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.