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Intero Insider: Buying a Home in Earthquake Country

By Gino Blefari | November 15th, 2011 0 Comments

Over the last few weeks, we’ve experienced several moderate earthquakes in the Bay Area. No major damage, no deaths and no injuries. So no big deal, right? We must be used to this by now.

In reality, though, earthquakes are a major factor for home buyers. They can be a great source of fear and anxiety. Let’s explore how buyers can consider these natural occurrences in the smartest way before closing a deal.

Basic construction
Unless you’re buying a new home, chances are that the one you’re considering buying has been through dozens of small to moderate earthquakes. To get a sense for how the house has held up, be sure to closely inspect the foundation for major cracks. This is routine in home inspections under any circumstances, but especially significant if you’re buying in this area. Pay attention to the small details during your home inspection, and seek advice from your agent if you’re not sure of the impact.

When was the home constructed?
If it’s an older home, has it undergone any seismic upgrades or retrofitting in the last 10-20 years? While these upgrades are no guarantee that a home will outlast “the big one,” in many cases they will ease your mind and help prevent small problems from growing much worse over time through several small or moderate quakes.

Proximity to a major fault line
We’ve all seen and heard stories about homes on the Hayward fault that have walls and floors that are separating more and more each year. Just because your home is close to the fault line doesn’t mean this will be you in 10 years. But if it’s really close, you should consider having an engineer check whether there’s any current shifting going on with the house. (And you really should know how close your home is to the fault line to begin with.)

When to call a geo-technical engineer
Not all home purchases in the Bay Area will require a visit from a geo-technical engineer. However, a big red flag would be that the house is built on the side of a hill that is very close to a major fault line. Houses in these circumstances may actually be sliding down the hill by an inch – or fraction of an inch – each year. Again, this might be fine, but better to know before you buy the house. No surprises!

Do you need earthquake insurance?
Earthquake damage is usually not covered by typical homeowner policies, so don’t assume you don’t need it if you’ve already got property insurance. A good way to think about it is to consider how much of your investment in your home you are willing to put at risk. If an earthquake caused major damage to your home and its contents tomorrow, how quickly could you get back on your feet with your own savings? You’ll want to think about the amount of equity you have in your home and the approximate value of your belongings when considering how much earthquake insurance to buy.

In the Bay Area, earthquakes are to be expected and many of us aren’t surprised when the building starts to shake without warning. But when buying a home, these are the basics all buyers in earthquake-prone areas should think seriously about. These may seem routine, but it’s surprising how many buyers will overlook these things – especially when they’ve already fallen in love with a property.

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Intero Insider: The Growing Wealth Gap Between Young and Old

By Gino Blefari | November 8th, 2011 0 Comments

New research out from the Pew Research Center this week finds that the wealth gap between older and younger Americans is widening. The new data found that households that were headed by Americans age 65 and older were worth 47 times more than those headed by people 35 and younger – $170,494 vs. $3,662.

It’s a stark jump from 1984, when the data showed older households were worth 10 times more than their younger counterparts – $120,457 vs. $11,521.

The interesting point for our discussion is that real estate is cited as the main cause of the disparity.

It’s not unusual for older Americans to have more wealth than their younger counterparts. In fact, common sense tells you that if the typical path of Americans is to start with little, work hard and save money, you’ll end up with a lot more when you’re older. The point that everyone is riled up about is that the wealth gap has significantly grown between the two age groups.

Real estate has played a role here because:

  1. The older households likely bought their homes before the run-up in prices took the nation by storm, which means they haven’t seen a significant drop in their home values compared to what they paid. In fact, they have the benefit of time on their sides, and that has enabled them to keep most of their gains.
  2. Declining home equity has been one factor in the wealth of the younger age group. They’ve had less time to build equity, and may even have bought at the top of the market, turning their gains upside down or taking out a substantial cut.

With the downside of this news aside (no one wants to think about our younger generation starting in a worse position than in generations past – or worse, being left behind altogether), the upside here for housing is that it’s a good concrete example of the value of home ownership on a household’s financial prosperity over the long term.

I talk a lot here about the real values of home ownership getting better over time, and this research supports that in full. The main takeaway from this research for me is that we have to do more to help younger Americans realize the value of home ownership and get into homes they can afford as early in their lives as they can financially handle.

Sure, not everyone is ready for home ownership in their 20s or even early 30s. But if we reinforce the value as one of prosperity and a path to financial security, I think we’ll see more young households striving to do it right.  A few years of poor market conditions and declining values in the grand scheme of things didn’t do much harm to the demographic that had more time in their mortgages and equity. That’s a great message that really speaks to the long-term value of home ownership.

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Intero Insider: Why Home Values Are So Misunderstood

By Gino Blefari | November 1st, 2011 0 Comments

Home values – it’s a topic we hear about a lot in the news, and one of great concern to home buyers and sellers, but one I feel many people gravely misunderstand. A survey released last week from Zillow underscores this misunderstanding.

The survey’s headline reads: “42% of Home Buyers are Unrealistic About Home Value Appreciation,” and goes on to explain that despite the recent economic downturn and volatility in the nation’s housing markets, 42% of those surveyed said they believe home values typically appreciate by 7% per year.

On a national level, home values declined for five consecutive years during the downturn. Historically, in a “normal” market, home values tend to appreciate at an average 2-5% per year. What is it that creates such an unrealistic view on home values – even now as much of the economy is still suffering?

Psychology of ownership: I think part of the reason home buyers are so optimistic about values appreciating is because they truly believe in the value of home ownership. In their minds, owning a home is the ultimate economic security, and one that will return financial value to their lives in many ways. Because it is so valuable to them, they feel like the numbers on appreciation move faster than historically they have.

Leftover boom mentality: Many buyers today witnessed the insane appreciation seen during the 10-year housing boom. News headlines constantly read crazy stats like “California home values up 20% from a year ago.” I think that collectively, we got used to this and quickly lost sight of history, which shows home values increasing at a much slower pace.

In a fast-moving society, home ownership is a slow means of financial gratification. However, even the stock market requires 10+ years to truly profit for the average investor. But you’d never know that by the programs you see on TV and the offerings of being able to pick and trade stocks online while you eat lunch.

I think it’s important as real estate service providers to give consumers the context around home values and what is so-called “normal.” Home ownership is a long-term investment that should be made first and foremost as a way to provide a stable place to live, then secondly as a way to create financial security. We can’t let consumers assume that buying a house is their ticket to retirement, just like we can’t let them assume that values will continue to decline forever.

A house is a different kind of asset than other financial investments. You can’t unload a house like you can with other investments. And home values only really matter when it’s time to buy or sell anyway. I say we promote the true value of owning a home as what it was always meant to be: owning your own home, the place you live, the place where you build a family and create your life’s memories. If its value appreciates in the process (which, historically, it normally does over the long-term), then that’s great. But keep those expectations in line with reality and don’t make any buying decisions based on what you think the resale value will be a year from now. That’s just the kind of boom mentality that got us into this mess in the first place.

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Intero Insider: New Initiative Looks Again to Refinancing

By Gino Blefari | October 25th, 2011 0 Comments

The buzz in housing economics this week is all about Obama’s revamped home-loan refinancing program and the hope that it will help hundreds of thousands of underwater homeowners. The new program makes significant changes to the original HARP program – viewed as a total failure by most critics because it was supposed to help “millions” of borrowers, but only helped 894,000 to date.

HARP stands for the Home Affordable Refinance Program. It was rolled out in 2009 to help borrowers who owed more on their homes than their current value, enabling them to refinance and take advantage of lower interest rates, which would lower their housing costs and ease their financial burden.

First, let’s look at the changes:
• Some fees will be reduced or eliminated
• No more 125% loan-to-value ratio cap
• Streamlines refinancing process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as they are current on their mortgage payments
• Encourages shorting the mortgage term
• Program now extended to December 31, 2013

What hasn’t changed:
• The program is only open to borrowers whose mortgages are owned by Fannie Mae or Freddie Mac.
• Borrowers must be current on their mortgage payments to be eligible. (So this program really is not for homeowners facing foreclosure, but rather aims to stop people from walking away from their underwater mortgages.)

Why refinancing?

Officials estimate that changes to the program will save the average eligible family about $2,500 every year – the equivalent of a substantial tax cut. They anticipate the number of people enrolled will double as a result of the revamp.

A lot of folks have criticized the administration’s refinance efforts through HARP because the number of borrowers it has helped pales in comparison to those in need. Five million homes have been lost to foreclosure and another 3.5 million foreclosures are anticipated over the next two years, according to Moody’s analyst Mark Zandi. And analysts peg the number of homeowners who owe more on their mortgages than the current market value at 15 million.

The reality, though, is that there’s only so much the government can do to help the underwater situation without completely devaluing the mortgage securities market. A mortgage is a contract by which a borrower agrees to pay under specific terms. The government can’t just rewrite all these contracts. This is why you see efforts that are met with little fanfare. But we have to remember that one program isn’t going to completely fix all of housing’s problems.

Will these changes make a difference? I say every home saved from foreclosure – whether it’s an owner walking away or an owner who can’t pay his mortgage anymore – will make a small difference in some way. That’s one less foreclosure on the books and one more family that stays in their home, and there’s something to be said for that.

For more information about how to enroll in HARP, visit MakingHomeAffordable.gov. (Note: This page still displays the old requirements and details, not the latest changes.)

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Intero Insider: New Option for Struggling Homeowners Presents Another Weak Solution

By Gino Blefari | October 18th, 2011 0 Comments

Homeowners facing foreclosure soon may have another option for help. The administration has tried many things with little success so far, but the latest proposal would involve changing the tax code without costing any revenue to the government – a potential “win-win” situation.

The bill, dubbed the HOME Act (short for Hardship Outlays to protect Mortgagee Equity) would allow homeowners who have 401k retirement plans to pull out money early to save their houses from foreclosure without the usual tax penalties for early withdrawal.

Under normal circumstances, a person cannot take funds out of his retirement account before the age of 59 ½ without incurring penalties. Even for a hardship withdrawal, he’d have to pay income taxes on the money being taken out, plus a 10% penalty fee.

The bill that was introduced Oct. 5 would work kind of like a hardship withdrawal, except that it would waive the 10% penalty if the funds are used to make loan payments in order to avoid foreclosure on a primary residence.

Like a lot of the previous housing initiatives in Congress, this one sounds great on the surface, but lacks substance underneath. Here’s why:

Pros of this idea:

  • It presents a possible temporary solution for those facing foreclosure.
  • It wouldn’t cost the government a dime.
  • It would put the heavy lifting on the homeowner – which goes along with the notion that those who have more “skin in the game” will work harder to keep their homes rather than walk away.

Cons of this idea:

  • It’s only a temporary solution for the borrower. If the borrower lacks a longer-term plan, it could end up delaying the inevitable except that with this delay he’s now put a large dent in his retirement accounts.
  • Raiding retirement accounts early should always been seen as a last resort, not a prime solution. Hopefully, this bill would not perpetuate a misconception that raiding accounts early is OK in desperate times. Sure, it may actually work out for some people. But chances are that many people are not ahead of the game on retirement savings. In fact, most are probably behind given the recession of recent years.

I’m not a financial advisor, but I see this latest move as lacking real substance. It’s easy to see why Congress would like it: it presents a nice gesture with overall low risk government revenues. Unfortunately, I don’t really see it doing much in terms of helping significant numbers of homeowners stave off foreclosure.

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Intero Insider: How Sellers Can Sharpen Their Competitive Edge

By Gino Blefari | October 4th, 2011 1 Comment

Selling a home is a hyper-competitive endeavor in many markets across the country. Even here in the Bay Area where many neighborhoods are doing well, we’ve got pockets of buyers’ markets that are posing challenges for home sellers.

Does this mean it’s a terrible time to sell? Not necessarily. But it does mean that sellers need to be ready to compete when putting their homes on the market. What can a typical homeowner do to make their home more appealing in a market where buyers may be looking at dozens of other similar homes in the same neighborhood?

Here are the top 4 things sellers can do to up the ante and ensure their home is in the right condition to get the best offer:

  1. Get a bird’s eye view on how your home compares. Take a sweep through a few open houses next Sunday to see what’s on the market in your area that’s comparable to your home. Take good notes on what you notice is common in all these houses. Do they all have new carpet? New hardwood floors? A fresh coat of paint? New windows? You may not be ready to invest in a large project for your home before selling, but often something like painting or installing new carpet can pay for itself in the end – especially if all the other comparable homes for sale have these things.
  2. Remove all your clutter and store it away while your home is on the market. There’s no bigger turn-off to buyers than a house that is filled to the brim with objects and furniture. Buyers need to be able to look at your home and envision their lives in it, which includes all their own furniture and belongings. That’s much harder to do the more stuff you have in your home. This is by far one of the best things you can do to help the sale of your home.
  3. Consider staging. Staging basically means removing all your clutter as outlined above and having someone – either your real estate agent or a staging specialist – look at your home and make recommendations for how to set up the furniture and décor. Often, a stager will even remove some of your furniture and bring in other furniture to best accentuate the space of your rooms.
  4. Research your market and price accordingly. This may seem like a no-brainer, but in all my years of the real estate business, the one tactic that agents say over and over again makes the biggest difference in selling a home is how it is priced from day one. This means you need to do a lot of upfront research with the help of your agent. Look at as many comparables as possible and decide on your listing price based on what has recently sold and what is currently for sale. This is how your buyers will be calculating their offers to you so it’s best to be realistic and not try to play price games.

There are dozens of other things that sellers can do to help their homes sell quickly and at the best price. Ask your Intero Real Estate agent for pre-list tips.

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Intero Insider: A Quick Pulse on the National Market

By Gino Blefari | September 27th, 2011 0 Comments

The housing market had a glimpse of good news this past week when the latest report on existing home sales showed an increase in sales both from the previous month and compared with a year earlier. There were a lot of things going on this report, so let’s dig in:

  • Sales of existing homes increased 7.7% to a rate of 5 million in August, up from 4.67 million in July. Sales were up 18.6% from August 2010. Obviously, this is a great sign. While many news reports early this week focused on the dismal housing starts numbers, existing home sales are a better indicator to watch because as long as there’s a glut of existing home inventory in many markets, starts will remain low. In other words, existing sales need to move first before any improvement in starts will take place.
  • Investors continue to gobble up property; the share of investors buying existing homes in August accounted for 22% of total sales, up from 18% in July and 21% in August 2010. Investors are motivated by the incredibly low cost of borrowing right now and the hot rental market that continues to see more demand and rising rents in many areas.
  • First-time buyers remained steady, accounting for 32% of home purchases in August. That was unchanged from July, and up slightly from 31% in August a year ago. This is surprising, given the many problems with contracts falling through. But again, it’s a great time to buy for those buyers who are financially ready – rock-bottom interest rates, amazing affordability, and plenty of home inventory to choose from.
  • Contract problems persist. The percent of contracts that fell through in August was 18%, up from 16% in July and 9% a year ago. Realtors say cancellations are largely due to declined mortgage applications or problems with appraised values coming back too low to support the negotiated price.

What’s the overall read? Not much has changed, despite the positive growth in sales. Low rates, bargain prices and a healthy rental market continue to lure more investors and first-time buyers. Restrictions in the lending market and problems with fluctuating home values continue to plague a lot of deals. What we’re seeing now is the slow growth many predicted and expected to happen earlier in the year.

What’s next? The Fed’s been discussing its new “Operation Twist” tactic, which basically means it’s going to be manipulating long-term interest rates by buying long-term bonds. The Fed has already said it’s keeping short-term rates low for the next two years – and at zero, they can’t even really do much more on that front. So, you guessed it – even lower interest rates may be on the horizon for home loan borrowers, which should help to fuel demand going into the traditionally slow season.

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Intero Insider: Housing and the Freelance Economy

By Gino Blefari | September 20th, 2011 0 Comments

Most of us in the real estate business understand what it’s like to be an independent contractor, aka freelancer – or as I often refer to it as “we eat what we kill.” The various challenges with getting a loan or line of credit are quite different when you’re in this type of employment situation. This has become an important issue in the housing market as millions more American workers move to independent or freelance status in a continuously tight job market.

Now is the time to be mindful of the challenges ahead. What happens when a self-employed individual tries to buy a home? He’s making decent money, has a sizeable down payment stashed, and is ready to jump in. But with extremely tight lending standards and non-traditional income, he faces a complicated battle.

Here are some tips for independent contractors looking to buy a home and for agents who have them as clients:

  1. The road is difficult, but not impossible: This is the first thing to keep in mind. As a contractor, you will have to prepare a lot more than a traditionally employed borrower. But this doesn’t mean you won’t get the loan. Brace yourself for a mountain of paperwork as lenders naturally are going to ask more questions about your source(s) of income, and you’ll need the paperwork to back up your claims.
  2. Highlight income stability: What lenders are looking for is proof that your income is and has been stable for a period of time. Basically, they can’t take a chance lending you money if you’ve not proven that you can consistently pay them back. Many mortgage brokers say to expect to have to show your earnings for the year-to-date when applying for a loan this fall. This goes with the point about income stability. They need to know that you’ll have steady income throughout the year, not just seasonally.
  3. Pay off other debts: All borrowers’ credit and debt situations are highly scrutinized these days. You’re going to help your case much more by coming to the loan with a lot less debt already on the books.
  4. Gather three years’ worth of tax returns: Even if you’ve only been self-employed for the past year, showing a few years’ worth of returns can help the lender see that you have been entrenched in your industry, and even give a view of what kind of salary you’ll likely fetch should you get a payroll job once again.
  5. Seek out local banks and credit unions: Don’t rule out larger lenders, but take some extra time to shop around at local banks and credit unions. These smaller operations are sometimes more willing to take the time to get you qualified.

The Freelance Economy is a new reality for post-recession America. But it shouldn’t stop those individuals who own their own business from buying homes. Freelancing is a legitimate way of making a living – you just have to expect a lot more hurdles when seeking a loan.

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Intero Insider: Can Refinancing Save the Day?

By Gino Blefari | September 13th, 2011 0 Comments

We haven’t heard much from President Obama this summer on the housing market – other than ideas for fixing the Fannie Mae/Freddie Mac problem. He’s certainly had a lot of other things to deal with. But he ended the silence in his speech on jobs last week when he said that he’s looking to broaden U.S. homeowners’ access to mortgage refinancing as a way to get more money back in their pockets.

This wasn’t terribly exciting to hear since we’ve already seen some pretty big failed attempts at “refinancing” away the housing problem. In fact, the real housing news in the President’s speech was the $447 billion jobs package itself. We all know that jobs are the real answer to cleaning up the national housing recession.

Still, Obama believes that by broadening refinancing, the average family can save more than $2,000 a year – a much-needed boost for many. In fact, with average rates on long-term fixed-rate mortgages at ridiculously low levels – 4.12% on a 30-year fixed last week – refinancing does seem like a great option for the economy. So, what is the problem? Why aren’t millions of people already refinancing their loans? Why does the government even need to create a special refinancing program?

The problem has been that even with rates as low as they are, many homeowners have been shut out of refinancing because they either have shoddy credit histories or owe more on their original mortgage than their home is worth. What the government is trying to do now is remove these and other barriers. White House officials said in news reports on the topic that the U.S. Treasury was in talks with Fannie Mae, Freddie Mac and the Federal Housing Finance Agency about ways to open up refinancing.

The problem with simply removing these barriers to refinancing is that it could cause investors in the mortgage market to lose billions of dollars. Some also say it could put Fannie and Freddie at greater financial risk. It will come down to weighing cost versus benefit: Will that extra $2,000 per year for the average homeowner be enough to save him? And is that worth turning off many more investors who will lose much more than that?

The administration hasn’t released any specifics of how a new refinancing program would work or how it would affect the mortgage industry. But they expect to begin releasing details over the next several weeks.

Refinancing is a great idea and a great privilege to those homeowners for whom it makes sense. But, at some point in this plan, I hope we see more scrutiny of the overall benefit of a government-supported program to help the overall housing economy. We have real problems in the national housing market that affect real people; I’d hate to see it continue to be just another political platform to stand on.

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Intero Insider: Study Spotlights Bay Area College Towns for Investing

By Gino Blefari | September 6th, 2011 0 Comments

While the real estate and economic news is often bleak these days – no new jobs in the latest national report, persistent foreclosures, softening values and slower sales – the reality is that now is a great time to take advantage of the lows. This is especially true for investors.

An interesting report from ZipRealty last week tackled an age-old question in real estate investing: Are college towns better investments for landlords? The study included data pulled for Berkeley compared with the East Bay in general, Palo Alto compared with the South Bay in general, and Cambridge, Mass., compared with Boston in general.

In each case, the college town proved to be a much better real estate bet. In Berkeley, home to the University of California, the median price-per-square foot for homes sold doubled that for the East Bay as a whole for almost two years. This is no big surprise to anyone who’s tried to buy a home in Berkeley over the last few years; the market has been just as fierce for the most part as that the rest of the country felt back in 2004.

In terms of market distribution, though, Berkeley showed more market-priced sales than distressed ones compared with the East Bay as a whole. While this shows stability, distressed sales are often the sweet spot investors need to really make waves.

In Palo Alto, home to Stanford University, the data showed a similar story. The median price-per-square foot for homes sold doubled that for the South Bay as a whole for almost two years. Palo Alto also had a much higher distribution of market-priced sales than distressed sales.

College towns can be great investments for the real estate-minded. A steady influx of young twentysomethings attending school makes for a steady supply of renters. These renters usually have financial support of some kind as well, making them reliable sources of income.

However, a university alone isn’t a great gauge of whether or not to invest in one town over another. Berkeley, for instance, is infamous for its restrictive rent stabilization laws, which can quickly become a landlord’s biggest nemesis. College towns are also much more transient than other towns – so that steady influx of potential renters also means constant turnover, which can eat into profits.

One other thing that may turn the “college towns are great places to invest” theory on its head is a way investing Warren Buffet lives by – the best investments are those that no one else is paying attention to. Buffet says (about stocks), “The time to get interested is when no one else is. You can’t buy what is popular and do well.”

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