Prior to 2007-2008 most of the American public and most mortgage lenders believed, and often would state in conversation, “real estate never goes down!” Since that time frame buyers and sellers have gone to the other extreme and now the common wisdom is “real estate will never go back up.”
Well never is a long time. Both perspectives are wrong.
For the last several years we have been pummeled for a seemingly continuous stream of negative events: tidal wave and earthquake in Japan, un-employment over 10%, European Debit crisis looms as Greece nears default on its debt, (The last one just kills me: the entire GDP of Greece in 2010 – $310 Billion +/- – is approximately the same as the State of Maryland in 2010 – $300 Billion +/-. Do we actually believe if the State of Maryland defaulted there would be a worldwide financial crisis?), and each of the events has run a shock wave through people’s emotions which does affect their willingness to make the long term commitment to home ownership. It’s not reality! Fear sells newspapers, magazines and broadcasts. Fear does not ever produce the best results or good decisions.
Truth be told, the down turn in housing started in the third quarter of 2005. In June of 2005 the Fed bumped rates up in order to stimulate “a soft landing in housing” the curves between housing units sold and housing prices began to diverge at that point with house prices continuing to increase for another two years, while units of sales began to decline at an ever increasing rate. By the time the reality hit it was already too late. That being said, let’s look at the sunnier side of the situation. All of this is clearly tracked by something called the Housing Affordability Index published by the National Association of REALTORS.
The Housing Affordability Index has two basic components: average mortgage rates and average house prices which is then compared to the average household income. The higher the number, the easier it is for people to buy homes, and the lower the number, the harder it is for people to own homes. The number is designed to indicate how affordable the median home is to the median income family in the United States. An index of 100 means that the median income household has exactly enough income to afford the median income home; when the index is greater than 100 then the median household has more than they need to purchase the median home and when it’s below 100 then they don’t have enough. (When I started selling homes in Pasadena, Maryland in 1982, the Housing Affordability Index was well below 100 due to very high interest rates, in the 13-15% range). Today due to all the price declines and interest rates being at historic lows, the Housing Affordability Index has soared to a record high number well over 100.
So what’s the point? The point is that a balanced perspective and a positive outlook on life are the key to making good decisions in housing as well as in other areas of ones life. Scientific studies have shown, (See Dr. David Lykken’s work), that your happiness set point is about 50% genetic and the rest is up to you. There can be little or no doubt that the homes that are being purchased today at historically low interest rates and the lowest prices in a decade or more will fuel the American economic powerhouse in a few years – so be positive, keep your perspective and never say “never”.
By Dick Thackston CRB, ABR, ABRM
Broker NH, MA & VT
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So, 2012 looks like maybe hone buyers will be back out seriously looking at homes which means the whole issue of buyer brokerage will soon be among us again with untrained agents trying to represent buyers again. Thinking about that, I have created a six point template that every buyer thinking about getting a buyer broker should consider. Buyer brokerage is not for every buyer and/or every agent, and I believe all of these points should be considered before any buyer agency agreement is signed. Be sure the arrangement works for you!
POINT# 1: Value: Will hiring a buyer broker actually create value for either party? Do you as the buyer actually plan to guarantee a buyer brokers compensation? Do really plan to buy a home through this buyer broker and only this buyer broker or do you plan to drift into open houses and call on ads that you see in the paper, or on line, or in homes magazines, directly to whoever ran the ad? As a buyer broker do you actually believe that this buyer will actually follow through with their obligations to you? As a buyer broker will you actually follow through with your obligations to this buyer or are you playing the game of you pretend that they will honor the contract and they pretend you’re actually doing any work for them when in reality you’re both fibbing?
POINT# 2: Effectiveness: It is very important that both the buyer and the agent view this as an effective relationship and both understand its boundaries. Do you as a buyer actually believe that you will get better representation, (any representation), by contracting with a buyer’s broker? Do you think you’d get a better price and terms than if you dealt with the listing agent directly? As a Buyer Broker do you actually think you’re going to make more money than if you just sold the house as a Facilitator/Sub-Agent/Transactional Agent? As an agent are you prepared for the long term liability and lawsuits or is that “my broker’s problem”.
POINT# 3: Contact & Skills: Do you as a buyer actually think this buyer broker knows any more than you do? Have they even looked at the listing on line? Will they put you on a search that is simply an automated feed from the MLS or will they call you and track properties that you have expressed an interest in? If they are tracking properties for you how will they do so? Will they develop a spread sheet that shows the properties you’re evaluating with notes and comparisons or will they just “remember what’s important”? When and how will you be in touch with each other?
POINT# 4: Best Properties: Will the buyer broker be committed to getting the buyer in front of the best properties? Will they put the client’s interest in front of their own? Will the buyer be prepared to act when good properties are available? Is the buyer prepared to provide confidential financial information to the buyer broker and get pre-qualified by the buyer broker’s chosen lender?
POINT# 5 Long Term Relationship: Is this relationship going any place long term? Can the buyer and the agent see themselves working together long term? Will the buyer be sending referrals to the buyer’s broker? Will the agent be following up on post closing issues, i.e. errors in the Seller’s Disclosures, Mechanic’s Liens, boundary disputes etc.?
POINT# 6 Timeliness: Is this the right time for the buyer to higher a buyer’s broker or have they already entered into an agreement to purchase and now should really be hiring a lawyer to fix it or litigate it? Does the agent really feel they are entitled to a fee or are they just “trying to make a quick buck”?
By Dick Thackston CRB, ABR, ABRM
Broker NH, MA & VT
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The National Association of Home Builders maintains indices that measure conditions for the home building industry. There are three basic measures that the NAHB looks at as measure of were the home building industry is at: traffic visiting model homes, current sales conditions and the most subjective of the three expectations for the next six months. When you look at these numbers 50 is the benchmark number anything under 50 is poor any thing over 50 is good.
Conditions have shown improvement over the last four months.
Last month’s traffic visiting model homes increased from 18 to 21; an increase of about 20% and similar to what we have seen in the “re-sale” home market. (Keep in mind its still winter in the northeast and this is not prime home selling season- really very dramatic news!) Last month’s number for current sales conditions moved from 22 to 25 which measures factors such as availability of financing, terms, interest rates and available inventory among other things and expectations for the next six months moved from 26 to 29.
The NAHB also looks at these number by census regions rather than state by state or just the nation in aggregate. The Northeast moved the most from 14 to 23 and the Mid West moved the least from 23 to 24. It’s probably worth noting that the mid-West has been one of the least impacted regions of the country in our now five + year old real estate downturn.
The South is considered the most important number for the nation and the association because it by far the largest region for population and business in the country. The South moved from 25 to 27. The West moved from 16 to 21.
Obviously, our primary/only concern is the Northeast which includes New England, (New Hampshire, Massachusetts, Vermont, Maine, Rhode Island and Maine). Prospects remain positive and cautious on all fronts in the real estate world and the “all clear” is by no means appropriate at this time. These are not great numbers but they are significantly less bad than the numbers of the recent past and may/hopefully reflect an upward trend that will be unfolding over the next several months as weather improves and the situation becomes clearer to all on employment and other investments besides real estate.
By Dick Thackston CRB, ABR, ABRM
Broker NH, MA & VT
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By Dick Thackston
2012 is likely to be defined, in the real estate world, by three “E’s”: Expectations, Employment and Europe/Economy. No matter what your political belief system is, no matter how much or how little money you have, these three factors will permeate American life and the economy more than any others in the next eleven and a half months.
Expectations: In the world of sales there is an old truism, “To live with the classes sell to the masses!” those will be the watch words for real estate this year. 2012’s real estate will almost certainly only be about first time buyers and large volumes of REO properties being sold to investors. Both first time buyers and investors have some striking similarities: both groups feel they are buying at the bottom of the market and both groups have an expectation of housing prices increasing over the next three to five years and both groups have an expectation of rents remaining and going higher. (Personally, I agree with both groups.) First time buyers not only have the family formation/nesting instinct driving them into purchasing, but they have the ever increasing cost of renting versus home ownership. Most first time home buyers are renters now and are looking at homes that will have monthly mortgage payments 15-20% below their current rent. Landlords/Investors are looking at the exact same equation from the other side and seeing that almost anything they buy now will have positive cash flow of at least 10% and often up to 20%. The group that is melting away at this time is the investors looking to buy, fix and flip, the risks are too great of carrying a vacant property or over improving and taking a hit in what is in fact a flat market, and of course move-up buyer’s remain effectively locked out of the market for the foreseeable future. Until move up buyers can sell and move there is likely to be no updraft in the real estate market, but when it does begin it will be huge.
Employment: In New Hampshirefor sure, the Northeast in general and for the nation probably, employment getting better.New Hampshire has experienced job creation. Not dramatic but some. GivenNew Hampshire’s favorable tax and business environment it’s not really surprising that it would be one of the first parts of the country to recover. New England more generally seems to be getting better although not at the same rate as New Hampshireand the nation, well let’s face it would be hard to screw things up much more – which is a perverse kind of improvement actually. So as workers become more secure in their outlook on employment, they become more confident that they can cope with a mortgage payment and the other cost associated with home ownership, and are feeling much better about leaving their apartments and Mom’s basement. This is having a very noticeable effect on stabilizing the market at the bottom.
Economy: The macro-economic environment remains dicey. I almost headed this section “Europe” as my third “E” but really it’s bigger than all that. The United Sates is no longer insulated from the rest of the world economically. I doubt that this was ever really true, but we felt it was true and we certainly acted as if it was true. The United States remains the world’s largest economy however it remains subject to outside shocks: Tsunami & nuclear disaster in Japan, economic slowdown in China and most dramatically European debit crisis – country by country bad news out of Europe send shocks through our financial system and impacts our banking sector. The largest of these in public perception is Europe which is unlikely to be resolved anytime soon and will continue to drag on the world economy. China seems to have better managed its financial affairs – easier in a totalitarian state – and seems likely to have a softer economic landing than Europe.
What’s the take away from all this? Housing is stabilizing now; sales volume is likely to increase significantly; good deals from a buyer’s perspective are likely to remain the norm for the next eight to twelve months; no real appreciation in real estate as an asset class is likely and value added efforts for renovations will remain high risk till after the end of 2012.
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By Dick Thackston
I continue to read about mortgage credit terms such as Credit Scores, Down Payment Requirements, and so forth being eased on home purchases. Federal Reserve Senior Loan Officer Survey still reports historically tight standards. Part of the problem from what I’ve seen, is values coming in low on appraisals after the buyer and seller have come to terms, which in my opinion, reflects tightened appraisal standards. (Appraisers don’t want to be held responsible for over valuing properties – as they have been in the past – even though local market conditions support values.) It’s odd because in my experience appraisers who “know local areas” almost always have a clear sense of what is going on in a market; the biggest problem is large un-named government backed lenders that bring appraisers in from 200 miles away that often do not have a sense of the nuances for local markets that even underwriters can pick up from a desk 2000 miles away. Ultimately, sloppy work is sloppy work and it creates a drag on the entire process.
If home prices are stabilizing, as many people feel they are, this will actually be a bigger problem because house prices will no longer “always be lower than last month” and buyers will be bidding up prices which won’t be adequately reflected in comparable sales from a few months earlier. Low appraisals serve to drive prices down and create a self fulfilling cycle of ever lower prices. If appraisers are better able to justify the sellers price this may in fact be a key to breaking the cycle of pain in real estate we have seen.
Lenders have clearly been working to slow the pace of REO properties coming on the market; to be sure there are plenty of lender owned homes available and they still represent the majority of sales in all market despite everyone’s desire to deny the fact; this decline in the speed at which REO properties are coming on the market is likely to be a big part of stabilization. Once there is any perception of stabilization in the market it seems likely to me that many buyers will “pile into the market” and then be confronted with the challenges of getting a new loan – back to the appraisal and underwriting issues. The entire process is likely to be painful but rewarding for those with the constitution to push through: sellers and buyers both.
Re-financing has gone nuts by all reports from our friends in the lending business with home mortgage rates at historical, probably lifetime lows, loan officers actually have trouble keeping up with the volume of business they are processing. The good news here too is that a much lower percentage of these home mortgage re-finances are taking cash out unlike the past re-financing booms, this time the home mortgage re-finances seem to be more focused on actually reducing cash flow burdens on households, where as in the last fifteen years the home mortgage re-finance booms have been more focused on stripping homes of their equity to finance current consumption.
Mortgage lending in 2012 is probably less consumer friendly than in most of the last twenty years in the sense of underwriting standards and appraisal issues, however loans are being made and the process is sufficiently painful so that borrowers seem to really be paying attention to their reasons for going through the process and is getting done in a way that will lead to a healthier housing market in the foreseeable future.
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By Dick Thackston
By now if you’re in the housing market, have been in the housing market or are thinking about being in the housing market, you’ve heard about buyer brokerage. Most folks, consumers & REALTORS, have an idea about buyer brokerage but very few actually understand it or have the training and background to engage in it effectively. Most real estate consumers tend to only see the short term, regardless of the market situation rising or falling; consumers tend to not see the long term. One of the most important services a Buyer Broker can provide is a long term perspective – knowing why a property is worthy of buying selling or holding. If that sounds about right to you then read on.
Most of the information about buyer agency in particular and real estate in general is written by, well, writers – people who write blogs, newspaper & magazine articles, TV scripts etc. Unfortunately, these folks are not the best judges of what is actually happening in the real estate world; their analysis, while genuine, is not usually based in any actual experience. Higher an experienced buyer broker, like myself or the Accredited Buyer’s Agents that work with me, whose only goal is to help you make the best buying decisions, and can freely share our experience and knowledge with you, is one of the most critical services you can obtain in making your real estate profitable.
A good relationship with a buyer broker means that number one you speak the same language: you can readily and honestly communicate back and forth about the pros and cons of each possibility. Keeping thirty to forty properties under review and analysis is not unusual in this market; many times your buyer broker is studying the market changes to let you know of interest in properties, price changes, zoning changes, vacancy rates, employment and any number of other factors that are specific to your plans. Often a good buyer broker will look for the best property of the day that targets your situation; by this I don’t mean just putting you on an auto delivery from the MLS but they will actually review properties daily and let you know the best buy of the day. Conversely they should be watching the properties in your portfolio of prospective purchases that would take them off your list as well.
Most importantly of all you need to have clear commitment between each of you as to how fees will be handled between you and the extent to which you want to work with each other.
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WHAT’S REAL ESTATE GONNA BE LIKE IN 2012? By Dick Thackston CRB, ABR, ABRM, Broker NH, MA & VT
2012 is looking like it’s shaping up to be the year of the buyer. The winter months so far here in the Northeast have been unusually busy with buyers poking around virtually ever listing – mind you it has not been hundreds or even dozens of buyers coming out to Open House like in the mid 2000’s but there’s been plenty of action. Over the holiday week virtually every REO listing I have has had one or more showings.
Conventional wisdom says that the buyers are going to remain primarily investors and first time buyers.
The investors were out in force in the month of December probing banks and making low offers hoping that banks would take massive price hits to get properties off their books and closed by 12.31.11. I don’t know of any of these offers that went anywhere, clearly these investors do not understand the obligations or objectives of asset manager’s or company’s working out REO inventory on behalf of investors. The truth is that it costs very little to hold a property and with rare exception the REO assets are priced to the market and there is NO incentive for REO assets to be dumped just because it’s the end of the year. As a practical matter most lenders run on fiscal years that don’t end on 12.31 so it’s just another day – many do not even use natural quarters of the year for the end of their businesses. That being said many excellent transactions were originated in the month that were great opportunities in the medium and long time frames. I had one experienced investor come into my office and talk for about forty-five minutes today about how he has changed his strategy to conform to the current climate. Now mind you this man has been buying, selling and building houses in this region for over thirty years. Traditionally he has picked up land and renovation projects in the down turns and built new homes or renovated and flipped, but he has changed his tack for now. He can’t build profitably and doesn’t want to “build for practice” so he’s banking land assets and buying moderately poor condition homes and stabilizing them with the plan of renting them out. I asked him how many did he plan on doing and he said he’s done nine clean-up and rent outs in the last six months of 2011. His business model is to acquire single family homes and renovate for a total of $75,000 or less which gives him about a 20% gross return based upon is average rent of $1,200. Not bad when you look at your other investment alternatives.
First time buyers are also out in force. They are of course first time buyers and have lots of information, most of which is bad, and lots of input from family, most of whom know less than the first time buyers. These folks are getting transactions together and they are closing, but it is very painful for them because regardless of the input from REALTORS who are actually trained as a buyer’s representative, (like me I am both an Accredited Buyer’s Representative and an Accredited Buyer’s Representative Manager through the National Association of REALTORS), they tend to listen to friends and family who bought homes at sometime in the past, and this is definitely not your Uncle Louie’s real estate market. Big changes for buyers are that no REO Manager will consider an offer that doesn’t have a high quality pre-qualification letter along with it – these REO managers don’t do wishful thinking, they want to know that the buyer can perform or they won’t consider tying up inventory. Other big changes are that when the REO contracts are accepted and they call for closing by a specific date there are penalties to the buyers for not closing on time or not completing inspections on time. The REO managers aren’t kidding when they say as is where is and close on time – this is very different from what most buyers came to expect in the last few years of the real estate boom. Most sellers and their agents became really flexible on dates and repairs because they knew intuitively no mater what the buyer wanted they were still making a killing on their property: that would not be the REO market – no matter what the REO’s are loosing money for the investors behind them and they are tremendous opportunities for the buyers who will live in them for a period of years and pay down there loans and sell later in a better time.
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