Investing in Homes

photo by Pictures of Money

TheStreet.com quoted me in Investing In Your Home Remains a Sound Financial Decision for 2018. It reads, in part,

Homeowners are still pouring money into their homes as renovations and upkeep are generating a large portion of sales for Home Depot as demand for purchasing homes rose in September and the three massive hurricanes in the U.S. boosted revenue.

Home Depot’s third-quarter sales surged in the aftermath of a robust hurricane season that spanned from Texas to Puerto Rico, increasing demand from homeowners who faced immense rebuilding as homes were destroyed by relentless floodwaters.

The Atlanta-based home improvement retailer reported an impressive 7.9% increase in comparable-store sales in the third quarter, which exceeded the Wall Street estimate of 5.8%. Home Depot also beat on earnings, reporting $1.84 a share, 2 cents ahead of forecasts. The company’s total revenue was $25.03 billion, up 8% from the same period last year.

 Home Depot’s third-quarter earnings rose 15% from a year ago and its comparable sales in the U.S. increased at a 7.7% clip.

“Though this quarter was marked by an unprecedented number of natural disasters,” said CEO Craig Menear in a statement, “the underlying health of our core business remains solid.

The company was able to raise its fiscal 2017 guidance due to its stellar earnings and now estimates comp sales growth of 6.5% and earnings per share of $7.36, which reflects its $8 billion buyback program this year.

Home Depot shares rose 2.7% to $168.06 on Nov. 14.

 Interest from first-time home buyers remains strong and home sales rose in September — new home sales increased to a seasonally adjusted rate of 667,000, which is up 18.9% month over month and 17% year over year.

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“When an individual buys a share of stock they can monitor the value of the investment on a minute-to-minute basis,” Johnson said. “People can see the fluctuation in value. With real estate, however, no one is quoting you a price instantaneously on your real estate purchase. Absent a market price, people tend not to worry about the value of their real estate purchase and assume that it is very stable in the short run.”

Millennials tend to be conservative with their investment choices and are “drawn to this seeming stability in the value of residential real estate,” he said.

Nevertheless, purchasing a home can often be a very poor financial decision and potential home buyers need to be aware of the additional costs and potential pitfalls.

“People fall prey to the stories of individuals realizing substantial gains by buying a home and selling it at a much higher price years down the road,” Johnson said.

Noble laureate economist and Yale University professor Robert Shiller had made a compelling case that real estate, especially residential homes, are a much inferior investment when compared to stocks. He found that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years.

The stock market’s average return on a large stock index such as the S&P 500 has been about 10% while inflation has averaged around 3% from 1926 through 2016 while the inflation adjusted return of the stock market over the past 90 years has been approximately 7%.

The rate of homeownership still remains much lower than the 1998 rate of 9.5% and the rate has remained stable since the commencement of the financial crisis — hovering around 5% since 2008.

So should you own or rent?

Renting can be a better deal for many consumers, depending on the city and region, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“This is a better question to ask yourself than whether owning is a sound investment choice because you are going to need to live somewhere no matter what,” he said. “It is not too helpful to look at national numbers to answer this question – you should look at the figures in the communities you are considering living in.”

Equifax and Your Mortgage

image by Mark Warner

HouseLoan.com quoted me in How Will The Equifax Data Breach Affect Your Ability To Get A Mortgage? It opens,

Like throwing a stone into a pond, the Equifax data breach has long-lasting repercussions. Already, because of what’s being considered one of the largest data breaches in recent history, 143 million consumers may be affected. Data compromised in the breach has the potential to impact any form of credit taken out in the U.S. — including mortgages, credit cards, and car loans.

WHAT ARE THE CONSEQUENCES OF THE EQUIFAX DATA BREACH?

The credit-reporting agency Equifax recently revealed that a data breach lasting from mid-May through July 2017 gave hackers access to their consumers’ names, Social Security numbers, addresses, birth dates, and, for some, driver’s license numbers. The Federal Trade Commission confirms that credit card numbers were stolen from an estimated 209,000 people and documents with personally identifying information for roughly 182,000 others. Hackers also accessed personal data for customers in the UK and Canada. Equifax says their agency didn’t discover the breach until July 29, 2017, after most of the damage was done.

Anyone who may be affected by the breach is encouraged to act fast, Lisa Lindsay, executive director of the collaborative group Private Risk Management Association (PRMA), which aims to raise awareness and educate agents and brokers, says. “Consumers will need to evaluate what they want to do next with regards to protection and what risk management options they want to take. Such as purchasing cyber and fraud insurance. Those impacted by the breach could be at risk for additional attacks.”

HOW WILL THE DATA BREACH AFFECT GETTING A MORTGAGE?

Buying a house may be the biggest financial decision you make. The last thing that you need is a credit setback — or disaster. Megan Zavieh, a Georgia attorney-at-law, explains that the full ramifications of the data breach have yet to be known because we don’t know who accessed private data or what they may ultimately do with it. But, she says, it could impact homebuyers significantly.

“If someone uses personal data to open new credit lines or take other typical identity theft actions, homebuyers could be in for a terrible surprise when they complete their home loan applications. Often, credit report correction following identity theft is a long process. And it could well prevent loans from closing if borrowers had identities stolen after the Equifax breach,” Zavieh says.

ADDING TO THE POST-EQUIFAX FRENZY, MANY PEOPLE ARE SEEKING TO FREEZE THEIR CREDIT IN THE WAKE OF THE BREACH.

David Reiss, Professor of Law and Academic Program Director of CUBE, The Center for Urban Business Entrepreneurship at Brooklyn Law School, says, “Those who are looking to refinance their mortgage or purchase a new home should be aware of how a credit freeze affects them. When they are ready to take the plunge and apply, they will need to contact the credit rating agencies where they had placed a freeze and lift the freeze temporarily.” Just as importantly, Reiss reminds buyers to put the freeze back in place after completing the mortgage process.

During the time when you’re buying a home and the freeze is lifted, you can place a 90-day fraud alert on your credit. Reiss explains that this should limit lenders from granting credit under your name without first verifying that you are the one who applied for the loan.

Time Is Ripe For GSE Reform

photo by Valerie Everett

Banker and Tradesman quoted me in Time Is Ripe For GSE Reform (behind a paywall). It opens,

Federal Housing Finance Agency (FHFA) Director Melvin L. Watt told the U.S. Senate Committee on Banking, Housing and Urban Affairs last month that “Congress urgently needs to act on housing finance reform” and bring Fannie Mae and Freddie Mac out of conservatorship after almost nine years.

Conservatorship is temporary by its very nature. There is universal agreement that it can’t go on forever, but there is widespread disagreement about what the government-sponsored entities (GSEs) should look like after coming out of conservatorship – and how to get there.

“Only a legislative solution can provide political legitimacy and long term market certainty for the housing finance system,” according to a recent Mortgage Bankers Association (MBA) white paper on GSE reform. MBA President and CEO Dave Stevens said now is the time for Congress to tackle the changes that will maintain liquidity, but protect taxpayers and homebuyers.

“The last recession destroyed many communities throughout the country,” he said. “The GSEs played a large role in that. They fueled a lot of the capital that allowed all varieties of lenders to make risky loans and then received the single-largest bailout in the history of this nation. They are not innocent.”

Connecticut Mortgage Bankers Association President Kevin Moran said his organization supports the positions of the MBA.

“There’s going to be change no matter what,” Stevens said. “We’re stuck with this problem. It’s technical and complicated and needs to be done. They can’t stay in conservatorship forever.”

Taxpayers Need Protection

Professor David Reiss at Brooklyn Law School said that future delays are not out of the question.

“Change is coming, but the Treasury and FHFA can amend the PSPA [agreement] again,” Reiss said. “It’s been amended three times already. There’s a little bit of political theatre going on here. It’s incredibly important for the economy. You really hope that the broad middle of the government can come to a compromise. If there isn’t the political will to move forward, they can simply kick the can down the road.”

Reiss said the fact that Fannie Mae and Freddie Mac are both going to run out of money by January 2018 is a factor in why reform is needed soon, but the GSEs aren’t in danger of imminent collapse.

“They are literally going to run out of money,” Reiss said. “But keep in mind they will continue to have a $2.5 billion line of credit. It’s partially political. They’re trying to get the public conscious of this. I don’t think anyone in the broad middle of the political establishment thinks it’s good that they’ve been in limbo for nine years.”
The MBA’s proposal to reform Fannie Mae and Freddie Mac aims to ensure that crashes like the one in 2007-2008 never happen again, in part by raising the minimum capital balance GSEs have to maintain to a level at least as high as banks and other lenders.

“They have a capital standard that is absurd,” Stevens said. “Pre-conservatorship they had to have less than 0.5 percent capital. Banks are required to maintain 4 percent of their loan value against mortgages. That’s a regulated standard. Fannie and Freddie are not as diversified as banks are. Our view is to make sure they are sustainable; they should at least a 4 to 5 percent buffer to protect them against failure.”

To put that into context, a 3.5 percent buffer would have been just large enough for the GSEs to weather the last housing crash without the need for a taxpayer-funded bailout. Stevens said the MBA would go even further.

“They should also pay a fee for every loan that goes into an insurance fund in the event all else fails,” he said. “In the event of a catastrophic failure, that would be the last barrier before having to rely on taxpayers. Keep in mind: for years, shareholders made billions and when they failed taxpayers took 100 percent of the losses.”

Stevens said the MBA would like to see more competition in the secondary market, and that the current duopoly isn’t much better than a monopoly.

“There should be more competitors,” he said. “If either one [Fannie or Freddie] fails, you almost have to bail them out. Our goal is to have a highly regulated industry to support the American finance system without using the portfolio to make bets on the marketplace.”

A Bipartisan Issue

While some conservatives like Chairman of the House Financial Services Committee Rep. Jeb Hensarling (R-Texas) have called for getting the government out of the mortgage business altogether, Stevens said that would likely mean the end of the 30-year, fixed-rate mortgage.

Furthermore, GSEs are required to serve underserved communities. Private companies would be more likely to back the most profitable loans.

“The GSEs play a really important role in counter-cyclical markets,” Stevens said. “When credit conditions shift, private money disappears. We saw that in 2007. It put extraordinary demands on Fannie Mae, Freddie Mac and Ginnie Mae. You need a continuous flow of capital. You can put controls in place so it can expand and contract when needed.”

Reiss said getting the government out of the mortgage business would certainly mean some big changes.

“I think there is some evidence that some 30-year, fixed-rate mortgages could still exist,” Reiss said. “It would dramatically change their availability, though. Interest rates would go up somewhere between one-half and 1 percent. Some people might like that because it reflects the actual risk of a residential mortgage, but it would also make housing more expensive.”

How Are First-Time Homebuyers Doing?

photo by designmilk

Genworth Mortgage Insurance Corporation released a a First-Time Home Market Report.  The big news from the report is that first-time homebuyers purchased fifteen percent more single-family homes in 2016 than in 2015.  The 2 million homes purchased in 2016 was the most since 2006, before the financial crisis. This is a positive sign for the housing market and for the homeownership rate which has fallen to long-time lows since the financial crisis. The Executive Summary reads,

First-time homebuyers represent an important segment of the housing market, generating significant revenue to real estate agents, homebuilders, and the mortgage finance industry. In this report, we adopt the Department of Housing and Urban Development (HUD) definition of first-time homebuyers as homebuyers who did not own a home in any of the prior three years  . . . Compared to repeat homebuyers, first-time homebuyers play a more pivotal role in influencing housing inventory and home prices because they represent the shift of housing demand from rental to owner occupancy. Despite this well-recognized dynamic, there has been limited data available on the first-time homebuyer market, starting with market size. In this report, we estimate the size of the first-time homebuyer market going back to 1994 using a combination of government and mortgage industry data—20.1 million actual first-time homebuyers were identified. This data provides a historical perspective on the first-time homebuyer market as well as important recent trends. (2)

The report’s key findings include,

1. Between 1994 and 2016, first-time homebuyers purchased on average 1.8 million single-family homes each year, accounting for over one in three of all single-family homes sold, and 45 percent of the purchase mortgages originated.

2. First-time homebuyers have led the housing recovery, contributing over 60 percent of the sales growth in the housing market over the past five years and 85 percent of the growth in the past two years. The resurgence of the first-time homebuyer market has contributed to very tight housing supplies and accelerating home prices, especially at the “low” end of the housing market.

3. During the Housing Crisis, the number of single-family homes sold to first-time homebuyers saw a peak to trough decline of 900,000 units (43 percent) – reaching a trough of just 1.2 million units in 2011. Over the last 10 years, the housing market has seen 3 million fewer first-time homebuyers in aggregate compared to the historical average.

4. The first-time homebuyer market stagnated during the historic housing expansion of the 1990s and early 2000s, leading to a decline in first-time homebuyer mix. Instead, it was repeat homebuyers, including second-home buyers and investors, who led the surge in housing activity.

5. The expansion of government lending programs and the implementation of the first-time homebuyer tax credit provided temporary support to first-time homebuyers. Between 2008 and 2010, first-time homebuyers represented 35 percent of all single-family home sales, which is close to its historical average. However, the percentage of single-family home sales to first-time homebuyers declined once the tax credit expired, and stayed below 30 percent for these three years.

6. First-time homebuyers have always demonstrated a greater need for low down payment mortgage products. Between 1994 and 2016, 73 percent of first-time homebuyers chose such products compared to 30-50 percent for repeat homebuyers. Mortgage products with a lower down payment will likely have a higher first-time homebuyer mix.

7. Private mortgage insurance and FHA (government-backed mortgage insurance) are the two leading products for first-time homebuyers and have together accounted for close to 1 million first-time homebuyers a year since 1994. They have played a key role in reviving the first-time homebuyer market in the current recovery, accounting for approximately 80 percent of its growth in the past two years.

8. First-time homebuyers purchased 2 million single-family homes in 2016, 15 percent more than 2015 – and the most since 2006. During the first quarter of 2017, there were more first-time homebuyers than any other year since 2005. A total of 424,000 single-family homes were sold to first-time homebuyers, up 11 percent from a year ago, and accounting for 38 percent of all single-family home sales. (3)

Obamas Buy Their Rental

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.”

Who Qualifies as a First-Time Homebuyer?

NewHomeSource quoted me in Who Qualifies as a First-Time Homebuyer? It opens,

You don’t always have to be a first-time homebuyer to qualify for down payment assistance programs.

As you consider purchasing a home, you may have come across down payment assistance programs that aim to assist first-time homebuyers.

“How can I qualify?” you might have asked yourself.

It turns out, you don’t always have to be a first-time homebuyer to qualify, even though it might say otherwise in the name.

“Freddie Mac defines ‘first-time homebuyers’ for its Home Possible program as someone who had ‘no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the mortgage premises,’” says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at the Brooklyn Law School.

Freddie Mac, a government-sponsored home loan mortgage corporation, says that its Home Possible mortgages offer low down payments for low- to moderate-income homebuyers or buyers in high-cost or underserved communities.

Another federal mortgage association, Fannie Mae, also offers down payment assistance programs for first-time homebuyers.

“The Fannie Mae standard 97% LTV Options let first-time homebuyers put down 3 percent,” says Reiss. “The program defines a first-time homebuyer as someone who ‘had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of purchase of the security property.’”

Similarly, the U.S Department of Housing and Urban Development defines a first-time homebuyer as an individual who has had no ownership in a principal residence three years prior to the closing date of the property.

Not a first-time homebuyer under these definitions? There’s hope for you still.

“Given the overwhelming dominance that the FHA, Fannie and Freddie have on the mortgage market, homebuyers who have sat out of the housing market for a while may find that they qualify for first-time homebuyer programs even if they have owned a home before,” adds Reiss.

Additionally, there are also assistance programs available for “displaced homemakers.” A displaced homemaker generally meets the following qualifications:

  • Provided unpaid services to family members in the home, such as a stay-at-home parent,
  • Were given financial assistance from another family member, but are no longer supported by that income and
  • Are unemployed/underemployed with difficulty gaining employment or upgraded pay.

“A displaced homemaker or single parent will also be considered a first-time homebuyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period,” Reiss says.

Mortgages for Grads

Realtor.com quoted me in College Grads Can Get Home Grants—but There’s a Catch. It opens,

Recent college graduates hoping to buy a home have one more reason to toss their caps in the air these days: Programs offering home grants to new grads are popping up across the country, offering thousands of dollars in assistance that could put homeownership within reach. Talk about a nice graduation gift!

In New York, for instance, Gov. Andrew Cuomo recently announced a $5 million pilot program, “Graduate to Homeownership,” providing assistance to first-time buyers who’ve graduated from an accredited college or university with an associate’s, bachelor’s, master’s, or doctorate degree within the past two years. That aid can take the form of low-interest-rate mortgages, or up to $15,000 in down payment assistance.

The catch? You’ll have to live upstate—in Jamestown, Geneva, Elmira, Oswego, Oneonta, Plattsburgh, Glens Falls, or Middletown—eight areas that many just-sprung college students tend to flee as soon as they have their diploma in hand.

“Upstate colleges and universities have world-class programs that produce highly skilled graduates—who then leave for opportunities elsewhere,” Cuomo admitted in a statement. “This program will incentivize recent graduates to put down roots.”

The trade-off for college grads

New York is not the only state offering this type of assistance to college grads, many of whom are saddled with significant student loan debt. According to analysis by Credible.com, nearly half of states offer some form of housing assistance to student loan borrowers, with a handful focusing on recent grads.

For instance, Rhode Island’s Ocean State Grad Grant program offers up to $7,000 in down payment assistance to those who’ve earned a degree in the past three years. Ohio’s Grants for Grads program offers down payment assistance or reduced-rate mortgages to those who have graduated in the past four years.

Still, what’s noteworthy about programs like New York’s is that you can’t just buy a home anywhere. Rather, you have to plunk yourself down in semi-ghost towns. That’s hardly ideal for someone who’s trying to kick-start a career.

So as tempting as this home-buying “help” might appear at first glance, you have to wonder: Is it enough to offset what these students give up? Some experts say it’s a risky bet.

“The New York program aims to retain highly educated people in economically depressed regions and revitalizing struggling downtowns in those regions,” says David Reiss, research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School. “It can certainly help people who are dealing with high student debt burdens. But programs like this have to deal with a fundamental issue: Do these communities have enough jobs for recent college graduates? Time will tell.”

Find a job first, then a home

Experts say students should think carefully before they pounce on this “gift” and make sure they can be happy in one of the designated locations—and gainfully employed.

“No question, they should have a job lined up first [before buying a house],” says Reiss. After all, “a good deal on a house or a mortgage is not a good deal if we don’t have a job to go along with it.”