Friday, July 10, 2015

Millennials: Should You Use a Real Estate Broker?

Reporter Brena  Swanson wrote this article for real estate trade journal Housingwire, and it got me to thinking about the Millennial generation and real estate agents. This post is directed at people in that generation who are thinking about buying a house in the next few years.

Millennial, there are two things you need to know upfront before I get into details on whether or not you need a real estate agent. The first is the inherent conflict of interest between you and your agent as soon as you start working together. The Freakonomics guys did this terrific video that explains why. It's about sellers and listing agents, but the reasoning applies to buyers as well.

If you're considering a house and the agent doesn't get paid unless the transaction closes, is that agent's advice in his interests, or yours? If he or she suggests you waive a contingency, who benefits?

The second is the purchase offer process. By the time you actually write an offer, you'll be in a stressed out, emotional mess. Maybe you've looked at dozens of houses, most stinky, ugly, or both, and you're sick of looking. Maybe you've been blown out of several deals. Whatever. By the time you actually write an offer, you're relieved to put the stress on hold.

And that's when an agent has you. Say your home inspector finds a half-dozen or so defects, including, say, a water heater about to blow. If your agent says something like,"The seller doesn't want to replace it, and if this house goes back on the market, someone else will get it within days," can you make a decision without duress? Is the agent telling you the truth, or to put it more fairly, is the agent casting the facts in the best possible light for you, or for closing the deal so she gets paid?

I don't mean to suggest that most agents are evil. In fact, it's the opposite. Most are decent people, some all of the time, some most of the time. But still. The conflict is there.

And I will also tell you that the conversation between buyer's agent and listing agent changes when the clients aren't in the room. It's far more about closing the deal than vigorously advocating clients' interests at the expense of closing.

In most states, when you sign a purchase offer, you're signing an agreement on what happens to the earnest money if the transaction doesn't close. It's less a purchase offer than it is an agreement to open an escrow on a house at some point.

That said, an agent's expertise in the home buying and selling process is valuable. They know markets, they know pricing, and they know how to manage the transactional process that's really foreign to most buyers--especially first-timers. The quest for (especially) Millennial buyers, then, is to find an agent they can trust.

Alternatively, you can find a real estate lawyer who will charge you for a few hours of time. If you go this route, ask the seller for a price reduction in the amount equal to the buyer-broker commission, usually two percent to three percent.

If you decide to find an agent:

  • Avoid those who say their services are free to the buyer. In fact,you're paying through the filter of a listing agreement.
  • View the moniker "neighborhood expert with great skepticism. In the first place, too many agents claim to be experts when they're not, and in the second place, what you think of as neighborhood expertise is different than what agents think it is.
  • Don't be overly impressed with "skilled negotiator." Anyone can make that claim. Negotiation is about leverage, not charm and guile.
  • Scroll through this blog and peek at several posts I've done, especially this one.

Thursday, June 11, 2015

Why the Housing Market is About to Get 'Way Shittier

This announcement from Cerberus Capital Management really caught my eye. The gazillion-dollar private equity firm, named after the three-headed dog guarding the entrance to Hades in Greek mythology, is buying up 4,200 single-family homes, pretty much in the Midwest. In this play, they're joining other private equity firms, such as Blackstone Group, who bought tens of thousands of homes at deep discounts. The difference for Cerberus is that theirs is a long-term scheme for rentals, unlike the others, who did it for a value investment.

And then, let's not forget other big players such as Invitation Homes, who just announced a whopping $1.2 billion mortgage securitization backed by its rental homes. Investors can, in effect, buy shares and receive interest checks backed by the homes' renters. And did I say it received a AAA rating from Morningstar and Kroy Bond Rating Agency?

What could possibly go wrong?

At the same time, CNBC and others are reporting a coming default on home equity loans (HELOC). Most HELOCs are written for 10-tear terms, so those that funded 10 years ago in 2005 are now coming due, with those written later coming due soon. In other words, borrowers took out the loans near the end of the housing boom but before the big bust, either as the back end of a piggyback loan or as a straightforward equity loan.

Will they be renewed? I don't know, but I do know that many, many homes are either still underwater or have very thin equity, according to Realtytrac and other sources. That being the case, I doubt many or these HELOCs will be renewed. Maybe that's what the hedge funds are looking at.

The scenario could negatively impact housing in a couple of ways. First, if the loans come due and the borrowers walk, there's a good chance their homes will be snapped up pre- or post-foreclosure, not just by Cerberus and Blackstone and their ilk, but by other investors for cash, effectively keeping them off the market for first-time and traditional buyers. Home purchase, thy name is bidding war.

Second, while we love gasping why Millennials won't buy and Baby Boomers won't sell, the Gen X'rs are the ones who need attention. They bought their homes during the go-go days with piggyback and other goosey-ish Alt-A loan products, only to see their home values tank. A not-insignificant number of Boomers own HELOCs coming due, but Gen X is the most impacted.

Even if these borrowers somehow avoid foreclosure, and I hope they do, they won't be buying or selling very much. If they do, cash buyers are first in line.

Wednesday, April 15, 2015

Why Buying a Home in 2015 Won't Be Easier

The National Association of Realtors (NAR), among others, is predicting a robust housing market for 2015. Aside from the fact that NAR always predicts a great time to buy or sell a house, forecasts of a healthy market are premature at best.

I hate to be the party pooper and I hope I'm wrong,  I know too many people and read too many stories of people, mostly young, desperately trying to buy a home, and I wish they could. But here's why I don't think things will get any easier.

Every bustling housing market in my lifetime has been accompanied by--if not caused by--a significant credit expansion. While mortgage credit has loosened a bit lately, it's still not enough. I do not believe credit will expand much until private entities get back into the mortgage purchase and securitization. Right now, all we have is Freddie Mac and Fannie Mae, who are in receivership following a government takeover, and Ginnie Mae, the federal entity who backs VA and FHA loans. That's not enough.

Second, Baby Boomers and Gen Xr's own most of the existing homes, and they're not selling. Even with the recent overall rise in prices, too many of them have negative-to-low equity and therefore can't sell and move on. In the case of Boomer homes, a good number of them are dated and in need of repairs and upgrades. Most of today's cash-strapped buyers can't write a check for a new furnace and new appliances after closing.

That leaves the demand void to be filled by new home construction, and that's a bit of a wild card. The statistics are, well, fair to good: The National Association of Homebuilders is predicting 837,000 starts--a healthy increase, but far less than the 1.3 million average in 2000-2003. But still.

My issue with new home construction is that the homes being built aren't what people want. They're still boring, cookie-cutter boxes in bland subdivisions miles away from shopping. Boomers want smaller places with good walkability scores--as do Millennials. Developers and planners need to address this reality instead of pretending we're still in the 1970s, when land and building material and gas was cheap.

On the plus side, cash sales, which blow out first-time buyers, are declining, even though they're still around 35% of the total. Jobs seem to be increasing, and if pay follows, it would be good. Rising prices could squeeze out a few more listings, but even a slight uptick in mortgage interest rates (I'm predicting a 1% rise) will push against price increases.

Demand is high right now and will stay that way, especially with rents going through the roof. But supply is not, and will likely stay that way. Will there be a bubble? It feels like it at times, with over-bidding and multiple offers and insane prices being paid in hot markets. Maybe there is, but bubbles can pop and bubbles can slowly deflate. Absent some shock to the system such as war or unknown financial catastrophe such as China melting down, we'll probably skinny our way through.

If you are looking to buy a home in 2015, you'll just have to be patient.

Tuesday, January 6, 2015

Should the Prospect of Higher Interest Rates Make You Buy Now?

My Facebook and LinkedIn home pages have been rained on the last few weeks by (mostly) real estate agents trumpeting the demise of super-low mortgage rates and exhorting people with yet another ruse to Buy Now Before It's Too Late.


Should the prospect of higher rates make you buy right away--sooner than you'd planned? Mmmm, nope.

The pitchmen will tell you that if rates rise by X percent, then your mortgage payment will go up by Y dollars. That's arithmetic, right?

It's also a statement that ignores the existence of objective truth. It assumes house prices stay constant, when, in fact, it's a buyer's lender-approved monthly payment that stays constant. If interest rates increase, then housing prices will probably decrease. That's more than mere math. It's the way any market works.

In order for a buyer to be forced into paying more if rates go up, the buyer's lender would have to approve him for a higher loan amount. That won't happen, unless the buyer gets a big, fat raise when he decides to go house hunting.

Bond traders have always understood that when interest rates go up, the bond prices goes down. But then, they usually have finance degrees or even MBAs.

But the assertion that buyers will pay more per month if interest rates rise is an example of where we take issue with the real estate profession. It's an example of bullshit. Unlike an out right lie, where objective truth is acknowledged. bullshit ignores the existence of objective truth, It's far more nefarious.

When it comes to real estate, all too many in the trade continually insist that "now is a great time to buy a house," no matter when, or that you should "buy now before it's too late." Sometimes, they do both.

And by the way, here's Zillow predicting home price moderation in 2015, along with HousingWire citing several sources and coming to the same conclusion.

 If you want to buy a house, 2015 is as good a time as any. Maybe rates will be a bit higher, but you can probably make a better deal anyway. What matters is why you're buying--your needs, your goals, and so on.

What doesn't matter is the hype. Don't buy it.