2016 – Real Estate Trends for Coastal Georgia and South Carolina

Here it is folks!  Your real estate road map for 2016 for coastal Georgia and the the southern coast of South Carolina:

Before we get to some predictions, lets take a look at the real estate industry and factors that that will influence the coming year.

It’s an election year.  In most election years, real estate sales slow down a little.  People get distracted with the election process and some sit on the sidelines until the election is over.  In Savannah, GA, the lean months are October through March, and in Hilton Head, SC, monthly sales are stable all year round.  How the election times with local market cycles will determine its effect, and how buyers and sellers personally perceives the results come into play as well.

The Fed is raising interest rates.  Although short term rates do not have an immediate impact on long term mortgage rates, these short term rate increases will eventually affect long term rates.  Paradoxically, the most recent Fed rate increase actually caused mortgage rates to go DOWN – but that will be short-lived for sure.  Expect long term rates to rise over the year.  They could get as high as 5%.  (if you have been in the business a while, that statement alone is kinda funny!)  Remember, interest rates are a matter of perception – if the public perceives them to be high, then they are high no matter what history says.

Flood Insurance…still!  Flood insurance remains a thorn in the side of coastal real estate markets.  Homes in flood prone areas have additional insurance needs for flood risks on top of general hazard insurance, and the National Flood Insurance Program (NFIP) has been in a state of flux for two years now.  Congress made attempts to stabilize the program in 2014, but uncertainty remains.  However, one certainty does exist – flood insurance rates will rise.

Borrowing / Lending money is more complex.  October 3rd, TRID was implemented.  What does TRID stand for???  “Truth in Lending Act, Real Estate Settlement Procedures Act, Integrated Disclosure”.  Only in government will you get an acronym of acronyms!  The Dodd / Frank Act of 2010 has culminated (at least for consumer lending) with TRID implementation.  This is the “age of the consumer” and TRID is designed to make the lending process easier and protect the consumer more effectively.  In short, it is more complex than before, it favors larger lending institutions, banks fear regulators so much they will say “no” to loans they would have previously approved, mandated cooling off periods create havoc on closing and possession timelines, and…and…and.  The industry will get better at following the new rules and closings will become more streamlined, but it will take a while…

Healthcare  I know… “How does healthcare effect real estate?”.  A personal perspective will help you understand.  First – 70% of our population gets healthcare from their employer (44.5%) or from a government plan (25.6%) (Gallup-2015).  11.3% are considered uninsured, while 16% get their insurance by purchasing it on the open market.  The ACA, aka Obamacare, does not effect large employers until 2016.  That means only 16% of the population have been impacted thus far, with a whopping 44.5% getting ready to go into sticker shock.  This will reduce the available money to purchase homes for sure.

Healthcare Sticker Shock!  2 years ago, my family of 6 spent $10,200 in PRE-tax dollars on premiums, with a $1,000 deductible and a family deductible of $2,500.  So, our total healthcare insurance exposure was $12,700 per year plus some change for office visits and prescriptions.  Compare that with my family’s costs after the “Affordable Care Act”…  We now spend $19,200 in AFTER tax dollars on premiums, with $2,500 deductibles and a family deductible of $9,000.  That makes our annual health care exposure $28,200 plus more change for office visits and prescriptions.  Our health care costs have gone up 125% in just 2 years.  125%!!!!  44.5% of the population is getting ready to experience these staggering costs.  At least my wife and I, neither of which have a uterus, have prenatal care and obstetrics coverage!

Nontraditional Workers Unite!  Entrepreneurial spirit is on the rise.  The 30 year factory position with a pension is like a purple unicorn.  My children see it.  Their peers see it.  They now feel the pressure of making their own way.  This is a great thing!

College Graduates saddled with enormous debt.   College is outrageously expensive.  I have 2 children in college.  I am experiencing these costs.  18 year old kids are suckered into huge student loan debt while pursuing their degrees in Psychology, Epistemology of the Spoken Word, or Gender Studies, only to find at the end of the rainbow no one is hiring in their areas of expertise!  So, they get a job flipping burgers to pay their $750/month Sallie Mae bill, move back in with Mom and Dad, and don’t contemplate purchasing a home for 10-15 years.  Couple that with a feeble economy and first time home buyers are facing some headwinds.

And now for some predictions…

Single Family Residential:  We’ve come a long way from the “Great Abyss” of 2008-2012.  Monthly number of homes sold just surpassed those of 2007 in the Savannah MSA.  Although this is not adjusted for population growth, it is a sign we have come a long way and there is still room to grow.  Homes sold will continue to grow at a modest 3% year over year pace.

Mortgage Rates:  Mortgage rates remain at historically low levels.  They will remain relatively low, and should not go above 5%.  How the public perceives this is the bigger question.  If the public thinks they are high, then they are high and they will keep their hands in their pockets.  If the Fed raises rates again, this may cause many to get off the fence while the “gettin is good” and we will see a short lived bump in home sales.

Regulatory Environment:  Due to the complexities of the new settlement procedures, the Consumer Finance Protection Bureau (CFPB.gov) will begin to relax some of their rules.  They may go as far as returning the responsibility of the the Closing Disclosure formulation, now uncomfortably in the hands of the Lenders, back to the attorneys.  This will relieve pressure on closing and possession timelines.

Average Home Price:  The median sales price will continue to rise nationally.  There are some hot spots like Miami, Las Vegas, and Los Angeles.  But for coastal GA and SC, expect a modest rise in median sales prices, no more than 3% overall.

Short Sales and Foreclosures:  With the correction of the housing market well underway, short sales and foreclosures sales are already in a sharp decline.  I expect that trend to continue.  Banks are being scrutinized by regulators and short sales are becoming even more difficult.  Additionally, with rising prices, banks will be able to wait out the market and reduce the amounts that must be forgiven when sellers must sell short.  Institutional buyers in large metropolitan areas like Atlanta who purchased huge amounts of foreclosures in blocks during the Great Abyss will begin to unload their inventory.

Overall impression for 2016:  Relatively flat growth with modest gains, a few bumps along the way, but a pretty good year on the horizon!

 

TRID: Triumph or Tragedy?

The Truth in Lending and RESPA integrated disclosure, affectionately abbreviated as TRID, is now the official “Rule of the Land”.  Effective October 3rd (actually TODAY because October 3rd was a Saturday), new rules come into effect that will change the way consumers apply for a loan and get financing for a home.  Depending on the fence you stand on will determine whether you see this as triumph or tragedy.

A brief history:  In 2010, the congress passed the Wall Street Reform Act, more frequently referred to as Dodd/Frank, so named after is main sponsors Senators Chris Dodd (D) and Barney Frank (D).  This law created a wholly separate branch of government called the Consumer Financial Protection Bureau a.k.a. the CFPB (www.CFPB.gov).  I say new branch because the CFPB functions independently without congressional oversight, budgetary restraints, or judicial review.  They need only desire money and simply invoice the taxpayers, who then must pay the bill.

Dodd/Frank was a response to the financial crisis of 2008.  Some say the law was draconian while others say it did not go far enough.  The gist of the law and subsequent rules is consumer centrism.  We have entered the age of the consumer, and the consumer is the indisputable king.  The law creates a host of new rules enumerated by the CFPB.  Among these new rules are the Qualified Mortgage, the “Ability to repay”, and now finally TRID.  For a more complete roundup of changes, please see  my previous blog posts, or visit CFPB.gov.

With the implementation of TRID, several forms go away.  The Good Faith Estimate or GFE is now replaced with the Loan Estimate, and the ubiquitous HUD-1 is replaced by the Closing Disclosure.  Furthermore, the closing date is no longer called as such, but rather referred to as “consummation day”.  An easily overlooked, but dramatically important wrinkle is the addition of a 3 day review of the Closing Disclosure prior to closing.  This 3 day review cannot be waived.  Again, it CANNOT be waived.  The closing disclosure must be IN THE HANDS of the consumer 3 business days prior to closing.

The triumphs many see in this law are consumer protections against predatory lending practices, and the liability lenders expose themselves to if they do not comply with CFPB rules.  That said, lenders fearing liability may decline an otherwise suitable borrower for fear of being sued down the road should the borrower fail to pay the money back (known as “Loan Default”).

With TRID, the consumer (read “borrower”) will be offered the opportunity to shop rates on things such as title insurance and homeowners insurance.  In reality, consumers have always been able to shop these items.  It is now a front and center disclosure that they may shop these rates.  One problem is shopping title insurance.  Most do not understand what it is, let alone what it SHOULD cost, and where to begin to shop for rates.  In reality, there are only 2 major insurers to choose from for title insurance.

In many states, title companies run the closing show.  In GA, attorneys run the show.  States where attorneys run the show will see the most changes to the closing (read “consummation”) process.  In GA, the attorney was responsible for the HUD.  With TRID, the responsibility of the HUD (read “Closing Disclosure”) is the responsibility of the lenders.  In fact, on a nationwide scale, the LENDER is now responsible for the creation of the final HUD/Closing Disclosure.  Add the new mandated 3 day review period to the final HUD/Closing disclosure with the LENDERS new responsibilities, and you begin to see some of the tragedies that may befall the real estate industry.

There are several trigger points that will require new HUD/Closing Disclosures to be resent to the borrower.  If one of these triggers are pulled, a lender must re-issue the HUD/Closing Disclosure and a new 3 day period must be observed.  If you are the borrower, this could create problems for you and if you are the seller, this could create problems as well.

Here is a scenario:  Buyer receives a final Closing Disclosure on the home they are purchasing, yet the home they are selling has been delayed.  The delay causes the buyer to lose their loan rate lock, causing a change in the loan rates.  In this case, the lender would have to re-issue a NEW closing disclosure, mandating a new 3 day waiting period and delaying their new home purchase.   This creates a domino effect.  The seller, who was planning on using the proceeds to buy a home, now has their closing delayed, and so on, and so on…

Kudos to the consumer, who is now the center point of the lending process.  Kudos to the lenders, who have moved mountains to get to comply with the new processes.  Kudos to the attorneys, who have moved mountains to accommodate these new changes.  Pitty the poor sellers of the homes these buyers are buying and lenders are lending for.  It is the seller who is in the dark, and considered an after thought, until they become a consumer of money for the purchase of their new home.

An attorney friend of mine who has been a real estate closing attorney since before RESPA was implemented in 1980 said “RESPA took 2 years to settle down once implemented”.  2 years from now, we will know for sure if TRID was a triumph or tragedy.  Until then…hold on as the ride may get a little bumpy!

Hat tip The Professional Wingman for the pix – click HERE to visit.

The Wild, Wild, West of Real Estate?

Never let it be said I am a proponent of government regulations.  I am not.  I am someone who plays by the rules and believe the rules have their place.  I believe in a robust and healthy competition, and marvel at the creativity Realtors employ in their businesses.  That said, let me get to my point.

The internet has revolutionized our industry.  Beginning with home grown text based websites maintained by individuals and exploding into the sophisticated network we have today, the regulatory bodies of our industry have struggled to keep up with the rapidly changing landscape.

The sole purpose for the creation of the regulatory agencies, and even the National Association of Realtors, was to protect the consumer and each other from sophisticated players.  The big players of the real estate internet space – Zillow, Trulia, Homes.com, Craigslist, Hotpads, Rent.com – all create venues where the consumer is getting harmed, and sophisticated players are taking advantage of the consumers lack of understanding.

A few examples:

• Rental fraud is rampant on Craigslist, Hotpads, and other internet sites.  Scammers copy listing information from legitimate websites, create profiles on these sites, advertise the rental as available, take peoples money, and sign bogus leases.  (my brokerages clients have been scammed in this way)
• Websites like Trulia and Zillow scour information from public sources and collate the data into compact presentations such as the “Zestimate”, and do not inform the consumers of the data sources, the age of the data, nor the reliability.  Data is frequently incorrect, unreliable, and stale.  Correcting the data is akin to dealing with the IRS.  The stock answer from these entities is “I will have to look into that and get back with you”.  There is rarely follow through.
• Websites collate legitimate listings and use those listings without broker authorization, then sell ad space to other real estate agents on the listing presentation pages.  This misleads the consumer and violates the laws in many states (GA in particular).
• Search history, cookies on the users computer, and many other data points are used – without the consumers knowledge – to alter the consumers personal computer experience and therefore alter/limit their choices.  The real estate industry is not alone here.  With the Consumer Financial Protection Bureau  proactively looking out for the consumer, it is a simple matter of time before they put their hands in this “cookie” jar.

I could go on, but I believe the point is clear.  The stock answer when asking key players at these firms about these issues is “We are just an advertising agency”.  They simply throw their collective hands up and say “Golly G, What can WE do”.  Here are a couple suggestions:

• Clearly display the source of information – as clearly as the call to action on the page
• Clearly display the Listing Broker information, as clear and prominent as the call to action
• Make available the Geo-location and valid email address of the modifier on manual entry listings (this can easily be done with IP addresses).
• If the source of a manually entered listing is using a proxy server or hiding their location in any manner, prevent the information from being loaded.
• Proactively manage fraud complaints with case numbers and audit trails and publicly disclose the data
• Create a direct modification of the listing by the owner (broker) of the listing with an audit trail of changes clearly posted on the listing itself (include Geo location of the user and valid email address of the modifier)

The spaces where these industries operate did not exist 10 years ago.  The progression to where we are now has occurred at lightening speed.  Regulators are typically political appointees – gunslingers of the past – no disrespect intended.  They are experts in their own right, but broadly speaking, their understanding of how this whole thing called the internet works is limited.  Consumer protections of the past must be folded into the new realities of today.

There was a time when real estate was unregulated.  High pressure sales induced buyers to purchase swampland in Florida, dual agency and lack of disclosure was the norm, fair housing laws weren’t yet enacted, and the consumer suffered greatly.  Regulatory agencies and licensing laws were created for these very reasons.

It seems we have come full circle where the consumer is now at the mercy of these sophisticated players.  While we are a long way from where we came, the unregulated world of real estate advertising and data mining on the internet has brought us back to the wild west.  There is a new sheriff in town called the CFPB.  If these sophisticated players do not self regulate and the licensing bodies of each state do not create effective protections for consumers on real estate websites, I believe the new sheriff will be knocking on their collective door soon.

The Creature from Wall Street – Part 1

Buying or selling a home will change on August 1st, 2015.  This we know.  How it will change remains a great mystery to most.  There is no shortage of information on this topic to be found on the internet for lenders, title companies, and closing attorneys, but for the mere mortal buyers, sellers, and Realtors, there is precious little information and guidance.  A brief summary follows to get us all on the same page.

Back in 2008, the housing crisis began to unfold, which ushered in the “Great Recession” of 2008 – 2012.  At the time, no one knew just how bad things would get.  Each downward dip on the housing roller coaster brought experts out saying “We have reached the bottom!”, only to be confronted with the next downward dip or death spiral.

Senators Chris Dodd (D) and Barney Frank (D) sponsored a bill entitled ‘The Wall Street Reform and Consumer Protection Act”, now simply referred to as Dodd / Frank.  This bill was passed and signed into law by President Obama in 2010, and began sweeping changes to the machine of Wall Street and consumer credit lending.  To monitor all of this, the bill created a committee known as The Consumer Financial Protection Bureau (CFPB), simply referred to as “the Bureau”.  Concisely stated, the Bureau provides oversight to essentially every consumer transaction that involves credit in the United States.  This includes, but is not limited to… credit cards, payday loans, credit unions, FDIC, banking rules, and home mortgages.

REAL ESTATE
This being a real estate centric blog, we will focus on real estate.  Since 2010, the Bureau has enacted reforms in stages.  They began with changes in mortgage underwriting requirements.  Anyone applying for a loan since 2010 has experienced the exacting standards of underwriting.  The Bureau was behind it all.  Then came the concept of a Qualified Mortgage (QM) and Ability to Repay.  In January of 2014, Debt to Income (DTI) ratios were changed, lowering the maximum DTI to 43% of gross income from as high as 55%.  To be fair, banks can lend to borrowers with higher DTI ratios, but not without opening themselves up to enormous liability down the road.

Dodd / Frank is a consumer focused law.  All changes that have occurred thus far have been leading up to the next big shoe to drop, which is the combination of the Real Estate Settlement Procedures Act (RESPA) and the Federal Truth In Lending Act (TILA).  All of this is scheduled to happen on August 1st, 2015.

Elizabeth Kubler-Ross identified a psychological model known as the 5 stages of grief in dealing with catastrophe.  Denial is followed by anger, then the bargaining phase begins, soon after followed by depression, and finally acceptance.  No doubt, Lenders and Closing Attorneys have experienced this as they have learned about the changes headed their way on August 1st, 2015.  With mortgage lending, some banks have thrown in the towel, closing attorneys have decided to stop doing closings – some have taken this opportunity as the catalyst for their retirement.  Others have responded by supercharging their technology buys, investing in new software and training, and look upon this as a change for the better.

Aside from the changes the lending and settlement industries, there are some practical issues no one is considering.  So how does all of this affect the buyer, the seller, and the broker?  How will brokers modify their practices?  How should they prepare?  How will the Seller deal with extended closing cycles, possession transfers, and potential delays?   How will the Buyer handle possession delays.  Exactly what are the changes coming on August 1st, and why do those changes necessitate such radical questions?

We will discuss the answers to those questions in Part II,

Yours Truly – Quoted in a National Magazine!

Yes – that is correct – not a typo! Rismedia recently published their national magazine for December 2014. They interviewed brokers throughout the country and included many of my quotes in their “What’s Next for Real Estate? Power Broker Predictions for 2015”.

For those of you that read Real Estate magazine, the article begins on page 82.

For those who prefer online reading, Click HERE – or here is the link:
http://rismedia.com/2014-12-14/whats-next-for-real-estate-power-broker-predictions-for-2015/

Enjoy!

“Down Payments Fall to 3%” says Fannie and Freddie

Not so fast…  This past week, Fannie and Freddie, the secondary mortgage market behemoths, announced lower down payment requirements as low as 3% of the appraised value of a home.  This is intended to “jump start” the housing industry.

Without getting to inside baseball, here is a quick background on where we are.  In January of this year,sweeping rules went into effect as a result of the Dodd Frank bill. Among several changes, the Qualified Mortgage mandate was implemented, and a 43% ceiling on  debt to income went into effect.  Predictably, these requirements chilled the housing recovery that was underway by making credit standards more strict, and scaring banks from risks.  In order for a borrower to get financing, they now must meet much more strict guidelines for “creditworthiness” and their ability to repay a loan.

In an attempt to kick the housing market out of its slumber and increase home ownership, Fannie Mae and Freddie Mac announced on Monday they will begin purchasing loans with down payments as low as 3%.  On the surface this sounds great!  I, for one am cautiously optimistic at best.

First, anything that allows borrowers to get mortgages with less “skin in the game” immediately makes me lean forward.   Little or no skin in the game was a major stimulant to the great recession and the housing bust.

Second, down payment is not the major burden buyers face.  FHA allows a 3.5% down payment, and VA allows 100% financing already.  So Tom… what IS the major problem?

Aside from ballooning student debt, anemic economy, flat wages, and underemployment, the major issue is the 43% Debt to Income ratio buyers are now held to.   By the time the buyer piles on mortgage insurance fees, HOA fees, hazard insurance, and taxes along with principle and interest payments to their monthly payments, the monthly payment devoted to housing has ballooned so high many buyers cannot get under the 43% imposed ceiling.

In my opinion, until the FHA reduces Mortgage Insurance Premiums, flood insurance is figured out, and the debt to income ratio is loosened up, buyers will be sitting on the fence no matter how low the down payments go.

At the very least, the big boys and girls are doing something to improve things, so Kudos to Fannie and Freddie!

Hat tip to http://absolutelymemorial.com for the photo