Archive for the 'Housing Prices' Category
Renewing the Home Buyer Credit
We’ve received a lot of questions recently about the soon-to-expire First Time Home Buyer’s Credit. Since the time has basically passed to be able to take advantage of it in a home purchase, the discussion has shifted to the future of the program. Analysts and commentators around the country are weighing in on the subject, dividing into two camps.
Camp 1: Extend the credit, and perhaps even expand it to all buyers and with larger credit amounts. Their basic contention is that the program is instrumental to stabilizing the fragile housing market, and that real estate will grind to a halt without the credit. The National Association of Realtors (NAR) has taken a leadership role in advocating this position, and has issued this Call to Action to their Membership in addition to their direct efforts in Washington.
Camp 2: End the program and allow the markets to rebalance on their own. This group feels that the credit is a poor use of taxpayer money and extends a credit/housing bubble which keeps home prices artificially expensive versus income levels. Numerous economists of all political leanings have taken this side of the debate. Economist Barry Ritholtz, author of The Big Picture Blog has been writing about the subject regularly and most recently posted a piece titled Why Expanding the Home Buyer’s Credit is a Mistake that summarizes the position and links to others in the same camp.
Our position is more sympathetic to the second group than the first. The real estate markets in Greater Hartford don’t seem to be locked up, and the tax credit doesn’t seem to be a critical consideration. Our experience has been that capturing the tax credit is nice, but it is not the key factor that motivates buyers to purchase their first home. We have worked with many buyers over the course of the year that have qualified for the credit. Some have accelerated their search to be sure to close in time, while others are going to miss out because the right house for them is not available. We have not worked with anyone who is buying solely because of the credit.
In addition to observations about the use of the credit among our clients, we also tend to side with the economists on the theoretical arguments about the credit. Our main issue is that the most of the buyers claiming the credit would have purchased a home anyway. NAR did a study finding that “about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.” They are using this data to support their contention that the credit helped the markets. However, it seems to us that the government paid the credit to at least:
buyers that would have purchased anyway, which is more than 80% of the total people that received it. So that comes out to at least:
of our tax dollars that could have been spent elsewhere, or not spent at all. Perhaps that’s not much when the annual deficit is in the trillions, but $11 billion seems like a lot of money.
We’d like to see a more honest discussion over the credit’s goals as the powers-that-be debate its extension. The data shows that the program is more about broadly supporting the lower end of the housing market than it is about convincing non-owners of the virtues of homeownership. Perhaps the housing market, like other industries, is “Too Big To Fail” and should be bailed out since it impacts such a large percentage of the US population. Or perhaps the government needs to take a step back and start allowing people who make poor investment decisions to lose their money, both on Wall Street and on Main Street. Either way, this is the debate we should be having as a nation as our representatives consider extending and expanding the government’s role in the housing market.
Should Rising Sea Levels Influence Real Estate Decisions?
Should the threat of rising sea levels factor into the real estate decisions of home buyer or home owners?
We hear frequent debate about whether the globe is warming, and if so, whether or not our civilizations and lifestyles are the cause. We also hear about large chunks of ice that break off into the ocean. But we do not hear much about specific consequences of rising sea levels in the news. Satellite images show that the amount of land ice has been decreasing in recent years. Reports from low lying areas tell the stories of societies already dealing with higher water. At some point the issue may become “real” for the rest of the world.
Rising sea levels, attributed to melting land ice, present a different type of challenge than we’re used to facing. Rather than being an acute event that ends as quickly as it began, rising sea levels stick around to create a new equilibrium. Coastal cities around the world will need to adapt if the predicted changes actually occur over the next 100 years.
New York City is already thinking about how they will protect their extensive coastline. The Wall Street Journal’s recent article about their efforts raised a number of interesting points. Most heartening is that City leaders are monitoring the latest studies to proactively plan defenses and countermeasures. Though there is no definitive prediction about what will happen, City leaders are currently expecting a climate similar to Raleigh, NC by 2080 and higher water around the City than in other parts of the globe. Despite the research, their ability to act is limited because they “can’t make multibillion dollar decisions based on the hypothetical.”
Assuming we believe there is a threat, the logical place to look for a plan is the Federal government since rising sea levels will directly impact much of the country’s population. Current government policy is to help regions that are impacted by natural disasters. Leaders declare a state of emergency and bring in help from other areas. What happens if our country’s entire 12,383 mile coastline is threatened? Which portions do we protect? When do we begin the projects? How are these decisions made? Given our tendency to punt on hard questions, we’ll probably see little proactive planning followed by various levels of government addressing problem areas as they arise.
There is little a homeowner can individually do about rising sea levels. Their best option is to be thoughtful about the risk for their properties. Beachfront homes clearly are at a higher level of risk than those at elevation. The recent work by FEMA to redraw flood maps has made more home buyers aware of floodplains, but very few in this area consider rising sea levels in their purchase decisions. Which may be appropriate since the City of Hartford sits at an elevation of 59 feet (18 meters).
The threat of higher seas is decades, and perhaps even centuries away. There is plenty of time to plan our personal and national strategies. Some thoughts…
1. The Federal government needs to take a position early stating what they are willing to do. Because of the persistence of nature, and the massive length of our coastline, the fair and practical response is probably to do nothing.
2. Coastal property will transition from selling at a premium to selling at a discount. This should happen whether defenses are built or not, and is just a matter of degree. Markets adapt as new information is available, and once there is more certainty about when rising sea levels will be a problem, buyers will begin to consider property elevation in their purchase offers.
3. It is common for buildings to last decades, or even centuries. Ideally, real estate development will shift to areas that will be less threatened by rising sea levels. Realistically, it probably won’t since there will still be demand in coastal areas until the point when the problem becomes “real.”
Nature has changed the face of planet earth on many occasions. It is a powerful and persistent force that will prevail despite our best efforts. One way to imagine the potential impact of higher seas is by playing with a simulator. Greater Hartford, as an inland metropolitan region, should not feel the impact directly. Perhaps we’ll even benefit as people and investments move away from the coast. But like everything else about rising sea levels there are no definitive answers.
The Appraisal Dilemma
The real estate appraisal business has been under increased scrutiny in the wake of the national housing bust. An article in today’s Wall Street Journal highlights the current challenges in securing an independent, yet accurate, property valuation.
Appraisals are an important part of a real estate purchase, helping to make sure that the negotiated purchase price is in line with recent comparable sales. Mortgage underwriters require an appraisal so that they can feel comfortable that the loan they extend to the buyer is adequately secured by the underlying property. Essentially, they want to be sure the deal’s Loan-to-Value Ratio is correct.
During the boom times, appraisals were often seen as an unnecessary step. Some mortgage lenders were more interested in writing the loan than in making sure that the home was a solid asset. They knew that the loans were going to be securitized, so the focus was on doing the deal and then handing off the risk to someone else. Unscrupulous mortgage lenders would have go-to appraisers that they could count on to value a property at whatever price was needed to make sure the deal closed. Appraisers were no longer seen as objective, writing reports that supported whatever value was needed by the mortgage lender that hired them.
These days appraisals are taken more seriously by banks and the unscrupulous mortgage lenders are generally out of business. In the meantime, different problems have emerged. The appraisal industry is being pressured to break the direct relationship between mortgage brokers (though not banks) and appraisers. Regulators want to see Appraisal Management Companies (AMCs) in charge of assigning appraisers to deals, hoping to restore objectivity to the process. As of May 1, 2009, Freddie Mac and Fannie Mae adopted the Home Valuation Code of Conduct, effectively creating a national standard for appraisals in single-family mortgages.
The unintended consequence of creating AMCs is that there are increasing complaints about the accuracy of appraisals. The Journal article highlights a number of examples in California where the appraiser assigned to a deal traveled outside of their local area for a job. Because real estate is a local industry, the dynamics of a market can be quite different one town, or even neighborhood, away. An appraiser not familiar with a market’s specific dynamics could assign a wildly inaccurate value to a property, which could unfairly impact the deal.
Local appraisers we have met who receive business from AMCs echo the concerns expressed in the article. They are being asked to travel further for jobs, do more work for each appraisal, and accept less compensation. It’s putting them in a difficult position, challenging their ability to make a living as an appraiser.
The informal solution to the dilemma seems to be to work around the new rules. Lenders that have underwriting capabilities are still able to hire appraisers directly, so many mortgage lenders are not actually impacted. Full-time appraisers with strong reputations are able to fill their schedules with work from the unregulated lenders, allowing them continue on with business as usual. All sides are watching the regulations closely, waiting to see what happens next.
The current direction of the regulatory activity seems to have two possible outcomes. In one scenario the AMCs increase the appraisal fee charged to lenders, which allows them to pass more money through to their appraisers. The higher fee would very likely be passed on to the buyer, adding to the closing costs associated with a home purchase. The other scenario is that appraisers are forced to find second jobs, or new careers entirely. If enough appraisers were forced out of the business, it’s possible that there would be a shortage of appraisal capacity during the busy spring market.
Neither scenario seems particularly attractive, and the regulation itself feels like it is addressing problems that have already been corrected by market forces. Since the new rules are not uniformly applied across all lenders, and workarounds have already been established, perhaps it would be better to roll back the regulation.