Which is better at valuing your home – you or a computer program?

Which is better at valuing your home – you or a computer program? Kenneth R. Harney on Oct 26, 2018 WASHINGTON — Do you have a pretty good idea of what your house is worth? Could you estimate within, say, 5 percent of what it’s likely to sell for? If so, would that make you more accurate about your home value than an estimate from a computer program loaded with recent sales data and algorithms? Maybe. Maybe not. Economists at the Federal Reserve recently completed a study that rated homeowners against computer programs — owners’ estimates of their homes’ worth versus those from automated valuation models (AVMs) — and compared both to the actual selling prices of the same homes. Guess what? It turns out they were, according to the study, “fairly similar.” Despite their reputation for excessive enthusiasm about their homes’ values, owners weren’t trounced by the computers. But neither the humans nor the computer programs were standouts on accuracy. Only about half of the AVM estimates and 40 percent of homeowners’ estimates came within 10 percent of the actual selling price. The study examined thousands of owners’ estimates provided during a Census Bureau consumer survey in 2014 with AVM estimates on their homes from the same time period provided by a commercial vendor. Then it compared both of these numbers with subsequent selling prices. The Fed researchers noted that although computer-generated estimates are based on information owners tend not to collect — such as data on sales transactions — these AVMs “can be incorrect if the characteristics of the home are not well measured” or sales prices of a sufficient number of comparable properties are not available. Owners, on the other hand, know the improvements they’ve made to the house, and they know what the interior looks like — key details that AVMs are missing. What owners tend to lack is stone-cold objectivity. They’re emotionally involved and may have inflated notions of what turns on today’s buyers. Ultimately the arbiters in the valuation game are the professional appraisers who lenders hire to give them independent estimates. Following an inspection, they’ve got much of the market data that feeds an AVM plus an intimate knowledge of the property. Ask appraisers which estimates they’d bank on — owners’ or computers’ — and you tend to get the same, resounding answer: Neither! Ryan Lundquist, an appraiser in Sacramento, California, says owners and sellers can be especially bad with estimates because they’re not tuned into current market trends. He said he recently appraised a house that the owner thought should be worth $500,000 more than Lundquist’s estimate — 30 percent over current market value. Owners like that “are profoundly disconnected with reality,” Lundquist told me. They think they’re still in the robust seller’s marketplace of a few years back rather than the market of today, which in many areas is seeing lower appreciation, rising interest rates, and more frequent price markdowns than in recent years. Lundquist says sellers often fail to understand that buyers today come to the table with a massive advantage — they tend to have far more information on comparable sales and other data, thanks to sites like Zillow, Redfin, Realtor.com and others. They pretty much know the tight price range within which a house should sell and are quick to spot overpricing. Seller disconnects on value can also create big challenges for real estate agents. Anthony Askowitz, broker-owner of RE/MAX Advance Realty in Miami, told me “the reality is that some sellers need to be fired” because they won’t listen to reason about more realistic pricing, and waste agents’ time and marketing dollars. Recently he worked with a seller who insisted that the house should command $1.25 million. Askowitz’s own estimate, based on recent market data, was $1 million. It sold for $950,000. Scott Godzyk, owner-broker of Godzyk Realty Group in Manchester, New Hampshire, says he sees it “all the time” — owners think their value is much higher than it really is. Ironically “they show me Zillow” Zestimates, which in his opinion are frequently off-base. Zestimates themselves use Zillow’s in-house AVM, which claims a 4.5 percent median error rate in New Hampshire. That means half of Zestimates there are inaccurate by more than 4.5 percent. Some counties in the state have median error rates as high as 9.5 percent. The takeaway: Valuing a home is hardly an exact science. Especially in a period when the real-estate cycle is transitioning toward buyers’ advantage in many areas, you need to tap into the data available online, then get the opinions of top realty agents in your neighborhood. That should get you pretty close.

Does going green net you more green when selling your home?

Does going green net you more green when selling your home? Kenneth R. Harney on Oct 19, 2018 WASHINGTON – If you make extensive energy-conservation and other green improvements to your home, will they earn you a premium price for the entire house when you go to sell? For years, the easy answer has been, oh yeah, absolutely- Green is good, everybody knows that saving energy is a no-brainer, and buyers will pay more to get it. There’s research to back that up. A study of California sales found that green-certified homes sold for between 2.1 percent and 5.3 percent more than similar homes with minimal or no green features. A 2015 study of renovated homes in Washington D.C. concluded the average price premium was around 3.46 percent. A study last year in Texas found that green-certified homes sold for 8 percent more than comparable properties. Home builders have told researchers that two-thirds of their customers say they’re willing to pay higher prices for homes with significant green features, such as energy-efficient appliances, heavy-duty insulation, water conservation, healthy indoor air quality and others. So is that it? Going green always nets you more green – case closed? Not so fast. Two recent studies by appraisers with long experience valuing green homes suggest the answer is more nuanced. Some of the researchers’ findings in brief- Though generally it’s true that green improvements will earn you at least a little higher price, the size of the premium may depend on external factors you hadn’t thought about- – Does the Realtor you picked to list your home know enough about green improvements to market them effectively? Is the agent competent to market what you’ve got to sell? – Does the agent have any formal training in this area, evidenced by a green designation in her or his own listing presentation or advertising? – Does the listing for your home in the local Multiple Listing Service (MLS) contain crucial information about your green improvements, such as a “green addendum” that details the special features that make it energy-efficient? – Does the local MLS have “green fields” that allow listing brokers to fill in the blanks with appropriate detail so that other agents – the ones who are going to find your buyers – know what your house really offers in terms of green improvements? – Do Realtors in the area know much or anything about rating systems such as HERS, LEED, ENERGY STAR or others? Do they know where to turn locally to obtain a rating? (HERS stands for Home Energy Rating System; LEED is a globally recognized rating system for residential and commercial green real estate; ENERGY STAR is a federally developed rating for appliances, building materials, entire houses and commercial property.) one of these key factors is working for you, your green features may be impressive, but may not earn you much of a premium. Worst case, they might even get you nothing. Sandra Adomatis, a Florida-based real-estate appraiser and nationally known expert on valuing green improvements, headed the research teams for both of the new studies – one focusing on “paired-sale” transactions of homes in the San Francisco Bay area, the other in Virginia and Maryland. A paired-sale analysis examines price differences in transactions, comparing virtually identical homes, one of which has significant green features. In the California study, green-certified houses sold for an average 2.19 percent premium. In some Virginia locations, where the local certification company, Pearl Home Certification, had marketed its services to realty agents, the average price premium was 5 percent. But in areas where Pearl had not yet reached out to Realtors and provided information on how to market certified properties, some premiums dropped to 1 percent or lower. Adomatis, author of the Appraisal Institute’s manual “Green Valuation Tools” and developer of training courses on the subject, told me that in interviews, some agents who listed certified green properties in California admitted they “had no clue what they were selling.” A few even said, “I don’t know what makes a house green.” That’s a direct violation of the code of ethics of the National Association of Realtors, which prohibits members from marketing types of property that are “outside their field of competence” and training. The association offers members in-depth courses on green-home marketing and has urged MLS’s across the country to include “green fields” in their listings. Bottom line- If you want to reap the maximum return from your green improvements, make sure that your Realtor understands what they are and how best to sell them.

New options open for homeowners seeking a reverse mortgage

New options open for homeowners seeking a reverse mortgage Kenneth R. Harney on Oct 12, 2018 WASHINGTON – You’ve probably seen actor Tom Selleck suavely pitching federally insured reverse mortgages on TV and thought, hmm, that sounds interesting. He says you can turn your home equity into cash and not pay back anything – no principal, no interest, no fees – for years after your retirement. And it’s true- Some form of a reverse mortgage could be a good choice for you, but it might not be the government-backed type Selleck is hawking. Those loans have hit tough times, and growing numbers of lenders have begun offering alternatives – proprietary, non-government reverse mortgages, including an innovative variant unveiled last month that allows owners to retain their current low-interest-rate regular mortgages while pulling out additional funds via the industry’s only “second-lien” reverse loan. A little background- Annual volumes of the Federal Housing Administration’s reverse mortgages have tanked to their lowest level in 13 years and appear headed for further declines. The program is a financial nightmare for the FHA, performing so poorly that the FHA’s commissioner, Brian D. Montgomery, complained recently that it is “still hemorrhaging money,” despite repeated reform efforts. Worse yet, FHA recently discovered hanky-panky in the appraisals used for reverse mortgages. An internal study by the agency found that in a sample of 134,000 loans, a stunning 37 percent of them had inflated values – the appraisers hyped the numbers – thereby exposing the agency’s insurance fund that backs the mortgages to bigger hits down the road. Some of the bogus value estimates billowed as high as 30 percent over actual market value in 2008 and 2009, though the average has moderated more recently. Federally insured reverse mortgages are targeted at homeowners 62 years and older. They allow borrowers to supplement their retirement incomes by converting their home equity into cash via lump sum payments, monthly payments or credit lines. No repayment of the debt is required until the homeowners sell the house, move out or die. If the amounts borrowed exceed what the house can bring in a sale, the lender can file a claim against FHA’s mortgage-insurance fund and receive compensation. Because of continuing multibillion-dollar insurance-fund losses, FHA has tried to rein in the reverse-mortgage program by limiting the amounts seniors can borrow against their houses, raising insurance premiums, and requiring applicants to demonstrate that they are creditworthy. These restrictions and other issues such as high fees have contributed to the program’s sharp plunge in volume, from just under 115,000 new loans in 2009 to 48,385 in fiscal 2018, the lowest total since 2005. Drastic declines in business volume like this have spurred lenders to come up with alternatives. At least four major companies now offer proprietary, non-government reverse mortgages. They include Finance of America Reverse, Reverse Mortgage Funding, Longbridge Financial and One Reverse Mortgage. All of them allow much larger maximum-loan amounts than FHA. They also charge no mortgage-insurance premiums, and may permit loans to owners of condominium units in developments that have not been approved for FHA financing. Kristen Sieffert, president of Finance of America Reverse – which continues to offer standard FHA-insured reverse mortgages along with its four proprietary alternatives – told me “we want to create a new proprietary product market for the long haul” that offers homeowners nationwide more flexibility and innovation than FHA can. For example, at the end of September, her firm debuted the industry’s first and only “second-lien” reverse mortgage, which is designed to allow owners who have low fixed rates on a first mortgage to retain that loan while tapping their equity via a fixed-rate second mortgage requiring no immediate repayments. Other companies’ proprietary offerings have their own special niche features designed to improve on FHA’s rules- Equity Edge’s program lowers the eligibility age for some borrowers to 60 instead of 62; One Reverse Mortgage permits loans on houses with solar panels, to cite just a couple of examples. Proprietary reverse loans have their own downsides, however. Generally, they are not aimed at the lower- to moderate-cost housing market like FHA, so they screen out potentially large numbers of owners from coverage. They may limit the total amount of equity you can access more strictly than FHA and require better credit histories. Like all reverse mortgages, proprietary alternatives should only be considered after discussions with an experienced financial counselor to make certain you’re getting a good deal. Bottom line- They’re an important, growing resource for senior homeowners and worth at least a look if you’re considering a reverse mortgage.

Tariffs could cost you more to remodel your home

Tariffs could cost you more to remodel your home Kenneth R. Harney on Oct 5, 2018 WASHINGTON – Thinking about remodeling your home – redoing a bathroom or the kitchen? Or maybe purchasing a new home from a builder? Or simply buying new appliances? Then get ready to dig deeper into your wallet as the Trump administration’s new $200 billion in tariffs begin to flow through to hundreds of the products that go into your planned project. They range from iron nails to flooring to granite countertops, tiles, sinks, roofing, cement, paints, cabinets, wooden and steel doors, windows, lighting, appliances and much more. And get ready to negotiate with remodelers and builders about “allowances” and escalation clauses as vendor pricing and availability of these imports become more difficult to predict. New estimates from the National Association of Home Builders indicate that of the 6,000 items on the list of goods imported from China that are now subject to tariffs, 463 are “ubiquitous” in home construction and remodeling. They total roughly $10 billion in expenditures a year nationwide. If the White House raises the tariff to 25 percent from the current 10 percent early next year as threatened, “the industry-wide cost increase would be $2.5 billion,” according to David Logan, director of tax and trade policy analysis for the home builders group. Tim Ellis, president of T.W. Ellis, LLC in Forest Hill, Maryland, a remodeling firm that specializes in kitchens and home additions, estimates that the latest round of tariffs – along with the existing levies on Canadian lumber – now affect somewhere between 15 percent and 20 percent of the products in a typical project for his firm. They have the potential to increase costs to the consumer by anywhere from 5 percent to 10 percent or more, depending upon what the client selects. “We are trying to absorb as much as we can until it starts to really impact our bottom line,” he told me. But like other remodeling firms, Ellis is also including flexible “allowances” in contracts that, in the event of big price hikes to tariff-affected products, give clients the flexibility to shift to alternative products that are not subject to the add-on levies. For example, if the quartz or granite specified in the original job by the client has the potential to become much more expensive – or difficult to obtain – the contract might contain language that allows a shift to alternative sources that are not subject to tariffs. Ellis calls it “skating around the tariffs” on imports from China. Bill Millholland, executive vice president of Case Design/Remodeling, says “we try to be honest with clients” but the tariff situation “puts us in a quandary. Do we bake in the 10 percent” increase expected from suppliers of Chinese products, or, looking months ahead, “do we bake in 25 percent?” The Canadian wood tariffs are especially troublesome for remodelings that involve extensive framing and carpentry work. They’re already adding $2,000 to the price of a typical new home, according to Logan. Kitchen cabinet prices have undergone multiple increases in recent months. Millholland said they are already adding “significant” bumps to the prices of custom cabinetry along with other component increases. The “dirty little secret” in the industry is that “vendors started to ramp up prices” on various components even before the latest round of tariffs took effect, he noted. Millholland estimates that 40 percent of the materials in major kitchen or bathroom remodelings are now affected by the tariffs. If a project is expected to cost $100,000, for instance, then $40,000 of the products in the job could be subject to tariffs, whether this year’s 10 percent tariffs or next year’s 25 percent. The Chinese and Canadian tariffs are not the only ones worrying builders and remodelers. The administration has also imposed 25 percent tariffs on steel imported from many countries and 10 percent tariffs on aluminum. According to a study by Freedonia Group, a market research firm, these tariffs are affecting prices on “most indoor and outdoor kitchen appliances” to varying degrees based on how much steel or aluminum they use. They include stoves and ranges, ovens, refrigerators, freezers, gas grills, among others. Together, according to Freedonia, they “have the potential to upend a product market that accounted for more than $18 billion in sales in the U.S. in 2016.” Sales could “slump as consumers decide a new fridge or stove isn’t worth the price.” The sobering bottom line- The tariff war is on. Building and remodeling are getting whacked, and the costs to you could go even higher soon.