Scott's Blog

A Sign of Hope - Mortgages May Be Safe From Bankruptcy Judges

Scott Wall (StoneHouse Realty, Inc) — Sat, 09 May 2009 22:24:33 -0500

This is good news for the mortgage industry. The housing bill winding it's way through Congress is most likely not going to include a cramdown provision allowing bankruptcy judges to change mortgage terms.

This will give mortgage writers the confidence that the terms of the mortgage can be upheld and that rates will not rise to counteract the government meddling.

Sen. Richard Durbin, D-Ill., said Monday that a provision granting bankruptcy judges the ability to modify mortgage terms during bankruptcy proceedings would be stripped out of a wider housing bill that will come to the floor of the Senate later this week.

The mortgage term modification provision, known as "cramdown," will instead be offered as an amendment to the bill. It is likely to be defeated with Republicans remaining united in opposition to it, and some moderate Democrats indicating they may vote against it.

The development is a significant defeat for Durbin, the No. 2 ranking Senate Democrat, who first introduced cramdown legislation two years ago. He has been unable to convince the mortgage industry to support the measure, and lend their significant lobbying weight behind his efforts. via WSJ.com.

Delaying the Inevitable - South Carolina Blocks Foreclosures Until Housing Plan Enacted

Scott Wall (StoneHouse Realty, Inc) — Fri, 08 May 2009 01:44:42 -0500

In an interesting move, foreclosures have been blocked from occurring in the whole state of South Carolina for loans from certain companies. The State Supreme Court has ruled that until the 75 billion dollar federal housing bill has been enacted homeowners should not be evicted and foreclosed upon. Instead, creditors should wait until the homeowner has the chance for a federally sponsored modification.

Now this is good in a way as it provides a specific timetable and rationale, but with homes across the country in foreclosure far exceeding the 75 billion dollar bailout, what happens when the homes are actually foreclosed upon? I will tell you, we will have a glut of foreclosures in the marketplace and the overall market will take a hit.

The actions of the South Carolina Supreme Court will be analyzed for years to come as an activist court measure that may prolong the housing slump in that state.

The Supreme Court of South Carolina halted foreclosures involving loans owned or guaranteed by Freddie Mac, Fannie Mae or other lenders intending to participate in the federal loan-modification program.

Roughly 6,300 properties in the state are in foreclosure proceedings, said Rick Sharga, senior vice president of RealtyTrac Inc., which tracks foreclosure data. The court's order will likely halt at least half of these, he said.

In March, the White House announced a $75 billion plan that offered incentives for lenders to modify some mortgages.

Fannie Mae, which requested the temporary restraining order, said the ruling gives it "additional time to identify borrowers who may benefit from the administration's modification plan and keep more struggling South Carolina homeowners in their homes with a sustainable mortgage." via WSJ.com.

The Road to Facism. Government Ownership of Private Property

Scott Wall (StoneHouse Realty, Inc) — Wed, 06 May 2009 00:32:33 -0500

I am from the government and am here to help.

Words that should make any American shudder. And the housing market may be wondering why we got sucked into another black hole of foreclosures and bankruptcies after the massive infusion of FHA loans into the economy.

1 in 8 Federal Housing Administration loans is delinquent. That is a higher rate than any major loan portfolio that the same government is calling irresponsible by a factor of 3.

So when you read about how the government officials are berating banks as being selfish and writing bad loans, just smile on the inside. They are the worst offenders, the true wolf in sheep's clothing, and they are using your money to lend to people who can not pay it back. Thus setting us, the tax payer up to own more and more private property.

Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low down payment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.

The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent - nearly triple the rate on conventional, non-subprime loan portfolios. Another 7.5% of recent FHA loans are in "serious delinquency," which means at least three months overdue.- WSJ.com.

Case Shiller Report For February 2009 ... as we haven't seen since 1929.

Scott Wall (StoneHouse Realty, Inc) — Thu, 30 Apr 2009 21:56:52 -0500

When you look back at this period of real estate history in the United States you will have to wonder how we kept our sanity. The picture of the stockbroker jumping out of the window is the image from the Great Depression. What will be the image of the Real Estate agent who went through the housing boom and then the losses we are looking at today.

The Case Shiller report for February, 2009 is out and the month over month numbers are ugly across the board, the year over year numbers are scary in many of the markets, but the numbers I dug up from the data is really freaky.

From July, 2006 (the peak of the market numerically) we have 6 major markets down more than 40 percent with Phoenix being down over 50%. With Tampa and Detroit hovering just under the 40 percent line and Washington and Minneapolis down around 30 percent, we have just seen a bubble burst.

Some have been calling a bottom now for a while, I came close a couple of times, but when do you think it will happen? And will it occur before or after inflation starts running rampant devaluing the homes even more?

Metro Area	Feb09     Jan09-Feb09  Feb08-09 	Jul06-Feb09

Phoenix         	111.89  	-4.50%     -35.20%   	50.79%

Las Vegas       	121.06  	-3.60%   	  -31.70%         48.33%

San Francisco   	120.39  	-3.30%     -31.00%   	44.68%

Miami           	154.28  	-3.00%     -29.50%   	44.57%

San Diego       	146.82  	-1.00%      -22.90%   	41.05%

Los Angeles     	163.16  	-2.00%      -24.10%   	40.42%

Detroit         	74.6    	-3.80%      -23.60%   	39.47%

Tampa           	145.25 	-2.70%      -23.00%   	38.99%

Washington      	168.02  	-2.30%       -19.20%   	32.77%

Minneapolis     	116.39  	-3.10%      -20.30%   	31.83%

Chicago         	126.3   	-3.40%      -17.60%   	24.63%

Atlanta         	106.65  	-2.50%      -15.30%   	20.94%

Cleveland       	97.76   	-5.00%      - 8.50%   	20.84%

New York        	178.16  	-1.60%      -10.20%  	17.23%

Boston          	148.77  	-1.30%      - 7.20%   	16.32%

Portland        	150.88  	-1.90%      -14.40%   	16.02%

Seattle         	152.12  	-1.50%      -15.40%   	15.47%

Denver          	120.22  	-1.70%      - 5.70%   	14.29%

Dallas          	112.39  	-0.30%      - 4.50%   	10.35%

Charlotte       	118.94  	-1.60%      - 9.40%    	 7.05%

Full Case Shiller Report

REDUCED - 14637 Seasons Drive, Centreville, VA 20120

Scott Wall (StoneHouse Realty, Inc) — Thu, 30 Oct 2008 19:46:21 -0500

Scott Wall | StoneHouse Realty Inc. | scott@ask2agents.com | 571-238-8176

14637 Seasons Drive, Centreville, VA

REDUCED - $100,000 BELOW ASSESSMENT

3BR/3.5BA Townhouse

offered at $299,900

Year Built	1994
Sq Footage	1,600
Bedrooms	3
Bathrooms	3 full, 1 partial
Floors	4
Parking	1 Car garage
Lot Size	1,633 sqft
HOA/Maint	$85 per month

DESCRIPTION

SAVE GAS! Walking distance to metro bus stop. With 4 spacious levels, this is the largest unit available in sought after Bryarton. Relax is cozy deck that overlooks trees. Do not miss this oportunity.

see additional photos below

PROPERTY FEATURES

Central A/C	Central heat	High/Vaulted ceiling
Walk-in closet	Hardwood floor	Living room
Dining room	Breakfast nook	Dishwasher
Refrigerator	Stove/Oven	Microwave
Basement	Washer	Dryer
Laundry area - inside	Balcony, Deck, or Patio

COMMUNITY FEATURES

Garage parking

Tennis court(s)

Playground

ADDITIONAL PHOTOS

Seller contact info:

Scott Wall

StoneHouse Realty Inc.

scott@ask2agents.com

571-238-8176

For sale by agent/broker

Equal Opportunity Housing

Posted: Oct 30, 2008, 5:07pm PDT

14637 Seasons Drive, Centreville, VA 20120

Scott Wall (StoneHouse Realty, Inc) — Fri, 26 Sep 2008 21:19:38 -0500

Scott Wall | StoneHouse Realty Inc. | scott@ask2agents.com | 571-238-8176

14637 Seasons Drive, Centreville, VA

Largest Available in Bryarton

3BR/3.5BA Townhouse

offered at $359,900

Year Built	1994
Sq Footage	1,600
Bedrooms	3
Bathrooms	3 full, 1 partial
Floors	4
Parking	1 Car garage
Lot Size	1,633 sqft
HOA/Maint	$85 per month

DESCRIPTION

see additional photos below

PROPERTY FEATURES

Central A/C	Central heat	High/Vaulted ceiling
Walk-in closet	Hardwood floor	Living room
Dining room	Breakfast nook	Dishwasher
Refrigerator	Stove/Oven	Microwave
Basement	Washer	Dryer
Laundry area - inside	Balcony, Deck, or Patio

COMMUNITY FEATURES

Garage parking

Tennis court(s)

Playground

ADDITIONAL PHOTOS

Seller contact info:

Scott Wall

StoneHouse Realty Inc.

scott@ask2agents.com

571-238-8176

For sale by agent/broker

Equal Opportunity Housing

Posted: Sep 26, 2008, 4:47pm PDT

U.S. Home Price Gains

Scott Wall (StoneHouse Realty, Inc) — Fri, 22 Feb 2008 20:04:44 -0600

New Realtor stats shows the credit crunch spreading pain nationwide. My trusty spreadsheet tells me only 11 of 152 towns tracked in the fourth quarter by the National Association of Realtors had price gains for sales on single-family residences vs. the third quarter. That's when shaky global financial markets began to make mortgages harder to get. Overall, U.S. prices fell 6.4% between the third and fourth quarters.

The fourth quarter's limited U.S. winners compares to 53% quarterly price gains in 151 U.S. markets in the third quarter. And while the fourth quarter can be weak for pricing, in 2006's fourth quarter saw 17% of the towns tracked by NAR had price gains.

Here's a look at my analysis of NAR's quarterly metropolitan area data: percent of U.S. towns with gains; overall change in U.S. pricing ...

Quarter	US towns up	US qtr. price chg.
4th ‘07	7%	-6.4%
3rd ‘07	53%	-1.4%
2nd ‘07	89%	5.1%
1st ‘07	45%	-2.9%
4th ‘06	17%	-2.8%

By the way, NAR chose to look at year-over-year data, which is fine. NAR tried to put on an glass-half-full view: "In the fourth quarter, 73 out of 150 metropolitan statistical areas show increases in median existing single-family home prices from a year earlier, including 11 areas with double-digit annual gains and another 12 metros showing increases of 6 percent or more; 77 had price declines including 16 with double-digit drops." In addition, NAR quotes its current president, Richard Gaylord, a broker with RE/MAX Real Estate Specialists ...

"Higher limits for FHA loans, which go into effect March 14, will be a big help to first-time buyers in high-cost markets. Higher limits for conventional loans purchased by Freddie Mac and Fannie Mae will take a bit longer - when they become available, high-income, creditworthy borrowers in high-cost areas will have access to affordable and safer financing, and that will help unleash pent-up demand. ... With the market in a state of flux, it's especially important for consumers to stay abreast of widely varying and changing market conditions. We encourage them to have a traditional long-term view, which means taking the time to thoughtfully research the market" To read more, CLICK HERE

DC/MD/VA has 7th Biggest Jump!!

Scott Wall (StoneHouse Realty, Inc) — Fri, 22 Feb 2008 19:36:58 -0600

Bureau of Labor Statistics' year-end data shows that the cost of living in a home, or housing inflation, rose at a slower pace both regionally and nationally last year. Housing inflation, which accounts for 46% of the Consumer Price Index math, includes home-operating costs from rent to energy to furnishings to insurance, but not purchase costs.

In DC/MD/VAl, housing's CPI rose at an average 4.8% last year vs. 4.4% in ‘06. With the increase, DC/MD/VA had the 7th highest housing inflation for 2007 among 27 regions tracked. (We were 9th worst in ‘06) Nationally, the U.S. city average was 3.1% housing inflation for ‘07 vs. 3.8% in ‘06.

Here's how the towns tracked by BLS fared ...

Region	2007	2006
Honolulu	7.2%	8.4%
Miami	5.9%	7.4%
Tampa-St. Pete	5.9%	5.2%
Los Angeles	5.1%	6.0%
Phoenix	4.8%	3.9%
Seattle	4.8%	4.8%
DC/MD/VA	4.8%	4.4%
Chicago	4.2%	1.7%
Atlanta	4.0%	2.7%
New York-NJ	3.5%	5.1%
San Francisco	3.3%	3.0%
Portland, OR	3.2%	1.9%
U.S. city average	3.1%	3.8%
Anchorage	2.7%	4.0%
Philadelphia	2.7%	5.8%
Pittsburgh	2.7%	4.5%
San Diego	2.6%	4.1%
Kansas City	2.5%	1.7%
Cincinnati	2.1%	4.1%
Minneapolis	1.9%	-0.2%
Cleveland	1.6%	1.3%
Boston	1.5%	3.5%
Milwaukee	1.5%	2.0%
Denver	0.9%	2.3%
Dallas	0.8%	2.4%
St. Louis	0.8%	0.9%
Detroit	0.7%	3.8%
Houston	0.5%	3.7%

LOSING THE APPEAL?

Scott Wall (StoneHouse Realty, Inc) — Fri, 22 Feb 2008 19:26:06 -0600

Here's what investment advisor Clyde Kendzierski wrote in his 70% Solution newsletter ...

It will be several years before the current housing surplus is absorbed. Although nominal home prices will eventually bottom, inflation is likely to outpace home prices for decades to come. The idea that a home is your best long term investment will once again be relegated to the dust bin of speculative fads. By the time this housing bust bottoms, baby boomers will be selling their houses in high cost areas to fund their retirement. As with every asset, there will be periodic profit opportunities that last a few years, but for the next decade or two, homeownership is consumption, not investment.
If you can afford the luxury, enjoy it, but profits are no longer likely. For the past eight years, most stock investors (our clients excluded) would have been a lot better off in TBills and CDs. From the peak in 2005, real estate investors should expect the same. Prices will fall until the after tax cost of a 100% financed home is way below rent. Reliquifying the banking system has resulted in a surge of refinancing. As many as 25-30% of the adjustable rate mortgages scheduled to reset this year may be replaced with conventional loans. The stimulus package increase in Fannie Mae/Freddie Mac lending limits will provide a further boost. A significant number of homes in the jumbo loan category that were previously unsaleable will now trade. You may be surprised that the primary impact of all this will be to cause another drop in home prices. High mortgage balances made it impossible for sellers to drop prices enough to generate a sale. Homes that don't sell don't count when the statisticians calculate home prices. Now a more modest drop in asking prices will cause a bigger decline in the average sales price because more properties will actually change hands at these prices.
This also means that the increased loan limits for Fannie Mae and Freddie Mac mortgages will slowly decline since the cap is based on 125% of median prices in the area. As prices fall, the cap will fall with it, reducing the median price further.

If you are planning to sell a home, DO IT NOW!

45% Real-Estate Layoffs

Scott Wall (StoneHouse Realty, Inc) — Fri, 22 Feb 2008 19:19:53 -0600

New federal counts of big layoffs in the fourth quarter at real estate-related businesses were 45% of all such U.S. dismissals vs. 34% in the third quarter and 39% a year ago.

My analysis of Bureau of Labor Statistics data shows bosses in construction, real estate sales and leasing, financing (mainly mortgages) and furniture manufacturing had 735 layoffs involving 50 or more workers in the last three months of ‘07 vs. 647 a year ago. Those layoffs involved 96,880 workers nationwide, up 11% in a year. Construction accounted for the bulk of the layoffs: 78,716 in the fourth quarter, up 9% in a year.

NO SIGNS OF STABILIZATION

Scott Wall (StoneHouse Realty, Inc) — Fri, 22 Feb 2008 19:14:56 -0600

What the Fed was thinking when it cut the Fed Funds rate by a half percent to 3% on Jan. 30, according to the meeting minutes ...

a relatively low real federal funds rate now appeared appropriate for a time to counter the factors that were restraining economic growth, including the slide in housing activity and prices, the tightening of credit availability, and the drop in equity prices. Members judged that a 50 basis point reduction in the federal funds rate, together with the Committee's previous policy actions, would bring the real short-term rate to a level that was likely to help the economy expand at a moderate pace over time. Still, with no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the Committee agreed that downside risks to growth would remain even after this action. Members were also mindful of the need for policy to promote price stability, and some noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.

To read more, CLICK HERE!

Need Furniture?

Scott Wall (StoneHouse Realty, Inc) — Fri, 22 Feb 2008 19:10:59 -0600

Housing weakness is killing furniture retailers.

Nationwide, the Census Bureau says furniture and furnishing store sales grew just 1 percent last year, the worst showing since the recession-scarred and terrorism-titled year of 2001. And, to be extra cruel, 2008 started with furniture sales off at a 4 percent annual pace in January. Good, local data is harder to get. The state's sales tax count is woefully late, but it still shows poor momentum. For 2006 - yes, 2006 - statewide furniture and furnishing store sales were up 1.5 percent vs. 7.1 percent growth back in 2005. (Remember the good old days?) Mike Pierce of the National Home Furnishings Association trade group, whose members own about 10,000 stores nationwide, was pretty blunt about the situation: "Business is bad. Almost every day we hear of another retailer going out of business."

Why Government Should Mind Its Own Business

Scott Wall (StoneHouse Realty, Inc) — Thu, 14 Feb 2008 21:02:21 -0600

You will see a new government agency created next year that will go out and buy up all the houses. Trillions worth of unwanted houses. They'll put 'em on the books of the ol' USA, maybe even rent them out for a bit, and eventually they'll resell 'em for whatever they can get.

Call it a Super-RTC. And when the government is selling distressed houses and the banks aren't lending, THAT'S when you want to have buckets of cash ready to buy.

This article takes it even farther, and says that in order to avoid a Depression and deflation, the government will also have to buy stocks and commodities. I disagree, the government will not buy stocks, as Bernanke will do a fine job pumping that new bubble. But they will buy houses, mark my words, they will buy the houses.

So sit back, grab some popcorn, and get ready to hunker down for years. We're just getting started. As the government is now admitting, the worst is yet to come.

Depression risk might force U.S. to buy assets

NEW YORK (Reuters) - Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.

"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday.

Congressional Halt!

Scott Wall (StoneHouse Realty, Inc) — Thu, 14 Feb 2008 20:31:23 -0600

Associated Press reports ...

The National Association of Home Builders said Tuesday its political action committee has decided to stop making contributions to candidates for Congress "until further notice." Since 1990, the trade group has given nearly $20 million to federal candidates, with 35 percent going to Democrats and 65 percent to Republicans, according to the Center for Responsive Politics.Lawmakers and the Bush administration, "have not adequately addressed the underlying economic issues that would help to stabilize the housing sector and keep the economy moving forward," the trade group's president, Brian Catalde said in a statement. "More needs to be done to jump-start housing and ensure the economy does not fall into a recession."

To read more, CLICK HERE

A Time to Remodel?

Scott Wall (StoneHouse Realty, Inc) — Thu, 14 Feb 2008 20:25:12 -0600

Why does your handyman return phone calls? Three reports suggest remodeling looks to be slow in 2008 ...

• The National Association of Home Builder's Remodeling Market Index reveals :pressure from the housing downturn." For the fourth quarter, both the index's current market conditions indicator ands its future expectations measure declined. While housing starts have fallen sharply from the peak in early 2006, the remodeling market has shown a much smaller decline. Historical data show smaller fluctuations in the remodeling market as well as a time lag between movements in new housing production and remodeling activity. NAHB Remodelers Chairman Mike Nagel says: "While the housing downturn has impacted the remodeling market to some degree, it is on a much smaller scale than the rest of the market ... "Homeowners realize the importance of maintaining their property and making necessary repairs to support the value of their homes, so we expect this type of work to start to pick up again." The index survey found 51% of those remodeling contractors polled predict a dollar-volume increase; 27% expect flat sales. To read more, CLICK HERE

• Contractor database ServiceMagic.com says an online survey of 2,162 folks in 11 cities found "31% of respondents will consider current economic conditions when deciding on whether to proceed with planning a home improvement project. That 31% breaks down like this: 21% say they will likely postpone their project; 7% say though pausing to consider, they'll likely proceed with their plans; 3% say they're abandoning their plans all together. Craig Smith, CEO of ServiceMagic.com, says: "Because business might be slower this year, it will be easier to get a home improvement project done by a quality contractor, in a reasonable time frame and at a fair price."

• Harvard's Joint Center for Housing Studies' remodeling index "reports that homeowner spending for home improvement activity will continue to decline, falling by an annual rate of 2.6% through the third quarter of 2008." This index has shown remodeling work nationwide running at a negative growth rate since 2007's second quarter. To read more, CLICK HERE

Manassas - January 2008 Trend Report

Scott Wall (StoneHouse Realty, Inc) — Sun, 10 Feb 2008 07:12:34 -0600

Residential Homes trended DOWN by 26.9% (January Year-to-Year)

Original Price: $287,960

Sales Price: $242,567 (84.2% of Original Price)

Average Days on Market: 129

Number of Homes Sold: 89

Currently Active Listings:

Average List Price: $245,153

Average Days on Market: 129

Total Listed: 1812

It is important to know the path the market is currently on. Sellers need to lead the market not follow. Continually lagging behind the trend will lead to higher days on the market and lower "walkaway" sales prices.

This article also found at http://www.ask2agents.blogspot.com/

Gainesville - January 2008 Trend Report

Scott Wall (StoneHouse Realty, Inc) — Fri, 08 Feb 2008 11:33:30 -0600

Residential Homes trended DOWN by 17.3% (January Year-to-Year)

Original Price: $464,594

Sales Price: $414,708 (89.3% of Original Price)

Average Days on Market: 101

Number of Homes Sold: 31

Currently Active Listings:

Average List Price: $486,568

Average Days on Market: 178

Total Listed: 358

This article also found at http://www.ask2agents.blogspot.com/

Haymarket - January 2008 Trend Report

Scott Wall (StoneHouse Realty, Inc) — Fri, 08 Feb 2008 11:16:30 -0600

Residential Homes trended DOWN by 18.9% (January Year-to-Year)

Original Price: $511,932

Sales Price: $449,896 (88.0% of Original Price)

Average Days on Market: 168

Number of Homes Sold: 42

Currently Active Listings:

Average List Price: $604,866

Average Days on Market: 261

Total Listed: 302

This article also found at http://www.ask2agents.blogspot.com/

Pretty Sneaky Sis

Scott Wall (StoneHouse Realty, Inc) — Fri, 08 Feb 2008 09:30:59 -0600

When is a rent increase, not an increase? When you call it something else.

At least that's how ApartmentRatings.com sees it based on reviews of apartments submitted by over 600,000 renters.

Some of what ApartmentRatings.com describes as "unscrupulous landlords" are finding ways to make money off their tenants without officially hiking rents. Some charges seem reasonable. You be the judge on the others.

Here are some of the things landlords are doing nationwide:

Parking. Charge $20 or more for parking an additional car.
Fees for guests. Charge $5 for a one-day parking pass for a guest. If a guest stays more than three days, tack on $30 per night "guest rent."
Late-rent fee on a lease. You accepted a $300 per month discount (a so-called "concession") when you signed your lease and your rent is late by one day. Your lease stipulates that you have to pay back all your discounts (which would be $3,000 if you have been in your apartment for 10 months) and your rent goes up to the original market rate.
Pool or gym access fee. Charge a $100 non-refundable key deposit.
Storage fee. Charge $20 per month to store items on site.
Alternate satellite or Internet access fee. Charge a 50% premium because your apartment signed an exclusive contract with a cable company.
Pet extras. Charge $500 deposit for your dog or cat and an extra $100 per month for "pet rent."
Disputed damages. Forget to report some holes in the carpet when you moved in? $500 of your deposit will be withheld to re-carpet the apartment.
Automatic lease renewal. Didn't send your written move-out notice 30 days prior to your lease end? Your lease automatically renews for another month or year.
Utility charges. Landlords are getting away from common meters and charging separately for everything from water to trash collection.

The Price of Ownership

Scott Wall (StoneHouse Realty, Inc) — Wed, 06 Feb 2008 22:13:04 -0600

A useful way to look at the total cost of housing is to evaluate the monthly cost of ownership. An ownership cost is any expenditure required for the possession of property. A working definition is important because there are many hidden or forgotten costs people overlook. These costs are borne by owners and not by renters. There are 7 costs to owning a house. Although some of these costs are not paid on a monthly basis, they can be evaluated on a monthly basis with simple math. These costs are:

Mortgage Payment
Property Taxes
Homeowners Insurance
Private Mortgage Insurance
Special Taxes and Levies
Homeowners Association Dues or Fees
Maintenance and Replacement Reserves

Mortgage Payment

The mortgage payment is the first and most obvious payment because it is the largest. It is also an area where people take risks to reduce the cost of housing. It was the manipulation of mortgage payments that was the focus of the lending industry "innovation" that inflated the housing bubble. The relationship between payment and loan amount is the most important determinant of housing prices. This relationship changes with loan terms such as the interest rate, but it is also strongly influenced by the type of amortization, if any. Amortizing loans, loans that require principal repayment in each monthly payment, finance the smallest amount. Interest-only loan terms finance a larger amount than amortizing loans because none of the payment is going toward principal. Negatively amortizing loans finance the largest amount because the monthly payment does not cover the actual interest expense.

Property Taxes

Property taxes have long been a source of local government tax revenues. Real property cannot be moved out of a government's jurisdiction, and values can be estimated by an appraisal, so it is a convenient item to tax. In most states, local governments add up the cost of running the government and divide by the total property value in the jurisdiction to establish a millage tax rate. Often the lender will compel the borrower to include extra money in the monthly payment to cover property taxes, homeowners insurance, and private mortgage insurance, and these bills will be paid by the lender when they come due. If these payments are not escrowed by the lender, then the borrower will need to make these payments. The total yearly property tax bill can be divided by 12 to obtain the monthly cost.

Homeowners Insurance

Homeowners insurance is almost always required by a lender to insure the collateral for the loan. Even if there is no lender involved, it is always a good idea to carry homeowners insurance. The risk of loss from damage to the house can be a financial catastrophe without the proper insurance. A standard policy insures the home itself and the things you keep in it. Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets. Damage caused by most disasters is covered but there are exceptions. The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners' responsibility.

Private Mortgage Insurance

Mortgages against real property take priority on a first recorded, first paid basis. This is known as their lien position. This becomes very important in instances of foreclosure. The 1st mortgage holders gets paid in full before the second mortgage holder gets paid and so on through the chain of mortgages on a property. In a foreclosure situation, subordinate loans are often completely wiped out, and if the loss is great enough, the first mortgage may be imperiled. Because of this fact, if the purchase money mortgage (1^st lien position) exceeds 80% of the value of the home, the lender will require the borrower to purchase an insurance policy to protect the lender in event of loss. This policy is of no use or benefit to the borrower as it insures the lender against loss. It is simply an added cost of ownership. Many of the purchase transactions during the bubble rally had an 80% purchase money mortgage and a "piggy back" loan of up to 20% to cover the remaining cost. These loan pairs are often referred to as 80/20 loans, and they were used primarily to avoid private mortgage insurance. There were very common during the bubble.

Special Taxes and Levies

Several areas have special taxing districts that increase the tax burden beyond the normal property tax bill. Many states have provisions which allow supplemental property tax situations. These provisions may be established to obtain public financing through the sale of bonds for the purpose of financing certain public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The taxes paid are used to make the payments of principal and interest on the bonds.

Homeowner Association Dues and Fees

Many modern planned communities have homeowners associations formed to maintain privately owned facilities held for the exclusive use of community residents. These HOAs bill the owners monthly to provide these services. They have foreclosure powers if the bills are not paid. It is given the authority to enforce the covenants, conditions, and restrictions (CC&Rs) and to manage the common amenities of the development. It allows the developer to legally exit responsibility of the community typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots. Most homeowners' associations are non-profit corporations, and are subject to state statutes that govern non-profit corporations and homeowners' associations.

Maintenance and Replacement Reserves

An often overlooked cost of ownership is the cost of routine maintenance and the funding of reserves for major repairs. For example, a composite shingle roof must be replaced every 20-25 years. It may take $100 a month set aside for 20 years to fund this replacement cost. Also, condominium associations often levy special assessments to undertake required work for which the reserves are insufficient. In the real world, most people do not set aside money for these items. Most will attempt to obtain a Home Equity Line of Credit (HELOC) to fund the repairs when they are necessary. Of course this assumes a property has appreciated and such financing will be made available.

Tax Savings

There are two other variables people often consider when evaluating the cost of ownership that is not included in the prior list: income tax savings and lost downpayment interest. When a borrower takes out a home loan, the interest is tax deductible up to a certain amount. For borrowers in the highest marginal tax bracket, the savings can be significant, and this can make a dramatic difference in the true cost of ownership. However, this benefit diminishes over time as the loan is paid off and the interest decreases. Plus, contrary to popular belief, it is never good financial planning to spend $100 to save $25 in taxes. Also, these benefits are almost universally overestimated by people considering a home purchase. A renter considering home ownership will need to remember they will be giving up the standard deduction when they itemize to obtain the Home Mortgage Interest Deduction (HMID). A "married filing jointly" taxpayer will forgo a $10,700 deduction in 2007. This reduces the net impact of the HMID. Anecdotally, even those in the highest tax brackets usually do not get more than a 25% tax savings.

Hidden Savings

This is the forgotten benefit of a conventionally amortizing loan: forced savings. Most people are not good at saving. The government recognized this years ago when they started taking money out of peoples salaries to pay income taxes because they knew people would not do it on their own. People who become homeowners during their lifetimes often have the equity in their home as their only source of retirement savings other than social security. To accurately calculate the cost of ownership, this hidden savings amount needs to be deducted from the total cost of ownership because this money will generally come back to the borrower at the time of sale. Since taxpayers in the United States get a capital gains exemption up to $250,000, this savings amount does not need to be adjusted for taxes.

Lost Downpayment Interest

Unless 100% financing is utilized, a cash downpayment will generally be withdrawn from an interest bearing account to purchase a house. The monthly interest that would have accrued if the downpayment money was still in the bank is a cost of ownership. This is perhaps the most overlooked ownership cost. For instance, if you are putting 20% down on a $500,000 property, you will be taking $100,000 from a bank account where it would have earned 5% in 2007. This $5,000 in interest comes to $417 in lost interest the moment this money gets tied up in real property. If someone chooses to rent rather than buy, they would earn this interest income. Of course, this earned income is also taxed, so 75% of this number is the net opportunity cost of a downpayment.

To establish the cost of ownership, each of these costs, if applicable, must be quantified. When the total monthly cost of ownership is equal to the rental rate, the market is considered to be at fair value for owner-occupants. In fact, this is the equilibrium in most real estate markets across the nation. In a strange way, the bubble did not upset this equilibrium. The use of negative amortization loans with artificially low teaser rates allowed borrowers to obtain double the loan amount with the same monthly payment: double the loan; double the purchase price. This is how prices were bid up so high so fast without a commensurate increase in wages. The elimination of these loans is also the reason prices collapse.

Ownership Cost Math

Below is a typical cost of ownership for a $500,000 Irvine property:

$500,000 Purchase Price

$100,000 Downpayment @20%
$400,000 Mortgage @ 80%

$2,528.27 Mortgage Payment @ 6.5%
$416.67 Property Taxes @ 1%
$104.17 Homeowners Insurance @ 0.25%
$104.17 Special Taxes and Levies @ 0.25%
$100.00 Homeowners Associate Dues or Fees @ $100
$625.00 Maintenance and Replacement Reserves @1.5%
_________________________________________________________________________
$3,878.27 Monthly Cash Cost

..................$2,166.67 Interest on First Payment
$(567.71) Tax Savings @ 25% of mortgage interest and property taxes
$(361.61) Equity hidden in payment
$312.50 Lost Downpayment Income @ 5% of Downpayment
_________________________________________________________________________
$3,261 Total Cost of Ownership

Notes:

The mortgage payment assumes a 30-year fixed-rate conventionally amortized mortgage at 6.5% interest.
The property taxes are set at the 1%.
The homeowners insurance is estimated at one-quarter of one percent per year.
Private Mortgage Insurance is estimated at one-half of one percent per year. It is not included in the calculation above because this example utilized 80% financing. If the financing amount required PMI, the costs would have been over $200 a month higher.
Special Taxes or Levies are estimated at one-quarter of one percent per year.
HOA dues are estimated at $100: some are lower, and some are much higher.
Maintenance and replacement reserves are estimated at 1.5%. This may be the most contentious estimate of the group because most people assume they will simply borrow their way around these costs when they are incurred. This certainly has been the pattern during the bubble years when credit was free flowing. This method of home improvement and maintenance may be significantly more difficult as the credit crunch and declining values make financing much more difficult to obtain. In any case, these costs are real, and failing to acknowledge them denies the realities of home ownership.
The sum of the above costs are the monthly cash costs of ownership. A homeowner may not write a check for each of these costs every month, but the costs are still incurred, and renters do not pay them.
The tax savings are based on the maximum interest payment at the beginning of a loan amortization schedule. This tax savings will decline each month as the mortgage is paid off. Contrary to popular belief, this is not a bad thing. Also, the property taxes are also deductable, but special taxes or levies are not fully deductible (even though most people mistakenly deduct it.)
The opportunity cost of lost interest assumes a 5% interest rate on the downpayment reduced by 25% for taxes on this earned income.

So there you have it. The actual cost of ownership on a typical $500,000 property would be approximately $3,250 per month. Some will be higher and some will be lower, but the calculation above, when adjusted for the specific property details being examined, will yield the cost of property ownership.

Gross Rent Multiplier

So what general relationships can be inferred from the ownership cost breakdown provided above? First, notice the relationship between monthly cost and price. This property is worth 154 times the monthly cost when you fully examine the cost of ownership. This is the basis for the Gross Rent Multiplier (GRM). The GRM is a convenient way to evaluate whether or not a rental rate will cover the monthly cost of a particular property. It was developed by landlords seeking a method to quickly evaluate the purchase price of a property to see if it would be a profitable investment. When performing such an evaluation, a cashflow investor will typically look for a GRM near 100 to find a property with positive cashflow. This method can also be easily adapted to calculate the breakeven point where an owner/occupant would break even compared to renting. As you can see, when you consider the full cost of ownership - including those costs often ignored - the gross rent multiplier is lower than most think. The GRM of 154 is very close to the 160 I have been using in my posts here. The Gross rent multiplier is a convenient measure of value because it spares you the brain damage of performing the above, detailed calculation for every property you wish to evaluate.

Renting Versus Owning

Renting versus owning is both an intellectual, financial decision and an emotional one. The financial decision is first and foremost an analysis of the comparative cost of renting versus owning. The cost of a rental can be determined fairly easily as there are usually a number of comparable properties on the market to establish a realistic rental rate for any given property. Of course, it is easy to justify in one's mind a comparative rent that is higher than the market will bear. A house someone is in love with will almost certainly rent above market in their minds. Also when looking at similar products the rental rates may not be realistic in the marketplace. It is probably a good idea to take 5% to 10% off comparable rental rates on properties offered on the market. Once you have established what you believe to be a comparative rental rate, and you have gone through a realistic evaluation of the true costs of ownership as outlined above, a simple comparison of the two figures will tell you if a property is overvalued, undervalued or just right.

This point-in-time analysis of the relative worth of a house does leave out a couple of important financial factors: inflation and transaction costs. Inflation is the erosion of purchase power of money over time, or looked at another way, it is the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index. The effect of inflation on housing costs is that it tends to increase the cost of renting over time, and theoretically, it will increase the value of a house over time as well. If the cost of rent is increasing, but your cost of ownership is fixed (assuming a fixed-rate mortgage,) then owning a home becomes less expensive over time and serves as a hedge against the impact of inflation. If you are a homeowner, inflation is your friend. There is one big cost of home ownership that works against the positive impact of inflation: transaction costs. When people buy a house, they pay some closing costs, but many of these get rolled into your loan and forgotten. When people sell a house, they generally go to a realtor to help them market the property and complete the paperwork necessary for the transaction. Real estate commissions for many years have been held at an artificially high 6% in the United States, and the seller is the one who pays this commission. From the time of purchase to the time of sale, inflation (or irrational appreciation) must have increased the value of the house enough for the sales price to cover the real estate commission or the seller will lose money. This is why it is often recommended for people who are not going to live in a given area for more than 2 or 3 years to rent instead of own. Renting is freedom - freedom to move when you wish (within the terms of your lease.)

Some people spend a great deal of effort evaluating the costs of ownership to determine if is a correct decision, but many people do not. Some people make the decision to purchase the most expensive asset they will ever own with no analysis at all. The decision to buy a house is primarily an emotional one. Even those who go through all the analysis generally only do so to provide rationalizations for their emotional decision. During price rallies, greed becomes a powerful emotion motivating people to fudge their financial analysis in order to justify their emotional purchase. Another factor often called the "nesting instinct" causes both men and women to want a place to call their own, particularly when there are children in the family. There is nothing wrong with deciding for emotional reasons. Most people pick a spouse this way. The real challenge is to have the emotions and the intellect working together to make a decision that is both fiscally sound and emotionally satisfying. This is easier said than done.

Got What It Takes to Buy a House in Virginia?

Scott Wall (StoneHouse Realty, Inc) — Wed, 06 Feb 2008 21:23:20 -0600

Got a spare $121,197? That's the household income required to buy the typical DC/VA/MD home (estimated price tag: $371,000) in 2007's third quarter, according to the Center for Housing Policy. That ranked DC/VA/MD as No. 25 for biggest salary needed to buy a home among 201 major U.S. markets. (San Francisco was first, by the way!)

The good news - and this is a stretch at optimism - is that this required lofty paycheck is 15.76% less than the $143,878 required to buy a year earlier. You can thank a 11.7% price drop for much of that "improvement."

The center used homebuilder home pricing and a proprietary salary database to arrive at that affordability measure. It assumes the buyer puts 10% down and pays his loan plus mortgage insurance, taxes and homeowners insurance. The assumption is that total house payments are no more than 28% of household income.

To read more of the study, CLICK HERE

You think renting is the way?

Scott Wall (StoneHouse Realty, Inc) — Wed, 06 Feb 2008 21:10:50 -0600

Think it's hard affording a home here? Pity the poor renter.

Last year a Northern Virginia worker needed to make $24.73 an hour ($51,438.40 a year) to afford the average $1,286 fair market rent for a two-bedroom apartment, says the non-profit Center for Housing Policy in Washington, D.C. That is out of reach for most of the service industry workers - the burger flippers, hotel workers and sales clerks - that keep the DC/VA/MD economy humming. Even an entry-level worker in a white collar job might have trouble making that much.

To be fair, paychecks of sales clerks and service workers fell short of rents in all 210 metropolitan areas studied.

DC/MD/VA tenants didn't even get the advantage of falling home prices last year. Local workers needed to earn an additional $2,433.60 last year to cover the increase in rent from 2006.

Want a real deal on rents? Move to Brownsville, Texas, where you only need to may $9.87 an hour ($20,529.60/year) to afford the $513 rent for a two-bedroom.

Here's a PDF version of the full report on rental affordability: CLICK HERE

Shutting Down ATMs

Scott Wall (StoneHouse Realty, Inc) — Tue, 05 Feb 2008 21:56:09 -0600

Countrywide Financial has halted withdrawals on some home equity lines of credit because owners have little or no equity left, reports the Los Angeles Times. In some cases the owners owe more than the home is worth based on Countrywide's computer modeling. Other lenders are taking similar actions. USAA Federal Savings Back has slashed credit lines in at least a few cases, and Chase Home Lending, a unit of JPMorgan Chase & Co., is tightening its guidelines on HELOCs.

Boy, such a move can be a shocker to folks who were sold on the idea that a HELOC could be a safety net for a rainy day, especially if the rainy day has arrived in the form of a job loss, illness or some other special circumstance. I'd like to hear comments on this one.

New Century Bankruptcy

Scott Wall (StoneHouse Realty, Inc) — Tue, 05 Feb 2008 21:51:54 -0600

New Century Financial, the bankrupt Irvine-based subprime lender, filed a liquidation plan that fails to say how it will repay $35 billion claimed by creditors, the Associated Press reports.

Documents filed in U.S. bankruptcy court in Delaware on Saturday contained blanks where the company was supposed to say how much it would repay creditors. New Century raised $235 million by selling assets.

Click here to see the AP story.

Construction Desperation

Scott Wall (StoneHouse Realty, Inc) — Sun, 03 Feb 2008 19:49:06 -0600

Wonder why those contractors are knocking on your door and even returning phone calls? One hint lies in the January national jobs report (COPY HERE) ...

Last month's unemployment rate for U.S. construction workers is 11%, up from 8.9% a year ago and 9% in January 2006. Now, to be fair, construction's a seasonal business, so comparing these workers' plight to the overall jobless rate (4.9% "seasonally adjusted") at this time of year is silly. But it's an honest trend to note that the 1.1 million construction workers who told government pollsters that were out of work last month is 177,000 more than January 2007, a 19% jump, and is the highest January total since 2003.

Look at the real estate slowdown's stature this way: In the year ended in January, 572,000 more U.S. worker joined the ranks of the unemployed. And 31% of the increase was tied to construction. Add in the unemployment pop in "financial activities" of 52,000 people in the past year, and real estate's hit to the jobless line is then 40%!