Pressure on Interest Rates

According to Freddie Mac, interest rates on 30-year fixed mortgages are currently averaging 4.61% as opposed to this time last week when rates were 4.46%. Moreover, while I am by no means an expert on mortgages and what drives rates, all I have heard in the last day or so is that current economic conditions dictate that rates will likely rise in the short term. In addition, historically, these rates are unprecedented, so it is naive to think we won't average higher rates over the long term.

What all this means is, for those of you who are timing a home purchase based on interest rates, now appears to be as good a time as any to purchase. This assumes that you are buying a property you intend to hold for at least a few years (minimum of 3-5 years, depending on the particulars). Historically, with transactional costs, it never made sense to buy a home that you were not going to occupy for at least 3 years in the first place.

As a side note, don't necessarily assume a slight rise in interest rates will hurt housing prices and further stagnate real estate transactions. In my opinion, the converse is more likely. The housing crisis has been ongoing for approximately 4 years. As a result of that fact alone, there is pent up demand. One major factor keeping buyers on the sidelines during the crisis has been the assumption that rates would further decline, or at minimum, would remain at these historic lows. Slightly higher rates may create a sense of urgency that has been lacking and be just the catalyst we need.

The Home Depot Effect

While it is important to look at housing numbers such as new home sales, existing home sales, mortgage applications, building permits, etc., when trying to predict the future of the real estate market, many ancillary factors are also strong indicators of market trends.

Home Depot, which just reported third quarter results, is a prime example. The following is an excerpt from a Marketwatch article dated 11/16/10:

Home Depot Chief Executive Frank Blake said more than 80% of the company's top 40 markets in the U.S. posted positive comparable sales...
"From an overall perspective, we see a stabilizing business," Blake said on a conference call with analysts.
Still, like Lowe's, the company said there's still "continued pressure" in the market. Average transaction size is down as customers continued to spend on smaller ticket items and basic maintenance and repair projects. Sales of items under $50, about one-fifth of Home Depot's business, were up 2.7%. Those above $900, also 20% of the total, fell 3.4%, with building materials and non-essential spending such as kitchen areas remaining weak.

What this means for you in your local market is open for your interpretation. My thought is that the above is indicative of what I have witnessed over the last few months.

People are doing what they can in order to keep their homes functional, but remain averse to making large expenditures given the tenuous state of the economy. This suggests that foreclosures may abate slightly. (People spend virtually no money on homes they intend to walk away from.) However, most homes require moderate to significant improvements prior to sale in order to maximize return. The net effect is that, until stores like Home Depot see average sale prices increasing dramatically, home prices will remain at current levels. The good news for buyers is that, for those of you looking to create value though sweat equity, opportunities abound.

As an aside, Warren Buffet recently reported that, in the third quarter of this year, he sold all of Berkshire Hathaway's shares in Home Depot...

Safety First

This topic is often covered and for good reason. It is important! Since I don't believe I have ever covered this topic, this post is long overdue. When selling your home, whether on your own or with the assistance of a real estate agent, there are many safety issues you need to consider.

Always keep doors and windows locked. Regardless of your prior habits and how safe you perceive your neighborhood to be, this is a whole new ballgame. Criminals now know that your home is for sale and people will be coming and going frequently, including strangers. Check your doors and windows often, especially after showings and open houses. Intruders sometimes unlock a door or a window, only to come back later and use it as a means of access.

When showing your home, keep a means of egress between you and the potential buyer. Along the same line, pull your car into the street prior to showings so that no one can block it in the driveway. It is also a good idea to have someone with you when showing your home to someone you don't know. At minimum, set up a code word or phrase with a friend who you can call when feeling unsafe. Whenever possible, let that friend know when you are conducting showings, so as to ensure he or she will be available to answer your call.

Most people know enough to lock up and/or remove valuables, but you also need to secure prescription drugs. Drug addicts and/or dealers have been known to steal prescription drugs during showings.

This is by no means an exhaustive list of safety issues. These are just a few tips to help keep you safe during the home-selling process.

As always, contact me at 978-423-9309 (cell) or via email to john@jw-realestate.com with questions, comments, or for help with your real estate needs.

Recession's Silver Lining

While there are few silver linings to the ongoing chaos that is the U.S. economy, investment in residential real estate for income purposes appears to be one of them.

In the Greater Boston area, residential real estate vacancies are at an 18-month low and we are seeing a stabilization (and perhaps slight improvement) in rents. (Source: The Boston Globe 8/10/10)

Unfortunately for many, foreclosures continue at historic levels and the jobless rate remains alarmingly high. Thus, it stands to reason that rental units are in demand. Of course, with a dwindling supply comes added value in the form of higher rents. Not only are apartments easier to rent and in higher demand, but foreclosures are, for the time being, creating bargains for investors. This is a win/win for those of you who intend to purchase rental properties at this point and time. The lag time between the increase in rents and a future increase in per unit purchase cost is what creates this window of opportunity. With that said, I caution those of you with minimal experience in rental real estate to do your due diligence prior to diving into this area of investing.

Regardless of your experience with owning rental properties, keep in mind that the landscape has changed. It is common practice to vet a potential tenant in many ways, including verifying credit scores. Although there is certainly merit to considering credit scores, given the current economic conditions, you may want to place more emphasis on less objective standards, such as conversations with prospective tenants and verification of references. Remember, the opportunity being discussed is predicated on foreclosures - which destroy people's credit - and unemployment which almost always leads to similar credit issues. In order to take advantage of the opportunities in today's rental real estate market, in all likelihood, you will need to take chances on people you may not have considered credit-worthy in the past.

As always, for any issues regarding real estate, feel free to contact me at 978-423-9309 (cell) or john@jw-realestate.com.

View My Crystal Ball

Here is my prediction for the real estate market, politics and the economy as a whole for the next year or so.

There will be another real estate tax credit implemented within the next 6 months. I am not sure of the depth or breadth of the credit, but the housing numbers on a national level have been atrocious, and one would be hard-pressed not to draw a correlation between housing numbers and the expiration of the credit. (Yes, the credit was extended for parties already under contract, but that is irrelevant to new contracts, building permits, etc.) Moreover, I have been hearing increased debate on the merits of a new credit over the last few weeks. As the government recoups a portion of the funds expended on stimulus (selling of Citigroup stock at a profit being one example) it will mysteriously come up with the money for a new stimulus which will likely be implemented before the upcoming elections. (The Democrat Congress will want it passed before the elections in order to avoid Republican opposition.) This will spur activity in low-priced and mid-priced home markets.

Speaking of the elections, Republicans will gain many seats in November and there will be a balance of power - which is normally good for the stock market. As such, we will see a bull market, at least for a few months, which should improve public sentiment. This will benefit all price ranges and should stimulate home sales.

The Bush tax cuts will be extended. The extent to which they are extended will dictate the impact on housing, but this will no doubt benefit higher-end home sales.

All of the above is trivial without a decrease in unemployment. The only way for unemployment to subside is for the costs associated with hiring to become more defined. In essence, business owners need to know what costs are associated with health care and new regulations imposed by the government before they will be willing to hire employees. These costs should gradually become more transparent over the next year and I think at that point, unemployment will begin to subside. Unfortunately, getting back to a healthy unemployment rate will take years, not months.

This is just one man's opinion...

Generation Y Housing Trends

My wife forwarded me an article she thought would make an interesting basis for a blog entry. The article, written by Mary Umberger and appearing on Boston.com on July 6, identified housing trends for Generation Y members, which it defined as persons born from approximately 1977 through 1989.

Here are the highlights:

This generation will tend to purchase their first homes later than prior generations. They tend to travel and/or go to graduate school. In addition, they are dealing with the adverse economic issues of the last few years. While I agree with the general premise, the article's estimate of age 35 for most first-time Generation Y buyers seems high. I believe the age will be closer to 30.

As far as their desires, Generation Y buyers seem to prefer locations closer to cities and public transportation than did their predecessors. They are willing to work with smaller homes, but require open concepts. A little land and a garage are important, whereas a formal dining area is not. I disagree with the article's premise that media and game rooms are not important to these buyers. Most of my clients in this age range are very focussed on an adult playroom, as well as where they are going to hang a large-screen television.

With the above said, sadly for me, I am not a member of Generation Y, so I would be interested in hearing the thoughts of those of you who are. Regardless of your age, feel free to let me know what is important to you in a home in order to keep me apprised of market trends.

As always, contact me via cell (978-423-9309) or email (john@jw-realestate.com) with any comments or questions. Clients, be sure to contact me soon to reserve your tickets to our annual company outing - the Saturday, July 31 (5pm) Lowell Spinners game!

Friday Musings

As I search the MLS to fill the needs of my various clients, I find my mind drifting to the housing market. I am trying to digest the most recent data on housing and figure out where we go from here.

All of the numbers I have seen on a national level over the last week or so have shown a dip in activity of 15%-25% since the end of the tax credit. Now I am no economist - nor am I a fan of wealth redistribution - but if the government is going to give away money, what better cause is there than home ownership? Homeowners take better care of properties than do renters, which is good for neighborhoods and house values in general. (It's similar to business owners caring more than employees about profitability: when you have skin in the game, you care more.) Moreover, economic recovery is much easier with a robust housing market. Without a rebound in housing (and jobs), we will limp along listlessly for quite some time. The FED simply cannot force interest rates down any further, so what are we left with? Answer: housing and jobs.

I urge everyone who reads this to e-mail your Members of Congress and request a renewal of the homeowner tax credit, and not just for first-time buyers. Even if you are not planning to buy or sell, it can only improve the value of your home and the economy as a whole.

On a more positive note, the Boston area numbers have been significantly better than the ones mentioned above.

As an aside and as I write this, the headlines on CNBC relate to the negative sentiment of home builders and the likelihood of a double dip in housing.

No Credit, No House

Most everyone knows that credit makes the world go 'round. It is that knowledge that makes people hesitant to do anything which may adversely affect their credit. They pay cash for everything and are quite proud that they haven't missed payments on credit purchases, which would thus damage their credit. However, there is a fatal flaw in this logic: no credit is actually bad credit!

If you are a young person just starting out, you may be afraid to open lines of credit (usually credit cards in your case), as you don't trust that you will be disciplined enough to use your credit cards responsibly. If this is you, pat yourself on the back. The people most likely to run up debt that they cannot pay back do not have this fear.

If you ever want to purchase a home, you will need credit, which takes time to build. (Right now, many loans require a credit score of, at minimum, 620.) Therefore, take the risk and begin the process of building credit at your earliest opportunity. It is a simple, yet lengthy process.

Look at your budget and what you spend on a monthly basis. Next, obtain one credit card. Charge a few things a month that you would normally buy (gas, groceries, etc.) and pay the balance promptly at the end of each monthly billing cycle. As you get comfortable and learn that you can be responsible, obtain one or two more cards and use the same process.

A car loan is also a great way to build credit. If you qualify and the rates are reasonable, take a car loan as opposed to paying cash. If you cannot qualify for a car loan, save the money and see if your bank will then give you a loan against the funds you have so long as you pledge the funds as collateral.

Remember, the worst that can happen is that your fears will be confirmed and you end up damaging your credit. This will set you back, but it is a lesson learned and, either way, you will likely never be in the position to buy a home without taking the chance.

For those of you advising young adults on credit issues, the knee-jerk reaction is to say, "If you can't afford it, don't buy it." With that said, keep the above in mind. If a young person starting out is seeking your counsel, that person is already fairly responsible regarding credit, and, again, what exactly are they protecting when they have no credit to begin with?

As always, feel free to contact me at john@jw-realestate.com or 978-423-9309 with any questions.

Tax Credit/Written Contract

As almost everyone to whom it matters knows, parties desiring to take advantage of the tax credit (see prior entries for details) must have a written agreement in place prior to May 1, 2010 and must close prior to July 1, 2010. Seems simple, right?

Given my background and need to parse words, I started thinking about what constitutes a written agreement for purposes of the credit, particularly given the custom in Massachusetts. There is little doubt that a binding purchase and sale agreement will satisfy the criteria. However, any legal document is defined by its content and not its captions. The issue comes down to intent of the parties and/or intent to be bound.

In Massachusetts, the precursor to the purchase and sale agreement is generally a contract to purchase, commonly referred to as an "offer" which is misleading. Most "offer" forms are in fact contracts and are binding, hence satisfying the criteria for the tax credit timeline. However, many people representing buyers attempt to water down the binding nature of the contract to purchase through language stating that the contract to purchase is contingent upon the execution of a binding purchase and sale agreement. This language may make the contract to purchase insufficient for purposes of the tax credit.

In the event that you are counting on the tax credit, but will not have closed prior to May 1, proceed with caution. Although the above may seem to be semantics, this is uncharted territory, and slight variation in the drafting of documents could prove costly.

As always, contact me at 978-423-9309 or john@jw-realestate.com with any questions or comments.

March Pending Homes Data

The number of single family homes in Massachusetts that were placed under agreement* in March increased 27% year over year while condominiums placed under agreement increased 38% over March 2009. This follows a trend of increases for both single family homes and condominiums which has held true for 9 consecutive months. (Source: MAR 4/6/10)

While this is encouraging news for sellers, the tax credit ($8K for first-time home buyers and $6.5K for those buying and selling a primary residence) requires that a property be under agreement by the end of April. Therefore, I expect the trend of pending* home sales to continue for the month of April and to then dip - perhaps significantly - at least until the end of July. This would be an aberration from historic cyclical trends, as May and June are typically strong months for real estate activity.

Bottom line: if you have a residential property for sale, use your best efforts to place that property under agreement prior to May 1. The one caveat is that there is the possibility that the tax credit could be extended in some form, which would allow the current trend to continue into at least the summer vacation season (usually the second or third week in June through July). However, I have heard no substantive discussion to that effect.

* The terms "under agreement" and "pending" are synonymous and simply mean that there is a contract signed with respect to the sale of a property, but ownership of that property has not yet transferred.

Obama Mortgage Plan

The Obama administration is rolling out new efforts to keep borrowers in their homes. Although this plan will likely take a few months to be fully implemented, it may help those of you who have previously been left out in the cold.

Unlike many other refinancing plans, this plan rewards payment and high credit scores. People availing themselves of this plan will need to be current on their loans and have credit scores of over 500. You will also need to owe more on your home than it is currently worth. The plan is to write down the principal of the loan by at least 10%. (Source: WSJ pg. A5 3/27/10)

Homeowners who do not qualify but are staying in their homes should see a benefit once they decide to sell their homes. The intended effect is to stave off foreclosures. Foreclosures decimate values of comparable homes by reducing appraised values and comparative market analyses (CMAs). If appraisers and real estate agents remain with their current formulas, principal write-downs should have no impact on neighboring homes, as both appraisals and CMAs are based largely on sold comparables. (A foreclosure would be included, yet there is no sale with a principal write-down, so these homes would be excluded entirely.)

My suggestion is that anyone who thinks they may qualify for this program should contact their lenders, accountants, financial planners and/or attorneys to further vet the details and timing of this plan.

Open House Preparation

As discussed in my last entry, your first course of action when marketing a property is to determine who your target market will be and to make the property most appealing to that audience. Regardless of whether you are selling a fixer-upper, a pristine property, or something in the middle, open house preparation is not to be overlooked. There are dual objectives when preparing for an open house: maximizing the attractiveness of the property while minimizing safety concerns.

The exterior grounds should be well maintained. Remove any snow and debris from walkways and driveways. Spread sand and/or salt where appropriate. Make sure the lawn is well manicured.

As for the interior, you want to keep paths of traffic free of any clutter. Clean thoroughly, including: dishes, sinks, counters, tubs, showers, mirrors, walls, floors and fixtures. These steps will make the property more attractive, while minimizing the likelihood of injury to invitees.

Equally as important as aesthetics is aroma. To the extent possible, pet and smoke odors should be eliminated. If you like to bake, do so just prior to the open house to make the home smell inviting. In the alternative (or in conjunction), air fresheners and candles make a property smell fresher and create a nice ambiance. (Lit candles should be kept high and out of the reach of children.)

Remember, even the most qualified real estate professional needs a fighting chance when trying to sell your property. Anything that draws attention away from the selling features of the home does you and your agent a disservice.

While open houses can be an effective marketing tool, they, like anything else, have their downside:

Theft can be an issue, so remove valuables, or store them in secure locations. In addition, check to make sure that doors and windows are secure after an open house. Although I have never had a related issue arise (knock on wood), we have all heard stories of items being stolen and/or doors and windows being unlocked for later access. At a successful open house, there will be numerous parties walking through the property at any time and an agent cannot possibly keep an eye on every person throughout the event.

Finally, remember that all marketing is most effective at the inception of the listing. This is when your property will garner most interest, so be sure to take advantage of that window by presenting your property in the best light possible.

As always, for further discussion on this or any other real estate matters, contact me at 978-423-9309 (cell) or via email to john@jw-realestate.com.

Preparing Properties for Sale

As of this date, the tax credit for home purchases (see prior entries) has not been extended and a property must be under agreement in writing no later than April 30, 2010 to take advantage of the credit. This means many of you should be preparing to market your homes. With that said, “fixer uppers” and pristine properties are currently in demand. If you have a property in dire need of repair, make a decision. Either leave the property as is (with minor cosmetic improvements), or invest the time, effort and/or money necessary to transform the property into “move in” condition.

As much as the term is over-used, enhancing “curb appeal” is generally the most effective use of funds:

• Landscaping and outside painting are the most cost-effective upgrades you can make to a property. Landscaping must take into account your target market. For smaller/less expensive homes, focus on ease of upkeep (mulch, stone, perennials, etc.). Higher-end properties (where landscapers will likely be employed) may benefit from more ornate landscaping.
• Driveways should be in good repair, while taking into consideration materials used for driveways of surrounding homes.
• Exterior painting must be clean, neat and in conformity with the neighborhood.
• The roof must be weather-tight and aesthetically pleasing.

Once the exterior features of your property have been maximized, only then should you begin interior upgrades:

• Interior painting adds more value per dollar spent than any other interior improvement. Remember, painting is 90% preparation. What that means is caulking, puttying, patching and sanding are of the utmost importance. (If you do not know how to do these things, hire a professional; it is money well spent.) When it comes to the actual painting, use a semi-gloss on the trim and a satin finish on the walls (these terms may vary, depending on the brand of paint you use. The store clerk should know what you need.)
• If your floors are wood and covered with carpet, expose them. Wood floors should be restored. It is relatively inexpensive. If there are stains or other imperfections, and they can be covered with area rugs or furniture, it’s fine to do so, but make potential buyers aware of the defects. There is a difference between presenting a property in the best light and intentionally hiding flaws.
• For properties that are not marketed as fixer-uppers, the kitchens and bathrooms must be pristine. For higher-end properties, the counters should be composed of a solid surface (many people refer to this as Corian, which is actually a brand name) or granite and the floors are generally expected to be tile or wood.
• Thin out cabinets and closets, leaving only matching settings if possible. This presents well and gives the appearance that there is ample cabinet space. The same goes for closets. Remove 60% of your clothes, and buyers will come away with the sense that there is ample closet space.

Feel free to contact me any time (john@jw-realestate.com or 978-423-9309) for more ideas or for a no-obligation market analysis of your Massachusetts or New Hampshire property.

Anticipating the Market

Economic indicators, and signs of the real estate market in particular, are everywhere. All you need to do is look closely and then extrapolate on what you see.

Are people spending money and, if so, on what? (Consumer staples, luxury products, travel, etc.) Where are they spending? (Home Depot, Marshalls, Tiffany, etc.) What about business spending? (Infrastructure, employees, office equipment, etc.) Where are interest rates? What interest rates are being discussed? Are we going into a period of inflation, deflation or stagflation? Which political party has the momentum and on what platform?

Today's focus: new home construction and government subsidies as they relate to you as a prospective seller.

Many of the national home builders are gearing up for a flurry of activity in the next few months. In fact, even after being caught with excessive inventory at the end of the last real estate boom in 2007, these companies are starting to build spec houses again in anticipation of an early spring market. (Source: WSJ page B1, 2/10/10)

The rush, of course, is predicated on the need for buyers to have a signed contract in place as of April 30, 2010, in order to take advantage of the tax credit. Now let's extrapolate.

If these developers - who follow real estatet market trends and are experts on market cycles - are confident enough in the tax credit's effect to start building without buyers in place, shouldn't you, as a seller, take this into account? After all, many of the large developers teetered on the verge of bankruptcy as the bubble burst and have been extremely cautious since.

What I take from the above is that developers are both excited about the early spring market and concerned by the dearth of activity that will likely follow the expiration of the tax credit. (By the way, I see no indication that the credit will be extended.) With that said, if you need to sell a property any time soon, strongly consider following the lead of the professionals. Do your best to have your property on the market in time to take advantage of the credit. The lower the price point of the property you are trying to sell, the greater effect the credit will likely have.

As always, feel free to contact me any time via e-mail (john@jw-realestate.com) or cell phone (978-423-9309) with any questions regarding your real estate needs.

Bank Owned Properties

As mentioned in prior entries, REO (Real Estate Owned), bank owned and lender owned are all interchangeable terms which simply mean that the bank/lender owns the real estate. These properties present a tremendous opportunity for buyers, but are also fraught with uncertainty.

As opposed to short sales and auctions, lender owned properties' prices are certain, as they have been set by the lender. Therefore, although a property may sell above asking price, you can be fairly certain that, so long as no one is bidding against you, the lender will accept a full price offer with reasonable terms. Moreover, lenders generally price properties reasonably from the start, and periodically reduce prices as time goes on.

Remember that the lender is not emotionally involved and has no interest in being in the business of selling homes. Also keep in mind that the lender is looking for a quick closing, so the sooner the closing date, the better in any offer. (In some instances, lenders will offer incentives if you finance through them.) Although the opportunity to close quickly on these distressed homes at a bargain price is appealing, there are issues to consider with the process, due diligence and disclosure.

Each lender instructs the listing broker on how to proceed in selling the proprty. The lender will generally demand that the parties follow their procedure and that no changes be made to their documents. Therefore, contingencies are limited. Although you are generally allowed a home inspection, these homes are often in disrepair and/or winterized, so the inspection may be of limited value. As the lenders know very little about these properties, they will be sold "as is" with no warranties and/or representations.

In short, as a general rule, lender owned properties are "fixer uppers" and best suited for savvy investors, or home buyers with some construction background, intending to build "sweat equity." Most lender owned properties have been foreclosed on. That being said, a disgruntled (and financially troubled) homeowner has lost this property to the lender. The homeowner often destroys the home and strips it of fixtures and materials prior to being evicted, so be sure you know what you are getting into prior to buying a bank owned property. With that said, if you are the right type of buyer and conduct your due diligence, lender owned properties can be extremely rewarding investments.

As always, feel free to contact me via email to john@jw-realestate.com or via cell (978-423-9309).