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Parents: Tired of Being Landlords? Buy Your Kids a House

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | April 28th, 2017

Parents who would like to see their adult children leave the nest are increasingly buying their offspring their own places.

Once upon a time, Mom and Dad would wait until their kidlets were starting their own families to help them buy a house or apartment, if they offered any help at all. But now, that kind of assistance is coming earlier and earlier -- and continuing longer and longer.

Leonard Steinberg, president of the New York real estate chain Compass, sees this trend as the vanguard of an enormous shifting of assets that will happen over the next 20 years, as wealth accumulated by baby boomers is transferred to their heirs.

How much wealth? A staggering $30 trillion, Steinberg says, adding that it will be “the greatest transfer of generational wealth ever.”

And this isn’t an isolated occurrence -- it’s a real trend, says Steinberg. As an example: Parental deals benefitting their children make up 21 percent of activity at one of Compass’s buildings in New York’s booming Lower East Side.

While the trend is nationwide, Steinberg says it is more concentrated among larger cities where the cost of renting is sky-high. The reasoning: Why waste enormous amounts of money on rent -- a “reckless” expenditure, in Steinberg’s words -- if a parent can help a child get started in homeownership instead?

Hopefully, doing so will give the children a leg up on all the financial benefits from building equity, and foster values necessary to homeownership, like commitment. It also helps grown kids who have gotten themselves into the financial netherworld of bad credit -- perhaps due to the burden of scholastic debt -- or who have no debt, or credit history, at all. In those cases, their debt-to-income ratio is either so high or so nonexistent that it’s all but impossible for them to qualify for financing on their own.

It may sound as though this kind of maneuver is the exclusive province of millionaires, but Steinberg says he sees it over all niches of wealth. “A $50,000 cash infusion can make all the difference,” he says, and can help an adult child make as much as a $50 million investment.

In New York City, parents are buying their children all manner of housing, from condominiums and co-ops to semi-detached homes and brownstones. In Manhattan, the property is likely to be an apartment. But in the outer boroughs, you can still find a brownstone for $700,000 to $800,000 -- and, of course, into the millions.

According to The New York Times, assistance for kids who’ve left the nest comes largely in the form of helping with rent and other living expenses. And the amounts can be substantial.

Some 40 percent of 22- to 24-year-olds receive financial help from their parents, at an average of $3,000 per year. Children working in the arts and design fields get the most help, typically $3,600, while those in blue-collar trades and the military receive the least, about $1,400. More than half the young adults working in arts and designs get parental aid, but only 29 percent of those working in personal services get such help.

In real estate, the child beneficiary is usually an adult, but he or she can be of any age. Steinberg says his Compass clients have bought property for children as young as 12. In those cases, the parents rent out the property until the child is old enough to have his own place.

For some parents, that time can’t come soon enough: According to a Money magazine survey, adult children expect to be financially independent at age 27, while most moms and dads expect them to hit that landmark by age 25.

-- Freelance writer Mark Fogarty contributed to this report.

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Getting Tax Quotes Right

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | April 21st, 2017

The one thing lenders seem to have the most trouble with at closing is estimating the borrower’s property taxes. They invariably get it wrong, and borrowers pay the price.

Not immediately, of course. Borrowers go along merrily in their first year of ownership, paying into their escrow accounts each month exactly what their lenders said they should. And then, BAM! They are told their tax accounts are short of funds, sometimes woefully so.

Sometimes they are required to send a check immediately to make up the difference. If their lenders are more magnanimous, borrowers will be allowed to make up the shortage over the next 12 months. But that amount is added to new, often markedly higher tax payments to avoid having a deficit in the future. And borrowers have no choice but to ante up. After all, not keeping up with your property taxes is grounds for foreclosure.

Why do tax estimates often miss the mark? Because there is no standard method. Lenders and closing agents make use of various resources, including websites, local real estate agents, and tax authorities.

Determining the proper amount is particularly difficult for out-of-state and internet lenders who are not always familiar with the local tax codes, says Brian Koss, executive vice president of Mortgage Network.

Now, there’s an automated solution. Property Tax Estimator, from California-based data company CoreLogic, can estimate taxes in two minutes, speeding up a process that often takes humans 10 or 20 times that long. And the program gets it right 99.5 percent of the time, says Kirk Randlett, a vice president at CoreLogic.

The power behind the software comes from CoreLogic’s extensive database on 148 million-plus real estate parcels countrywide, plus information from the company’s tax services business and a built-in calculator that predicts future values.

The program can also estimate the property taxes on new construction and in jurisdictions that have ceilings on annual tax increases on existing houses. Here, the accuracy rate for the tool runs from 60 to 90 percent, depending on the complexity of the state’s tax code, according to Randlett.

California is probably the state best known for limiting the levy on current owners with its Prop 13 rule. But Florida, with its Save Our Homes legislation, also has restrictions on assessment changes, as do Massachusetts, Maryland, Michigan, Texas and Oklahoma. In those states, owners are protected against significant run-ups in their property taxes. But when the home changes hands, the assessment can increase significantly. And humans frequently calculate the change incorrectly.

And then there are the numerous places that have more than one taxing authority. Take Homer, New York, for example: The town levies a property tax, as does the incorporated village and the school district.

Estimating the tax is also important for lenders, since nowadays, if they regularly miss the mark in the early stages of the lending process, they can be flagged and fined by federal regulators. Furthermore, an accurate estimate later in the process helps underwriters determine whether a would-be borrower can afford all the costs associated with the mortgage.

“The tax estimating process is critical to several stages of the mortgage cycle: disclosures, underwriting and servicing,” says Randlett, who calls property taxes “a hidden cost.”

Unfortunately, the Property Tax Estimator is a B2B product that’s not available to homebuyers directly. But it has just recently been integrated into Ellie Mae’s mortgage management program, and several major national lenders also are now using the software.

The bottom line is this: Ask your lender how the property tax was calculated. If it was done using the CoreLogic program, there’s a good chance it was on the money. If not, you should prepare for a jump in your monthly escrow -- maybe a big one -- in 12 months or so.

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Quick Takes: Gaps, Gains and Shrinking Inventory

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | April 14th, 2017

Women have broken through the “glass ceiling” in the homeowners association field. But in at least nine major cities, according to a new report, they are all but shut out from buying homes themselves.

A study by real estate data firm PropertyShark and its sister company, RENTCafe, found that the housing gender gap persists in nine major cities, including Chicago, Seattle and Denver. In those markets, single men can afford to buy or rent a starter home -- but, due to the gender wage gap, single women cannot. (A starter home, for the purposes of this study, was defined as either a studio or one-bedroom residence -- whether apartment, condo or house.)

Even worse, 14 markets were found to be so expensive that neither single men nor women could afford the average mortgage payment on a typical first residence. Manhattan, Los Angeles, San Francisco and Boston topped that list.

In the most expensive markets, the monthly payments on a starter house would command “upwards of 80 percent” of a woman’s median income, the study said. In places where men can take the first step onto the housing ladder but women can’t even get a toehold, the payments would exceed 30 percent of the median women’s income.

The median income for single women was considerably less than men’s in all 50 cities covered in the research.

There’s no such divide in the homeowners association field, according to the Community Associations Institute (CAI). The group provides resources to homeowners and professionals in more than 338,000 community, condominium and co-operative associations in the United States.

Women not only hold the majority of positions on the CAI’s leadership roster; many also lead organizations in the community association field that work with multi-million-dollar budgets. And according to the latest research, their salaries are on par with their male counterparts.

“From entry level to executive, there are no barriers in our industry for women to achieve great things,” says Cat Carmichael, chair of CAI’s 2017 Business Partners Council.

The home-building business is still dominated by small shops that build only a few houses a year. But last year, big builders -- both national and regional -- grabbed their largest share of the market since 2010.

In 2016, the 10 largest publicly traded builders captured a combined 27.4 percent share of the 559,000 single-family home closings. D.R. Horton alone nailed more than 40,300 deals, giving it a 7.2 percent share of the market. By comparison, the 10th largest company, Toll Bros., closed 6,100 houses for a 1.1 percent share.

Public companies enjoy several advantages over their smaller counterparts. They have better access to less-expensive credit, the lifeblood of the business, through the capital markets. And they can buy building products in bulk for their numerous projects.

But small builders have their own skills. For one thing, they are a lot more nimble and can move quickly if their markets change. They also tend to be much more flexible in their ability to customize their houses to meet local demands and preferences.

Here are the top 10 home builders for 2016: their number of closings and their shares of the market.

-- D.R. Horton: 40,309, 7.2 percent

-- Lennar: 26,563, 4.8 percent

-- Pulte Home: 19,95, 3.6 percent

-- NVR: 14,928, 2.7 percent

-- CalAtlantic: 14,229, 2.5 percent

-- KB Homes: 9,829, 1.8 percent

-- Taylor Morrison: 7,369, 1.3 percent

-- Meritage: 7,355, 1.3 percent

-- Hovnanian: 6,712, 1.2 percent

-- Toll Bros.: 6,098, 1.1 percent

According to Trulia, the inventory of houses for sale nationally hit a record low in the first quarter of 2017, falling 5.1 percent over the last 12 months. That makes it eight consecutive quarters that inventory has stumbled, putting upward pressure on asking prices.

Looking at the housing stock nationally and in the 100 largest U.S. metropolitan areas, Trulia found that the decline was most pronounced in the starter home category, which fell 8.7 percent from the first quarter of 2016 to Q1 2017.

Over the same period, the number of trade-up places listed for sale dropped 7.9 percent. At the same time, the inventory of premium houses slipped 1.7 percent.

“The persistent and disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach,” the Trulia report said. “Starter and trade-up homebuyers need to spend 2.9 percent and 1.6 percent more of their income, respectively, than they did at this time last year.”

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