Closing costs can bust a homebuyer’s budget

Closing costs can bust a homebuyer’s budget

Kenneth R. Harney on Jul 27, 2018

WASHINGTON – In the emotional rush that precedes buying a home – negotiating contract details and price, beating away rival bidders, searching for the best mortgage deal – closing costs often aren’t a pressing concern. Yet what you pay at settlement can be surprisingly expensive, even a budget buster.

Would you believe that the average buyer of a single-family home in Kings County, New York – better known as Brooklyn – got hit with $57,333 in total closing costs at settlement during the past year? Or that the average buyer of a home in the District of Columbia shelled out more than $20,000?

Ouch! Granted, the average cost of the houses was between $900,000 and $1 million in Brooklyn and close to $800,000 in D.C. In both cases, the single largest component of the closing bill was local government-imposed transfer taxes – a stunning $50,189 in Brooklyn, $14,022 in D.C.

Then there’s Montgomery County, Maryland, where the average buyer paid $22,181 in total settlement fees, Philadelphia ($16,463), Los Angeles ($10,991), Miami ($9,364) and Cook County, Illinois (Chicago area, $7,085).

All these figures come from a comprehensive new compilation of what buyers pay for closing services and taxes in the 50 states and the District of Columbia, plus hundreds of counties and “core” metropolitan statistical areas. The study was conducted by ClosingCorp, a data and technology company for the real estate industry. It covered more than 900,000 home-purchase transactions that went to settlement nationwide between October 2017 and March of this year.

The study’s primary focus- measuring the fees charged for the services typically involved in closings – title insurance (lenders’ and owners’ coverage), appraisals, recordation, land surveys, settlement charges – plus transfer taxes. The variations buyers can encounter are eye opening.

On a national basis, the average-priced single-family home purchased during the study period cost $318,362. The average appraisal charge was $526; lender’s title insurance policy, $1,282; owner’s title insurance, $517; and recording fee, $197. The settlement fee charged by the agent or attorney administering the closing came to $916. Real estate transfer taxes added $3,438, and the total for all services plus taxes came to $5,651.

Depending upon where you live, $5,651 in closing fees might strike you as low, reasonable or ridiculously high. For example, if you lived in Pottawattamie County, Iowa, where home prices average a little more than $149,000, you’d have paid just $1,821 when you closed on your house. That included all the regular services – from title to appraisal to surveys – plus $117 in taxes. Pretty cheap. You’d also probably feel you’re getting a good deal in Tippecanoe, Indiana, where the closing charges on your $133,000 home came to $2,029, with zero transfer taxes.

But real estate is all about location, and when the location is in or close to a big city or along the east or west coasts, you tend to have to pay a lot more – for the house, for settlement fees and taxes. So it’s not surprising that the highest average total closing fees, including taxes, are in Washington D.C. ($20,228), New York ($15,254), Maryland ($13,358), Delaware ($13,293) and Pennsylvania ($10,206). Removing taxes from the equation, D.C. is still the highest-cost “state” in the country with average closing-service fees of $6,206. Excluding taxes, Hawaii is second most expensive, California is next at $5,276, and they are followed by New York ($4,915) and Washington state ($4,860).

But focusing on dollar amounts paid at settlement is not the only useful way to look at closing costs. High-price housing markets will almost always be expensive at closing. But here’s an alternative way to look at it- Putting aside local tax levies, what portion of a home-sale price is paid for the actual services rendered – from title insurance to surveys, appraisals, and the money paid to the attorneys or agents who conduct the closing? Analyzing it this way allows you to gauge the costs of the services themselves relative to the price of the house.

By this measure, Pennsylvania turns out to have the highest closing charges – 1.91 percent of average home price. Illinois is second most expensive at 1.85 percent, Michigan comes in at 1.69 percent, Oklahoma at 1.62 percent, and Ohio at 1.5 percent. Also using this measure, some of the highest housing price areas look like bargains- D.C. closing fees represent just 0.81 percent of the average home sale price; California, 0.80 percent; and Massachusetts, 0.83 percent.

Bottom line- Check out local closing-cost variations before you purchase. Thousands of your dollars are at stake.

Could baby boomers spur a housing bust?

Could baby boomers spur a housing bust?

Kenneth R. Harney on Jul 20, 2018

WASHINGTON – Will baby boomers turn into party poopers when they unload their homes in large numbers starting in the next decade? Could they create an indigestible oversupply in the market that lowers home prices and frustrates sales?

That’s a sobering scenario outlined by two new, provocative studies. One, from Fannie Mae’s Economic and Strategic Research group, warns that the “beginning of a mass exodus looms on the horizon,” where “homeownership demand from younger generations is insufficient to fill the void left by multitudes of departing older owners.” The net result- gluts in some local markets with potentially negative impacts.

A second study, from the Stephen S. Fuller Institute at George Mason University, focuses on the Washington D.C. market and sees a similar problem ahead. “The significant number of older owners in relatively large homes may portend a ‘baby boomer sell-off’” in the D.C. region and elsewhere in the U.S., it reports. Some long-time owners “may have difficulty attaining the price gains they witnessed in their neighborhoods during recent years,” according to author Jeannette Chapman, the Fuller Institute’s deputy director.

Both studies cite demographic and housing data to make their cases. Boomers – the giant generation of Americans born between 1946 and 1964 – own 32 million homes, two of every five in the country. The generations preceding them occupy another 14 million homes. Collectively their properties are valued around $13.5 trillion, according to the Fannie Mae study, co-authored by Patrick Simmons of the strategic research group and Dowell Myers, a professor at the University of Southern California.

All of these homeowners face key choices- Do we stay put, sell, downsize or move to a rental? At some point, the inevitable kicks in- health issues and death will force them to dispose of their properties.

Fannie’s study estimates that from 2016 to 2026, between 10.5 million and 11.9 million older owners will end their ownership status. Between 2026 and 2036, another 13.1 million to 14.6 million will do the same.

This massive and unprecedented generational unloading of houses could be “negative for the home sales market,” the Fannie study warns, because the upcoming generations of buyers may not have the financial capacity – or desire – to absorb the large numbers of homes coming to market. How much of a price hit to boomers’ and potentially other owners’ properties could occur can’t be predicted at this point, co-author Myers told me in an interview.

“It’s impossible” to forecast price impacts “10 years ahead,” he said. “We do not mean to be alarmists,” he added, but hope to spur discussion of the impending challenges and the need for public and private policies that might cushion the impacts. Among the possibilities- Create additional financing programs that encourage Millennials and others to purchase first-time homes, so that they have the equity needed to purchase boomers’ homes 10 to 20 years from now.

In the Fuller Institute study, author Chapman notes that there’s already a mismatch in many Washington D.C. area neighborhoods, where empty nest seniors own homes with far more space than they need. More than 273,000 homes are owned by individuals 50 years and older that have at least two more bedrooms than the number of people living in the house. “As these owners downsize or move elsewhere … ” Chapman says, “the potential for increased supply is large enough to moderate price gains.”

Arthur C. Nelson, a professor of planning and real estate development at the University of Arizona, says some local markets with large oversupplies of boomer homes for sale could encounter significant price declines. In an email, Nelson, who has written about the coming challenges with boomers’ homes for several years, suggested that in the worst-hit areas, price declines could be as crushing as “a quarter or a third or more” – essentially the next housing crash.

Not everybody agrees. Lawrence Yun, chief economist for the National Association of Realtors, says such dark forecasts ignore positive developments well underway – strong U.S. population growth, the rising importance of foreign born buyers who will help sop up the oversupply of large houses in metropolitan suburbs, and the “glacial” speed at which the oversupply is likely to manifest itself.

Yun is emphatic- There should be “no measurable price declines” attributable to the boomers.

What’s this all mean for you? At the very least, be aware of the issue. And think about devising a strategy for dealing with whatever scenario sounds most realistic to you, whether you’re an owner or future buyer.

CFPB shifts gears on policing Zillow’s co-marketing schemes

CFPB shifts gears on policing Zillow’s co-marketing schemes

Kenneth R. Harney on Jul 6, 2018

WASHINGTON – In a move with potentially significant implications for consumers, realty agents and lenders, the Trump administration has decided not to take legal action against online realty giant Zillow for alleged violations of federal anti-kickback and deceptive-practices rules.

The decision represents a departure from the direction the Consumer Financial Protection Bureau appeared to be headed under its previous director, Richard Cordray, an Obama appointee who resigned last November to run for governor of Ohio.

Rick Mulvaney, the CFBP’s acting director appointed by President Trump, simultaneously serves as director of the White House Office of Management and Budget. Mulvaney has promised to bring a more business-friendly approach to the bureau’s enforcement activities in the financial arena. Cordray, by contrast, aggressively sued or obtained settlements from banks, mortgage companies, title companies and other businesses and obtained an estimated $12 billion in fines and consumer restitutions.

Though the consumer bureau made no announcement of its decision and declines to discuss the case, Zillow said in a statement that “we are pleased the CFPB has concluded their inquiry into our co-marketing program.” Early last year Zillow was informed by the CFPB that the bureau was considering legal action because of alleged violations of the Real Estate Settlement Procedures Act (RESPA) and federal unfair and deceptive practices rules. Zillow has steadfastly denied that its program violates any federal law.

The focus of the bureau’s concerns was Zillow’s “co-marketing” plan, under which “premium” realty agents have portions of their advertising bills on Zillow sites paid for by mortgage lenders. Some quick background here- When buyers visit Zillow’s website, which includes millions of home listings, they frequently see “premium” agents featured prominently, along with a photo and contact information.

“Premium” agents often are not the listing agent for the property nor are they necessarily among the most active or successful in the neighborhood. Instead they are advertisers, paying Zillow hundreds – sometimes thousands – of dollars per month for the placement, hoping that shoppers will contact them. Given these high costs for leads, Zillow instituted a “co-marketing” plan that allows mortgage lenders to be featured on the same page as the agent along with contact information. In exchange for the placement, lenders pay as much as one-half of the realty agent’s Zillow bill. As with premium agents, “premium” lenders do not necessarily offer the best financial deal or the lowest interest rates to the shopper; they pay money to reduce the realty agent’s monthly expenses and market their own mortgages.

Among the key issues in the CFPB’s investigation, according to legal experts familiar with the case, was whether the Zillow plan violates federal prohibitions against paying compensation for referrals of business – kickbacks. RESPA bans “giving or receiving” anything of value in exchange for referrals of business related to real estate settlements. The rationale is that referral payments are anti-consumer – they add to overall costs, frequently are unknown to the consumer, and discourage shopping for the best available services or prices. Zillow insists its co-marketing plan does not entail referrals or endorsements, but on its website in an area designated for realty agents it touts the program as a way to “Promote your favorite lenders to customers on Zillow.”

-In multiple cases, the bureau under Cordray targeted what it considered to be illegal and deceptive marketing arrangements. In one high-profile settlement last year, the bureau fined Prospect Mortgage, LLC, a national lender, $3.5 million for allegedly illegal referral-fee-marketing arrangements with more than 100 realty firms. The schemes were designed to “funnel payments to [realty] brokers and others in exchange” for referrals of loan business involving “thousands” of buyers, according to the CFPB. Among the allegations in the settlement were that Prospect paid portions of realty agents’ marketing costs on an unidentified “third-party website” – widely understood to be Zillow. Prospect neither admitted nor denied wrongdoing as part of the settlement.

Following the Prospect settlement, some lawyers active in the financial regulatory field expected that the CFPB would sue Zillow or seek a settlement. By dropping the case, the bureau under its new leadership appears to be signaling that Cordray’s tough approach to policing co-marketing schemes between realty agents, lenders and title companies is dead, said Marx Sterbcow, a nationally known RESPA expert.

“This is going to drive up consumers’ costs” in real estate transactions, said Sterbcow, because the extra expense paid by participants in co-marketing schemes – whether they violate RESPA or not – inevitably gets passed on to consumers.