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A Tale of Two Markets

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | November 20th, 2020

Two relatively small housing submarkets are starting to show signs of strengthening. One of those markets: renters looking for more space, both inside and out. The other: people looking to get away from it all, if only for a few weeks.

Renters should soon see more opportunities to lease brand-new houses specifically built as rentals, while buyers of vacation homes are already flexing their purchasing-power muscles.

The built-to-rent market is, indeed, small. Currently, only about 6% of all single-family houses are purposefully built as rentals, working out to about 70,000 houses a year. But that’s not enough to keep up with demand, according to RCLCO, a Maryland-based advisory firm that says built-to-rent housing represents a big opportunity for its clients.

Other consulting firms have been saying the same. One, Meyers Research, has suggested that big master-planned communities should contain entire neighborhoods of rental houses. And the National Rental Home Council expects demand to surge.

“For many Americans, the pandemic has brought a new urgency to the search for housing, and many are discovering the benefits associated with renting a single-family home,” said Executive Director David Howard of NRHC. “Suddenly, living in a small apartment in an urban high-rise isn’t as appealing for families navigating the realities of working and schooling from home.”

If builders get the message, the trend will be just another step in the evolution of rentals as they break away from the traditional multifamily mold.

Originally, small-time investors with one or two houses dominated the sector -- and still do, for the most part. But since the recovery from the Great Recession, large institutional investors have acquired portfolios of unsold houses scattered across the landscape and turned them into rentals.

Some 12 million families currently live in detached one-unit rentals -- nearly as many as the 14.5 million who reside in buildings of 10 or more apartments. Now, Tricon Residential, one of the early investors in the space, is buying up single-family lots and partnering with local builders to deliver rental properties. American Homes 4 Rent, another large institutional owner, is doing much the same. And NexMetro has now closed on its 30th Avilla property, which are communities of one-, two- and three-bedroom homes.

RCLCO’s Gregg Logan and Todd LaRue say the demand is being driven by demographic shifts in which more households are in a stage of life where a house suits their needs best. But while these families would ordinarily be buyers, they are hampered by affordability issues that are not likely to dissipate anytime soon.

Afforability is just one factor, though. Renting offers much more flexibility than owning. Not only do renters not have to tie up their nest egg in real estate, they also can move from place to place without having to sell the old homestead. And they can sometimes find affordable rentals closer to city centers than they could find affordable, comparable homes for sale.

Meanwhile, second-home markets, especially those within a four-hour drive of major metro regions, are booming, according to John Burns Real Estate Consulting.

The sector is benefiting, Burns researchers say, from a rise in what they call the “YOLO” mindset -- You Only Live Once -- as people try to get away and enjoy life as safely as possible during the pandemic.

“Households who may have otherwise waited have decided now is the time to buy, often using funds that would otherwise be allocated to more traditional vacation travel,” they explained in a recent bulletin to clients. “Today’s buyers are showing more interest in lifestyle and use than rental potential and future appreciation.”

To prove their point, the researchers pointed to some remarkable sales figures from across the country. In July, the Sierra-Tahoe Multiple Listing Service logged its highest residential dollar volume in history, up more than 200% year-over-year. Sales at Long Cove, an upscale lakeside community south of Dallas, reached an all-time high in June -- then bested that in July. Pending home sales in Bend, Oregon, rose 150% year-over-year in July. Sales in Rehoboth Beach, Delaware, doubled compared to the same time last year, fueled by demand from New York and New Jersey. And in Worcester County, Maryland, sales were up 104% above last July.

The key to most of these numbers seems to be proximity. Most buyers of second homes, particularly those with school-age children, prefer to drive less than four hours to get there. They desire a getaway house to “invest in family,” and to provide a place of refuge for the future.

In some cases, since many parents can work remotely and children can learn online, the vacation spot actually switches places with the main residence. This flips the traditional “weekend home” model on its head, with families staying at their vacation home most of the time and occasionally traveling back to their primary residence.

Elements such as high-speed internet, home offices and learning spaces for children have become just as important in second homes as in primary ones, now that some owners measure second-home stays in weeks and months, rather than days.

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High Prices Offset Gains From Low Rates

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | November 13th, 2020

Housing prices are rising so fast -- “too fast,” as the chief economist at the National Association of Realtors said recently -- that they are all but obliterating any gains buyers are seeing from record-low interest rates.

Even if rates continue to fall -- and Mark Fleming, chief economist at title insurance company First American, thinks it’s possible they could dip as low as 2% -- house prices are poised to continue rising so quickly that any savings could be minimal, if not wiped out altogether.

Loan rates had remained below 3% for 12 straight weeks as of the end of October, according to mortgage investor Freddie Mac. And as the month came to a close, the average was at 2.81%, nearly 1 full percentage point lower than the same time last year.

But according to Realtor.com’s latest report, median listing prices in September were 12.9% higher than a year ago. For 21 consecutive weeks now, prices have been accelerating, says Chief Economist Danielle Hale, adding that 2020 is way beyond the ordinary.

“During a normal year,” Hale reports, “asking prices begin to dip going into the fall as the types of homes for sale shift and sellers have to do more to attract a buyer from a smaller pool of shoppers. But 2020 is not following this usual seasonal trend, and the typical September asking price remained at $350,000 -- on par with peak summer home prices.”

Brokerage chain Redfin pegs the late-September median selling price in 434 metropolitan areas at $319,769. That’s the highest median cost for homes ever, and a 14% jump from a year ago. It’s also the largest spike in median home sale price since August 2013, the company reports.

And with new listings down 7% and inventory falling by 38%, according to Realtor.com, prices are bound to rise ever higher. Indeed, Veros Real Estate Solutions, a collateral valuation service, anticipates that home-price appreciation will increase sharply during the next 12 months in the 100 most-populated markets.

A look at mortgage rates shows why homebuyers are coming out of the woodwork. In January, the average for a 30-year fixed-rate loan was 3.708%. But by September, it had slipped to 2.75%. That’s not a record low, but it’s still awfully attractive.

Now for the rudimentary math: In January, the median price of an existing house nationally was $268,600, according to NAR. And at 3.708%, the monthly cost for principal and interest was $1,238. But by September, the median had jumped to $316,200. And at 2.75%, the monthly charge was $1,291.

As a result, buyers of median-priced homes paid $53 a month more -- $636 a year -- even though rates had fallen by almost a full percentage point.

Of course, your monthly payment is based on what you borrow, not the price of the house. And the amount you borrow depends on the size of your down payment. The more you put down, the less you need to borrow and the lower your payment. The larger the down payment, the lower the monthly payment.

That said, here’s a little deeper way of looking at the math above:

According to Ellie Mae, whose loan origination technology is used by thousands of lenders, the average 30-year purchase loan amount in January, when the typical mortgage rate was 3.95%, was $262,629. The result was a payment of $1,258.

By September, the rate had fallen to 2.95%. But the average loan was for $292,475, yielding a payment of $1,234. So, because of larger loan amounts as a result of higher prices, the total savings from a full percentage point drop in rates was just $24 a month.

The savings for people who refinanced were a bit larger -- $101 a month for those who didn’t take any cash at closing and $86 for those who did -- again, because in each case, the amount financed was larger. And when all loans, including those with 15-year terms, were lumped together, the savings netted because of lower rates was just $28.

These numbers, says Ellie Mae’s Erica Bigley, are “very generalized” and do not take into account borrowers’ credit profiles or location. And none of the figures used here include mortgage insurance, property taxes and homeowner’s insurance, all of which are likely to be a tad higher because of higher house prices.

They also don’t take into account the “points” that may or may not be paid at closing by borrowers to secure a low mortgage rate. (A point is 1% of the loan amount. So if a borrower paid 1 point on a $262,000 loan, he or she would pay $2,620 in cash at settlement.)

And finally, these are median loan amounts. Borrow more than the median, and whatever savings you enjoy from lower rates are likely to be totally exhausted.

The bottom line: Lower rates have not turned out to be the blessing most people believe them to be. While they have indeed sparked demand, that demand has cut deeply into supply. And the lack of supply has driven up prices.

“If there was an oversupply of houses for sale, the impact of lower rates would be much greater,” Fleming told me. “The market always finds equilibrium.”

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Sellers: Go Easy on the Holiday Decor

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | November 6th, 2020

“The height of sophistication is simplicity.” -- Clare Boothe Luce

Halloween’s over. If you haven’t done so already, it’s time to break out the Thanksgiving and Christmas decorations. Even if your house is on the market, you can still decorate. Just remember to keep it simple.

There’s nothing wrong with trying to sell a house during the holidays. It’s as good a time as any -- maybe even better. Most buyers this time of year are serious prospects -- otherwise, they’d be home celebrating with their families and friends -- and there’s less competition because most sellers wait until the new year to list their properties.

Selling your house shouldn’t keep you from enjoying the festivities, said Florida-based Kathy Streib of Room Service Home Staging, on the ActiveRain real estate website. But decorate with these key staging principles in mind: Don’t distract and don’t detract.

Paul Henderson of Fathom Realty in Tacoma, Washington, has seen some ghastly decorations while touring houses for sale. And just before Halloween, Will Hamm of Hamm Homes in Aurora, Colorado, visited a house that was “so decked out, inside and out,” that Hamm got the feeling the sellers weren’t really interested in selling at all.

Staging is the art of making a house as appealing as possible to a wide audience. And its rules apply to decorating for any holiday, not just Thanksgiving and Christmas, says Streib.

So before you put up your tree and hang your stockings with care, consult with your agent, who needs time to take photos of your place for the multiple listing service and other websites.

You don’t want to post pictures that date your listing if it doesn’t sell by, say, mid-January, and you also don’t want anything in the photos to distract buyers from seeing the house itself.

So don’t overdo it. “Resist the urge to ‘holiday’ every room and flat surface,” says Streib. “You want the buyer to see the space. A few well-placed seasonal decorations can be festive, but not overwhelming.”

It’s not that agents and stagers “are trying to play Grinch,” says Chris Lima of Florida’s Atlantic Shores Realty, but “there has to be a happy medium. Moderation is the key.”

Let’s start with curb appeal: A nice wreath on the front door is good, and large pots filled with seasonal plants add color. A clean, new welcome mat is a good idea, too.

But this is not the time for a giant inflatable Santa or snowman. They are distractions that prevent buyers from seeing what your house really looks like -- and if they deflate, they become serious eyesores.

Amanda Davidson of eXp Realty in Alexandria, Virginia, suggests leaving the inflatables in storage, and warns against trying to light up the neighborhood. Don’t “Griswold” the place, she says, referring to famous over-decorator Clark Griswold of “National Lampoon’s Christmas Vacation.” After all, “what might be merry to you can be downright tacky to a buyer.” Stick to minimal string lights, preferably in white, and use them to accent the positive aspects of your exterior.

Inside, you don’t want your house to be awash in orange at Thanksgiving or red at Christmas. You want visitors to see the house itself. “You don’t want your buyer’s eyes to bounce all over, seeing everything but taking in nothing,” Streib advises.

Shannon Jones of Keller Williams in Long Beach, California, is “a big fan of holiday colors, but in everyday objects like flowers or pillows.”

Potential buyers are there to try your house on for size, so don’t block your house’s best features. A giant tree -- tastefully decorated in, say, one color, as opposed to all kinds of mismatched ornaments -- is a great way to emphasize a two-story entry. But if it blocks the fireplace or patio door, it’s doing you a disservice. You don’t want to make visitors peer behind or walk around the tree to see those selling points.

And if you must hang stockings, wait until Christmas Eve so they don’t become distractions.

Now’s also not the time to trot out your oversized Nativity set -- or anything overtly religious, for that matter. Not all buyers celebrate the same holidays, or in the same way, and not everyone has the same religious convictions. So stick to pinecones in a vase and tiny reindeer on the mantle, and bring out that other stuff next year in your new home.

And remember: Less is more. “Over-decorating can mean buyers spend more time studying decorations than observing the features of the house,” say Sally and David Hanson of eXp Realty in Brookfield, Wisconsin.

Finally, a word about scents. One of real estate’s oldest rules of thumb is to bake some cookies just before an open house to create a welcoming aroma. That’s still a good idea. But some sellers go too far, overwhelming guests with Vanilla Bean or Spiced Apple.

Some people can be allergic to such scents, or just find them “so overpowering that (they) have to leave to get some fresh air,” says Barbara Altieri of New Haven County (Connecticut) Real Estate.

Streib’s advice: Stick with a scent that says “clean.”

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