Monday, September 30, 2013

FHA May Not Shut Down Right Away

Updating an earlier post...

If the federal government shuts down at midnight tonight, FHA may hum along, although gasp may be a better term than hum.

Andrea Bramblia of Inman News reports that H.U.D. has reversed its earlier position. It will continue to endorse new loans in order to minimize disruption of the housing market.

Most sources say that if the government shuts down, programs needing appropriations will be curtailed. FHA falls into this category unlike, say, Medicare or Social Security, which are mandatory entitlements and are already funded.

Funding for single-family home loans received multi-year appropriations, so the pipeline isn't dry just yet (multi-family funding is another story). H.U.D. (and, therefore, FHA) will continue top operate, although at slower levels than before. If the federal shutdown doesn't last too long, operations won't be severely affected. But if it lasts a long time and the commitment authority runs out, home loans will be impacted.

Other sources have reported a similar story.

Sunday, September 29, 2013

Is FHA or VA Part of Your Transaction? Watch Out.

Well, it's looking as though the federal government will be shutting down faster than a bar in Utah. To know more about the who's and the what's, read this article in USA Today.

But if you've got an escrow set to close, if you're making an offer on a home or even thinking about it, and you're using an FHA or VA program, you need to plan accordingly. If the government shuts down, your escrow may not close and your offer will receive a different kind of scrutiny.

Yeah. There oughtta be a law or something.

Wednesday, September 25, 2013

What Is Equity? Can You Build More?

The equity in your home is the difference between what you sell it for and how much you owe on it. Homeowners gain equity through price appreciation and paying down their mortgage debt.

In the past few years, homeowners haven't given as much thought to their equity in their homes as they did in the years prior to the housing crash. In fact, the pumped up promise of free equity is what made the bubble in housing. But as market volatility fades and more and more homeowners are lifted above water, people are starting to think about equity once again.

The postwar Baby Boomers gained equity primarily through home price appreciation, actually creating their own demand. Those who remained in their homes a long time saw equity buildup from paying down their mortgages.

For the many new buyers using low down payment programs such as the FHA 3.5% down program, building equity is challenging. The day they close on their new home, they're probably ten percent or more underwater. If they had to sell, the price would be the same as they paid, at best, but their closing costs at purchase time and selling costs at sale time would overwhelm their equity--the 3.5% down payment--and then some.

This space has written previously on the true cost of home buying, and it's worth a re-read now and then. One of the takeaways is that equity isn't investment income or "profit." The true cost of a home is the base price, all the remodeling and repairs, the points and other costs associated with the initial mortgage, refinances, home equity loans, and the like. These don't get deducted in the equity calculation, but they're very real costs.

One way to build equity more quickly is to make additional principal payments. Some lenders offer a program where the borrower makes two mortgage payments a month, each of them half the normal monthly payment, which pays down the principal a bit more quickly. Another way (and one I think is better) is to pay more than your payment, if you can, because the extra amount will pay down principal.

For example, with a $200,000 mortgage at 5%, about $240 of the nearly $1,070 monthly payment is applied to principal for the first ten years. The rest is interest (taxes and insurance aren't in this calculation), which is why you'll pay about $386,000 over the entire thirty years. If you paid an extra $100 per month and apply it to principal, you'd be adding 70% more to principal payoff and gaining quicker equity buildup.

These are rough calculations, of course, but they make the point. Talk to your lender or financial adviser to see what works for you.

As always, if you have any questions, just ask. The Captain is always here!

Wednesday, September 18, 2013

The Latest Fed Action: Good News or Bad?

In the last five years, the Fed has almost single-handedly saved the U.S. housing market with its aggressive purchasing of mortgages. Mortgage rates were pounded to, and kept at, historical lows, an action which allowed pricing to stabilize. Mere speculation that the Fed might taper off its purchases was enough to send interest rates a full point higher.

Today, in a move that most analysts found surprising, the Fed announced that its purchasing program would continue. That's good news for buyers, because rates should stay low and may even drop a bit.

But overall, it may not be such good news. The only reason to have curtailed the program was a recovery in the housing market, which made Fed intervention less necessary. That the Fed Board elected to continue the programmay mean that Bernanke et al suspects the recovery is less robust than originally thought, and the housing market is either stalling or tipping downward.

Monday, September 16, 2013

Is It the Beginning of the End for Real Estate Sales Commissions?

When home sellers are shown the savings in fee-for-service listings versus listing commissions, they nonetheless usually choose to pay a commission. Moreover, an inherent conflict of interest is created when a seller enters into a commission-based listing agreement with a broker. Why this practice continues is anyone's guess.

In the past few weeks, though, Inman News has posted several articles on the issue, far and away more than is Inman's customary practice. This blog has done its own riffs based on the Inman stories, one having to do with innovative marketing and the other with dynamic broker startups. Does this new and sudden buzz foretell a change in the way real estate brokers are compensated?

Stay tuned. The Captain believes that the biggest driver for change is demographic. Brokerages are having a tough time recruiting young people because Millennials don't like pay based solely on commission. At the same time, their larger numbers will supplant Baby Boomers' within six or seven years, dramatically changing the housing market.

A possible last straw: Mortgage loans arguably include pay for the buyer's broker. Will lenders unbundle this amount?

Wednesday, September 11, 2013

The Next Big Thing for Real Estate Brokers

Until the last few years, real estate brokerages' business model keyed off brokers' exclusive access to local multiple listing services (MLS). Brokers all sold the same product. They still do.

While it's true that some firms try to specialize in certain niches, they still all sell the same stuff. Walk into, say, Rodeo Drive Brokers and tell them you want to invest in low-income rental housing in Compton, and they'll take care of you. And while individual brokers may specialize to a degree--say, in REO (foreclosures) properties--they'll say yes if you want them to help you buy a suburban tract home out of their territory.

The question for brokerages: What's the difference between you and the one down the street? The same is true for individual brokers.

Joel Burslem of 1000 Watt Consulting wrote a terrific short article for Inman News that addresses the issue. He says that instead of clinging to the mindset of being the consumers' gateway to homes listed for sale, brokers--and brokerages--need to drop their all-encompassing search engines, and, in his words, "get narrow."Getting narrow means focusing on homes, say, located near the best private high school or favorite restaurant row or whatever.

What real estate brokerages--and brokers--lack is branding, and by branding, I mean a je ne sais quoi attached to a name. Remax isn't qualitatively different than Sotheby's. Or Century 21 or Keller Williams. They aren't different because their  Glengarry Glen Ross business models have keyed off the same exclusive MLS access and sharing of broker commissions rather than some unique quality that's theirs, and theirs alone.

Individual brokers sometimes advertise service, often referring to themselves with such monikers as "your trusted advisor"or other sloganeering (a new favorite is "prosperity through real estate achievement") attempting to present the broker's service as a value-add to the consumer. While it's true that the most successful brokers are those who work the hardest, the fact remains that a conscientious new licensee or part-timer can serve a client with the same degree of quality that a broker who bills himself or herself as the "Top Producer," and charge the same fee.

As far as the consumer is concerned, objective correlation for service quality doesn't exist. Brokers don't have branding in the way that Sears or Saks Fifth Avenue has.

Both demographic and technological forces will cause a move to true branding. For the next few years, the seventy-eight million Baby Boomers will have the greatest influence on the market. But there are also eighty million so-called Millennials right behind them, and they are better educated, more tech savvy and demanding of authenticity. And they will dominate the market.

Right now, one-fourth of Realtors are 65 and older, while only six percent of them are under 34, according to a National Association of Realtors survey. Yet, a related survey notes, the average American worker is 41, and the typical age of a first-time buyer is 31.

The old ways just won't work for them. And that's what will cause the Next Big Thing.

Monday, September 2, 2013

C C&R Violation or Not? You Be the Judge

Off-leash dogs pooping, dead lawns, homes painted electric teal--these are obvious C C&R violations. They're easy to flag. What about off-leash dogs that aren't bothering anyone and are under voice control? What about a parked vehicle that violates the half-ton rule but is an attractive Mercedes? Rule violation becomes less clear.

What would you do in the following example?

Perhaps the most prominent and loveliest features of our community is a 33-acre lake, which the HOA dues maintain. It's home to a variety of waterfowl, bass, blue gill and carp. Community members may fish, go boating in non-motor boats and generally enjoy the beauty of the lake.

Usage is controlled, although plenty of people from outside slip in. No one much cares as long as these visitors are nice. Swimming is strictly forbidden, as is harassing the waterfowl. Outside that, things are pretty loose.

Sunday, a group of twenty or so people showed up at lake's edge in front of my home about the same time as I took the dog out for her afternoon walk. At first, I thought they had arrived to set up a picnic, but no one carried food or baskets. They all seemed to be speaking to one another, as though conspiring, and I assumed they were going to lay claim to one of the picnic tables. While I did not recognize them as neighbors, they didn't seem to be bothering anyone. Although their presence set off tinkling alarm bells, I still thought no-harm, no foul.

I continued up the path and peered back after five or ten minutes, only to see that three men, perhaps in their mid-thirties, had waded out into the water, fully dressed. One was speaking as the other two seemed to be listening earnestly. One of them--not the one speaking--took off his shirt. The water is super-scuzzy--so bad that the botanist who inspects the lake annually said he wouldn't allow his dog to enter. A no-swimming violation, maybe. Trespassers. Whatever.

A thousand thoughts collided in my head when it dawned on me what was happening, and I hurried back to my house.

Once there, I turned to watch the shirtless man get dunked in a full-immersion baptism. When he got back to shore, the others seemed to congratulate him (or whatever it is they do), and the group left. However, about half of them--including the now-saved young man--stopped off at our community pool (since it's locked, one or more had to be homeowners) and went inside.


1. Did a C C&R violation occur?
2. If so, what's the penalty?