Cooling trend could bode well for home buyers Kenneth R. Harney on Nov 16, 2018 WASHINGTON – Don’t call it a “buyer’s market.” Don’t call it a “correction.” But the fact is that a sobering change is taking shape in the housing market – an unmistakable cooling trend that defies an economy that is showing impressive growth, has the lowest unemployment rate in years and the highest home-equity levels on record. Anyone thinking of selling or buying a home shouldn’t ignore it. Doing so could cost you money, time and maybe a great opportunity. Call it a re-balancing. For years since the end of the financial crisis, prices in most markets have increased steadily – by single digits annually in most places, double digits in cities like Seattle, San Francisco, Denver and others that have vibrant employment growth plus persistent and deep shortages of homes for sale. Sellers were in the saddle. That was then. This is now- – Sales of existing and new homes have been sagging for half a year. According to data from the National Association of Realtors, resales have been dropping since the spring compared with year-earlier levels. At the end of the third quarter, resales were 2.4 percent below their level at the end of the same quarter in 2017. That’s despite growing inventories of homes available for sale in some areas, reversing the boom-time pattern of bidding wars that pushed prices to record levels and drove buyers batty. – Mortgage rates hit their highest level in nearly eight years in early November – 5.15 percent for a conventional 30-year fixed-rate loan – according to the Mortgage Bankers Association. Lending Tree, an online network that pairs mortgage applicants with lenders, reported last week that the average annual percentage rate quoted to shoppers was 5.27 percent. Buyers with good scores between 680 and 719 were quoted 5.42 percent. Though rates in the 5′s may sound reasonable to people who purchased or refinanced a home a decade ago, they are disturbingly high to millennials and other young buyers and magnify the affordability challenges they already face. Higher rates are also daunting to the millions of owners who have mortgages with rates in the mid-3-percent to 4-percent range. Rather than pursuing a move-up or downsizing purchase – requiring a new mortgage at today’s rates – many of them prefer to hunker down on the sidelines, further reducing sales activity. – Sellers are cutting their list prices. According to research by realty brokerage Redfin, 28.7 percent of prices of homes listed for sale in major markets during the month ending October 14 saw reductions. That’s the highest share of homes with price drops recorded since Redfin began tracking this metric in 2010. One of the key reasons for the cuts- Demand by shoppers is down by more than 10 percent compared with a year earlier. Consumer psychology is shifting as well- A national survey by Fannie Mae released last week found that the net share of Americans who believe it’s a good time to buy has fallen to just 21 percent, while the net share who say it’s a good time to sell is 35 percent. There are other signs of cooling underway that could be cited, but you get the point. The cycle has moved from seller-advantage to at least mildly purchaser-advantage in many parts of the U.S. Bear in mind, of course, that the cooling trend nationwide may not mean the same things are happening in your neighborhood. In fact, some cities with moderate housing costs are seeing price increases, homes selling above list, and tightening inventories. According to Redfin, nearly 40 percent of homes in Buffalo, New York, are selling above list at median prices 8.5 percent higher than last year’s. In Richmond, Virginia, 29 percent of homes are selling above list; in Akron, Ohio, 22 percent are selling for more than the original asking price, as are 23.2 percent in Greensboro, North Carolina. So what does this mean to you as a potential seller or buyer? Top of the list- Speak to multiple realty professionals to get a good handle on where your local market is relative to the national cool-down. If you’re a seller, the key to your transaction will be getting your list pricing right. If you’re a buyer, take your time but keep in mind- If you shop diligently, this fall could be a smart time to catch a deal – a marked-down price on the house you really want.
Fannie and Freddie programs offer options to retirees seeking home loans Kenneth R. Harney on Nov 2, 2018 WASHINGTON – It’s a common problem for retirees seeking to refinance or get a new mortgage- After their regular employment earnings stop flowing, their monthly incomes drop. They might have hundreds of thousands of dollars stored away in IRAs or 401(k) plans and other investments, but for mortgage purposes, they don’t have enough monthly income to qualify for the loan they want. They look asset rich, income poor. In some cases, that impression can create serious problems – even rejections of applications by loan officers who don’t know how to work with pre-retiree and retired applicants. Take the case of Jim Slaney. He’s a retired industrial real estate broker, lives in a home valued around $1 million in Glenview, Illinois, near Chicago, and has accumulated substantial retirement funds after a 40-year career. He and his wife have stellar credit scores in the 800s and decided to refinance their existing mortgage, an adjustable-rate loan that was about to shift to a higher interest rate. Slaney assumed that his application would be a slam dunk. Not only did he have significant home equity as well as a flawless history of on-time payments to his bank, he even planned to reduce the principal balance on his mortgage from around $600,000 to $400,000. What he ran into shocked him. The bank’s loan personnel “didn’t know anything” about handling mortgage applications from retirees, he told me last week, and they questioned whether his post-retirement income would support a new mortgage at today’s interest rates. His application contained detailed documentation on his substantial financial assets, but the loan officers at his bank were clueless about what to do with them. Most importantly, they were in the dark about program options offered by investors Freddie Mac and Fannie Mae and some private lenders for retirees and pre-retirees. The options essentially recharacterize retirement assets into qualified income for mortgage purposes, sometimes without requiring actual withdrawals of funds. Had the bank personnel been better trained and had more experience, Slaney could have been approved in a matter of days rather than the eight weeks it ultimately took him to get a run-of-the-mill refi. The programs generally take two forms- One treats ongoing distributions from IRAs, 401(k) accounts and similar funds as income that’s acceptable for home-mortgage applications, provided the withdrawals plus other income are adequate to amortize the loan and are likely to continue for at least the next three years. The second option is designed for people who have retirement funds that haven’t been tapped yet. Loan officers can use retirement-account balances as the basis for what functions essentially as imputed income – money that is or will be available to the borrower to supplement regular monthly income when needed to make repayments on the loan. Steve Stamets, a senior loan officer at The Mortgage Link, LLC, in Rockville, Maryland, has used these options periodically, and considers them “a great alternative” when clients have assets but don’t quite fit the traditional rules that define eligible income. He offered a simplified example of how it works- A client had $2 million in mutual funds but not enough regular income to qualify for the size mortgage he sought. The client didn’t want to withdraw money or be forced to liquidate securities. Using Fannie Mae’s program option, he was able to produce qualifying income for mortgage purposes of $3,889 per month using a formula that discounts the fund balances by 30 percent to protect against market fluctuations that might devalue them. This amount was then added to other income the client had to total the amount he needed to support the mortgage application. John Meussner, a loan officer for Mason-McDuffie Mortgage Corp. in San Ramon, California, says that although Fannie’s and Freddie’s options can be helpful, they come with their own complications as well. One of the biggest- The assets in some seniors’ investment or retirement accounts may not qualify if they’re derived from ineligible non-employment-related earnings. Another issue- Loan terms for seniors may be just 10 or 15 years. Monthly payments on such mortgages are higher than those with standard 30-year terms. Not all clients can afford them. Bottom line- If your assets are tied up in retirement and investment funds, and you’re seeking a mortgage based on your post-retirement income, ask lenders about the Fannie and Freddie options as well as alternatives offered by some private lenders. If the loan officer pleads ignorance, you’ll know it’s amateur hour. Shop elsewhere.
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? 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 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.