To Buy or to Rent, That is the Question…

By: Victor Normand

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

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

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

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

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

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

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

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

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

Beware the Bubble

By: Victor Normand

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

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

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

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

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

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

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

Disruptive Innovation

By: Victor Normand

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

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

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

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

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

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

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

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

Not the Oldest Profession

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

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

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

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

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

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

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

Decisions, Decisions, Decisions

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.

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.

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.

The Original Tiny House

By: Victor Normand

Thoreau's cabinEarlier this month, Sarah Hastings was unable to get town meeting in Hadley to approve a zoning bylaw amendment which would have made her Tiny House legal, so she and her 190 square foot house will be moving on, literally. The first Tiny House builder constructed his house on land owned by Ralph Waldo Emerson at Walden Pond without any complaints from the Town of Concord.  But it wasn’t long after Thoreau built his house in 1845 that the first zoning regulations in the nation were adopted in 1916 in New York City.

The new regulations were seen as a violation of the 14th amendment to the Constitution by some who felt zoning regulations unlawfully restricted property rights of individuals. Lower courts agreed but in 1926, the Supreme Court upheld the constitutionality of zoning regulations. Today, the bylaw most commonly affecting Tiny Houses, including the Tiny House in Hadley prohibits more than one residence on a building lot, even though tiny usually means less than 400 square feet of living area and most of these houses are built on wheeled trailer beds.

Sarah, like most Tiny House proponents, seems undaunted. The “light touch on the earth” Sarah believes in, extends to her heart as well. Although 214 voters at town meeting voted against the amendment, 102 supported her and she believes her efforts have advanced the conversation on the subject of living small. And that, after all, is what Tiny Houses represent.

Sarah, who recently graduated from Mount Holyoke College with a double major in Architectural and Environmental Studies, built her house about a year ago and lived there until May 7th when the town made her vacate and cut power to the house. Thoreau only lived in his tiny house for two years, two months, and two days, never intending for it to be a long stay, though he was at the height of his creativity while he lived there. Similar to today’s Tiny House builders, Thoreau wanted his house to be both a philosophical and practical expression of his life.

He wanted the design to be a unique expression of his personality and probably would have objected to the availability of plans that may be purchased today for replica enthusiasts. He used recycled building materials and kept meticulous records of every penny spent on the project, for a total of $28.13; less than $3,000 in today’s money.

Walden, first published as Walden; or, Life in the Woods, compresses his time in the tiny house to the four seasons of one year and is about his experiment in simple living, clearly the same theme captured by Sarah and her contemporaries. The five main attractions to life in Tiny House Nation include:

  • Aesthetics, both Sarah and Thoreau were concerned about having a design that expressed their individual sense of beauty;
  • Philosophy, living small in a space that denies materialism;
  • Environmental Impact, even as an existentialist, Thoreau probably never contemplated his carbon footprint, but he would have gotten it;
  • Efficiency, the reconstructed images of the Walden Pond cabin and the online video of Sarah’s house read efficiency;
  • Financial, Thoreau cleared the land and eventually gave the cabin to Emerson in exchange for building rights, grew crops in surplus and otherwise lived cheaply; Sarah’s finances are not public, but her millennial cohorts are having difficulty affording housing and besides, they would rather spend their money on travel then housing.

So, where is the Tiny House movement going? Not to Hadley, nor most any other community in most any other state. But there is no question the Tiny House is becoming one of the iconic images of our times and as Sarah says, the conversation carries on.

The Spring Market in the Digital Age

By: Victor Normand
Published: March 2016

Acton Real Estate now wears the “Crown of Excellence” for its overall relocation and referral accomplishments. Again this year, the Leading Real Estate Companies of the World ® ranked our company in five different measurable categories of performance at the annual conference held in Miami. Based on our accomplishments in 2015, Acton Real Estate bested 140 other independent real estate companies from across the country to take top honors in our class.

So what does relocation have to do with the spring market? Well, everyone likes the idea of buying a home in the spring and moving in during the summer, but it doesn’t always work out that way. People change jobs, retire, blend families and generally have many reasons to buy a home throughout the year, not just between April and June.

If you have planned ahead and followed the drill to prepare the house for sale this spring, you won’t be disappointed. Inventories are still below average, interest rates remain at historic lows and the economy continues to improve. Every indication points to a very strong real estate market this season. Use this checklist to see if you are actually ready:

  • Hire a real estate professional
  • Know the general condition of the market
  • Declutter/depersonalize
  • Consider a home inspection
  • Fix-up/remodel
  • Set a price

But don’t despair, all is not lost, people are buying homes all during the year, even more so in this digital, virtual age.

Taking buyer and seller behavior into consideration is a good thing, and an experienced Realtor can give you up-to-the-minute information on what those current mindsets are. If timing is everything to you, you might want to get Di Vincenzo’s best seller, Buy Ketchup in May and Fly at Noon: A Guide to the Best Time to Buy This, Do That and Go There. Besides the benefits of listing during the spring market, some interesting factoids include:

The best month to make an offer on a house is January
The best day of the week to list a house is Thursday
The best day of the week to make an offer is Tuesday
The best time to tweet about the listing is 4:00PM

Trying to time a listing can be a challenge, but you don’t have to think you have made a big mistake if your timing is off. We know that buyers are looking at properties 24/7 all during the year. Just because they are not circling the block doesn’t mean they are not shopping. The combination of good weather and the start of school in September have created the traditional spring real estate market, but everything else about how, when, and where we shop for everything has radically changed.

When the time is right for you to list your property, bring in a professional for a consultation. The Resident Expertssm know all about timing and everything else involved in the home selling process.