Wednesday, April 27, 2011
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.
Wednesday, March 9, 2011
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...
Friday, February 11, 2011
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...
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...
Wednesday, January 5, 2011
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.
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.
Thursday, December 9, 2010
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.
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.
Wednesday, November 17, 2010
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...
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...
Friday, October 8, 2010
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.
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.
Wednesday, August 11, 2010
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.
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.
Friday, July 23, 2010
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...
Monday, July 12, 2010
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!
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!
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