Gay Marriage and Real Estate: Do you have new rights, or not?
When the voting returns came in on election night 2012, it became certain that same sex couples would soon have the ability to get legally married in Maryland. With that status, most everyone assumed, would come the same assortment of privileges and protections that define the institution of civil marriage, including the ability to buy and hold property on the same preferred terms accorded to opposite sex couples. We are now at the point where the marriage ceremonies are beginning to take place, but it turns out that it may not be true that the basket full of other legal goodies will automatically follow.
At least, not yet.
First, what are these "preferred terms" that apply to real estate? Under Maryland law only married couples can hold property as "Tenants by the Entirety," a quaint legalism that offers better protection against outside seizure than the generally available Joint Tenants or Tenants in Common.
In the past, most same sex couples were counseled to buy property together as Joint Tenants, because it offered the right of survivorship if one of the partners were to die before the other, and the property would transfer to the partner by operation of law automatically. That unmarried couple also needed to make sure they had a Domestic Partnership Affidavit to avoid Maryland’s 10% inheritance tax.
â€¨Tenants by the Entirety (“T by E”), by comparison, offers not just the survivorship of a Joint Tenancy, but also further protection against one of the partners' creditors, according to Mark F. Scurti, an attorney with PK Law, PA. whose practice concentrates in same-sex family and estate law. A creditor of one of the partner's could not attach or seize his or her assets to satisfy the debt as the property is "marital property" and protected under Maryland law, the only exception being taxes owed to the IRS. “T by E” was created as a way to protect the marital home and the security of the family unit, while still allowing only assets held by one of the partners to be a risk to creditors.â€¨â€¨Scurti states assuredly that same sex couples married in other states have been able to hold Maryland property as Tenants by the Entirety since May of 2012, when a case he handled with Michele Zavos, Port v. Cowan was decided by the Maryland Court of Appeals. His firm has drafting and filing such deeds throughout Maryland ever since.
Other legal professionals disagree. F. Michael Grace, the corporate counsel for Sage Title, one of Maryland's largest title companies -- the entities that conduct most real estate closings in Maryland and that write and file the most deeds -- believes that "the jury is still out" on whether same sex couples married in Maryland or elsewhere "can avail themselves of the best joint tenancy that is up until now been traditionally for a married male and female." Grace believes that further action by the legislature is required in order for the extra protection of “T by E” to become available to same sex married couples who own property in the state.
Some of the sponsors of the Marriage Equality Act in the Maryland legislature are equally perplexed. Delegate Luke Clippinger (D-46-Baltimore), when contacted for comment, was unaware of the issue and went himself to the Office of the Attorney General (OAG) for clarification. "I've learned," he wrote, "that the OAG is in the process of analyzing all of the aspects of State law that are impacted by the passage of Question 6. I am told that the issue of Tenancy by the Entirety is high on that list. Once the OAG completes its review, they will present the results to Members of the General Assembly, and we will examine their findings and determine the best course of action."
Del. Maggie McIntosh's office (D-43-Baltimore) went in a different direction for clarification. Her District Manager, Matt Stegman, said that the Delegate and House Speaker Busch were "aware of this issue and several others related to property and tax rights for married same-sex couples. Currently they are looking into it and determining if the necessary changes can be made administratively, or if they must be done through legislation."
State Senator Richard Madaleno's office (D-18-Montgomery County) was contacted, but did not respond to the inquiry before the print deadline for this article.
So, while there will be many happy gay and lesbian couples taking their vows and beginning married life in Maryland in these early weeks of January, it may be many more months before they, their lawyers and accountants, Maryland court judges, and government bureaucrats can really say for sure just what protections and privileges they have gained by exercising their new right to be married. Same sex marriage in Maryland appears to be less of an accomplished event and more of an ongoing evolution than anyone was willing to admit last November.
Beware the Old Loan Zombies!
Refinancing? Taking out a home equity line?
Both of these are fantastic ways of capitalizing on today's very low interest rates, and the fact that major banks are beginning to loosen the credit strings a little bit. But, as a consumer, one of the things to which you need to pay close attention is that these loans actually die when they are paid off. Otherwise they can rise from the dead, like a bad Halloween movie character, to wreak havoc on your future happiness!
I recently represented a Seller who had refinanced more than ten years ago. When it came time to sit down at the settlement table to sell this house, the title company confirmed that the old loan, which he thought had been paid off more than ten years ago earlier, had never been recorded as paid.
This is probably more common than you would think. This client had let the new lender pay for the costs of refinancing – like most people would – and the title company they used had neglected to follow through on recording the payoff of the first loan. So, it should be easy to go back to that lender and that title company and get proof of the payoff, right?
Wrong. In the intervening decade the housing crash had taken place. Both the lender and the title company were no longer in business. A new lender had bought out the old one, but they had moved all these old files into “deep storage” and they said it would take two months to retrieve the file. The house was supposed to change hands in two weeks. Obviously, this was a nightmare to rival any Halloween scary tale!
Likewise, most home equity lines do not go away when the balance is zero. The line of credit remains open, even if unused. That often shows up as a lien on the property that has to be satisfied before the property can change hands. This also can be an unwelcome surprise right before settlement.
So, when you sit down to refinance your loan or write that last check to pay off the home equity loan, think about these zombie stories and take care to 1. Ask the title company to send you confirmation that the loan payoff has been recorded, and keep on them until they do, or 2. Write a letter to the bank to accompany the equity line payoff and ask them to close the loan. Follow up with them to make sure it gets done.
If you plan on selling your home and have also refinanced in the pre-housing crash days, it wouldn’t hurt to be pro-active and follow up with the title company who conducted the refinance and make sure that the old loan payoff was recorded.
This way, no old loan zombie will ever rise up on a dark and stormy night to threaten your future happiness!
Its late Spring-early Summer, the beginning of Damp Basement Season, the homeowner's nightmare. There's no greater issue in real estate than water penetration into the house, usually the basement level, and what to do about it. When I bought my own house, the previous owner had installed a perimeter drain and two sump pumps, so I thought any water issues had been dealt with. But they did not keep my basement from looking like the Lower Branch of the Patapsco after the first summer thunderstorm.
Until about 60 years ago, basements were not generally considered living spaces suitable for finishing off with drywall and carpet. Old foundations, whether brick or stone or even block, naturally allow a certain amount of moisture to get through. Some old cellars or crawlspaces have dirt floors. The vast majority of Baltimore's housing stock was built BEMC (Before the Era of Man Cave). So whether you are looking for a home, have just bought one, or are thinking of selling, you most likely will be dealing with water issues at some point.
Here are a couple of things to look for so that you can catch problems when things are dry, before that hurricane-driven downpour builds a close relationship between you and your wetvac.
1. Look at the guttering and downspouts. Are they clean? Clogged gutters fill and overflow before they can move the water to the downspout, bringing water right next to the foundation wall. Can you see where the rainwater goes once it leaves the roof? In some areas the original builders put underground rainwater drain lines to the curb, so the downspouts may empty directly into a pipe opening right next to the house. This may have been a great idea when everything was new, but if the house is 30 years old or more, that underground drain has almost certainly become blocked, either by tree roots (and the tree could be long gone) or the drain pipe has collapsed with age and deterioration.
Other builders in this area routed rainwater from rear roof gutters back into the house through pipes that connected to the main sewer line. This was an issue in my basement, because during a subsequent renovation that drain line was cut off and the back gutter was emptying into a drain that went nowhere. That water had no place to go, except to bubble over and go into the ground right beside the foundation wall and then onto my basement floor.
They may not be pretty, but plastic downspout extenders that carry rainwater at least three or four feet from the foundation are the best, inexpensive, foolproof method of making sure none of that rainwater comes back in through the foundation walls.
2. Is the yard landscaped and graded to carry water away from the house? It does no good to evacuate the water four feet away from the foundation if the yard slopes and brings it all right back. That is especially true around old window wells. Old homes tend to have window wells made from brick, where both brick and mortar have cracked and now allow every drop of water to come through and have free entry right back to the foundation wall. Putting fancy coverings over the window well will do no good if the earth around it funnels every drop right back to the house.
If you can manage these rainwater issues before it penetrates the foundation, you will solve a majority of your wet basement problems. After removing my front downspouts from the old underground drains and extending them away from the foundation, discovering and dealing with the cut off drain line in back, regrading around my window wells, and replacing one downspout with a larger version to carry off more water, the basement of my 90-year-old-home has been dry for over a decade. And as far as I know, those sump pumps have never been used.
Rain water penetration is not the only source of wet basements, however. Homes have sometimes been built in areas where the ground water level is unusually high, and basements can be damp without a heavy rain to blame. This water wells up from beneath the house and finds its way through the base of foundation walls. This type of problem requires the services of your local waterproofing company. The perimeter drains and sump pumps they install will collect water below the level of the current floor and prevent the water intrusion from happening in the first place. Then it can be pumped away from the house where it will be harmless. Disclosure of such a condition by an honest Seller is the best way to make sure that a Buyer is aware of such a condition, since the water table rises and falls over time depending upon long term weather trends.
As we head into spring, there's some great news brewing in the housing market. But, don't take my word for it, here's what other news sources have to say.
First, the RE/MAX National Housing Report for March put it best: "For the first time in 18 months, home prices in February rose higher… Prices in the 53 cities surveyed by the RE/MAX National Housing Report rose by 1.1% over February 2011. Home sales were even higher, up 8.7% from one year ago. With a positive sales trend of 8 straight months above the previous year, it's looking like 2012 will witness a very strong home-selling season."
That should be enough reason to set off some fireworks. But, there's more. The Huffington Post uploaded an article on the housing market in early April under the headline, "Renting a Home Costs 15 Percent More Than Buying One." That turns common wisdom on its head, since historically renting a home has been as much as 10 percent cheaper than owning one.
Not anymore. Because of very low vacancy rates -- at a ten year low -- rental rates have skyrocketed. In fact, a recent report by the National Low Income Housing Coalition found that it would take a minimum wage worker 100 hours of work per week just to afford rent. Even the average American renter, making a little over $14 per hour, needs a 29 percent raise to be able to afford an average apartment and have enough money left over for other expenses. Ready to ask your boss for a 29% raise?
With mortgage rates still very low for qualified buyers, its clearly time to buy. The website rentorbuybaltimore.com recently compared the costs of buying a $200,000 home against renting a $2,000 per month apartment -- not uncommon these days in the harbor neighborhoods. The results, according to a New York Times calculator, showed that after just two years buying was better than renting. After five years, buying that home saved nearly $64,000 over renting.
Buyers are returning to the Baltimore area home market in droves this spring. There are even multiple offers coming in on desirable homes. If you were waiting for signs that the housing crash was over, then this is your time.
What's Up for 2012?
The holiday spirit has ebbed away, and the outdoor lights are down (well, except at my neighbor's house). Its time to take a look forward at the year to come. For the record, I do believe that the housing market will begin to recover this year — but there are even greater issues in play that will affect the home buyer and home seller for years to come. One of those is a brewing controversy over data mining and the internet.
The world wide web revolutionized real estate over the last decade. Lots of people, even those not interested in purchasing a home, love to surf home listing sites to see what their neighbor is asking for their home, or find evidence for appealing their tax assessment, or just to spend a spring afternoon visiting a few open houses. We take it for granted now that many websites will have home listings, virtual tours, value estimates, etc. That may not last much longer.
Here's why: when the real estate business started, each broker controlled their own listings. If you were searching for a home, you would have to either rely on the yard signs you saw, or visit all your neighborhood real estate offices and ask to see their listing book. This meant you would sit down with a real estate salesperson and literally page through a book to become educated on what properties were available for purchase.
The Multiple Listing Services (MLS) in communities around the nation developed as a way to make it easier for home buyers and home sellers to get together. Each real estate broker who joined the MLS agreed to cooperate with other brokers in the region to show and sell each others' listings. In exchange, they also agreed to split their commissions on cooperative sales. While this agreement made it easier to become educated on what was available, the public still did not have easy access to MLS listings. You would still have to go to one broker's office and sit down with a Realtor, but that salesperson could show you 99% of what was for sale in the area. So, you saved time and trouble.
This is essentially what buyers had to do at the dawn of the internet age, although the listing book had been computerized. You and the Realtor would sit down at the computer or go over listing printouts from the MLS. This control over listing data reflected the fact that it is the essential business resource for our industry. Our listing information is the only "product" we make. We then provide the "service" of assisting home buyers and home sellers to negotiate and create a transaction that transfers property from one owner to another.
With the growth of the Web, MLS organizations and individual brokers took this business asset -- the listing information -- and put it online to make it easier still for buyers and sellers to become educated on what property was for sale. Through agreements with the MLS, other websites bought the right to display this information, too, and so you had the birth of Trulia, Zillow, and dozens of other sites that simply re-posted listing information. They were not brokers and did not create any new listings, so they added other services and trinkets to lure you to their site over their competition's website. Like many other internet-based businesses, these websites were constantly looking for that special method to earn money: to draw traffic that advertisers would pay for, or to become so influential that the real estate industry itself would have to pay attention.
Here's where the problems begin. More and more of these websites have found interesting ways to manipulate the listing data, and some have begun displaying this information in ways that makes it unclear who the original listing broker is. Others have begun enrolling potential buyers and selling those names back to Realtors, or gotten broker's licenses and started asking for a percentage of the commissions from successful transactions where they referred the buyer. Brokers began to wake up to the fact that they have, to a great degree, lost control of their most basic business resource.
There is a growing movement among some brokers to reclaim this control, by once again restricting access to their listing data. If this trend continues and gains momentum, many of these third-party websites will disappear, and others may not be able to display all the properties available for sale in a particular region. Instead of visiting several broker offices, as buyers in the past needed to do, in the future they might have to visit a couple of different websites to be able to find all of the homes for sale. The problem of inaccurate listing data will grow, which can be very frustrating to potential buyers.
As always, a professional Realtor is your best guide as this marketplace changes and evolves.
An Early New Year's Resolution
As 2011 winds down, there are only a few things we can know for sure. One of those things is that the real estate market will continue to be a major topic of concern and conversation in 2012. With a growth in consumer confidence in November, continued low interest rates, and a slight increase in activity in the market this December, there is more than a glimmer of hope that the new year will finally (finally!) bring some welcome relief to housing which will aid the economic recovery.
So, with that hope in mind, here are a series of questions you might ask yourself this New Year's Eve to help you decide if 2012 is the year that you should buy a home.
How long do you anticipate being in Baltimore?
The average American homeowner stays in their home 5-7 years. If you think that because of your job, education, or family life that you will not be in the region for a minimum of 3 years, then perhaps renting makes more sense for you. If, however, you don’t foresee a relocation within that timeframe, then you should definitely consider buying over renting.
Where do you want to live?
If you love the popular neighborhoods within walking distance to the Inner Harbor, Fells Point, O’Donnell Square, the Can Company, or other regional attractions, then you will be paying top dollar to rent. Of the 41 rental apartments listed in those areas on October 31, the average rent was $2,000 per month. Most landlords will require that you provide a first and last month’s rent, pet deposit (if you own a small pet), fees for the Realtor® and for your credit report(s). You could easily be writing checks for more than $4,500 just to secure that prime rental you want. A $2,000 monthly rent means you will also be paying your landlord $24,000 without having any equity, and no housing-related tax deductions on your Federal income tax return.
What life changes may happen during that time: will you marry? Have children?
Nobody has a crystal ball, but most first-time buyers are considering the purchase for specific reasons. Perhaps they feel that they have reached a point in their lives where they want to start a family. Some may be far from settling down in the marital sense, but have had a landlord raise the rent every year and want some kind of security in their home. There are too many motivations to list, so what is the impulse in your life that is making you consider this move? Most likely you anticipate a change in lifestyle that will impact your daily routine for a few years. How much living space will that require? What other amenities would you want? Can you see that new life taking place in a home that someone else owns?
How long have you been in your job, and do you feel secure in it?
One of the most common reasons that first-time buyers have been hesitating to enter the housing market is uncertainty over the depth of the economic downturn, and whether their job is secure. Certainly if you work for a new start-up company, or if you have only been in your job a few months, this economy might not be too kind to your source of income. Buying a home might not make sense.
But in this region, there are a fair number of institutions and agencies of government — state, local and Federal — that provide stable, secure employment year after year. If you are in that situation, then you are in a prime position to capitalize on this most affordable housing market.
Do you believe that home prices in this region have stabilized?
Statistics for the Baltimore-Washington metro areas say “yes, they have.” It appears that we have hit a rough bottom that will bounce around a bit, but there isn’t any significant price depreciation at this time. Our inventory of homes for sale is decreasing, and the number of transactions are beginning to slowly increase. With supply falling and demand beginning to move up, basic economics would argue that we should start to see some modest price increases by this time next year. Mortgages are hovering at historic lows, in the 4% range. Add that to the mix, and it would seem that the most affordable time to jump into the housing market is now.
If home prices stabilized but did not increase over the next three years, would you be comfortable with the investment?
Whether you invest in stocks, pork bellies, or real estate, most professionals encourage the individual investor to take a long term view and not be too concerned about daily results. In real estate, while there is no market indicator to follow, there can be press releases every few days with contradictory results based on different locations. The importance of each bit of data can be confusing. Past long term performance of real estate as an investment indicates you should see a small rise in your home’s value over that period. But even if prices stay level, by making your monthly mortgage payments you will have been building equity in the property and you will have been reaping tax benefits from being a homeowner. You will not have been stuffing your money into someone else’s bank account! There are several online calculators to help you compare the economic advantage of buying over renting. I link to a particularly good one at www.rentorbuybaltimore.com.
Did you know that home ownership has been the largest source of individual wealth in American history?
Its true, and there have been many studies that quantified it over time. Buying a home is the largest monetary transaction that most people ever experience, and its the growth in equity in their home that provides the average American’s greatest source of personal net worth. As we move through the 21st Century, with retirement programs in jeopardy, home ownership and that source of wealth will become even more important in determining a retiree’s quality of life after leaving their jobs.
Would having professional assistance make you feel more comfortable in going through this evaluation process?
While most people buy and sell homes only a few times in their lives, professional Realtors® guide their clients through many such transactions every year. We can help you avoid some of the most common pitfalls, and represent your interests through the intense negotiations that can sometimes take place to deal with important issues. We can also recommend ethical, competent professionals to build a team — mortgage officers, title officers, home inspectors, and more — to make sure you have the best people working on your behalf.
However you decide to proceed in 2012, I hope you have a wonderful year and that its the first of many.
No one has been more affected by the last few years of real estate devastation than my old friends, the Sellers. If its been more than five years since you've sold property, then you really need to forget much of what you thought you knew about the process. Its a new world out here. So as we approach the beginning of the Autumn selling season, here are four points that every Seller needs to take to heart.
1. You were never as rich as "they" said you were. Who are "they"? Appraisers, bankers, even the algorithm at Zillow… but its not their fault. In most cases (except probably Zillow) they were giving you valuations on your home based on what was current market price. Unfortunately, most property owners took this inflated value and carved it in stone under the heading of "Personal Net Worth" and -- even to this day -- are having a difficult time adjusting to the fact that those monumental numbers just are not true. But if you own a stock and you want to sell it, you ask the question, "What is Triple Y Corporation stock selling for today?" Not last year. Not in 2007. If you try to place a sell order on Triple Y that is based on what the stock sold for in 2007, your stock broker will laugh you out of the office.
Selling your home works exactly the same way. And just like the stock market, that valuation is different today than it was three months ago, as values have continued to go down in most markets. If you list your home for sale today, you need to think about what the value of it is TODAY, and kiss farewell to what you thought it was worth yesterday. You'll also likely have to re-think the asking price if you should be on the market in two months, because the market may continue to decline.
2. You are selling a product and a lifestyle -- not just a house. You need to find out what the competition looks like. Get your Realtor to take you through the properties that you're going to compete with in the marketplace -- certainly every one of your potential Buyers will have seen them, so you need to see them too. The Buyer doesn't really care how you've lived in the house, they want to see how they might be able to live if they bought your house. By comparing your home to the competition, you get to see the competing visions that are out there, and you can craft your product presentation to outshine the rest. This is the basic philosophy of staging, and you can use it to varying degrees, but if you're not actively trying to change the way you think about and look at your home and trying to see it through the eyes of the Buyers who tour it, your home will likely be one of those that sit on the market for awhile, with multiple price reductions, and a sales price much lower than you had hoped.
3. Some of your competition isn't trying to turn a profit. Now, this is a tough one to wrap your head around if you're a Seller. Every individual Seller approaches a real estate transaction with visions of finally-realized equity with which they will fund something, whether its a bigger house purchase, a downsizing with money left over for a new toy or a beefed up IRA, or at the very least, a clean balance sheet with debts paid off. In this market a significant number -- if not a majority -- of your competitors have already given up on making a profit. These could be residents approved for a short sale, or banks and mortgage companies -- even the government -- selling foreclosures, or people who have been on the market so long that they are desperate just to get to that new job in another city. This is yet another argument for getting to know your competition, and if you can't compete with their prices, then figure that out before you list and save yourself a lot of heartache.
4. Buyers don't shop for homes the way they used to. The process that Buyers use to become educated on the market has been completely revolutionized in the last few years. The National Association of Realtors conducts a study every year that asks successful homebuyers questions about the process of buying their home. The results are important because they point out the most successful ways to market a home -- and marketing a home is THE most important task that a listing agent performs. In just the last decade, the percentage of Buyers who found the home they purchased on the Internet has skyrocketed from 8% to 37%. Those who found it in print advertising, such as newspapers, has gone from 7% down to only 2%, and if you look just at those slick homebuyer magazines, the current number is below 1%. Even the trusty yard sign, which accounted for 15% of discoveries in 2001 has declined to just 11%.
So, what does this mean if you're the Seller? It means that among the most important qualities you need to look for when selecting a listing agent is that agent's comfort level with mobile technology and the Web, because that is where most homebuyers are hanging out, looking around, and eventually deciding on which homes to visit. And don't doubt that you DO need an agent. If you combine the Buyers who found their homes on the Internet and those who found them through the recommendation of their agent, you account for 75% of successful home purchases in 2010.
That's a chunk of the marketplace that you must be able to access if you wish to sell your home in 2011.
Investment, or Ball & Chain?
Recent poll results on the attitude of younger Americans toward real estate and home ownership have raised questions as to exactly what the role of real estate is and will be in the future. Is owning your own home an investment and source of wealth, or is it a 'ball and chain' that locks you to a locale and saps money that -- if invested in stocks -- would appreciate faster than real estate?
This question seems to outline the two most common opinions emerging in the generation of potential homeowners now between the ages of 21 and 35, where most of our first-time homebuyers tend to be. Here are the primary arguments laid out on both sides of that question.
Ball and Chain
If you've been watching the housing market in the last few years, you certainly can see where someone would come up with this notion. Many people feel locked into their current home, current city, even current state because they can't sell their home to move to a new job or a better performing region of the country. Some homeowners are paying mortgages that were based on a sale price substantially higher than the house is currently worth. There are even economists who are predicting that with the economy evolving into a digital one, it will be more important than ever for the workforce to remain fluid, easily relocatable, and that buying property that can't be loaded onto a truck and moved (like a house) doesn't make sense in the future.
There is no doubt that the effects of the Great Recession are still felt most sharply in the housing sector. Most experts agree that it will take another year or two for the excesses of the housing bubble to work through the system and for the housing market to begin to resemble a "normal" market that responds in the ways that it has in less troubled times. Certainly, these are fresh reminders that there is no such thing as a "safe" investment, and that every one has to learn to live with a certain amount of risk.
Source of Wealth
The data over time gives a great deal of support to the idea that owning a home is one of the greatest sources of wealth, and wealth building, in the United States. The National Association of Realtors did a study on Housing Wealth Effects in 2004, which looked at the difference between household wealth for owners and renters in the period between 1984 and 1999. Since this does not include the period of the housing bubble, its results can be seen as closer to the average return you might expect over normal times. The study concluded that "a typical renter household in 1984 had accumulated $42,000 in net wealth by 1999, but a typical owner household in 1984 had accumulated $167,000 over the same period. Marital status, age, race and ethnicity, initial wealth and household income … accounted for only $20,000 of the net $125,000 accumulated wealth difference."
That $105,000 difference is, almost without exception, due to home equity from both paying down the balance of the mortgage and the appreciation of the value of the property over time. The Case-Schiller Index of home prices shows that from 1987 to 2009 the price of existing homes increased by an average of 3.4% annually. This period includes the bubble, but also the crash from 2007-2009. Since most bank accounts yield considerably less in annual interest, that figure doesn't look too bad as a way to grow your money. Yale University's Robert Shiller has calculated that, in the period from 1950 to 2009, the S&P 500 yielded a real price change of 3.3% annually -- surprisingly close to the appreciation in housing.
There's one more point in housing's favor: with government-backed mortgage insurance programs, the opportunity to invest in a home is much more open to people of average means. Few bankers are going to lend the average person $100,000 to invest in the stock market. But, average people purchase homes every day by taking out FHA mortgages that require only 3.5% downpayment. These programs open up long term investing through real estate to working and middle-class Americans in ways that don't exist for the stock market. Its not a get-rich-quick scheme, but studies have proven that it works.
This will continue to work for a new generation of homeowners, but only if Congress allows Fannie Mae, Freddie Mac and the Federal Housing Administration to continue to offer the type of government-backed mortgages and mortgage insurance that have made home-buying money available to people of average means with good credit. Without that support, the 3.5% mortgage downpayment programs will surely disappear. Mortgages will most likely be available only to borrowers who have between 10-20% of the purchase price in their savings, because private lenders will be unwilling to take the risk of underwriting 96.5% of the purchase price without government support. By making home ownership less available, a generation of workers will have the greatest avenue of building private wealth cut off from them. What will that America be like?
A Springtime Primer
Ever since the groundhog predicted an early spring, most of us have been eagerly waiting for the little guy to be proven right. And while the weather makes it a day-to-day affair to know if winter is truly over, from the real estate data coming out lately it seems that spring truly has arrived early.
February 2011 statistics show that in the Baltimore region, home sales were up 7% over February of 2010. Down in the Washington metro area, which includes nearby Montgomery and Prince George's Counties, pending home sales in February increased a whopping 33% over the same month a year earlier. The median home price in February 2011 in the DC region was $300,000, down from $309,000 the year before -- but Baltimore's median home price in February 2011 was $205,350, down from February 2010's by 9.54%. So, Baltimore metro still remains a much more affordable alternative for Washington-area homebuyers, even with price declines, and a lot of the activity here has come from DC residents looking for less expensive housing, a trend we expect to continue.
All of this is good news, unless you happen to be selling a home right now. From a seller's perspective, the overriding issue is the number of distressed properties currently flooding the market and driving prices down. Most buyers enter the market eager to snap up a bargain, but not fully informed as to exactly what it means to them to buy a distressed property, or the differences between the types of distressed property currently on the market. So here's a brief overview to get you up to speed.
The largest category of distressed properties include homes listed for sale that are "under water" -- where the owner owes more than the house could currently sell for in the market. Short sales are where a seller, who is under water, also doesn't have the money to make up the difference and has to ask the lender to forgive the amount of the shortfall.
Short sales get their name from this seller's shortfall, not from the amount of time they take to settle -- which is anything BUT short. Generally, the seller is still in the home and has listed the house as a short sale in consultation with their bank or institutional lender. The mortgage is still in place, as are all the investors who bought into that mortgage once it went to the private equity market. Sometimes there is a second mortgage, and yet another set of investors. Before a property can reach the settlement table and transfer to a new owner, the current seller has to negotiate a contract with a qualified buyer and then start to make the case to the lender(s) that he/she will require financial assistance to sell the property. If the lender(s) accept the fact that the seller is truly in distress, they then have to go to their investors and get them to agree to take the loss. All of this has to take place before the lender can notify the buyer if the contract offer will be acceptable -- even if the contract has been signed by the seller.
This process is long and tedious. Buyers and their agents can only wait on the sidelines while the lender(s) and investors go back and forth with the current owner to satisfy all the paperwork requirements. In today's market it is not unusual for a short sale to take more than three months to settle, nor is it uncommon for a buyer to wait three months to discover that their offer will not be accepted by the lender at all. Most first-time buyers, who are dealing with a landlord who needs a specific date upon which his rental apartment will be vacant, cannot consider short sales as a viable option.
Foreclosures are where the lender has evicted the previous owner, passed the loss along to the investors who are now out of the picture, and has taken ownership of the property. Foreclosures are usually listed for less than market price, which is why they tend to drive down property values in the area.
Foreclosures present a completely different set of challenges from the buyer's perspective. With the previous owner and the investors gone, the chain of authority for decision making is much clearer, but the bureaucratic nature of most lenders removes much of the give and take you'd find in a real negotiation. Listing prices are usually set with a businesslike efficiency, and routinely reduced on a four to six week schedule if no qualified buyer has surfaced. In between reductions, there is usually little flexibility on price. Many buyers think the bank will be desperate to negotiate and get rid of the property, only to have their opening low offer rejected in short order because it is too far below the current listing price.
A majority of foreclosures also need some level of renovation before they can be occupied. While this can be a great way to get a newly renovated house at a good price, many first time buyers are not ready to handle the purchase experience and then jump immediately into working with a contractor to complete a four to six week renovation.
If you're a buyer in this market, do your homework, and you can truly use the current distress to your advantage and end up with equity in your new home from day one. But be realistic about your goals and your abilities, and if you don't think your life will allow you to deal with the uncertainties of a short sale or the responsibilities of a renovation, stick to conventional non-distressed listings with individual sellers where the timeframe and the purchasing process is much more predictable.
For the last few years, there's been a real decision for consumers, especially younger consumers who might never have owned a home before, as to whether it made economic sense to buy a home. Home prices have generally fallen all over the country since 2006 or 2007, depending on your region, and many buyers decided that the possibility of buying a house as it was losing value was too scary from their perspective. Some consumers who were homeowners and had to move for their job sold their home and rented in their new city.
Rent or Buy?
The Rent vs. Buy contest is now beginning to tilt back toward the Buy side in many areas. Trulia, the well-known real estate website, publishes a Rent vs. Buy Index every three months. On that list, they rank the fifty largest metro areas in the country, based on a ratio comparing the costs of home ownership with the average cost to rent. In their First Quarter 2011 Index, thirty-six of the fifty regions qualified for the "Much Less Expensive to Buy than to Rent" classification, including Baltimore (#11) and Washington (#13).
Renting a home in this region has gotten comparatively more expensive in the last few years as vacancy rates have declined and landlords have enjoyed stiff competition for their properties. But there are also several reasons why now may be the best time in many years to consider purchasing a home.
1. Prices in the greater Baltimore-Washington region have begun to stabilize. Especially on the Washington DC end of the region, as prices in the District have actually increased 8% in the last two years. One of the biggest advantages Baltimore had in the last decade was its affordability when compared to Washington. If prices have begun to rise in DC, Baltimore will once again start to look like the bargain it still is (even with much publicized commuter rail problems between the two cities).
2. Interest rates have started to rise, and are about .5% higher than at their low point last fall. We've been hearing about how interest rates have tumbled to low points not seen in fifty years, and while they continued to fall or held steady, there was no motivation to buy. In fact, many buyers watched falling home prices and decided to wait, no matter what the interest rates were doing. But now, with prices starting to stabilize and interest rates actually rising again, we may be at the most affordable point in the cycle.
3. Interest rates are predicted to be yet another 1% higher by the end of 2011. For an idea of what that might mean to a potential buyer, I used one of my own current listings and calculated the principal and interest payment that would be available today to a qualified buyer, and then did the same calculation adding 1% to the interest rate. With everything else staying the same, the mortgage payment went up by about 5%. On a $1,500 a month payment at today's rate, that means the buyer will pay another $900 every year just on principal and interest on their loan.
To me, that says it may be time to get off the rent bandwagon and start looking to cash in on the bargains that the housing crisis has created.
Hope for 2011
There are quite a few good signs that 2011 will be a better year for real estate, and the economy in general, than was 2010. If you're one of the many potential buyers that are holding back, waiting for some positive signs that the worst is over, then I hope you'll find what you're looking for right here.
1. Improving employment picture. While the Baltimore and Maryland economies have fared better than the overall national picture, there have been some very encouraging signs nationally. For the last few weeks of December, initial jobless claims fell to levels not seen for several years, and the January employment report actually dropped the unemployment rate by a tenth of a point. Every prediction from economists has pointed to a slow, steady improvement through this year and these figures would confirm that is actually taking shape.
2. Consumer spending is increasing. The holiday shopping season was better than most retailers expected, and recent figures on the number of new automobiles being sold gives added strength to the fact that Americans are coming back to the marketplace and buying big ticket items. When consumer spending increases, businesses feel more comfortable adding inventory, placing orders, and restocking shelves, which has a positive ripple effect down the supply chain. Jobs result. Even sales of existing housing went up in December, and as an unscientific measure, my colleagues and I saw an increase in the number of people out looking, coming by open houses and setting up appointments with their agents.
3. Interest rates remain near historic lows. The cost of borrowing money is an important factor in determining how many people can afford to be in the housing market in the first place, and for the last few months mortgage interest rates have been cheap. Homeowners can refinance into 15 year mortgages for under 4%, while new 30 year mortgages have remained under 5%. As spring approaches, however, rates always tend to increase, so its not clear that these bargains will be available for much longer.
4. Housing prices have fallen dramatically. Along with the cheap cost of mortgage money, this increases the number of potential buyers who can qualify for a home purchase. With more buyers looking, and home sales beginning to pick up, its most likely that prices will stabilize and not fall much farther.
5. The Washington DC housing market has already stabilized and started to show price increases. Washington was one of only four metro areas in the country to show housing increasing in price in December. In the last decade, more and more homebuyers have been priced out of the DC market and have turned to Baltimore as a potential place to live. In fact, if the 2010 census shows that Baltimore has gained population (which many believe it will), that result can be attributed to the increase in Washington commuter traffic between the two cities. So, if the DC market has improved and started to rise, can Baltimore be far behind?