REFinBlog

Editor: David Reiss
Cornell Law School

June 2, 2017

Obamas Buy Their Rental

By David Reiss

2011 portrait by Pete Souza of the Obama family

Realtor.com quoted me in Former President Obama Finally Buys the DC Home He’s Renting: 6 Smart Reasons Why. It reads, in part,

Former President Barack Obama has decided that buying beats renting. The former first family have surprised many by purchasing the Washington, DC, house they’ve been leasing and living in since January, coughing up $8.1 million to call the place their own.

After vacating the White House, the Obamas had moved into the 6,441-square-foot, nine-bedroom, 8.5-bath mansion, located at 2446 Belmont Road NW in the tony neighborhood of Kalorama. The neighborhood has since become the place for the new political elite, with Jared Kushner and Ivanka Trump moving into a luxe rental a couple of blocks away, and Secretary of State Rex Tillerson snapping up a $5.6 million Colonial Revival down the street.

The reason the Obamas decided to stick around DC in the first place was so their younger daughter, Sasha, then a freshman at posh Sidwell Friends, could finish up high school there. With only three years to go, renting seemed to make sense so that the Obamas could easily pick up and move once she’s done.

But apparently, there’s been a big change of heart. Why?

On its surface, their decision seems a bit puzzling, given Sasha now has only twoand-a-half years to go. In real estate, the general rule is that it makes sense to buy a home only if you plan to stay put for five years, because this allows time for your house to appreciate, which helps you recoup hefty closing costs.

“People who sell after a year or two of ownership will often find that they have lost money on their purchase,” explains David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Nonetheless, real estate agents and other experts we spoke to say there could be plenty of reasons it’s smarter for the Obamas to buy rather than rent, even for this short span of time. Here are a few possibilities to ponder.

Reason No. 1: They’re making a commitment to DC

As presidential spokesman Kevin Lewis explained in a statement, “Given that President and Mrs. Obama will be in Washington for at least another two and a half years, it made sense for them to buy a home rather than continuing to rent property.”

Granted, you can read a whole lot into that “at least” if you want. After all, as Atlanta Realtor® Bruce Ailion explains, “Many buyers think they will only be in a property for two to three years and end up living there three to seven years. That is common.”

And it might be an indicator that our former commander in chief isn’t ready to shed the political life quite yet.

“Perhaps they want to keep a foothold in Washington, DC, for other reasons with regard to political advocacy and involvement,” says Florida Realtor Cara Ameer.

Reason No. 2: In certain markets, 2.5 years is long enough to make a profit

While 2.5 years might not be long enough to profit on a home in general, that rule varies widely by neighborhood, based on rent levels, home prices—and how quickly both are going up. And this is one hot neighborhood.

It isn’t known exactly what the Obamas were paying in monthly rent, but estimates hover at around $22,000. It’s entirely possible that the former first couple did the math and determined that buying made far more financial sense, and that mortgage payments would be less of a monthly nut. (To find out what’s best for you, you can crunch the numbers in an online rent vs. buy calculator.)

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Reason No. 5: This home will sell for a premium—he’s a former president, after all!

“It was always a little perplexing why the Obamas would ever rent if they planned to stay for anything longer than a year,” contends Washington, DC, real estate agent Rachel Valentino.

Her reason: “While they’re buying at market value, they can eventually financially benefit on the back end, where a buyer will pay significantly more for the celebrity factor. We aren’t Southern California, where every house has that star appeal. So, I can only imagine what a buyer will eventually pay to own a piece of history.”

Reason No. 6: Profits aren’t everything

“One lesson we can draw from this story is that buying a home should not always be seen as a financial transaction,” says Reiss. “Sometimes we buy a home because it’s best for our family at a particular time. Sometimes we buy a home because we fall in love with it. And sometimes those are the best reasons of all to buy a home, profits be damned.”

June 2, 2017 | Permalink | No Comments

Friday’s Government Reports Roundup

By Jamila Moore

  • The United States Housing and Urban Development Agency(HUD) recently published a report proposing adjustments to the method of calculation of fair market value rents. Additionally, HUD seeks the public’s input on the matter before determining a final decision.
  • The Consumer Financial Protection Bureau (CFPB) released a report regarding elders and the effect of reverse mortgages. The CFPB has known about the reverse mortgage problems; however, the complaints from those age 62 in above is 10% higher than their younger counterparts. The chief complaints presented by elders are “difficulty in changing the loan terms”  and “problems communicating with loan servicers.”
  • The Federal Trade Commission (FTC) believes the state of Louisiana is in violation of federal law. The FTC alleges Louisiana’s Real Estate Appraisal Board’s regulatory practices violate federal antitrust laws. The Louisiana Real Estate Appraisal Board requires strict adherence of a “‘customary and reasonable’ appraisal fee schedule” which stifles competition.

June 2, 2017 | Permalink | No Comments

June 1, 2017

Dorms for Grownups

By David Reiss

The Bridge quoted me in Why Dorms for Grownups Are a New Way of Life. It opens,

If you think applying to Stanford or MIT is a long shot, consider the odds of landing a spot in a Brooklyn co-living residence. Common, the company now operating six co-living facilities in the borough, recently received more than 15,000 applications for about 300 available rooms in three of the cities it serves: New York, San Francisco, and Washington, D.C. Why the demand? Co-living, essentially the residential version of the co-working trend, offers dorm-like, amenity-filled living that’s particularly attractive to millennials. The apartments come pre-stocked with furniture, appliances, fast WiFi, and lots of prospective friends.

John Bogil, 24, has shared a giant living room, kitchen, basement, and backyard with nine other people since moving into a Crown Heights facility called Common Albany a year ago. Although it sounds crowded, Bogil enjoys the company. “It’s awesome. I’ve made friends for life,” Bogil said. Common, launched in 2015, is Manhattan-based but has found fertile ground in Brooklyn. The growing portfolio in the borough includes the newly built Common Baltic in Boerum Hill, which offers co-living spaces as well as traditional apartments. The rent varies by neighborhood, with spaces in Crown Heights starting at $1,475 and Boerum Hill spots going for $2,143 and up.

Tenants have their own private bedrooms, many with private baths, but share the living room and kitchen as well as amenity spaces including lounges, fitness rooms, roof decks, dining rooms and work spaces. Convenience is a major selling point: the suites in a Common building come fully furnished with beds, dressers, couches, tables and chairs, a TV, towels and sheets, and a weekly cleaning service. Many of the issues that traditional roommates wind up fighting about have been taken off the table, like Real World with less drama.

Common was launched by Brad Hargreaves, who earlier had co-founded General Assembly, now a global educational company with campuses in 15 cities. Like many entrepreneurs, Hargreaves was looking to solve a problem. When the Yale grad first moved to New York City, he looked for an available room in an apartment on Craigslist and found the process cumbersome. “Common offers an alternative to this,” he said. “We make living with roommates better, more convenient, and more efficient.”

With young people increasingly crowding certain urban areas, the idea of a starter apartment is changing. While rents in Brooklyn have eased lately, thanks in part to new construction, the median rent is a daunting $2,785. With rents like those, some 76% of people 21 to 34 years old say they’ve made compromises to find a place to live, including living with roommates, according to the NHP Foundation, a group advocating affordable housing.

“Co-living has proven to be more than a passing trend,” said Hargreaves. “The response to opening our first home in Brooklyn was so strong that we were able to rapidly expand in the borough as well as into San Francisco and Washington, D.C. We now have nine homes on two coasts and are actively looking at new homes and new cities.” Common chooses its spots carefully, aiming to balance affordability and urban amenities. “We look to open in neighborhoods where there’s access to public transit and great local retail for our members to explore and enjoy,” said Hargreaves.

Common has the financial fuel to grow much more. The company has raised more than $23 million in two rounds of financing from 15 investors. The budding co-living industry now has multiple competitors as well, including WeLive, HubHaus, Node, and Krash. In Long Island City, a co-living company called Ollie plans to operate what it calls the largest co-living facility in North America, occupying 13 of the 42 floors in a new skyscraper.

While much of the allure of co-living is practical, many residents appreciate having the company, which in a cosmopolitan place like Brooklyn creates diverse collections of roommates. “I really appreciate the exposure to different peoples, ideas and cultures,” said Bogil. “I’ve learned so much about Australian politics and South African sports, for example, which might sound like useless info on the surface, but it helps me to learn about the world in a way that I never would normally. It makes the world feel smaller.” More than 70% of Common members are on 12-month leases but most stay longer than a year.

While typical co-living residents are in their 20s, the format could work for older adults as well, once the format goes mainstream. “There is growing interest in more communal types of living environments of the type offered by Common,” said David Reiss, an attorney and professor of real estate at Brooklyn Law School. “Co-living appeals to different people and our membership is diverse,” Hargreaves said. “We have young professionals, married couples, those moving to New York City for their first job, those moving from abroad, and ranging in their early 20s into their 30s and 40s.”

June 1, 2017 | Permalink | 1 Comment

Thursday’s Advocacy & Think Tank Roundup

By Jamila Moore

  • Wells Fargo has experienced another setback in their attempt to recover in the wake of their “fake account scandal.” On Wednesday, May 31, 2017,  New York City’s mayor and comptroller announced an end to the city’s business relationship with Wells Fargo. New York City is one of many cities severing ties with the bank due to the company’s actions regarding the Community Reinvestment Act.
  • The Community Investment Trust (CIT) pilot program originated to give low-income residents in Portland an opportunity to invest in real estate. The program allows individuals to purchase shares of “income-producing real estate.” Residents will build wealth by receiving dividends based on their number of shares; thereby, increasing their overall socioeconomic status.

June 1, 2017 | Permalink | No Comments

May 31, 2017

Cracked Foundation for American Households

By David Reiss

photo by shaireproductions.com

President Trump’s budget claims to lay A New Foundation for American Greatness. Whatever else it does, when it comes to housing it leads down a path to ruin for many an American family.

Here is just some of what he proposes: cutting housing choice vouchers by almost $1 billion; cutting support for public housing by nearly $2 billion; and getting rid of the entire $3 billion budget for Community Development Block Grants (CDBG). These are all abstract numbers, so it is worth breaking them down to a more human scale.

Vouchers.  Housing choice vouchers help low-income families afford a home. Republicans and Democrats have long supported these vouchers because they help tenants afford apartments that are rented by private landlords, not by public housing agencies. Vouchers are effectively an income subsidy for the poor that must be used for housing alone. The landlord is paid the subsidy and the tenant pays the difference between the subsidy and the rent. These vouchers are administered by local public housing agencies.

Nearly half of vouchers go to families with children, nearly a quarter go to the elderly and another fifth go to disabled adults. The nonpartisan Center on Budget and Policy Priorities has found that voucher dramatically reduce homelessness. It also found that voucher holders were likely to be in the workforce unless they were elderly or disabled. While vouchers are a very effective subsidy, the federal budget has only provided enough funds for about a quarter of eligible households. Trump’s proposed cuts would cut funding for more than 100,000 families. That’s 100,000 families that may end up homeless as a result.

Public Housing. Public housing has been starved of resources for nearly forty years. While some believe that public housing has been a failure overall, it remains a vital source of housing for the very poor. Trump’s proposed cuts to public housing operating and capital expenses means that these tenants will see their already poorly maintained homes descend deeper into decrepitude. Unaddressed leaks lead to mold; deferred maintenance on boilers leads to no heat in the winter – every building needs some capital repairs to maintain a baseline of habitability.

We must ask ourselves how bad will we allow this housing stock to get before we are overcome by a sense of collective shame. If a private landlord provided housing that was as poorly maintained as much of the public housing stock, it would be on a worst landlords list in local newspapers. The fact that the landlord is the government does not redeem the sin.

CDBG. The Community Development Block Grant funds affordable housing and anti-poverty programs along with community development activities engaged in by local governments. CDBG has broad support from Republicans and Democrats because it provides funds that allow local governments to respond more nimbly to local conditions. Local governments use these funds for basic infrastructure like water and sewer lines, affordable housing and the soft costs involved in planning for their future.

While these expenditures are somewhat abstract, recent press stories have highlighted that CDBG also funds Meals on Wheels for the elderly. While this is not a big portion of the CDBG budget, it does make concrete how those $3 billion are being allocated each year by local communities seeking to help their neediest residents.

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Trump’s budget proposal is honest in that it admits to making “substantial changes to the policies and spending priorities of the previous administration . . .” Members of Congress from both parties will now have to weigh in on those substantial changes. Are they prepared to make Trump’s cuts to these housing and community development programs that provide direct aid to their neighbors and local governments? Are they prepared for the increase in homeless that will follow? In the increase in deficits for state and local governments? If not, they should reject President Trump’s spending priorities and focus on budget priorities that support human dignity and compassion as well as a commitment to local responses to address local problems.

May 31, 2017 | Permalink | No Comments

May 30, 2017

Gen Z Eying Real Estate Trends

By David Reiss

The Washington Post along with its content partner National Association of Realtors quoted me in Eye on the Future. It reads, in part,

The suburbs as we know them are in flux. Many of the country’s bedroom communities have traditionally been known for their single-family homes and a lack of walkable public spaces. That’s changing as condos, sprawling townhome complexes and apartment buildings now dot areas where single-family homes would have been built.  Developers are building walkable public spaces to accommodate young families leaving cities but still seeking urban-like amenities.

 Another wave of change is expected in the next five to 10 years. That’s when members of Generation Z-those born on the heels of millennials-will become homeowners. Experts say they’ll transform areas that are sandwiched between major cities and suburbs into districts with an urban feel and amenities, without the hefty price tags major metros demand.

That transformation is already starting to happen. “Many of our ‘suburbs’ are actually neighborhoods in Los Angeles, particularly the San Fernando Valley,” said Kathryn Bishop, a real estate agent with Keller Williams Realty in Studio City, Calif. and member of the National Association of Realtors. “In the Valley, many neighborhoods have become mini ‘cores.’ Sherman Oaks, Encino and Woodland Hills have office towers, good restaurants and night-life business creating their own city areas.”

It’s no surprise that the younger generation needs to find an alternative to the sky-high costs of urban living. The Economic Policy Institute noted in 2016 that folks who live in San Francisco face a cost of living that’s 52.9 percent above the national average. For New Yorkers, living costs were 49.4 percent higher. The country’s least-affordable place to live was Washington D.C., where residents faced costs 63.5 percent higher than the national average.

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“Since the financial crisis there has been an increase in multigenerational households, driven in large part by financial limitations and insecurity as well as by marital status and educational attainment,” said David Reiss, professor of law and research director at he Center for Urban Business Entrepreneurship at Brooklyn Law School.  “Young adults are more likely to live at their parent’s home in recent years than they have been for more than a century.”

May 30, 2017 | Permalink | No Comments