Researchers from several universities have just completed a paper that looks at what they call the hurdle rate. This is the point at which it’s equally smart to rent or buy if your only criterion is to build wealth. Based on today’s hurdle rate, it’s a better time to buy than to rent, because you can build more wealth owning than renting.
The study looks at what they call an indifferent renter. This is someone who is just as happy renting as buying depending on which choice is better at building wealth over a holding period, in this case eight years. The study assumes the renter puts the savings from renting into an investment to earn a return.
The hurdle rate is the point of equilibrium between renting and buying where it’s a wash in terms of wealth building. If today’s hurdle rate rate is lower than the average past property appreciation rate for a particular market, then it makes sense to buy, because future property appreciation should be such that an individual will, on average, create more wealth through owning rather than renting. On the other hand, if today’s hurdle rate is higher than the average past property appreciation for a particular market, then this is a sign that ownership can be a drag on wealth creation.
“It’s not a perfect reason to buy, it’s just a test,” says Ken. H. Johnson of Florida International University in Miami, one of the authors of the study, called “The Rent vs. Buy Decision,” released about two weeks ago. “But it’s a good sign that the market’s turning.”
The paper is part of a series Johnson and some other researchers have been doing on the rent vs. buy decision. This paper just looks at the narrow topic of the hurdle rate; other papers look more broadly at whether it makes sense to rent or buy based on financial considerations. In one earlier paper, renting can make more sense in some instances, at least in the short run, if renters invest all of their savings over a period of time in an instrument that generates a yield comparable to what they would earn in appreciation on a house in their market. But since few renters could realistically invest all of their savings from renting, it’s more appropriate to assume renters don’t invest all of their savings. And in these cases, owning is the overwhelmingly better investment over the holding period.
You can learn more about the paper that looks at the hurdle rate in the two-minute video above. The paper was sponsored by the REALTOR® University Research Center, which is part of REALTOR® University.
The $25 billion settlement between the U.S. government and state attorneys general and the country’s five biggest banks for foreclosure processing problems that came to light about 18 months ago gives lenders three years to provide financial relief to financially troubled home owners.
NAR doesn’t have a position on the settlement, but its leadership has said it hopes the resolution helps more struggling homeowners stay in their homes, and that the settlement provides lenders the certainty they need to proceed again with loan modifications, short sales, and foreclosures, which will help support the housing market recovery.
Here are some details on the settlement:
- The banks will dedicate $20 billion toward various forms of financial relief to borrowers.
- Of that amount, $10 billion will go toward reducing the principal on loans for borrowers who, as of the date of the settlement, are either delinquent or at imminent risk of default and owe more on their mortgages than their homes are worth.
- At least $3 billion will go toward refinancing loans for borrowers who are current on their mortgages but who owe more on their mortgage than their homes are worth.
- Up to $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance.
Read details of the settlement from the U.S. Attorney General’s office.
Access the full video of President Obama’s remarks on the settlement.
By Erica Christoffer, Multimedia Web Producer, REALTOR® Magazine
But today’s new-home buyer may surprise you.
Let’s start by looking at a few builder and consumer statistics presented during the International Builders’ Show in Orlando Thursday.
The average start size increased from 2,381 square feet to 2,522 square feet and the average sales price rose from $264,900 to $274,400 in 2011.
New homes have more amenities, too. More houses built in 2011 had four or more bedrooms, three or more bathrooms, three-car garages, finished basements, patios, and two stories.
Is the buyer profile becoming clear?
“It’s sort of counterintuitive to what we’re hearing and reading about consumers,” said Rose Quint, assistant vice president of research with the National Association of Home Builders. “The answer is in who is able to buy.”
In the tightened lending environment, buyers have had to be a “superstar” qualifier, says Quint, with at least 20 percent down, a high credit score, well-documented income, and proof of established employment history. Continue reading »
If you’re working with a buyer who’s interested in submitting an offer for a Fannie Mae REO, you’ll have to do it online. The secondary mortgage market company last week launched an all-online system for submitting offers on its inventory of foreclosed homes.
Here’s how Fannie describes it on its HomePath website:
“Making an offer to purchase a HomePath property is now quick, easy and entirely online! Beginning February 2, all offers on HomePath properties must be made using the HomePath Online Offer system. If you’re ready to make an offer, just have your real estate professional click the “Make an Offer” button on the property information and follow the instructions.”
Only licensed agents can make offers, so any consumers shopping for a home on Fannie’s HomePath site have to contact an agent first.
If you’re not already registered as an agent with the site, you’ll need to do that, then click the “Make an Offer” button and follow the instructions. You’ll have to be able to scan documents and otherwise be prepared to input information digitally.
Registering with the site so you can submit offers as a selling agent is not the same thing as registering with Fannie Mae as an approved listing agent. That seems obvious, but sometimes it helps to state the obvious to avoid confusion. To become a listing agent for Fannie Mae in your market, you have to submit an application (also an online process) and then go through its proprietary selection process, which requires you to submit information about your practice. Every market is different, but generally the company works with a handful of brokers or agents that it has selected to list its REO properties.
The company says it pays a commission of 2.5 percent to the listing broker, with a $1,000 minimum, and a commission of 3 percent to the selling broker, also with a $1,000 minimum. It says it has some additional selling incentives in some markets.
Fannie gives owner-occupant buyers a 15-day window after a property comes on the market to make an offer without competition from investors. Offers made by investors during that “first-look” period are rejected from the system with instructions to resubmit after the 15-day period ends, if the property isn’t under contract by that time. The offers are not kept in the system and queued up.
Buyers can use any financing they want, including Fannie Mae financing through its two HomePath mortgage programs, one for purchases and one for purchases with renovation. If the buyer is using HomePath financing, Fannie only requires a downpayment of 3 percent, waives the appraisal and also doesn’t require mortgage insurance. Investors can get up to 90 percent financing.
You can learn more about online submissions on the Real Estate Professionals’ page on the HomePath website and click on “HomePath Online Offers Support page.”
The housing industry lost a good friend last month with the passing of Lawrence B. Simons, a developer, lawyer, and long-time advocate for affordable housing. He was 87 and he passed away in Hilton Head, S.C., where he lived.
Simons served as FHA commissioner and assistant secretary for housing at HUD during the Carter administration, and under his leadership the federal government hit some high water marks in providing rental assistance to households in need.
During his tenure, almost 1.5 million affordable rental units were added to the country’s affordable rental housing inventory, about half of those through Section 8 vouchers and certificates, the other half through below-market interest-rate financing for development or rehab of rental apartment buildings.
Although his focus was on affordable rental housing, he was a leader in all aspects of residential real estate. He served on the boards of numerous housing advocacy organizations and for many years was on the board of advisors of Housing & Development Reporter, where I worked as a reporter for much of the 1990s.
What I remember from my years of association with him was his generosity, humor, and unflagging concern for households struggling to improve their lives. Although people differ on how much the federal government should be involved in housing markets, including rental markets, Simons was animated by a desire to help people who were in need of safe and affordable housing, so he leveraged his considerable expertise to that end. Struggling households have lost a voice on their behalf.
Federal Reserve Board Chairman Ben Bernanke told the U.S. House Budget Committee last week that tight mortgage conditions are preventing a stronger economic revovery because their adverse effect on home buyers is keeping inventory levels high, damping appreciation, and holding back new construction.
“Although low interest rates on conventional mortgages and the drop in home prices in recent years have greatly improved the affordability of housing,” households aren’t able to take advantage of these good conditions, he said.
Bernanke agreed with a question posed to him by Rep. John Campbell (R-Calif.) that there are steps Congress could take to ease regulatory issues that are contributing to the lending problem.
“I don’t think this is purely a market phenomenon,” he said. “I think there are a number of legal and administrative and regulatory barriers to housing being as strong as it should be.”
Although he didn’t go into detail at the hearing, a white paper the Fed sent to Congress two weeks ago lays out some of the issues it sees as a problem. One of them has to do with repurchase requirements by Fannie Mae and Freddie Mac. These requirements reduce lenders’ willingness to lend without strict underwriting overlays because based on certain underwriting matters, if the loans go bad, they could be on the hook to Fannie or Freddie for them.
Overlays are requirements over and above minimum underwriting standards of Fannie and Freddie and FHA.
“This hesitancy on the part of lenders is due in part to concerns about the high cost of servicing in the event of loan delinquency and fear that the GSEs could force the lender to repurchase the loan if the borrower defaults in the future,” the Fed says in the paper.
Also in the white paper, the Fed said Congress should consider allowing Fannie and Freddie, which are under federal conservatorship, to absorb some short-term losses if that would help get housing sales moving again, and that the two companies should be allowed to make some REO homes they hold in their inventory available to buyers for use as rentals.
President Barack Obama in his State of the Union speech last week and in a more detailed plan he released earlier this week is pursuing a limited pilot program with Fannie Mae to allow some REO sales for use as temporary rentals in some markets. NAR has said it wants to be sure the pilot is open to small- and medium-sized investors, not just big investors, and that real estate practitioners be used in the transactions to make sure they’re done in such a way that they don’t destabilize the local markets.
After Bernanke’s House Budget Committee testimony, NAR President Moe Veissi released a statement in support of the need for a sustained federal focus on the struggling housing market.
“We fully support Chairman Bernanke’s comments that the lack of available and affordable mortgage financing, low home values and high foreclosure inventories are inhibiting a meaningful housing market recovery,” he said. “His remarks coupled with President Obama’s new housing proposal announced earlier this week, shows that the administration and Federal Reserve recognize the vital role that real estate plays in both the short- and long-term health of the nation.”
In the video clip above, Bernanke talks about the barriers to a housing recovery. To watch the entire video, go to Bloomberg’s website.
One of the best things about any Super Bowl telecast is the ads. And this year advertisers will pay a whopping $3.5 million for 30 seconds of air time for the largest television audience all year. Century 21 will be the only real estate franchise advertising for the big game and will debut three ads during the third quarter of Super Bowl XLVI. The franchise enlisted the help of Donald Trump, Deion Sanders, and Apolo Ohno.
“The timing couldn’t be better for Century 21 Real Estate to advertise in the Super Bowl, and I’m happy to be a part of it,” said Trump in a statement. “The truth is many Americans believe in the value of home ownership and for people who are in the position to buy, this is a great opportunity to either enter the market or move up into a better home.” Here’s a sneak peek at what you’ll see on Sunday.
And seeing this prompted us to dig through the vault to find other entertaining real estate ads. Enjoy! Continue reading »
When the first-time home buyer tax credit was enacted in 2008, in the aftermath of the housing crisis, it was structured as a no-interest loan and taxpayers who used it had to pay it back over time (in annual installments through your tax return). In 2009, the credit was amended to eliminate the pay-back requirement.
To help 2008 and other borrowers who have to pay back the proceeds of that credit, the IRS today released a “tool” to help make that process easier, the First-Time Homebuyer Credit Lookup Tool.
In essence, the tool simplifies the gathering of information you need to include the proper pay-back amount in your federal tax filing:
- Balance of your first-time homebuyer credit
- Amount paid back to date
- Total amount of the credit received
- Annual installment repayment amount
Prior to release of this tool, taxpayers had to gather this information themselves for reporting on IRS Form 5405. Now it’s available through the IRS by punching in your Social Security number, date of birth, and some other identifying information.
Who else besides 2008 credit users need to pay back their benefit? The IRS says those who used the credit in 2009 or 2010 and then sold their home within three years of purchase. (Under the program, you have to own your primary residence for three years after you take the credit to avoid the pay-back rule.)
You can get more on the rules and the new look-up tool from the IRS.
President Barack Obama today fleshed out a proposal he announced in his State of the Union speech last week to help boost the housing market by helping more underwater home owners than are being served now by lenders.
In the details he released today, the President said he wants to make the federal government’s existing mortgage refinance program, called HARP (Home Affordable Refinance Program) available to more home owners. It’s currently available to struggling borrowers with loans backed by Fannie Mae and Freddie Mac. For these borrowers, incentives are provided under certain conditions to make refinancing more attractive.
Under the new proposal, this HARP program would be expanded to include borrowers with loans that aren’t backed by Fannie and Freddie. These are the borrowers whose loans were securitized in private-label securities without any federal backing, and they would be allowed to refinance into FHA-backed loans, the same as the Fannie and Freddie borrowers. The administration has estimated that borrowers would save $3,000 a year in mortgage costs.
Key points: 1) More underwater home owners would be able to tap federal refinance assistance than can do so today, 2) mortgage servicers would be restricted in their ability to foreclose until after they’ve exhausted efforts for borrowers who’ve make a good-faith effort to modify their mortgage, and 3) efforts to reduce the inventory of foreclosed homes through bulk sales to investors for use as rental housing would be tried in a pilot program.
To be eligible, borrowers would have to have made their mortgage payments over the last six months with only one delinquency, and their loan amount couldn’t exceed the FHA loan limit for their area. If borrowers owe more than 140 percent of the value of their home, the lender has to agree to reduce the loan balance. Also, borrowers wouldn’t have to submit a full file of paperwork for the refinancing as long as they can verify their employment. The proposal also would enable borrowers who still have equity in their home—up to 20 percent—to participate.
The changes will require legislation, so Congress will have to agree to them for the expanded program to take effect.
In his State of the Union speech last week, Obama said he would pay for the expanded program using a fee charged to the country’s largest banks so the initiative wouldn’t add to the deficit. But some members of Congress have said they oppose charging banks a fee to cover the cost.
The Obama plan would also introduce a Bill of Rights for home owners, part of which is intended to smooth the mortgage modification and foreclosure processes, which today can be contentious and difficult for borrowers to understand. A key part of this is an effort to curb banks’ practice of undertaking a mortgage modification while at the same time proceeding with a foreclosure—a process called dual tracking. Before they can start foreclosure, banks will have to show they took all reasonable steps to modify a borrower’s mortgage.
To help ease inventories of foreclosed homes, the plan would give a green light to Fannie Mae to implement a pilot program to make foreclosures available to investors in bulk purchases for conversion to rental housing. Under the pilot, Fannie would package for sale foreclosed homes in a limited number of markets and require them to be used as rental properties for a period of time.
NAR has concerns with this proposal and has been talking with federal regulators to ensure that the program is carefully tailored to the communities who can truly benefit from it, that small- and medium-sized investors be able to participate, and that real estate professionals continue to play a role in the disposition of the homes.
In a statement released after the President outlined the details of his proposal, NAR said it’s urging the regulator of Fannie and Freddie, the Federal Housing Finance Agency, “to proceed cautiously with the REO-to-rental program since housing markets are complex and varied.
“NAR believes an overly aggressive REO-to-rental program that is not privately administered by local entities and does not involve substantial participation of local market experts, especially licensed real estate professionals, could be disruptive and counterproductive to communities already suffering from high foreclosure inventories and lower housing values.”