Author Archives: David Reiss

Homebuyer’s Guide to Rate Hike

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Day Donaldson

Fed Chair Yellen

U.S. News & World Report quoted me in A Consumer’s Guide to the Fed Interest Rate Hike. It opens,

The era of cheap money isn’t exactly over, but on Wednesday, after seven years of having near zero interest rates, the Federal Reserve voted to raise the central bank’s benchmark interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. Economists have largely seen this as a positive development – it means the American economy is considered strong enough to handle higher interest rates – but, of course, the all-important question on everyone’s minds is likely: What does this mean for me?

It depends, of course, on where you’re putting your money these days.

Homebuying. While it’s expected that the minor interest rate hike will result in it being more costly to borrow money to buy a home, that isn’t necessarily the case. Numerous factors influence mortgage rates, from where in the country your home is located to the state of the global economy to whether inflation is believed to be around the corner. Still, there’s a pretty fair chance that the interest rate hike will lead to higher borrowing costs.

But it’s worth remembering that even if the rates go up, it’s still cheap to buy a house compared to the recent past. According to Freddie Mac’s website, the average 30-year fixed-rate mortgage currently stands at 3.94 percent. If you bought a house, say, 15 years ago, the annual average rate in 2000 was 8.05 percent.

David Reiss, a law professor at Brooklyn Law School who specializes in real estate, says he wouldn’t rush out to buy a home based on the Fed’s announcement.

“I would caution strongly against letting the Fed’s actions on the interest rate influence the home-buying decision all that much, no matter what market you live in,” Reiss says. “First of all, the mortgage market has taken the Fed’s likely actions into account already, so interest rates … incorporate some of the rise in rate already.”

Bottom line, he says: “Generally, people should be buying a home when it makes sense for their lifestyle. Expect to stay put for a while? Maybe you should buy a home. Expecting kids? Maybe you should buy a home. Retiring to a warmer clime?  Maybe you should buy a home.”

Again, the interest rate climbed 0.25​ percent, and while the Fed has indicated that rates may continue to rise, Federal Reserve Chair Janet Yellen has stressed that any future hikes will be gradual.

“Small changes in interest rates do not generally make that much of a dollars-and-cents difference in the decision to buy,” Reiss says.

America’s Rental Housing

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Shahnaz Maqbool

Harvard Kennedy School Littauer Building

The Joint Center for Housing Studies of Harvard University has issued America’s Rental Housing: Expanding Options for Diverse and Growing Demand. The report concludes,

The need for rental housing that low- and moderate-income households can afford is already great and growing. Although multifamily construction is booming, most new rentals are targeted to the high end of the market. And with the huge millennial population poised to enter the housing market, the pressure on rents will only increase.

The strained political climate and caps on nondefense discretionary spending have held down appropriations for federal rental assistance programs. Recognizing these limitations, the federal government has made new efforts to integrate affordable housing, healthcare, and supportive services for the most vulnerable households, including the working poor and older adults with chronic health conditions and disabilities.

There is broad recognition that neighborhood quality directly shapes the economic opportunities available to low-income renters. Indeed, increasing the access to communities with good-quality schools, low crime rates, and proximity to employment and transit can result in better economic outcomes for both parents and children. Improvements to existing rental assistance programs would help more low-income households find homes in a broader range of neighborhoods. At the same time, however, developing new rental housing in disadvantaged communities can be an important means for fostering neighborhood revitalization.

Each of these policy issues deserves attention and debate. While specific solutions vary across markets, the ultimate goal must be to ensure that the nation’s rental housing stock meets the needs of the diverse renter population and that America’s communities are inclusive of all households. (36)

These conclusions are most certainly correct, although they may not be giving the process of filtering its full due. If there were to be a dramatic increase in the total supply of housing, it would lower its average cost, all other things being equal.

I must conclude this post with my constant refrain about the Joint Center’s publications: they fail to adequately disclose their funders. Readers would want to know that the funders for this publication include lots of companies that stand to benefit from an increase in production in multifamily housing, such as builders, construction supply companies and financial institutions.

 

Won’t You Be My Neighbor?

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David Wilson

Realtor.com quoted me in Are Neighborhood Watch Signs Killing Home Sales? I reads, in part,

Neighborhood watch programs proclaim that a community’s members have one another’s backs, a collective way of saying, “Hey, we got you covered.” So home shoppers who see neighborhood watch signs plastered on telephone poles and in parks should feel confident about settling down in that community, right?

Not necessarily.

A debate is brewing, most recently in Longboat Key, FL, over whether neighborhood watch signs are good or bad for property values. While some think these safety-first signs raise home prices, former Mayor George Spoll is arguing the opposite: that they make an area look crime-ridden, sinking home prices and scaring off potential buyers in the process.

*     *      *

“It would be hard to say that a watch sign on its own is a good or bad thing, but in particular contexts it could make a difference,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. After all, he points out, “If home buyers have heard that crime is an issue there, neighborhood watch signs may give comfort that the neighborhood is doing something about it. On the other hand, if it’s a neighborhood that is not facing major crime issues, signs may be a confusing signal.” 

Bottom line: If you’re a home buyer and see these signs, do your homework and research crime in the area. Go ahead and ask your seller and Realtor about crime in the area; call local law enforcement or search online on sites such as Crimemapping.com or Neighborhoodscout.com.

Down Payment Help

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Shimer College

The Dallas Morning News quoted me in Asking for Help with Down Payment Can Often Be Difficult. It reads, in part,

How do you ask a question when no one wants to talk about the subject?

Often, it’s quite clumsily, without much effort at sparking an honest exchange.

*     *     *

Before asking, hopeful buyers should investigate options, said David Reiss, a real estate professor at The Brooklyn Law School.

“You would want to press your lenders to identify all first-time homebuyer programs you might be eligible for,” Reiss suggested.

The Federal Housing Administration offers loans with low down payments, and many state housing finance agencies offer low or no-down loans to eligible buyers, he noted.

In any case, said Reiss, “It would be helpful to know your options when speaking with family members about a gift.

“They might be willing to give a smaller gift for an FHA mortgage, or they might be willing to make a larger gift if they see that it would result in lower monthly payments for your,” Reiss said.

“And the mere fact you did this type of research is evidence that you are a financially responsible adult,” he concluded.

Feds Financing Multifamily

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Brett VA

The Congressional Budget Office has released The Federal Role in the Financing of Multifamily Rental Properties. The report opens,

Multifamily properties—those with five or more units— provide shelter for approximately one-third of the more than 100 million renters in the United States and account for about 14 percent of all housing units. Mortgages carrying an actual or implied federal guarantee have been an important source of financing for acquiring, developing, and rehabilitating multifamily properties, particularly after the collapse in house prices and credit availability that accompanied the 2008–2009 recession. According to the Federal Reserve, the share of outstanding multifamily mortgages carrying such a guarantee increased by 10 percentage points, from 33 percent at the beginning of 2005 to 43 percent at the end of the third quarter of 2014. (A slightly larger increase of about 16 percentage points occurred in the federal government’s market share of the much larger single-family market.) Such guarantees are made by a variety of entities, and some policymakers are looking for ways to make the federal government’s involvement more effective. Other policymakers have expressed concern about that expanded federal role and are looking at ways to reduce it. (1)

This debate is, of course, key to housing policy more generally: to what extent should the government be involved in the provision of credit in that sector?

This report does a nice job of summarizing the state of the multifamily housing sector, particularly since the financial crisis. It provides an overview of federal mortgage guarantees for multifamily projects and reviews the choices that Congress faces when it decides to determine Fannie and Freddie’s fate. That is, should we have a federal agency guarantee multifamily mortgages; take a hybrid public/private approach; authorize a federal guarantor of last resort; or take a largely private approach?

We should start by asking if there is a market failure in the housing finance sector and then ask how the government should intercede to correct that market failure. My own sense is that we intercede too much and we should move toward a federal guarantor of last resort with additional support for the low- and moderate-income subsector of the market.

 

 

 

Using Homeowners Insurance

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Republic_Fire_Insurance_Company_certificate

Univision quoted me in When to Use Your Home Insurance Policy (Cuándo Usar la Póliza de Seguro del Hogar). It opens,

It is not advisable to use your homeowners insurance every time something breaks. Find out why and learn when it’s the best time to file a claim and when to avoid it.

As explained by David Reiss, Professor and Research Director at Brooklyn Law School’s Center for Urban Business Entrepreneurship, it is important to think carefully about the consequences of making a claim for a small loss.

We leave you with several issues you should consider when deciding whether to file a claim.

Is the payment worth the effort?

Generally, the homeowner will be responsible for the first part of the loss in an amount equal to the deductible of the policy. “So if the policy has a $1,000 deductible, and there was a $1,500 loss, only $500 at most would be paid by the insurance company,” said the expert.

Many claims, canceled policy!

After a homeowner files multiple claims, many insurance companies may cancel a policy.  Reiss recommends that you determine how this would work beforehand.

Thanks to Ana Puello for assistance with the translation.

Paid off Mortgage in Three Years

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Sean Cooper

Sean Cooper

Realtor.com quoted me in Why the Guy Who Paid Off His Mortgage in 3 Years Isn’t as Smart as You Think.  You’ll want to read about this guy:

You’ve gotta hand it to Sean Cooper: In a mere three years, this Toronto homeowner made epic sacrifices to pay off a $255,000 mortgage on his $425,000 house. His reason: “For a lot of people, their mortgage is like a life sentence,” the 30-year-old explained to the press. “I just wanted to not have a mortgage hanging over my head.”

After his story broke in publications such as the Toronto Star and The Hamilton Spectator, thousands applauded this as a feat of frugality.

But some experts say the opposite—that Cooper made a colossal mistake.

Forget the fact that to pay off his mortgage this pension analyst took on two extra jobs (including in the meat section of a supermarket even though he’s a vegetarian) and worked over 100 hours per week. Let’s also set aside the fact that he stopped using his car and claims Kraft dinners were his “best friend” (because clearly his real friends stopped hanging out with him). No, experts argue that Cooper’s extreme mortgage-paying regimen may have actually damaged his financial health.

     *     *     *

“Having a mortgage is not really such a bad thing,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “When you think about what a mortgage is, it makes sense to pay it off over a long period of time. You use a mortgage to buy something that will last a long time—a home—so you would probably want to spread the payments for that expensive thing over the whole period you’re using it, just as you would with a car. [Cooper’s paying off his mortgage quickly] may work for him, but not for the typical person.”

So if you’re inspired to follow in Cooper’s footsteps, think twice and consider less drastic measures.

“There are less extreme ways of doing this,” Reiss says. “Some people make payments every four weeks instead of every month. This results in one extra payment every year and does not seem so painful. Others will put extra payments into their mortgage—a tax refund, a bonus, money from a consulting gig. This is also less painful because you were probably paying your regular expenses without that money already.”

Bottom line: Don’t beat yourself up for having a mortgage. Embrace the benefits, relax, and live a little. Cooper, for one, is now playing catch-up. Now that he’s debt-free, he’s moved on to his next goal: He’s looking for love. Because let’s face it, most bachelorettes aren’t into eating mac ‘n’ cheese on a date.