‘Realtor’ Is 2 Syllables, Not 3

Chairman of S&P’s index committee David Blitzer was encouraged by the improving trend but cautioned:

Continued increases in home prices through the end of the year and better annual results must materialize before we can confirm a housing market recovery.

It’s also worth going back to what Blitzer said last month:

…we are back to regional housing markets, rather than a national housing market where everything rose and fell together.

As I discussed then, Blitzer’s comment properly acknowledges that real estate is local. Here are my comments which still hold:

Macro research like Case Shiller data helps, but it’s not entirely accurate for your local market decision making. Homebuyers using Case Shiller to price a home is like investors using sector data to price a stock. It’s one input, but local analysis is more important for property selection and offer strategy.

Homebuyers are justifiably waiting for some kind of bottom. To make good decisions on whether a bottom is here or near, buyers need hyper-local analysis from realtors on the ground in their specific target areas. This is confirmed by Blitzer’s statement today.

There are deals in any market, but it’s street-to-street analysis, not city-to-city.

Last month’s write-up also includes critical insights from a Realtor on this topic, explaining how he combines Case Shiller with local analysis to advise clients.

It’s also worth noting that Case Shiller’s 10- and 20- “City” composites aren’t cities. They’re broad regions or “Metropolitan Statistical Areas” (MSAs). For example, “San Francisco” in the table below is a five county region, and the actual city of San Francisco contains only 12% of the house inventory in the MSA, so the aggregate Index is heavily skewed toward the other counties’ markets.

Here’s S&P’s methodology for each of their MSAs.

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Source:
S&P Case Shiller July Home Price Report

Here’s the most important note from today’s Case Shiller home price report—from chairman of S&P’s index committee David Blitzer:

…we are back to regional housing markets, rather than a national housing market where everything rose and fell together.

Blitzer’s comment properly acknowledges that real estate is local. Macro research like Case Shiller data helps, but it’s not entirely accurate for your local market decision making. Homebuyers using Case Shiller to price a home is like investors using sector data to price a stock. It’s one input, but local analysis is more important for property selection and offer strategy.

Homebuyers are justifiably waiting for some kind of bottom. To make good decisions on whether a bottom is here or near, buyers need hyper-local analysis from realtors on the ground in their specific target areas. This is confirmed by Blitzer’s statement today.

There are deals in any market, but it’s street-to-street analysis, not city-to-city.

Here’s one good comment from South Carolina Realtor Mark Brian on how he combines Case Shiller data with his local market analysis:

I use reports such as Case Shiller to compare and contrast to my market’s statistics. Local data such as for a city or county is not always specific enough. I feel that you have to look at each individual home and compare to recent sold comps and active listings to get a better idea about the value of that home. The market reports I like to give for a certain area are good for starting to understand the local market, but not for knowing how much to offer or the best possible list price.

It’s also worth noting that Case Shiller’s 10- and 20- “City” composites aren’t cities. They’re broad regions or “Metropolitan Statistical Areas” (MSAs). For example, “San Francisco” in the table below is a five county region, and the actual city of San Francisco contains only 12% of the house inventory in the MSA, so the aggregate Index is heavily skewed toward the other counties’ markets.

Here’s some relevant analysis on this topic from Paragon Real Estate Group—it’s specific to San Francisco, but you can see your region’s fine print here.

-STUDY: Mass Indecision On Rate Outlook (WSJ)
-Misunderstanding Rent vs. Buy Dynamic (Ritholtz)
-Bank of America Death Watch (NakedCapitalism)
-7 Things That Make Me Worry (PragmaticCapitalism)
-Is The American Dream Of Homeownership Dying? (MReport)
-Think U.S. Can’t Fund It’s Debt? Then See This Chart (BusinessInsider)

-How NBA owners lost $300m this year (Bill Simmons via ReformedBroker)

-Obama to nominate Gruenberg for FDIC chair (HousingWire)

-Greece update–with critical dates (CalculatedRisk)

-Roubini: Perfect Storm & Bond Market Revolt Threaten Global Economy (Bloomberg)

-Know your local property market by being a nosy neighbor at open houses (Amy Hoak, Marketwatch)

-Seller financing returns, but seller & buyer beware (MSNBC)

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So let’s review mortgage basics for new buyers and especially experienced buyers who need a refresh given new lending complexities of the past two years. Here’s how lenders analyze you, how the buying process works, and how mortgage rate markets work.

A good mortgage advisor will do a 30-60 minute consultation with you and lead with data collection. They can’t help you set objectives or make recommendations without your profile. Of course you have to be comfortable with their style, then you’ll provide these items (verbally first, then documentation):

-Personal information including birth date, marital status, number of children and ages. Loan applications are Federal documents and require this data. Good loan agents use it to help with family and retirement planning.

-Residence history for at least two years. If renter, rent payment is needed. If owner, all mortgage, insurance and tax figures are needed.

-Employment and income for at least two years. If you receive commissions or bonuses, you need two years of figures—all lenders average variable income (including self-employed income) over two years. Full tax returns for two years are always required, including business taxes if you’re a business owner.

-Asset balances including all checking, savings, investment, and retirement accounts. If you move money among accounts, you must provide all accounts even if you’re only using one account for the down payment, because the lender will review every line item on two months of full account statements and ask to paper-trail large deposits and withdrawals. Here are specific rules if you’re using gift or retirement funds for down payment.

-Debt payments and balances for credit cards, mortgages, student loans, car loans, alimony, child support, or anything else.

-Social security number: A good loan agent can use the verbal debt information to estimate your credit score which is needed for loan qualifying and rate quotes, but eventually you’ll need to provide your social security number so lender can verify with a credit report.

Borrower pre-approval is a combination of credit score, down payment, and your total (housing and non-housing) debt relative to income. So collecting this information (verbally first, then documentation) enables your loan agent to:

(1) Provide written estimates purchase showing prices and down payments you qualify for, monthly budget (with rates), and tax benefits.

(2) Pre-qualify or pre-approve you for a loan. Both phrases mean the same thing.

Now comes property pre-approval. Loans are made based on borrower AND property profiles. So after you are pre-approved and start home shopping, you or your Realtor must tell your lender about each property you’re serious about so they can also pre-approve the home.

For a single family home, a loan agent should screen the property (before you write an offer) for any deferred maintenance, pest reports, un-permitted additions, or known structural defects. Some of these issues are ok to lend on, but you need to know before you get into contract.

For a condo, a loan agent should screen the property for owner-occupancy ratio of the building, budget, commercial space, and homeowners association litigation. Loan approval depends on these factors, so again: make your lender find out before you’re in contract.

Rate locks require a borrower’s social security number AND a property, so you must be in contract to buy a home before you can lock a rate.

Home mortgage rates are derived daily from yields on mortgage bonds. As mortgage bond prices trade up and down each day, bond yields (or rates) move inversely. So if economic news is bad, bonds get bought, prices rise, and yields (or rates) drop. And if economic news is good, bonds sell, prices fall, and rates rise.

All U.S. lenders update mortgage rates throughout each day based on whether mortgage bonds are trading up or down on the day’s economic data.

A good loan agent will brief you on each given week’s economic outlook and update written estimates as rates move during your shopping process. They’ll also advise on what market factors will impact rates when you get into contract, so you can decide when to lock a rate.

The official approval process begins when you’re in contract to buy a home.

That’s when your loan agent assembles the property documentation—appraisal, title report, inspections and condo docs as necessary—with what they already have for you, and presents the full loan package to their bank underwriter for formal approval.

If your loan agent follows a detailed pre-approval and documentation process as noted here, the formal underwriting approval process should be smooth.

If they don’t, the process is really just beginning when the bank underwriter gets the package.

Gift Funds: You can use gift funds from a family member as money for a down payment. You and the family gift donor must both sign a lender Gift Letter verifying the funds are in fact a gift. For most loans the donor must also provide proof of their ability to gift, usually in the form of a bank statement. As for tax implications, Gift Tax is imposed on donor, not receiver. Any individual can gift any other individual $13k per year tax free. So a married set of parents can each give $13k to their single child for a total of $26k. Or that same set of parents could gift to a married couple for a total of $52k. Then the balance needed for any gift funds beyond those amounts can still come tax free under the $5m lifetime exclusion for gift tax under 2011 estate tax law.

401(k) Loan: You may borrow up to 50% or $50,000 of your 401(k) funds for a down payment, whichever is less. Rates on 401(k) loans are set by the institution that administers the 401(k), and today are between 4.75% and 5.25% amortized over 30 years. On a $50,000 loan at 5.25%, the payment would be $276. This is far more advisable than paying taxes and penalties for early withdrawal. The part you borrow is removed from whatever it’s invested in and placed in an interest-bearing account. So you lose some but not all of your ability to stay invested. If you leave the employer administering the 401(k), you have 90 days to repay the remaining loan balance or it’s counted as an early distribution, subject taxes and penalties.

IRA Withdrawal: You can withdrawal $10,000 in down payment funds from a traditional IRA penalty free but not tax free. So you’ll get the whole $10,000 when you take it out, but you’ll have to pay federal and state capital gains taxes (about 35% total) on the next tax filing cycle. If you liquidate more than $10,000, 20% of the overage will be withheld for taxes (but taxes will eventually be about 35%). On top of this, federal and state penalties are about 12.5% on anything above $10,000.

Roth IRA Withdrawal: Roth IRA contributions are made with after-tax dollars so you can withdraw your contributions at any time for down payment (or any other reason) with no tax liability. But if you withdraw any capital gains your Roth accumulates beyond your contributions, there are more rules. When buying a home, you can withdrawal $10,000 of capital gains with no taxes or penalties. After that initial $10,000, any withdrawals from capital gains are taxed as income and have a 10% penalty unless two things are true: (1) the withdrawal occurs after five full “tax years.” A “tax year” begins January 1 of the contribution year, even if the contribution is made on December 31. (2) You’re a first-time homebuyer, which is defined as someone who hasn’t owned a principal residence for three years. Owning a rental property or a vacation home doesn’t disqualify you. Also, if you’re looking to help a spouse, child, or grandchild who is a first-time homebuyer, you can make a tax-free, penalty-free Roth IRA withdrawal of up to $10,000.

Always consult tax, mortgage, financial planning, and estate advisors regarding your specific profile.

Will they be filled with buyers? It is highly unlikely that 30-yr fixed rates for conventional loans will drop back to 4%, in spite of short-term improvements like yesterday. We’re now in a 5% to 5.5% trading range on rates, so we’ll see how that impacts buying. As for current data, mortgage applications jumped about 13% last week, with refinances about 66% of total apps. And last quarter Freddie Mac reported that 46% of refinance volume was “cash-in” where borrower brings in cash at closing to lower loan balance. Like companies, many households have saved cash and are deciding that buying down debt during periods of low rates is a good option. Companies face a slightly different set of options, including paying a dividend, buying another company, expanding existing facilities, etc.

As for the NYT piece, the only practicing investment professional among the sources cited was Barry Rithotlz, head of investment research firm Fusion IQ, who later expanded on his blog to say that it is safe to buy 2 kinds of properties right now—see below.

It is safe to buy 2 kinds of properties right now: The first is simply math: If you are planning on living in a specific location for at least 10 years , then the calculus of rent vs own likely favors the buyer once you figure in mortgage tax deduction. The numbers are obviously determinative, so do the math of your income, tax situation, and alternative rental options. Renting might put you into a less desirable school district in parts of the country; that is a non-monetary factor that needs to be considered.

Second, I would not be afraid to buy a “unique” or vacation property. By unique, I mean not a tract home or development, but a something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced. The kind that 10 years from now, you kick yourself for not buying. A truly unique purchase avoid Real Estate regret.

As for the macro picture, here are some more housing stats from Ritholtz that didn’t make it into the NYT piece:

Housing over the past century managed to just outpace inflation (by 1.1%, according to Shiller);

The bond bull market that began in the late 1970s has driven mortgage rates down from the peak by as much as two/thirds — as high as 15% down to ~5%.

The post WWII growth of suburbs and the subsequent baby-boom demographic surge created a massive demand for Housing unlikely to be equaled inthe next few decades;

The three decade long decrease in the cost of credit was an enormous source of Real Estate appreciation over that same period (1980-2005);

Bull Markets eventually end with a blowoff top; In doing so, they pull forward a decade or more of future returns;

We remain 5-15% overvalued n home prices nationally; That could be worked off by a big drop tomorrow, or by a 7-15 year period of no appreciation, depending upon inflation and wage gains;

Housing has problems with both too much supply and not enough demand. Bring in 3 million qualified home buyers from abroad and the Housing issue goes away.