Several real estate economists have shown that the average homeowner accumulates more overall wealth than the average renter.[i]  However, it is not clear how this is done.  Is it that owned property usually appreciates at such a rate that, after considering leverage, returns to ownership are extraordinarily high?  Said another way, might homeowners accumulate more overall wealth because ownership is a great levered equity creator through property appreciation?  Or, is it that owners acquire greater wealth, on average, because they are systematically paying down a mortgage thereby creating equity thanks to loan amortization?  In other words, paying off property creates wealth.

In ongoing research being conducted by Beracha and Johnson,[ii] these and other questions concerning homeownership and the accumulation of wealth are being investigated.  In earlier research, Beracha and Johnson show that renting is the superior investment strategy; however, in this earlier strict horserace between buying and renting, a very bold assumption is made.  Specifically, it is assumed that any rent savings (from lower rent versus mortgage payments) are reinvested without fail. Thereby, after balancing all of the costs and benefits from ownership and comparing them to renters’ portfolios from reinvesting rent savings, renting wins.

The question, however, very quickly becomes that, in a setting where Americans generally save less than 5% of their disposable income, is this assumption realistic and how might the removal of this reinvestment decision alter the outcome of the horserace between buying and renting?  As part of their current research, this question is directly addressed.  In particular, Beracha and Johnson find that after allowing renters to spend any rent savings on consumption (beer, cookies, healthcare, education, etc.), ownership leads to greater wealth accumulation, on average.  The graph below highlights this finding.

Many believe that very few houses are selling and that almost no one can get a mortgage. We want to let everyone know that neither of these assumptions is true. Recently, the National Association of Realtors (NAR) released their Existing Homes Sales Report. According to the report there are, on average, 12,109 homes selling in the United States EACH and EVERY DAY! That means that approximately 12,000 houses sold yesterday, approximately 12,000 will sell today and approximately 12,000 will sell tomorrow. So the thinking that homes aren’t selling just isn’t true.

Another interesting fact in the report was that 72% of these transactions were accompanied by a mortgage. That means that approximately 8,719 people qualify for a mortgage on a daily basis in this country.

There are over 12,000 homes sold and over 8,000 mortgages granted every day. The real estate market is doing better than many believe.

So Call me today to get you Pre -Approved for a mortgage(718) 801-3005 or fill out this form Get Pre-Approved Today

In 2011, we experienced one of the most volatile housing markets in American real estate history. Things we never anticipated happened. Events we were sure would take place didn’t. Today, we want to review the five headlines we think had the biggest impact in 2011.

1.) Interest Rates remained at historic lows

In order to help stabilize the economy in 2010, the Fed took certain actions which kept mortgage rates at or near historic lows (approximately 4%). Most felt this would be a short term tactic and once abandoned would result in rates returning to long term averages (6-7%).

However, the government has continued to support lower rates with the hope of fostering a recovery in the housing sector. The 30 year fixed rate mortgage (as measured by Freddie Mac) stood at 4.77% to begin 2011. A month later, it was over 5% and many, including us, believed this was the beginning of rates returning to normal levels. Instead, rates continued to fall ending 2011 at 3.91%.

The lower rates along with great prices have had a favorable impact on home affordability leading more buyers to enter the market.

2.) Sales up over 2010

At the beginning of 2011, we all realized that a year-over-year (Y-O-Y) comparison of home sales would not be a true “apples to apples” comparison as home sales at the beginning of 2010 were bolstered by the Home Buyers Tax Credit. Likewise, comparing home sales over the summer would not be a fair comparison as many sales in 2010 were dragged forward so that buyers could take advantage of the credit. However, many thought Y-O-Y comparisons would again be useful later in 2011 as the impact of the 2010 tax credit waned. Yet, the National Association of Realtors (NAR) Existing Homes Sales Report shows that over the last three months sales have increased quite nicely. The October and November reports each showed a Y-O-Y gain of in double digits and the December report gain was 12.2%. These numbers showed closed sales were increasing even though more contracts were falling through.

3.) Contract cancellation rate surges

Probably the most troubling trend to emerge in 2011 is that the number of sales contracts that are cancelled before closing has skyrocketed in the last year. The cancellation rate has jumped from 9% in August 2010 to 33% each of the last two months.

Some of the increase can be attributed to the higher level of difficulty in distressed property transactions. However, NAR also says cancellations are caused largely by “declined mortgage applications or failures in loan underwriting from appraised values coming in below the negotiated price.”

4.) Foreclosures were delayed

The robo-signing debacle of late 2010 caused a delay in many foreclosures entering the market. It DID NOT prevent the banks from continuing to put homes into the foreclosure process. The delays jut prevented banks from repossessing the homes and putting then up for sale as REOs (foreclosures owned by the banks).

For most of 2011 the banks and the state governments worked on a set of standards that would be enforced before a bank could repossess the house. They are currently working on a settlement to be paid for those homes that where foreclosed on without the proper paperwork.

As these procedures and settlements are completed, more and more of the backlog of distressed properties will come to market. Distressed properties sell at a discount. They will have a substantial impact on the prices of all houses in the region.

5.) Prices move up then down

Many experts expected prices to continue to slide downward as we entered 2011. However, a large inventory of distressed properties was held back (see #4). That turned out to be good news for prices as supply decreased throughout the year and demand increased in the second half of the year. That actually caused prices to ‘bottom out’ and ten nudge upward in the late summer and early fall.

As the foreclosed properties again began to enter the market in the last quarter, prices again began to slip. Most believe this downward trend will continue through the first half of 2012.

The National Association of Realtors recently released their 2011 3rd Quarter Housing Report. In the report, they showed that combined sales of single family homes, condos and co-ops increased in EVERY state as compared to the 3rd quarter of last year. Here are the state-by-state numbers.  

The next time someone says houses aren’t selling, ask them which state they live in and show them the chart.

As Thanksgiving approaches, I think it’s important to take a gratitude inventory. A number of things in life can make us uncomfortable or even a little miffed. But sometimes they are gifts in disguise. With that in mind, here are my top ten things to be thankful for.

1.    Be thankful for growing older. Not everyone gets this opportunity. Aging with health and grace is a rare and beautiful gift.

2.    Be thankful that you can read these words. It is a very sad thing that many people do not have the ability to read.

3.    If you have to wait in line at the supermarket for your Thanksgiving dinner, be thankful that you can afford what you want to eat and have a convenient place to buy it. We are all aware of the many people waiting in line to have a meal at the local homeless shelter.

4.    Be thankful for the ability to pay your bills, even if it means that you have to give up some things that you want. Remember that having basic needs met is a luxury for many people.

5.     If you have to get up before dawn to get to work, be thankful that you get to see another sunrise and have a job to go to. Think about what it would be like if you slept every day until noon and spent the rest of your waking hours wondering what to do with your life.

6.    When you’re stuck in traffic, be thankful you have a car to get where you need to go and money to buy gas. Standing in the rain while waiting for a bus is, at the very least, uncomfortable.

7.    When the kids are screaming at each other, be thankful that you have children to love and who love you, and remember that at least some of the time, they do get along. There will always be bumps in the road, but they are usually followed by easier times.

8.    When your mate is acting grumpy or giving you a hard time, be thankful for having love in your life and someone to grow old with. A life partner is something that less than half the population has. Having your partner is a blessing that needs to be counted several times.

9.    When your parents are telling you how to run your life, be thankful that you still have them around. If they are no longer with you, take a moment to be thankful for the time you had with them.

10.When you sit down with your loved ones for your Thanksgiving dinner, be thankful for everyone and everything that makes it possible. Look your family and friends in the eye and express to them your gratitude for sharing this wonderful time together.

Thanksgiving is a very special holiday. Embrace those around you and your ability to give thanks to those you love.

Standard & Poors released their Third Quarter 2011 Shadow Inventory Update yesterday. We want to cover the basic points of the report today.

What is shadow inventory?

It is an inventory of houses that will come to market as a distressed properties at a discounted price. Each of the data companies define shadow inventory in slightly different ways. Standard & Poors defines it this way:

“We include in the shadow inventory all outstanding properties for which borrowers are 90 days or more delinquent on their mortgage payments, properties in foreclosure, and properties that are real estate owned (REO).

We also include 70% of the loans that “cured” from being 90 days delinquent (loans that once again became current) within the past 12 months because cured loans are more likely to re-default. Our calculation of the months to clear the shadow inventory is the ratio of the total volume of distressed loans to the six-month moving average of liquidations.

Is this inventory increasing?

The report shows that shadow inventory is decreasing in many parts of the country as banks are starting to release distressed properties to the market. From the report:

“We estimate that it will take 45 months to clear the national shadow inventory. This is seven months below our peak estimate but three months longer than our estimate a year ago. Twelve of the top 20 MSAs recorded declines in months-to-clear during the quarter, while eight reported increases.

What impact will shadow inventory have on real estate?

One of two things will happen:

1. The inventory will continue to mount and be a hindrance to a housing recovery
2. The inventory will be placed on the market and impact prices

As the report states:

“Despite the recent stability of our months-to-clear estimates and liquidation rates, these distressed loans continue to loom over the housing market and threaten to further depress home prices. Though fewer additional loans are currently defaulting, the overall volume of distressed loans remains huge. Low liquidation rates over the past two years allowed the shadow inventory to grow as distressed homes have remained tied up in foreclosure proceedings.

The shadow inventory will continue to jeopardize the housing market’s recovery until servicers are able to improve liquidation times. However, if and when that happens, an influx of homes will likely enter the market, increasing supply and driving prices down further.”

Bottom Line

We believe the inventory will come to market impacting prices now but bringing about a housing recovery in a much shorter period of time.

There is more and more research coming out showing that it makes great financial sense to purchase a home today . Whether it be rent vs. buy ratios, income-to-price ratios or income-to-mortgage payment ratios, purchasing a home right now is a bargain compared to historic norms. Now we want to look at the COST of a home today compared to pre-peak prices.

According to the most recent S&P Case Shiller price index, residential real estate values have returned to 2003 1Q PRICEs. That, in itself, says something. However, when you factor in mortgage rates, the case for buying a home today becomes even more compelling.

In 2003, 30 year mortgage rates stood at 5.88%. Today, they are 4%. How does that impact the actual COST of a home? On a home purchased for $250,000, here is the difference in monthly cost:

That means you save $285.30 a month, $3,423.60 a year and $102,708 over the life of a 30 year mortgage! You buy the home for the same PRICE but the COST is over $100,000 less.

Bottom Line

This is why so many financial advisors are saying that this may be one of the greatest times in history to purchase a home.

1.) When Loan Officers issue pre-approvals without reviewing the relevant bank statements, pay stubs, and tax returns. We all know that virtually every loan program requires these documents and that underwriters examine them closely.

Loan Officers should obtain these documents and address potential challenges (like large deposits, payroll deductions, and unreimbursed expenses) up front. Issuing a pre-approval without a real analysis has resulted in a lot of avoidable heartache.

2.) When real estate agents don’t meet the appraiser at the house armed with comparable sales to support the selling price. Today, a home’s value has to be validated twice – to the buyer and to the lender’s appraiser. Good agents know that it is easier to establish the best value while the appraiser’s opinion is being formed (as opposed to getting the appraiser to reconsider later).

3.) When problems arise (and they do) and people bury their heads in the sand. Nothing gets “snuck by” anymore. There are so many checks and balances in the process now that nothing is hidden. Being honest up front gives everyone the best chance for the best outcome.

4.) When people think they know more than they do. Agents who think they are mortgage experts or loan officers who think they are appraisers, are some examples. It’s hard enough to keep up with one area of the business at an expert level. More than one? Very rare indeed.

5.) When non-real estate attorneys get involved in real estate transactions. Whether it’s arrogance or laziness, I have seen too many deals get messed up because people used their business attorney to buy a home.

Anything bother you that can be avoided?

Last week, Fannie Mae released their National Housing Survey for the third quarter of 2011. They survey the American public on a multitude of questions concerning today’s housing market. Each quarter, we like to pull out some of the findings we deem most interesting. Here they are for the most recent report:

Most Important Reasons to Buy a Home

The study shows that the four major reasons a person buys a home have nothing to do with money. The top four reasons, in order, are:

• It means having a good place to raise children and provide them with a good education
• You have a physical structure where you and your family feel safe
• It allows you to have more space for your family
• It gives you control of what you do with your living space (renovations and updates)

When we talk about homeownership today, it seems that the financial aspects always jump to the front of the discussion. There is no doubt that families must justify a home purchase from a financial point of view today. However, the reasons they actually buy are the same reasons our parents and grandparents purchased their home – to create a better lifestyle for their families.

The Home as an Investment

Though most people purchase a home for non-financial reasons, everyone realizes there is a money component to homeownership. Here is what they said on this issue:

• 64% of the general population (and 69% of homeowners) believe that homeownership is a ‘safe’ investment.
• 55% believe that homeownership has more potential as an investment than any other traditional asset class.
• 68% think that now is a good time to buy a home

Rent vs. Buy

We are always interested in the difference people see in renting vs. owning.

• 63% of renters have aspirations to someday own their own home
• 70% of renters think that owning is superior to renting
• 96% of homeowners see homeownership as a positive experience (4% see it as a negative experience) while 83% of renters see renting as a positive experience (15% see it as a negative experience)
• 97% of homeowners live in a single family residence while 53% of renters live in a multi-unit building

Bottom Line

Even in these difficult times, Americans still realize the value of homeownership both from a financial and social standpoint.

On August 10^th, The New York Times reported: “Uncle Sam wants you — to rent a house from Uncle Sam”.  The gist of the story is that the Obama administration is seeking ideas on how to convert the federal government’s inventory of foreclosed properties into rental properties that can be managed by private enterprises or sold in bulk.  The goal here is to stabilize housing markets around the country that are suffering through a wave of foreclosures.  Today, rumors of turning foreclosures into rentals are surfacing again.  Is this a good idea?  If so, how should such a program be organized and managed?  What are some of the potential downfalls of such a program?

To begin with, this is, in general, a good idea for a number of reasons.  First, vacant non-performing assets (empty properties) will begin to provide returns and thus mitigate total eventual losses to lenders and thereby lower the tab to all.  Second, the program should slow down the flood of foreclosed properties and should help stabilize pricing as traditional home sellers will now have fewer foreclosures to compete against.  Third, the program would allow lenders (Fannie, Freddie, and others – perhaps the original lender) to time the selling of foreclosed properties, which would assist in stabilizing the housing markets around the country.

If turning foreclosures into rental happens, what should not be done?  Renting to the previous owners should not be allowed as this would create significant conflicts of interest, which could easily lead to a deluge of lawsuits resulting in the failure of the program.  Additionally, social engineering should not be allowed.  Let the marketplace decide rent levels.

Where might problems arise from turning foreclosures into rentals?  Though they are very similar, foreclosure laws vary by state.  One general commonality among the various laws is that the lender must mitigate the loss to the previous owner through a timely resale of the property.  These laws can be thought of as the Milton Drysdale deterrent.  It is simply not in the best interest of society to allow lenders to foreclose on property, ride out the tough times, and then resell at a huge profit.  However, these laws never contemplated a situation where foreclosures would be as rampant as they are at present.  Regardless, if the federal government, through Fannie, Freddie, joint ventures with outside investors with Fannie and Freddie, or even the original lenders themselves, becomes a landlord looking for a better environment in which to sell, the likelihood of lawsuits over violations of state foreclosure laws is almost certain.  That is to say, we will probably have “Robo-signing II”.  Thus, the big question is will Congress be willing to back turning foreclosures into rentals with a federal law that overrides state foreclosure statutes.

Four years ago, I told a graduate audience that banks should get ready to manage property in order to mitigate losses from the coming real estate crisis.  However, state laws would probably prevent this and that federal legislation was needed to allow for lenders to manage and/or re-sell property in a way that balanced market stabilization with mitigating losses to the original owners.  Is turning foreclosures into rentals a good idea?  Yes, the idea is sound.  The only surprise is that it took this long to get around to considering this eventuality.