else is doing, having the discipline of a contrary thinker makes sense as well. A true contrarian starts out questioning everything and trying out an opposing view. You might want to keep your contrary views to yourself until you have done some homework. After all, conventional wisdom is not to be ignored but if you think you are on to something, you might want to make your move. Often those who have done very well with a real estate deal acted ahead of the crowd, whether they meant to do that or not.

The more information you have and the more critical tools you have to process that information, the better your chances of making the right real estate decision. An open mind is required, as is the willingness to consider opposing points of view. As always, having a Resident Expertsm to help you think things through is a great idea.

The Real Estate Market in Cuba

By Victor Normand
Published: July 2014

It would literally take an act of Congress before Americans could legally buy property in Cuba, but Cubans are now able to buy and sell their homes on the open market, for market value. For more than 50 years that was not allowed, but now, it’s legal and happening every day. If you think it is a challenge to sell your home or buy a new one here, the process is that much more complicated for the average Cuban.

Jackie and I visited Cuba recently (yes there are proper ways to get a visa to the largest of the Caribbean islands and the only fully communist country in the western hemisphere) and among the many things we experienced, we could not help being curious about Cuban real estate.

You might be surprised to know that between 80% and 90% of Cubans own their own homes. That wasn’t always true, in fact only a small percentage of Cubans owned their own homes before the revolution in 1959, but within days of the communist takeover, all private ownership of housing was abolished, rents were cut in half and evictions outlawed. From that time on, rents were paid to the government and the tenants were given title to their homes in exchange for rent payments that never lasted longer than ten years. Still, until 2011, there was only one place where Cubans could actually buy a piece of real estate, in cemeteries:

cuba 1Colon Cemetery, Havana, Cuba

Among the many social problems that exposed the former Cuban government to overthrow, the cost of housing was right up there along with organized crime and government corruption. The change brought about by the revolution was successful in making almost all Cubans “owners” of where they lived. However, government policy dictated that homes were for “living in” not “living off of”. The problem was that while Cubans owned their homes, they could not sell them. Passing the home to your heirs was allowed and swapping or permutas was tolerated until 2003 when even permutas was outlawed.

If you travel to Cuba, as we did in April, you will be struck by the deplorable condition of most residential properties. It seems that while the government gave apartments to their occupants, no one owned or was responsible for the buildings within which those apartments were located. Every day in Havana, where one in five Cubans live, whole buildings or parts thereof collapse into the streets.

cuba 2Residential Neighborhood, Havana, Cuba

In addition to what happens with 50 years of neglect, no private mechanism exists to deal with a severe housing shortage. Recognizing the seriousness of the problem, the Cuban Government under Raul Castro instituted reform in 2011 which allowed homeowners to sell their property at market prices. The real estate brokers, called corredores, or runners, who had previously arranged the permutas, were back in business.

Because there is no organized system for marketing real estate in Cuba with little help from the tightly controlled, censored, and expensive internet, the buying and selling of homes mostly happens at places like the Paseo del Prado in downtown Havana on Saturdays. Buyers and sellers stand around the square holding signs with the particulars of property for sale or sought after.

paseo-de-marti-o-paseo-del-prado_515148Paseo del Prado, Havana, Cuba

Since there are no mortgages in Cuba, all real estate transactions are in cash. Cuba has a dual currency system; the Peso, used for local purchases is worth about 4 cents, and the Cuban Convertible Peso (CUC) which can be purchased for one dollar less a 10% tax to the government. Rent and transaction taxes are paid in pesos, the purchase price in CUC’s.

The average monthly wage for a Cuban worker is about $20. So how does the average worker buy an apartment for 40,000 CUC’s in Havana, or a free standing house for 120,000 CUC’s? Two ways: either sell a larger, higher priced home and buy a less costly property, keeping the difference as a nest egg; or use cash earned by exiled Cubans who have repatriated or have provided remittances to relatives on the island . The bad news is both buyer and seller pay a 4% tax on the sale, the good news is, the sale price is determined by an assessed value mostly based on the original, post revolution value determined by the government and paid in pesos not CUC’s.

Cubans are only allowed to own one primary residence and one vacation home. So, while real estate activity has increased every year since the reform on 2011, the lack of private capital has meant that the housing shortage has not been helped by all this new housing market activity. Younger Cubans often live with their parents or other relatives, waiting for a housing opportunity to open up.

Other economic reforms have taken place recently allowing certain businesses to operate privately with government permission. The corredores joined the list of occupations allowed to work on a private basis in September of 2013. Because nearly every Cuban has a stake in real estate, expect more changes to come. There are no licensing laws or continuing education requirements, but you can be sure there will be a Cuban version of Resident Experts (SM) just the same.

The Housing Market Never Stops Changing

By: Victor Normand
Published: May 2014

Real estate professionals agree that presently, there is a shortage of homes for sale in most areas. Consumers who are actively looking for a home to buy would most likely agree.   In the larger economy, whenever there are more buyers than sellers of anything, the market will correct the imbalance, and so will the housing market….. eventually. It takes considerable time to produce new housing and it apparently takes considerable time to convince existing home owners to offer their property for sale.

Sometimes there is urgency on the part of sellers and buyers to make a move in the instance of a job change perhaps, but often there is a rather big window of opportunity within which to make a move. For the most part, buyers are living somewhere now and can continue that way, and sellers often seem to be waiting for inspiration. Unfortunately for sellers, when a clear sign comes, it is often too late and the most favorable conditions have passed. For some potential home sellers, waiting for a home to return to its peak value is an indicator of when to sell.

In some Massachusetts communities, home values have reached or surpassed the peak values of 2005. Those communities tend to be the towns in the inner suburbs of Boston, mostly east of route 128. Other cities and towns located south of Boston and in the north central towns are far from recovering their peak values. In our market, most towns are still off the peak by around 10% (see the chart below). Still other potential home sellers are held back by the fear that once they sell, they will have trouble finding something to buy in this tight market.

The perfect situation is a balanced market where all sellers and all buyers are equally matched in number. Unfortunately, while balanced markets do happen, they rarely happen for very long. There are clearly times when it is a buyer’s market, like during the years immediately after the Great Recession, and there are times when it is a seller’s market, like now. More often we are in a state of transition where buyers think it is a buyer’s market and sellers think it is a seller’s market. So, knowing the inventory of homes on the market relative to recent sales activity is a good measure of the overall condition.

The chart below shows the current supply of listed single family homes by town, the number of home sold in the previous 12 months, the actual monthly absorption rate and the number of months it will take to sell off the current inventory. Nationally, in 2010, the worst real estate year after the Great Recession, the absorption rate stood at 9.4 months. According to the National Association of Realtors, a balanced housing market should have between 6 and 6 ½ month of inventory. The rate for the entire state of Massachusetts in presently 4.4 months, and in our market the average is 2.6 months.

Like politics, all housing markets are local. In our market, housing values are increasing in most towns, though not as fast as others and not yet fully recovered to their pre-recession levels, and the inventory level of houses for sale are so low as to keep the market in favor of sellers. That is the condition today, and tomorrow you can be sure changes are likely.

Rising Interest Rates and the Local Housing Outlook

By Victor Normand
Published: January 2014

The good news for the housing market is that the economy is improving.  Job creation is getting better and incomes are growing.  The bad news for home buyers, and sellers who need buyers, is that the economy is improving.  Of course, that news is not really bad, but it is changing the marketplace.

The Federal Reserve is easing up on its purchase of mortgage backed securities resulting in the expected rise in mortgage interest rates.  Last month, when the Fed finally followed up on its intention to “taper off” its level of purchases, the markets reacted calmly and interest rates went up only modestly.  That was a good thing.  Now economists are wondering what the longer term impact on housing will be.

Even before the Fed acted, interest rates had been going up from their historic lows (3.34% in May of 2013).  At the current rate of 4.50%, it is hard to say if the increase has had an effect on the market.  Nationally and locally, sales have softened a bit but that may have as much to do with the lack of inventory as anything else.  The math tells part of the story. Presently, the median price for a single family home in Acton is approximately $520,000.  For every 1/8th percent increase in the rate of interest on a 30 year mortgage, the consumer loses about $5,500 in buying power.  This example below holds the term, down payment, and monthly payment constant, showing how significantly purchasing power and interest rates are inversely related.

Mortgage Interst Rate Chart
However, as the charts below show, dramatic changes in home mortgage interest rates as seen during the 20 year period from 1972 to 1992, seem not to have effected home value appreciation.  Nationally, values rose steadily during the same period when interest rates fluctuated by more than 10 points, peaking in January of 1982.  Home price appreciation averaged 8.5% during this period despite extraordinarily high interest rates, which has more to do with annual inflation running at 6.4% and increases in median household income of 6.1% during that same period.

jan blog chart 3jan blog chart 4
Source: Freddie Mac (http://mortgage-x.com/general/historical_rates.asp  U.S.Census Bureau (http://www.census.gov/construction/nrs/historical_data

All this helps to explain why the recent low interest rates, nearly as low as they have ever been in history, were not enough to restore home values.  The Great Recession began in December of 2007 and lasted for 16 months, bringing  about low inflation and low household income growth as well as low interest rates.  In Middlesex County, sale prices fell by 15% from their peak and were not able to reach their pre-recession levels until 2013.

So, as the economy improves, look for increased sale prices and increased numbers of sales. If anything, rising interest rates will cause buyers to enter the market fearing even higher rates to come.  Interest rates are an important factor to consider when making a real estate decision and do influence consumer behavior. Call on a Resident Expertsm to help you keep all of the factors in perspective.