I'm Coming Up For Air

I'm buried right now but I'm feeling embarrassed at not having posted in over a month. As a compromise, more news, less comment.

Here's a story about a couple cancelled DC condo projects. One of the projects is outright finished and the other is going to be an apartment complex instead of a condo complex. As I discussed a while back, when monthly mortgages are significantly higher than monthly rents for similar units, consumers of housing shift away from buying in favor of renting. A closely related phenomenon is the reduced interest among developers in building sellable units in favor of building rentable units. Why? Obviously, as demand for condos shrinks and demand for apartments increases, developers move quickly to divert resources appropriately. Just one more way in which the natural order of things is slowly restored after a hot market.

OK, seriously, less comment. Closely related to the above, an article about rents heading higher, seeing the biggest jump since 2000.

An article about sketchy mortgage lending practices. I've discussed non-traditional financing devices before.

Finally, after I pointed to a story in April that homes were less overvalued (huh?), here's a story saying overpriced housing is getting more overpriced. Apparently, this is one group's (or possibly just some dude's) opinion and I didn't look at the numbers really closely or examine where they came from. But I'm always skeptical when someone comes up with their own metric for evaluating a market and then makes a radical proclamation based on their findings.

Being Lazy: Some Recent Articles of Interest

Busy with other things these days, but some articles of interest in the news and further evidence of a return to market normalcy:

Relative affordability of single family houses vs. condos in the DC area. Condos considered much more affordable than SFHs. Washingtonpost.com

Condo sales to take a hit in DC area due to increasing inventories. Predicting condo prices to fall between 15-20%. Washingtonpost.com

New home sales jump 13.8% in March, biggest increase in 13 years. Builders slashing prices to deal with increasing mortgage rates and inventories is seen as a major reason. This is highest rate of increase in sales month over month, not highest rate of sales in 13 years. Obviously. CNNMoney.com

Rents seen increasing in 2006. CNNMoney.com


On the lighter side:

Places to hang out, see, and be seen in Richmond. Charlotte Observer

Trying to sell your home on your own may not be the best idea. I know this is true. But 6%. 6%!!! Washingtonpost.com

The Predictions Are In: Either the DC Market Will Crash Or It Won't

Washingtonpost.com article describing how different approaches to market analysis are leading to highly conflicting predictions. Me personally, I find the mortgage vs. rent analysis easiest to follow. From a common sense standpoint, it just seems like the ratio of owners to renters should remain pretty stable over time. Sure, there are lots of factors that go into an individual home owner or renter's decision to own or rent. Interest rates, job security, income, etc. Over time, these factors may fluctuate and as they fluctuate, so does the ratio of owners to renters. But with owning vs. renting we're talking about two things that are very closely related, opposite sides of the same coin, so to speak. For every increase there's a decrease and for every down there's an up. I think that's what the guy means when he says "[t]hey're the same market, at the end of the day."

When owning becomes more attractive relative to renting for whatever reason, be it interest rates, tax incentives, a buyer's market or what have you, people who are currently renting rush to buy. Under normal circumstances, the increased demand for homes to purchase leads to a seller's market causing prices to increase and allowing lenders to raise rates driving up monthly mortgage payments. At the same time, the sudden increase in supply of rental units abandoned by these new buyers forces rents to come down. Soon some of the people making monthly mortgage payments begin to notice how low monthly rents are and they rush over to rent at the first chance they get, reversing the trend and restoring equilibrium.

The run on buying was extended this time around I think in part because of all the conversion projects that took place. So as people abandoned renting for buying the supply of rental units came down and the supply of ownable units went up to help meet demand. So we didn't see as much pressure as we usually do from oversupply of rentals and undersupply of homes. Does this mean that when equilibrium is restored, there will be a higher ratio of owners to renters? Possibly. Or possibly the rate of rental unit development will simply increase at a greater rate than we would have seen had all those conversions not taken place. I think we'll end up around where we started.

In any event, none of this means we are headed for a crash of any sort. Just a return to normalcy. From the article:

Economy.com's [Mark] Zandi, who ranked Washington No. 36, says it is 32 percent overvalued. However, he said, that does not necessarily mean that prices will drop that much.

"There's different ways the market can adjust," said Zandi, a believer in the soft-landing scenario for housing. Prices could be flat, he said, "and the economy can catch up to it, or the market could fall 5 to 10 percent, trade sideways and let the economy catch up."

Ahhh a voice of reason.

East Side of Richmond's Henrico County Catching Up to West Side

Following the huge success of the Short Pump Town Center at spurring growth in western Henrico County, developers are looking at doing the same for the east side. The proposed White Oak Village will sit on 136 acres of land and house 913,600 square feet of space for retail, dining, and even a hotel. No tenants have been named, but the article cites a few such as Target and Ukrops which may be potentials. According to project manager Jim Richardson of Forest City Enterprises Inc., they are currently looking at several national retail chains to serve as anchors but White Oak "won't be high-end fashion like Short Pump." Hopefully, East Richmond will see the same type of growth and influx of people and commerce as the West Side has seen recently.

Mortgage Rates Continue to Tick Upward

30-year fixed rate mortgages moved to 6.49% this week, according to this article on washingtonpost.com. Rates haven't been this high since July 2002. The article goes on to say that some economists believe interests rates will hit 7% by year's end. What does that mean for the prospective home buyer? Consider this: if you are looking to purchase a $500,000 home with a 5% down payment and an interest rate of 6.49% with no points, you are looking at a monthly mortgage payment of about $3000. If you wait until the end of the year, at a rate of 7% holding everything else constant, the monthly payment climbs to about $3160. If you can double your down payment by then to 10%, you're back at $3000. What does this tell us? Nothing, really, I just wanted to know.

Not surprisingly, the upward trend in mortgage rates is coinciding with an increase in the number of foreclosures seen of late, as described in this article at philly.com. Those who have been predicting a bubble burst are likely holed up in their fallout shelters with a smug I-told-you-so look on their face. It is important to note, however, that foreclosure rates have been uncommonly low in recent years and while this slight increase could be viewed as a prelude to the apocolypse, a more rational take would be that foreclosure rates, like home prices, sales, and average days on market numbers are softly returning to normal after a period of abnormality. From the article:

In the past several years, foreclosures across the United States have been hovering around historically low levels, as home prices have risen nearly 50 percent in five years. This appreciation enabled troubled borrowers to sell their homes relatively easily to resolve mortgage difficulties.

Now, a survey of the latest data confirms, that's starting to change, with an uptick across the United States in foreclosure rates and mortgage delinquencies (or late mortgage payments). But even the new higher rates of foreclosure and delinquencies are still low in historic terms.

Let's everyone stay calm.

You CAN Do Well in Real Estate Without Being a Gazillionaire

Move over Trump, the next big name in real estate mogul-dom may be Godwin. Check out the article from CNNMoney.com about a couple from Chesapeake, VA who have built a modest but growing real estate portfolio. It's worth mentioning Mr. Godwin is a police officer, a profession right up there with teachers and nurses in terms of under-appreciation and under-compensation. But with smart decisions and thorough research, the Godwins are steadily expanding their real estate holdings in impressive fashion. I always enjoy stories about 'regular people' that I can identify with who are succeeding in real estate. It gives me hope. Congratulations to the Godwins.

Changes Afoot Among Real Estate Agents

I've been tracking several stories like this one about buyer's agents who are willing to kickback a fraction of their commission to their client. Normally, the seller pays their listing agent 6% of the sale price of the home and the listing agent pays half that, or 3%, to the buyer's agent that brings in the purchaser. What many buyer's agents are doing now is kicking back a portion of that 3% to their client to create an incentive for using them. So companies like ZipRealty offer buyers that use them 20% of their commission which works out to 0.6% of the sale price. RebateReps.com ups the ante, offering 1% of the sale price on pre-existing home sales and 2% on new construction. On a $500,000 new construction home, that's a rebate of $10,000! In effect, since using a buyer's agent costs the buyer nothing, foregoing the services of a buyer's agent when looking for a home is passing up an opportunity for free money.

Are there any drawbacks to using a buyer's agent? Not so much drawbacks, but a couple points to keep in mind: a buyer's agent will usually ask you sign a contract agreeing to use them and only them for a period of 60, 90, or more days. Making such a commitment can be hard when you are not sure how useful the agent will be or how good he/she is. Also, what happens if you find a For Sale By Owner Property on your own? Are you still obligated to pay your buyer's agent a percentage of the sale price if the seller is not offering a commission? Finally, one of the duties of the buyer's agent is to negotiate the price of the home for you. But because the agent's commission is based on the final sale price of the home, there is little incentive for the agent to try to drive the price as low as possible.

You can mitigate the effects of these question marks by going with an agent based on a recommendation and by negotiating the terms of the buyer's agent agreement before signing on to it. I am currently working with a rebating buyer's agent in the DC area whose background I can vouche for. If all goes well, I will in turn recommend him to anyone and everyone. Equally as important as going with an agent you trust is entering into a fair buyer's agent agreement. When negotiating the terms of the agreement, remember you are purchasing a service. Don't try to get something for nothing. Your agent will be working for you and he/she deserves to be compensated for it. Your goal should be to arrive at a fair agreement that allows both of you to benefit when things go right. But don't be afraid to negotiate. Most agents wouldn't be offering a rebate in the first place if they weren't flexible enough to work with you on your concerns. If you want to sign on only for a 30 day trial, ask for it. If you think you are entitled to a greater percentage of the agent's commission should you spend more than $600,000, say so. If, in your opinion, your requests are rebuffed unfairly, take your business elsewhere.

It is my opinion that agent commissions have been artificially maintained at an inflated rate for several years now. With the increasing use of technology in real estate transactions and the extent to which the prospective buyer (or seller) can contribute to the process, there is no reason that commissions should not have come down by now. This trend is only the first sign of market forces pressuring commissions downward toward the actual cost of providing the service. This is a good thing.