"Should I Take My Home Off the Market for the Winter?"

A common question posed to me at this time of the year is whether sellers should pull their homes off the market for the winter. I also get asked whether potential sellers should hold off listing their homes until spring. The simple answer is that it is subjective and depends on many factors. 

There is no question that in the Northeast, activity decreases around Thanksgiving and increases again when the winter begins to wind down. Many sellers see no benefit to marketing a home during a period of relatively low activity. Moreover, winter is a difficult time of year to keep a home in good showing condition and is inconvenient given the weather, holidays, etc. These are valid considerations, but many people fail to see the upside.

Those buyers and sellers that are in the market during the dead of winter are serious and motivated. You seldom see a family taking a Sunday drive to random open houses in 20-degree weather and snow on the ground. As a general rule, sellers do not test the market at this time of year. Therefore, with serious, motivated parties on both sides, there is more of a chance of getting a deal done. Even better for sellers is the fact that not only are the buyers motivated, but there are fewer homes from which to chose.

Were I looking to sell my home at this time of year, I would weigh the various factors as discussed above along with the conditions specific to my local market and personal factors. What I would never do is make the decision based solely on the fact that there is generally less activity in the winter than in the spring.

As an aside, there was a time when the market history in the multi-listing service was easily manipulated. Taking a property off the market for a bit - or changing listing agencies - gave the appearance of less overall time on the market. (There is a bit of a stigma against homes that sit on the market for a long time). However, at least in the system used in my area, you can now see the full property history and, therefore, this "benefit" has been substantially diminished.

As always, your thoughts and questions are welcome (john@jw-realestate.com or comment here).

The Time to Buy is NOW!

I challenge everyone reading this entry to remember a time in your life when purchasing a home was more attractive.  Forget the articles about foreclosures, negative equity, etc. - I am talking about this static point and time and how you will be affected moving forward.

Last I heard, prices were at 2003 levels, on average. Prices in most local real estate markets are 15%-30% lower than their highs of 2006. As the tax code now stands, there is a significant tax advantage to owning a home as opposed to renting.

A few years back, when rates hit approximately 5%-5.5%, they were at a 30-year low and it was the opinion of most experts that rates could not go much lower. Since that time, however, the housing crisis has continued to spiral out of control and has done so for far longer than most had imagined possible. As a result, the government has done everything possible to depress interest rates as one means of spurring a housing recovery. To its dismay, this policy has not had its desired effect and housing prices have declined slightly further or, at best, leveled off in most local markets.

Sounds awful, but that was then and this is now...

Assuming you can find a 30-year fixed loan for which you qualify, the rate should be approximately 4% today! If you lock into this rate, you are doing better than your parents and likely their parents before them, and really, what could be the downside? Rates could go slightly lower and if they get to a point where it makes sense, you simply refinance at the lower rate. However, once these interest rates begin to increase, it will be the result of a policy shift, or the fact that the government is out of tools with which to depress rates. Either way, they will only continue to increase for the foreseeable future, and you will have missed the boat.

While the government is keeping interest rates low, it is simultaneously trying to stabilize prices so as to save any equity current homeowners may have and to spur an economic recovery. That makes the likelihood of further significant price declines unlikely. Also keep in mind that the longer you intend to own the home, the less important price is in relation to the interest rate.

Finally, buying a home and locking into a fixed rate gives you price stability over time, as well as flexibility. Many markets are seeing increases in rents given the difficulty of qualifying for loans and the general misconception that owning a home is a bad idea at this time. If you look at historic inflation rates and tie them to rent increases assuming 30 years of renting versus ownership, then it is a no-brainer to own a home. Roughly speaking, given a rent of $1,800 - $2,000 per month today, you would pay roughly twice as much in rent over 30 years as you would if you owned a home and were paying on a thirty-year fixed mortgage of the same amount. (These numbers are approximate. Speak with a tax lawyer, accountant, or mortgage lender to fully vet the savings.)

One more thing to think about. Assume the market bottoms, and interest rates (or prices and interest rates) begin to rise and you do not yet own a home. Maybe we even go into a period of inflation where interest rates rise unexpectedly and drastically as mentioned above. Without home ownership, you may be priced out of the market indefinitely. In the alternative, if you own a home under any of these circumstances, you at least have options.

If prices increase, you gain instant equity. You can sell your current home and use that equity to put down on a new home. Depending on interest rates and rents, you may alternatively want to keep your current home as a rental to offset some of the cost associated with a new purchase at a higher rate. Worst case scenario: if we do hit a period of rapid inflation, can you imagine how expensive it would become to rent a property or to buy a home? Just as no one predicted interest rates of 4% five years ago, no one predicted rates 0f 15-20% in the early 80's - until it happened, that is.

Just a few things to think about as you read all the negative articles bashing home ownership.

That Day

My career was in flux. I was closing my law practice on Revere Beach Parkway in Everett and leaning toward a real estate business full time. I thought this was the most important thing there could be and, in retrospect, was extremely self-absorbed.

I was walking out of the Gold's Gym across from my office and saw people staring at the TV's. A plane had hit a building. I had headphones on so I couldn't hear the commentary. I saw a replay, but noticed the building was already on fire? That didn't make sense. I took off my headphones and was told it wasn't a replay, it was a second plane hitting the World Trade Center in New York. I said, "Oh shit." I left and headed for Seabrook, New Hampshire where I was starting a new real estate endeavor. I was listening to Howard Stern which was riveting as they were there and giving a front-line, second-by-second report.

I called my wife, who was working in a high-rise in Boston and told her to get out immediately as it wasn't safe. She said she would not leave until everyone else was leaving. I told her that would happen within the hour. We hung up. She called me back 5 minutes later and told me that they were being evacuated and she was concerned for me.

In the interim, I was hearing the second tower was coming down (Tower 1 had already collapsed), there had been an explosion at the Pentagon, and more planes were unaccounted for. Howard Stern was yelling that we knew it was Bin Laden and that we should flatten most of the Middle East (I'm paraphrasing). Some New Yorkers were already heading down to volunteer, while others were walking over the bridges, briefcases in hand, covered in ash.

As Flight 93 was going down due to the bravery of its passengers, the Pentagon was in flames, firemen and volunteers were running toward the carnage in New York, and my phone rang. My wife now was leaving Boston on foot and wanted to know I was in a safe place. I told her I was on Route 286 in Seabrook and that I was as safe as I could be. I hung up, looked to my left, and was staring at the nuclear power plant less than a mile away. I stopped my truck in the middle of the road. I thought about where was safe and realized safety had become a fiction. I went to my destination and carried on with my life.

Ten years later, the question remains...where is safe? This is my answer.

The United States remains the greatest, strongest, most philanthropic - and yes, safest - country in the world. Where are we safe? Where we see our military, police, firemen and generally brave brothers and sisters such as those on Flight 93. Where are the terrorists not safe? Where they don't see our special forces and government operatives.

As Ronald Reagan said in his farewell address, "God bless you, and God bless the United States of America."

Housing Fix or Folly?

You may have heard that the Obama administration has reached out to experts in the field of real estate regarding foreclosures for their opinion on reviving the market. His idea is twofold. First, bundle thousands of Fannie Mae and Freddie Mac owned properties and sell them to investors provided they agree to rent the units as opposed to selling them. The second idea is to have investors partner with Fannie and Freddie to manage the properties as rentals and share in the profits. I normally reserve my opinion on this blog, but occasionally deviate from that norm. So here goes...

Bundling the properties and selling them as a package may be the quickest way to take the pain (a/k/a ripping off the band-aid). This, I have no problem with, on a macro level.

The government is, or should be, in the business of taking care of society's basic needs and the private sector is in the business of making money which leads to innovation and prosperity. When the government dictates the use of resources, the resources are not used to their full potential, unless blind luck intervenes. The term that personifies productivity as it relates to real estate is "highest and best use."

In simple terms, sell the properties individually or by the thousands, but let the buyers dictate the use (environmental issues as the caveat). The properties will then garner the highest price which is best for taxpayers currently on the hook for the losses of these agencies. Moreover, the highest and best usage of the properties will not artificially affect the rental market. There are unintended consequences to any government intervention. (The people owning rental properties will be unduly burdened financially by this plan.)

Put another way, if I know I can generate a greater return on the purchase of a property by renovating and selling, yet the government tells me that if I buy it, I must rent it at a lower return, am I going to pay the same price as if I could sell it? Is the government going to obtain an optimal return on the debt owed by these quasi-governmental agencies? The answer is axiomatic. I welcome your comments on this important issue.

Irresistible Force vs. Immovable Object

Remember the following paradox no doubt posed to you at one time or another:

What happens when an irresistible force meets an immovable object?

One of the answers proffered by many philosophers and scientists is that there is no answer as the two concepts cannot coexist.

I pose a similar question to you with respect to the current real estate market:

What happens when a seller brings a property to market based subjectively on desired return and buyers believe any price is too high as this is, after all, a "buyer's market"?

The answer is simple: the two cannot coexist.

My point is that while it is unfortunate for sellers that we are in one of the most depressed real estate markets on record, a property must be priced objectively based on current market conditions. Of course, there comes a point where a party simply cannot afford to sell a property. However, more often than not, the selling party simply desires a greater return (or, in a worse scenario, desires less of a loss) than the market will bear. The irony is that, in overpricing a property, you reduce the likelihood of a maximum selling price. The most activity a property will see - either on the internet, or in person - will occur in the first few weeks it is on the market. After those first few weeks, the traffic falls off dramatically. While price reductions will help, many potential buyers will no longer have the property on their radar and/or will become skeptical as to its value. Buyers start to ask, "Why has no one bought this property? It must be overpriced or have serious issues." This will almost always result in a lower selling price than if the property was priced reasonably from the beginning.

With the above said, be wary of real estate professionals who agree to list your property at the price you suggest (or even higher) unless they support your price with objective analysis. This objective analysis should be contained in a comparative market analysis (CMA) and will include similar properties to the one being sold.

Conversely, while it is a "buyer's market", some properties are actually priced reasonably from the start and, in any event, there is always a price at which a property is a good deal. You cannot assume that an asking price is too high and that there is a dollar amount reduction, or percentage off the asking price, at which you are going to purchase the subject property. As is true for the seller, a buyer should rely on comparable properties to base an opinion of value. With that said, a property may be slightly out of your price range, or may only be worth a certain amount to you, at which point there is no harm in making a low offer. However, if you truly want the property and it is worth the price, you should make a reasonable offer. If you play the game too long, you may give the seller the impression you are not a serious buyer, or you may lose the property to another buyer. (I have actually seen some properties sell at or above asking price in recent weeks!)

In short, sellers want to sell and buyers want to buy. More often than not, there is a middle ground at which the two can strike a reasonable bargain.

New Obstacle for Home Sales

When dealing with older homes and/or homes needing rehab, there are many issues to consider. One issue that is becoming more prevalent is appraisal requirements.

For those of you who have dealt with FHA loans over the last few years, you may be aware that appraisers on these transactions are being asked to act as a hybrid between appraiser and home inspector. What you may not know - and what everyone needs to be aware of - is that this inspection aspect of appraisals is now becoming a requirement for many lenders on many types of loans.

Traditional appraisers were asked to value properties, period! Defects in the condition of the property were taken into consideration merely to the extent that they affected value. Today however, more and more lenders are requiring appraisers to make note of hazardous and/or dangerous conditions for various loan products. Two prime examples of  hazardous conditions are flaking paint in older homes (due to the possibility of lead) and broken windows. The reason for this requirement is somewhat technical and has to do with the reselling of the loans to investors, but the practical effect is that these homes won't qualify for many loans unless the issues are rectified.

What does this mean for you?

If you are a seller and want the broadest possible market, fix the problems prior to marketing the home. Remember, these appraisers aren't contractors or inspectors, so they are only noting obvious defects. However, if you can see it, so can they.

For buyers, question your mortgage lender or broker as to what they know about the particular loan product you are using, so that you don't waste a great deal of time vetting properties that cannot be financed through that product.

Unfortunately, due to ever-changing regulations, real estate transactions continue to become more complex. Going forward, it will be even more important that you select the most qualified real estate professionals to help you through the process.

Identifying "The Recovery"

February housing numbers for the Boston area as promulgated by the S&P/Case Shiller Index show a year over year decline of 1% and a 1.5% decline from January to February. What stock should we put in these numbers when gauging the health of the real estate market and a potential recovery? In short, virtually none.  

The year over year difference is slight and remains 2.3% higher than the bottom reached in April of 2009. Moreover, both year over year and month over month numbers, if they could somehow be adjusted for the severe weather we experienced in February, would likely show an improvement in both categories. Also, keep in mind that these numbers look backward and we are concerned with the future.

In predicting the future of the real estate market, I am most intrigued by the historically high number of homes being bought for cash; particularly considering that at the height of the market, the vast majority of buyers had no (or virtually no) skin in the game. I am seeing percentages of cash buyers ranging from 25%-40%, depending on the method of calculation and geographic location. What this means depends largely on who is buying these homes. Based on my personal experience and all that I have heard and read, it is largely investors. More specifically, investors who are buying distressed and bank-owned homes in order to "flip" them. The speed of a recovery depends largely on the success of these investors. (Obviously, job creation, inflation and consumer sentiment factor into any housing recovery as well.) If these investors see a high enough return and a healthy pool of buyers, they will continue the process and the recovery will be self-sustaining, irrespective of additional government stimulus. If a market for these rehabilitated homes does not materialize, I see the real estate market remaining stagnant for quite some time. The good news is that the amount of money coming in from the sidelines and investors' willingness to risk the same is a very positive sign.

 In addition, keep in mind that whatever happens, the market will need to absorb the shadow inventory (see prior entries for definition). Here again, investors flipping property is a crucial component.

As always, I welcome your thoughts.

Managing Expectations

While there is a subjective component to buying any property (particularly one purchased for personal use), it is incumbent upon buyers to consider the objective component as well. More and more, I am hearing that buyers' expectations are out of control. In fact, there was an article in Sunday's Boston Herald that was basically a forum for buyers' agents to vent their frustrations. 

The bottom line is that the term "buyer's market" is one of the most overused and least understood terms I have heard over the last year or so. What is a "buyer's market"? I know what it is not. It is not a magic phrase which allows buyers to suspend logic and objectivity in order to dictate unrealistic purchasing terms. I suppose a buyer's market is one in which prices are depressed and interest rates are favorable. If this is your definition of a buyer's market, then we couldn't be in a better buyer's market. However, in order to take advantage of a buyer's market, a buyer must be willing to take action when a relatively good deal comes along.

To take advantage of today's favorable conditions as a buyer, do your subjective analysis (where do you want to buy, what amenities are of particular import, etc.). But once you have concluded your subjective analysis, leave your emotions at the door, and rely on the raw data that is available. What is the property worth, and are you willing to pay that amount? If you are unwilling to pay what a property is worth, then you shouldn't be seriously looking, as you will only be disappointed. (A qualified buyer's agent can usually provide you with a list of comparable properties and what they are selling for per square foot, which generally provides a solid starting point for valuation.) 

While there are certainly some good deals out there, it is important to be realistic. When making an offer, base your decision on the above and you will maximize your likelihood of success. For those people who say things like, "No one pays asking price in a buyer's market!" without any objective analysis, it could be a very long spring...

Rising Rates

Interest rates are on the rise, which made the front page of today's (2/11/11) Wall Street Journal. For the first time in months, the interest rate on 30-year fixed mortgages has climbed over 5% to 5.05%, according to a survey conducted by Freddie Mac. Compare this rate to the historic low of 4.17% approximately three months ago. I found the article to be particularly helpful as it puts what seem to be abstract numbers into context:

In general terms, an increase of 1% in the interest rate raises home purchase expenses by roughly 10% for the average buyer. Assuming a 10% down payment, an annual household income of $84,000 at a rate of 4.5% will qualify a buyer for a 30-year fixed mortgage of approximately $400,000. If the rate increases to 5.5%, the buyer's income will need to increase to $92,000 in order to service that same debt.

In my experience, buyers tend to place less significance on interest rates than on prices. While both are important, keep in mind that the longer you intend to own a home, the more important the interest rate becomes in relation to price. With that said, rates are still at historic lows and the convergence of low home prices and low interest rates is unusual. Generally speaking, when rates are low, prices are high. Normally, when rates increase, prices decrease; however, I do not see much room for prices to decrease from current levels. Further, there is a saying that trying to time the bottom in any market is like trying to catch a falling knife! Put another way, the time to buy is now.

Anecdotally, as I am writing this, I have CNBC on in the background. They just posted today's poll question. The question is whether 6% interest rates will keep you from purchasing your dream home...

Happy New Year

As a real estate professional I say "good riddance" to 2010. Here's to a better year in 2011.

As I often mention, the real estate market does not operate in a vacuum, but is part of the overall economy. That being said, here are my predictions for the upcoming year.

The economy, in general, will continue its recovery. Although the jobless rate will remain a major concern, it will likely improve at a rate better than most expect. Unfortunately, it will take improvement in unemployment prior to any significant recovery in the real estate market. I expect values to stay relatively flat over the next year. This will be due in large part to the "shadow" inventory lenders will gradually funnel into the market over the next 1-2 years so as not to flood the market with bank-owned homes. Additionally, I see mortgage rates increasing on a gradual basis. So long as it is gradual, this may actually be a good thing (see prior blog entry). However, at some point, an increase in interest rates would be a major setback for the housing market.

The good news is that, as always, an economy in a state of flux can be extremely beneficial for savvy real estate sellers, buyers and/or investors. Not only is real estate local, it is segmented. If you do your homework and seek guidance from those who are experienced in real estate, tremendous opportunity awaits in 2011.