Sarah Jarvis Team at One South Realty

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Part One of ‘The Market is Too Sensitive (Fannie, Freddie and the GSEs)’

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This is a 4 part series about how the housing market is far too sensitive to the effects of government.  Each section is below:

Washington Monument and the Capitol Panoramic Nighttime
Even DC’s most subtle and seemingly minute policy shifts can have a dramatic impact on the housing market.

I know what is said here will ignite feelings (and comments, possibly) that are decidedly anti-this or anti-that…which is not my intent.

As a matter of a fact, if you feel so compelled, please refrain.  This is not the forum.

The intent of the discussion is for those who choose to read this to better understand why and how the housing market is so sensitive to subtle shifts in housing and monetary policy.

Part I – Mortgages and the GSE Guidelines

No discussion about housing can begin anywhere else other than with the money supply.  The Federal Reserve, Fannie Mae, Freddie Mac, FHA (and to a smaller extent, VA) all impact the availability of credit.  Credit (or in the case of housing, mortgages) are the primary instrument by which we purchase our houses.  30 year mortgages in all of their forms (fixed, adjustable, hybrids) and their somewhat dysfunctional relatives (interest only, balloons, contract for deed) are what makes real estate affordable by allowing buyers to purchase with far less than the price of the home.  Leveraging $20,000 into a $400,000 home with a monthly mortgage payment roughly equivalent to the lease payment on a nice apartment is an attractive option…or at least 75 million believe it to be the case.

iStock_000013200637XSmall
Fannie and Freddie’s mortgage backed securities were designed to shift risk and hopefully decrease it, not eliminate it…as many seemed to think prior to 2008.

These loan products are a result of the formation of the GSE’s (GSE is an acronym for Government Sponsored Enterprise.)  Specifically, it is a reference to the entities of Fannie Mae, Freddie Mac and Ginnie Mae, whose charter (basically) allows them to create a secondary market for the mortgages generated by the network of originators throughout the US.  Their involvement shifts the risk of borrower non-payment from the banks who originate the mortgages to the GSE’s and purchasers of the pooled debt (this is also a gross simplification but it suffices for the point of this article.)

The existence of the GSE’s means a bank can originate a loan and, provided it is within established parameters, sell it to Fannie/Freddie, and redeploy the cash to the next borrower (and repeat the process millions of times).  Knowing that Fannie and Freddie stand ready to purchase the debt originated according to their own guidelines, banks have higher incentive to originate only those mortgages which fall within those parameters.  Interest rate pricing is better, leverages are greater and the underwriting scrutiny for borrowers is less stringent.  One only needs to look at commercial loans to see the difference (commercial loans are held on an individual bank’s books and the pricing will be similar to a home which is not backed by a Fannie/Freddie loan.)

The following pricing is as of August 19, 2013:

The cost of financing for Fannie vs. local lending institution is far higher in both rate and terms.  Given the choice, the market will almost always opt for the Fannie/Freddie backed loan, for obvious reasons.  On a $300,000 mortgage, the Fannie 30 Year payment is  $1,564 while the local bank’s is $2,150…that is a big difference.

So what is the impact?

Understanding the payment difference for being inside the parameters versus outside, you can see how buyers would be affected if a policy shift moved them from in to out.  What if this shift affected millions of potential borrowers?  Adjusting credit score minimums, down payment levels or even how commission income is counted towards qualification can have a drastic impact on the pool of buyers.  Fannie and Freddie (and FHA) constantly tweak many of their underwriting guidelines and correspondingly add and subtract both the number of buyers who qualify as well as the different types of homes which qualify.

One simple example:

  • The VA Jumbo Loan Limit is currently $417,000 in Caroline County but $843,000 in bordering Spotsylvania County…for those who know that marketplace, there is not a 2x difference in home prices.
  • Further, the median home price in Mechanicsville 23116 was $310,000 and in Spotsylvania it was $272,000 yet the same Jumbo loan discrepancy exists.

Can you imagine the impact on the upscale new home builder in Spotsylvania if Jumbo guidelines were changed (as you can argue they should be)?

During the market adjustment, Fannie and Freddie dramatically changed their underwriting.  As they did, they began to not buy loans on the properties (or on the borrowers) that they would have accepted only a scant time before.  The modification in lending practices was supposed to firm up the market by only allowing those who should buy to buy, but it effectively shrank the pool of buyers at a time when the pool needed to be expanded to combat falling prices.  Prices fall when demand weakens and even an incremental governmental policy shift can have a huge impact on the marketplace…especially at such a critical time.

As long as we are dependent on Fannie and Freddie to determine what types of properties and people they will loan on/to, we will be very sensitive to their policy shifts as ultimately, their policies have the greatest ability to impact demand.  Those whose properties are near loan underwriting margins (Jumbo, Condos, Investors, especially) need to be quite mindful of this fact.

Additionally, it absolutely be noted that the involvement of Fannie Mae and Freddie Mac makes housing more affordable.  As the example above of how commercial mortgage pricing differs from commercial pricing clearly shows, Fannie and Freddie DO help make the financing of real estate far more affordable, despite some obvious holes in the system.  Somewhat recently, voices on Capital Hill have begun to question the need for Fannie and Freddie.  As a tremendous amount of taxpayer money was pumped into these entities during the market adjustment, the voices are becoming increasingly louder.

Will Fannie and Freddie be around in 5 or 10 years?  They probably will, albeit in different forms.  I hope that DC understands that homeowner equity is a huge part our nations economic well being.  If the cost of financing were to increase sharply, the value of housing would suffer.  On the heels of the massive levels of lost wealth during 2007-2012, the dissolution of Fannie and Freddie would not be wise without some very viable private alternatives.  As always, the market would adjust, I just hope that policy makers understand the element of timing and the still fragile nature of the recovery.

Part Two can be found here...

Why or When You Buy…Which is Most Important?

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For the past 12 months, the voices screaming ‘IT IS TIME TO BUY’ have been at their loudest…and during any 12 month period in the last 5 years, the voices had it pretty much right.  According to Case Shiller (the gospel when it comes to home prices), from April of 2012 to April of 2013, home prices in the 20 City Index rose over 12%.  That is the largest gain in home prices in a 12 month period since 2006, and in my opinion, perhaps the most reasonable gain in the history of home pricing since we moved out our caves.

CS Index April 13
The Case-Shiller Index measures home prices in the largest markets in the US. If you look at the trend line going back into the middle 1990’s to now, you can see that with reasonable appreciation, we are not too far off of trend.

Why do I say this?

Quite simply, we are correcting back to where we should have been in the first place had lending standards never been altered and Wall Street never hijacked the process.  Had we simply continued on the historic 3 – 5% per year appreciation track, we would be right about where we are now.

If you look at the appreciation discussion a bit differently, ask yourself the following question:

Are you better off because of when you bought or because of why you bought?

Imagine this scenario, you have no substantial down payment, a decent but unstable job and serviceable but weak credit.  You walk into Countrywide’s office in the mall and somehow decide that buying a home is a good idea…it is 2003.  By the end of the weekend, you are under contract to buy a newly constructed $485,000 home with 6 bedrooms, his and hers brass bidets, 14′ ceilings on a golf course…and 30 days later, you move in your new home.  By some miracle (the miracle was probably disguised as a job loss, but I digress), you end up selling it in 2007 and renting an apartment downtown.  How much money did you make?  A ton.

Lets say it 2007, you are 27 years old with a graduate degree, a stable job ($85k/year as an managerial consultant) and you have saved up $30k for a down payment.  You shop diligently each weekend for 6 months in numerous neighborhoods.  You decide on a reasonable 3 bedroom home with 1.5 baths in a decent school district.  Your back end DTI is less than 30% (very conservative) and you make an offer, get bid up a bit, and end up under contract and close 45 days later.  In 2012, your company closes down, you lose your job and take a dramatic pay cut on the new one meaning you have to sell and move into an apartment downtown.  How much money did you lose?  A ton.

Lets say it is April 2012 and you land your first job after college.  Your roommate, who works for a commercial contractor, says he will rent a room from you and if you give him 3 months free rent, he will help you paint it.  Your parents, as a gift for your graduation, stake you to a small loan, and you find a 4 bedroom colonial in a decent school district with a HOMEPATH rider on the for sale sign indicating a foreclosed home with incentives for first time buyers to buy.  The home was sold in 2006 for $385,000 and you bought it for $249,000 with a 3.35% 30 year mortgage and about $20,000 all in with closing costs and down payment.  45 days after you move in, the paint is complete, as are the new counter tops and the weeds are gradually being converted back to grass.   You have 2 room mates paying you $500/mo and you make up the difference…maybe $400/mo including taxes.  How much money do you stand to make?  Several tons…

The simple point is, since 2003, WHEN you bought has been far more important to the outcome than WHY, WHAT or WHERE.  This is rapidly changing back to the way it should be where WHY, WHAT and WHERE matter more than WHEN.

As noted earlier, prices went up 12% in the last 12 months and we are still about 20% below the tip top of the market.  However, if you look closely and draw a 3.5-4.5% yearly increase from 1995, do you realize where we are?  We are right about where we should be and I am ok with that.

Housing is not stock and it should not be treated as such.  Housing, while an asset, is the only real appreciating asset that you use on a daily basis.  You do not use your stock certificates as place mats nor do you use your mutual fund prospectus as anything other than a cure for insomnia.  The market gains from ’03-08 were false and driven by underwriting guidelines that were an embarrassment.  Likewise, the subsequent correction from ’08-12 were driven largely by the same idiotic factors (just reversed)…neither of which represented a normal market.

The new market, which will begin sometime in 2014 as the production of new houses catches back up and the Federal Reserve quits buying down our interest rates, will reward the astute buyer and the solid decision makers.  It will reward those who see housing as ‘buy and hold’ and not ‘buy and trade.’  It will reward those with an eye towards design and reward locations ripe with walkable amenities.  The last half of 2013 will prove to be the last 6 month period where it sort of didn’t matter what you bought…just THAT you bought…and the market will make you look like you made a good decision.

So it is a great time to buy and use mortgages to do so as pricing for both is still historically low.

In 6 months, that may no longer be the case.

Is It a House or Is It “Housing?”

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cantor
Congressman Eric Cantor was kind enough to listen to what a panel from the RAR (including yours truly) had to say back in 2011 about the lending policies of Fannie Mae and Freddie Mac.

I live in a HOUSEand you live in a HOUSE, but collectively, we live in HOUSING.

Please explain…

Individually, we buy a house (or condo) that fits our needs and personality.  It can be big or small or it can be blue or beige or tall or short, but it is our house.  It contains our stuff and it contains our memories.  It has pictures on the walls of the people, places and things that are important to us and it creaks and moans when the wind blows…and we know where the water shut off valve is (because of ‘The Incident’ back in 2007.)  We also know that flushing the toilet in the master bath while the washing machine is running means an immediate increase in the shower temperature by about 20 degrees.

Once again, it is our house.

That being said, the US is comprised of millions of houses just like yours and mine.  This collection of millions of homes makes up the market called ‘HOUSING’ and it is what shot to the moon in 2006 and was in free fall in 2008.  The US Housing Market is a complex collection of numerous inputs (supply, demand, credit, Mortgage Insurance, schools, materials, seasonality, type, location, density, demographics, etc.) and it is these factors collectively that drive value.   Despite what HGTV, Pottery Barn and Home Depot would have us believe, it is not our paint colors, furniture placement or lighting selections that truly affect value.

[ Inventory levels have plummeted since 2008 while pending inventory is trending upwards.  More stats here ]

Currently (spring of 2013), we are in the throws of another massive correction…but this time to the positive.  The correction that we are currently experiencing is a re-correction from the over-correction that occurred from 2008-2011.  During the 5 year period prior to 2008, prices rose at an unsustainable pace due mostly due to a lending process that was flawed.  The severity of the correction was due, in large part, from the UN-availability of credit once the market adjusted.  The overall leverage in the marketplace in 2008 was unprecedented, especially when compared to historic trends, and when values began to fall, the debt levels exacerbated the correction on a level unseen in most of our lifetimes.  The implosion of the market either caused (or was caused by, depending on who is asked) the implosion of Wall Street and the fallout in the credit market was global.

The lesson in all of this is that the HOUSING MARKET determines the value of homes and not Realtors, an appraiser, Zillow or the individual homeowner’s selections.  Without a doubt, the most important inputs to the local market are controlled well outside of the region.  While design trends and color palates may affect pricing to some degree, by and large, the swings in value that are significant are driven by MACRO factors.  A paint job will not improve your property values by 10% but a policy shift in DC sure can.  Simply put, when there are more homes than buyers, prices go down and when there are more buyers than homes, prices go up.  Those who are truly shrewd investors understand this and strategize accordingly.

Remember to keep these macro factors in mind when making the decision to purchase.  I see so many buyers fail to understand the overall picture and in doing so may let a home pass over an inspection item or negotiations break down over a few thousand dollars.  In the grand scheme of things, owing property now, at the interest rates currently available is likely to be one of the most intelligent financial decisions you will make.

These extremely favorable market conditions will continue to be for the next 12-24 months as we correct back to trend.  Keep an eye on the inventory levels and interest rates.  When the graphs look like they did in 2003-5, we are back to a stable and (relatively) predictable market.

The re-correction is not over but it is in mid-process and the days to purchase an large asset at a discount are ending sometime in the foreseeable future.   Serious consideration should be given to the opportunity to enter, re-enter or adjust one’s housing situation as these market conditions are fleeting.

Understanding Condo Dues

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ginter-condo-256x144_optSomeone should write a condo app. The app wouldn’t sell anything or make sounds or track anything. It would simply be an app that brokers could point their clients to once the litany of questions about condo dues comes up.

And they will come up.

While some of the questions I get, pretty much on a daily basis, are quite astute and on point, many indicate a complete lack of understanding of what “dues” really are. And that isn’t an easy concept to explain. A sentence or two usually won’t do the job. It can take not one but two agents—the purchasing and sales agents—to get a buyer comfortable with the idea of dues.

Condos are still relatively new to Richmond. In Downtown Richmond seven years ago, condos didn’t really exist. The rapid rise and growth of condos in the city created a steep learning curve for both the Realtor community as well as the buyers. Many agents went out of their way to understand the intricacies of condo ownership. And they’re better for it. But more than a few agents punted, and this lack of knowledge has given rise to too many buying agents feeding their clients bad information.

newIMG_7643
The Marshall Street Bakery has a dues structure lower than the Emrick Flats despite a largely similar profile. What is the difference?

I’ve taken it upon myself to give back to our fine real estate community and once and for all explain condo dues.

For starters, this is not a true statement – SINGLE FAMILY HOMES DO NOT HAVE DUES. If you are a buyer and your agent tells you this, show them the door. They don’t understand dues.  Let me repeat, if your agent tells you that single family homes do not have dues, then fire them.

Single-family houses have dues….you just aren’t made aware of them in the same way as you would be with a condo.

Before we go any further, let’s apply some numbers so that we know what we are talking about.

The majority of the condos in Richmond have a dues structure of roughly $2.50 – 3.50 per square foot per year of dues expense.  Let’s use an example: a 1,000 square foot condo with a parking garage and an elevator will typically generate $200-300 per month in dues, or somewhere in the neighborhood of $3,000 a year.

Do you get a water or sewer bill at your home? Well, in a condo, water and sewer is typically a part of your dues ($200-300 per year is about right in most places).

How about hazard insurance? A group of condos must be insured by the association. Therefore, the vast majority of your insurance bill is included in your dues (about $500-700 per year).

So before you get worked up about high condo fees, think about what normal operating expenditures are included in them, and what you won’t be paying in the normal course of business.

The second (and most misunderstood) component of dues is the maintenance and reserve budget.

osrg_vcu_poster_final
The condo options within the ‘VCU Bubble’ all offer different dues structures. Make sure to compare services as part of your analysis of the overall cost of ownership.

Do you have a roof on your single-family home? I’m going to go out on a limb and say yes. What does that cost to replace? A lot. When will it happen? When you can least afford it. Are you putting any money away for that replacement? Probably not, right?

The condo people are.

How about those exterior walls you see every day? What does it cost to keep them painted or cleaned? What does it cost to replace the rotten siding or wood trim? Are you putting money away for this repair?

The condo people are.

Each month, the condo association stuffs some portion of the dues go into an account for future repairs and maintenance. In lieu of waiting for the repair to be needed and then asking for each person to put up their pro-rata share, the money is available. If the repair is not needed, then the money is not spent. It is sitting in an account, ready when needed.

But there’s more. Who mows the lawn? Who cleans your pool? Who cleans your gutters? Ahh, you’re starting to understand condo fees, right?

When you think about it, putting $2,000 a year towards both current AND future repairs seems to make a lot of sense, right?  When you’re paying 100 percent of the repair and maintenance expense for your house, and you encounter some big-ticket items, your checkbook will feel that pain. Look at the last year. Better yet, look back five years at what you spent on maintenance. My bet is that living in a condo is actually cheaper than living in a single-family home when the entire cost of ownership it truly examined.

Here’s the takeaway—all improved properties (single-family, commercial, apartment, condominiums) have “dues” by one name or another. The question is whether or not they are paid collectively in advance (as they are in condos) or in a lump sum in arrears (as they are on a single-family home). To say that one property type has dues and one does not is foolish, especially if you’re using dues as a deciding factor in your purchase decision. You have to dig deep to make it an apples-to-apples equation.

Lay it all out on a spreadsheet and review the condo association’s budget (which by law you have the right to do) and then make your decision. There are a lot of factors you should consider when thinking about condo living. But don’t let condo dues have too much influence, at least without truly understanding exactly how they measure up to single-family living.

Ginter Park and Ginter Place

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ginter condo_optI really have become a fan of Ginter Park.

In April of 2012, we were asked to take over the lead sales of the Ginter Place project (the old Richmond Memorial Hospital Complex) along Westwood Avenue.  The hospital complex abuts both the Laburnum House and the Baptist Theological Seminary Campus at the corner of Westwood Avenue and Brook Road.  The Union Theological Seminary is also within sight of the east side of the condo tower which really helps frame the views…especially from the upper floors.

GP logo{ Click Here for Condos For Sale at Ginter Place }

In 2003 (or so), a group of investors purchased the entire site when Richmond Memorial moved to Midlothian.  It was a large undertaking, to say the least.

GP Overhead

After a rather contentious period of negotiations with the Ginter Park Neighborhood Association, the first phase of the project, the condominiums in the old hospital complex, went live in early 2008.  As history has shown, 2008 was not kind to ANY housing project, much less an upscale condo project targeting downsizing buyers.  Needless to say, it fell flat.  While the reasons are many, it is safe to assume that even the best conceived and executed projects brought to market in 2008 would have experienced similar outcomes.

ginter street scape
Ginter Park’s pedestrian-friendly nature means a casual stroll may not lead to anywhere in particular but enjoyment along the way.

Fast forward to 2013 and the environment has changed.  Lending, sales, inventory and overall public perception of the market has turned from thoroughly negative to fairly positive and the real strengths of both the project and the neighborhood are emerging.  The condos are large and well appointed with an excess of both features and finishes in excess of all competitive products.

They have begun to sell quite well.

I find it interesting that while Ginter Place has begun to experience the sales success that it should have experienced had 2008-2012 not occurred, it is still under most of the Realtor’s (and their client’s) radar.  I think that Ginter Park, and to much the same extent, Bellevue, are still largely misunderstood by much of Richmond…and that is truly unfortunate.  Despite some of the most powerful architecture of the era and with a diversity in design unseen in Richmond, the homes of Ginter Park and Bellevue trade at a discount to many other comparable neighborhoods.  While the reasons for the value bias are as diverse as the design of the homes there, probably the biggest reason is that the large majority of the market does not truly understand the area.  The many neighborhoods that comprise North Richmond are misunderstood mostly because the subtleties that drive values are not apparent to those not engaged in figuring them out.

{ Click Here for Homes for Sale in Ginter Park and Bellevue }

ginter park
The homes along Seminary Avenue rival those along any stretch in Richmond.

Without a doubt, my favorite part of Ginter Park is the architecture.  While the interior layouts of the homes can be a little antiquated with smaller closets and less ‘open concept,’ the exterior presence of the homes in Ginter Park are as striking as any in Richmond.  Despite a relatively tight time period for construction, the diversity of architecture is stunning.  Cottages, Bungalows, ‘Four Squares,’ Arts and Crafts and Tudors with brick, stucco and different sidings all can be found.  Even the relatively benign colonial designs are more engaging due to side porches and larger, manicured yards.  For those that wish to see some of Richmond’s finest homes, a leisurely drive up Seminary Avenue will result in some jaw-dropping residential design unrivaled in the Metro.

Ginter Park deserves to be understood better than it currently is and we hope that the brokerage community invests the time required to truly understand the power of the neighborhood.

 

 

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