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Top 10 Threats to Real Estate in 2019
Rising interest rates and the economy are the top two current issues to watch in real estate, according to the Counselors of Real Estate’s Top Ten Issues Affecting Real Estate 2018-2019, a list of the biggest threats to the housing market. For the first time, CRE broke its annual list down into current and longer-term issues to watch during the industry’s next year.
Top Current Issues to Watch
1. Interest rates and the economy: As interest rates rise, commercial and residential real estate markets are seeing several changes, such as decreasing demand for commercial property and higher home mortgage rates. Rate increases are making homes less affordable and are also limiting the value appreciation for commercial real estate. “Lack of wage growth for all but the wealthiest population segment is dampening housing demand, and limiting consumer spending that the economy needs for growth,” the report notes.
2. Politics and political uncertainty: Tax reform and policies aimed at balancing trade with other countries will have an impact on jobs, incomes, and both commercial and residential property, according to the report. “Congressional action to relax certain bank lending and asset management regulations was also among developing trends that may improve access to capital,” the report notes.
3. Housing affordability: The lack of affordable homes across income brackets, excluding the most wealthy, is being fueled by low wages, rising mortgage rates, and the underproduction of housing for nearly two decades, according to the report.
4. Generational change/demographics: Four distinct generations are exerting influence on commercial and residential real estate, such as in office design, student and elder housing, amenities, and location preferences.
5. E-commerce and logistics: Volatility in the retail sector, such as from the increase of e-commerce, is leading to a growth in warehouses.
Top Longer-Term Issues
1. Infrastructure: Roads, bridges, airports, water and sewer lines, electricity, and public transit are rapidly deteriorating, the report notes. An estimated $4.5 trillion is needed to improve critical infrastructure by 2025, according to the American Society of Civil Engineers. “The lack of serious effort by the U.S. to address its condition and much-needed revitalization leads the list of broader and emerging issues affecting real estate,” the report notes.
2. Disruptive technology: The report highlights advances in robotic manufacturing and warehousing; driverless cars and trucks; the extensive availability and utilization of personal and transactional data (aimed at enhancing business decisions); “smart” building technology that enables efficiency; global connectivity; automated business processes; and information protection through cybersecurity. “Nearly every aspect of real estate is undergoing dramatic change as these types of technology are adopted,” the report notes.
3. Natural disasters and climate change: The ongoing threat of natural disasters and climate change can result in high-priced property and environmental damage. This includes everything from severe storms, wildfires, and floods to earthquakes, volcanic activity, and rising sea levels.
4. Immigration: “If reduced by law, will have a negative impact on new housing starts and home purchases as well as worsen the current skilled labor shortage in the U.S.,” the report cautions.
5. Energy and water: Natural resources that are vital to property and quality of life are being threatened by environmental damage (manmade and from changing climates) as well as “entangling state and local regulations that are complicating development and lack the standardization that national regulations would provide.”
CRE additionally notes several other issues making its “watch list,” including rising construction costs; urbanization/suburbanization (with suburbs adapting citylike development and amenities); tax cuts (which may positively impact commercial properties; legislation is still developing); and societal leadership (social activism among younger Americans that is fueling business and social reform at many levels).
Six Surprising Retirement Trends You Need To Know
Tiny homes. Rockin’ communities where Jimmy Buffet is your spirit animal. Rockin’ a strenuous hike minutes from home. Yeah, this is not your Grandfather’s retirement.
Long gone are the days when people packed it in and moved to a nice, calm little home for the aging in Florida the day they turn 65. Not only are people working longer today, but they are looking for more out of their retirement – more fun and excitement, more job opportunities, and more opportunity to hang out with family. If you’re getting ready to retire, these are the trends you’ll want to know about.
And we’re not just talking about weekly bingo. There is a wave of new retirement communities, most notably Jimmy Buffet’s foray into a new career path, that cater to a much more active lifestyle. “It’s easy to chuckle at news that a Margaritaville retirement community is coming to Florida (what better age for Parrotheads to pursue their day-drinking dreams?),” said Curbed. “But the billion-dollar community offers more of what today’s and tomorrow’s seniors really want: active, engaging, and walkable neighborhoods. Latitude Margaritaville Daytona Beach has nine models open, with new homes priced from the $200,000s; the Hilton Head, SC location is in its first phase with prices from the mid $200,000s.”
Other developments, like the new $100 million-plus Rancho Mission Viejo in Orange County, CA is being developed “as an upscale mixed-generation development, with housing catering to older adults integrated into clusters of neighborhoods,” they said. “Developments like New York’s new community center for the Morningside Retirement & Health Services (MRHS) showcase a renewed focus on active, communal space. A cohousing development for seniors on Oakland’s waterfront called Phoenix Commons has been compared to a ‘dorm for grownups.'”
Retiring…but not all the way
Mid-size and larger cities are becoming havens for retirees because, among other positive attributes, they offer thriving job markets. So why would that be important to someone who is getting ready to stop working? Because, increasingly, retirees aren’t retiring all the way. Or, they’re embarking on secondary careers, often part-time, post retirement. “74% of working Americans plan to work past retirement age, with 11% expecting to work full time and 63% expecting to work part-time,” said The Street.
Multi-generational living is on one of real estate’s fastest-growing trend. “In 1940, about one-quarter of the U.S. population lived with three or more generations in one home. After WWII, American families largely became two-generational, with parents and minor-age children under one roof,” said Forbes. “The percentage of households with multiple generations started declining to 21%, reaching a low of 12% by 1980.” According to Pew Research Center data, 60.6 million people, or 19 percent of the U.S. population, lived in multigenerational homes, including 26.9 million three-generation households.”
In fact, the trend is so pervasive today that builders are increasingly creating highly livable granny flats and tiny homes that can live on family land or in backyards. They’re also building new construction homes like Lennar’s Next Gen, which is billed as a “home within a home” and includes “all the features you’d expect in a separate unit (a kitchenette, single car garage and full bathroom) while giving you the freedom to pop in whenever you’d like,” they said.
Increasing the activity level
“The choice of recreational activities is gradually shifting as the baby boomer generation heads into retirement,” said U.S. News & World Report. “A recent study by the Physical Activity Council revealed some interesting findings. Activities that are increasing in popularity include camping, bicycling, hiking and canoeing. Activities that are decreasing in popularity include golf, swimming for fitness and working out using machines or weights.”
The AARP found that boomers are increasingly migrating to states “with mild climates and recreational options. “A newly released survey indicates that those who do move increasingly choose mountain and western states where they find a desirable combination of affordable housing, mild weather and outdoor recreational opportunities, such as skiing and hiking,” they said. United Van Lines’ National Movers Study found that the Mountain West region – which stretches from Arizona to Wyoming – attracted the “biggest influx of older people, with 24.5 percent of those moving citing retirement as a reason for relocating.” That represents a strong shift from several decades ago “when older people mostly left northern states and headed southward. ‘We’re seeing retirees being attracted to more outdoor adventure destinations than in the past.”
Another of today’s top trends has retirees moving closer to family. For many grandparents, moving toward their children and grandchildren is “the last chance to focus on family and to leave a legacy of special memories,” says Christine Crosby, editorial director of Grandmagazine,” to Kiplinger.
WRITTEN BY JAYMI NACIRI
Existing-home sales declined for the second consecutive month in January and last month’s decrease was the sharpest in three years.
Total existing-home sales slumped by 3.2% in January to a seasonally adjusted annual rate of 5.38 million, according to the National Association of Realtors. The annual rate during December 2017 was 5.56 million.
Sales are down by 4.8% compared to this time a year ago, which is the lowest annual drop since August 2014.
Once again, low inventory is at the forefront of the market’s problems. Housing inventory actually increased by 4.1% last month to 1.52 million existing homes available for sale. Good news, right? Sort of. Inventory is still 9.5% lower than a year ago and has fallen year-over-year for 32 consecutive months, according to the NAR. Unsold inventory is at a 3.4-month supply at the current sales pace.
NAR chief economist Lawrence Yun believes the market desperately needs a correction from a supply standpoint to satisfy rampant buyer demand.
“While the good news is that Realtors® in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace,” Yun said. “It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”
The good news for agents and sellers is that prices increased for the 71st consecutive month. The median existing-home price in January was $240,500, up 5.8% from January 2017.
Agents can seriously control the market by accumulating a sufficient inventory of listings. Not only can you grow your network by connecting with sellers and buyers, you’ll put yourself in a prime position to cash in on the current market conditions. Until supply meets demand, housing prices should continue to rise.
Keep generating leads and kicking the tires on prospective, hesitant sellers. Remember: those who list, last.
by Matt Barbato
Portability Initiative Is Designed To Help 55 and Over To Sell Their Homes And Buy Another
The California Association of REALTORS® (CAR) is attempting to qualify a ballot initiative, The Property Tax Fairness Initiative, that will restructure the way property taxes are calculated for buyers over the age of 55 (and also the disabled and/or natural disaster victims). In many cases REALTORS® are already circulating petitions asking for ballot-placement of the initiative, and, in short order, professional signature-gathering organizations will be engaged as well.
CAR’s approximately 200,000 members have been assessed $100 each in support of the effort; and there are expectations that the Association’s substantial reserves will also be tapped in efforts to support the initiative’s passage.
What would this accomplish and why is it needed? In what follows I will seek to summarize CAR’s answer to those questions. First: the why?
As is well-known, California is currently experiencing a shrinking inventory of housing available for sale. This lack of supply has driven up prices, which makes it extremely difficult — in many cases, impossible — for first-time buyers to enter the market. In many cases, it also makes it difficult for move-up buyers to find replacement property.
There are, no doubt, multiple causes for this, but, no doubt, a major one is this: nearly 75% of California homeowners 55 years of age and older have not moved since the year 2000!
Why? Because of the way property taxes are calculated under California’s Proposition 13. For tax purposes, properties are valued on the basis of purchase price, not current market conditions. (Example: Suppose I bought my house for $600,000 a few years ago; and that my neighbor bought the same model — as identical as can be — in this heated market for $800,000. My tax will still be calculated on $600,000, whereas his will be based on $800,000.)
CAR says, “A large part of the reason why [55 and overs are not moving] is that, even if they want to downsize or move closer to family, the prospect of a property tax increase of 100, 200, or even 300 percent, effectively locks our parents and grandparents in their homes.” Thus, CAR maintains, “…The Property Tax Initiative…will help these homeowners to sell their current homes and move without being subjected to a what is effectively a massive “moving penalty.”
How will it help? By modifying current law to expand the conditions under which those over 55 would be allowed to transfer their current tax base — based on their original purchase price — to a replacement home that they are purchasing.
Currently there are only limited conditions under which someone over 55 may transfer his or her old tax base to a newly purchased home. The Initiative would expand this. “C.A.R.’s Property Tax Fairness Initiative would allow homeowners 55 years of age or older to transfer their Prop. 13 tax base to a home of any price, located anywhere in the state, any number of times.”
CAR’s talking points offer two examples of what would happen if the Initiative should pass.
Buy Up Example
- Original Purchase Price: $100k
- Estimate Property Taxes: $1K/annually
- Existing Home Sale Price: $300k
- New Home price: $400k
- New Property Taxes: $2k/annually
The $100k difference between the $300k sales price and the $400k purchase price is added to the original Prop.13 property tax base of $100k for a new Prop. 13 tax base of $200k. The buyer still pays their fare share of taxes but isn’t blocked from making the move.
Buy Down Example
- Original Purchase Price: $100k
- Estimated Property Taxes: $1k/annually
- Existing Home Sales Price: $300k
- New Home Price: $200k
- New Property Taxes: 1/3 of $200k = $67k [value] or $670/year for property taxes
If a homeowner buys a less expensive home, the property taxes will be proportionally the same as for the original home. In other words, if the tax base was one-third of the sale price, the new property tax would be one-third of the new sale price. Buying down reduces the homeowner’s annual property tax bill.
Among the objections raised to the Initiative is that it will reduce revenues to local governments. In response to this, CAR says: “The revenue loss is the result of a ‘static’ analysis — it only looks at the revenue lost, not the revenue gained which a ‘dynamic’ analysis would do. All buyers of homes formally owned by a senior homeowner will have the home reassessed to market value and pay property taxes based on the reassessed value.”
Lots to think about. There’s an election coming.
WRITTEN BY BOB HUNT
Does It Makes Sense To Buy A New House Before Selling The Old One?
You’re interested in moving. You need to sell your old house first before buying a new one, right? After all, you don’t have enough of a down payment for the new house without selling the old one, and you are pretty certain your bank will not qualify you for two mortgages.
You are in a dilemma; houses in your area are currently receiving multiple offers. Inventory is low. Sure, you can sell your house under the same circumstances, but will you be able to identify a new house so that you can simultaneously move from the old house to the new one? Unlikely. Do you sell the current house, move to a rental [or hotel) while you identify and try and close on the new house? Is the extra hassle of moving twice and the added stress of the inability to simultaneously close on the sale and purchase the new worth it? IF you could purchase a new house while still living in the old house, is it worth the added costs involved with having a second mortgage until you sell the old house? How much is “peace of mind” worth in not having the pressure of having to purchase a new house (because you sold the old house too soon)?
These questions are a reality in today’s world in many parts of the country, specifically, the San Francisco Bay Area, because of the real estate rebound after the Great Recession. According to Jeff Stricker, a real estate professional with Alain Pinel Realtors specializing in the Silicon Valley in California, his clients are faced with these exact situations much of the time, as property is swooped up almost as soon as it hits the market, and, many times, with multiple, over asking prices. Jeff states that, although it is great for his clients as sellers, those same clients face challenging hurdles when buying a replacement property; competing against other buyers, some with cash only offers, who are willing to bid up a property far beyond the asking price in many circumstances. Some buyers are just so frustrated with the process of competing and getting outbid that they act in ways that they normally would never have thought. Overbidding. Settling for a house that they may not have originally envisioned. The list goes on.
Jeff, however, decided to think outside the box. What would happen if another house was purchased (without the added pressure of “living out of a suitcase”, if you will) prior to the sale of the old house? Is it even possible with the banking regulations that were placed upon financial institutions as well as homeowners over the past decade due to the “mortgage meltdown” that happened in 2008 and on? Dodd Frank rules that placed inordinate restrictions on the ability of homeowners to obtain financing left many people unable to get loans in which they previously were easily able to qualify.
Jeff decided to come up with a spreadsheet wherein, if he plugged in some assumptions, he could figure out if it would make economic sense to acquire a new house before selling an old house. The other part of the equation was to find a lender who would allow for a homeowner to purchase a new home without first selling the old home; thus, carrying two mortgages at the same time. Since most conventional lenders would not touch this, Jeff had to look to alternative sources. He found a company called Pacific Private Money, in Novato, CA that specializes in such a product.
Pacific Private Money can lend enough to the borrower to purchase the new home if there is enough equity in the old home to justify a combined Loan to Value (LTV) of 70% or less. Sometimes, if there is not enough equity in the old home, the borrower needs to add cash to bring the LTV to 70%, but, the ability to purchase a new home without having to sell the old one first can solve many issues for the homeowner. First, the new home can be identified without adding pressure since the homeowner is still living in the old house until the new house closes escrow. Second, the stress of moving twice is eliminated. Third, and probably the best (and possibly most surprising) is that this solution may actually cost LESS in terms of increasing net equity to the household than selling the old house and buying a new house with the proceeds from the old house (and new mortgage) in most circumstances wherein the new house is more expensive house than the old house.
In a rising market, the earlier the purchase of the more expensive new house and the delay of the sale of the old will increase the net equity to the homeowner more than the costs associated with carrying two mortgages.
For example, let’s assume the old house is worth $1,000,000 and there is currently a 1st mortgage of $200,000. The homeowner desires to purchase a new home for $1,400,000 and has $100,000 in the bank that can be used for a down payment. We will look at two scenarios; the first is where the homeowner sells the current house, rents for a period of time, and then purchases a new home. The second scenario is where the homeowner borrows the money in order to secure the new home while owning the old home.
Obviously, there are many moving targets with both scenarios, such as how much it will cost to rent a place (in the event of selling the old house first) as well as how long it takes to identify and close on the new house, storage costs for belongings, the cost of obtaining a private loan, and the appreciation assumptions for both houses, just to name a few.
Here is a calculation making the following assumptions; it takes nine months to close on a new house after selling the old house; houses in the area (both old and new houses) are appreciating at 1% per month; interest earned on bank deposits are at 1% per annum; storage costs are $1,000 per month, a conventional bank loan is not available because the homeowner does not qualify and has to use a private loan company; the costs for the private loan are 9% plus 2 points; the interest rate on the old house is 3% per annum.
As you can see, in a rising market, where the new house is worth more than the old house, there is a significant benefit to using a private loan to purchase the new home and sell the old home at a later date. Waiting 9 months to eventually acquire the new house has tremendous opportunity costs, as compared to a net benefit of purchasing the new house right away and eventually selling the old house.
Although assuming a 1% per month appreciation of real estate may seem aggressive, the San Francisco Bay Area, and specifically the Silicon Valley, has experienced such growth. However, even if we lower the appreciation to .5% per month, we still see a fairly significant benefit to purchasing the new house now rather than waiting to first sell the old house and then buy the new house.
Aside from the economic benefit, other factors need to be considered; the lack of stress of moving twice should the homeowner decide to sell the old house first and then purchase the new house; what if the homeowner finds the house of his/her dreams now and does not want to let the house slip away? In today’s market, sellers are not willing to take contingent offers. Can the homeowner budget for both houses at the same time while waiting for the old house to sell? Is the market rising? Is the new house more expensive than the old house? How long will it take to sell the old house? These are just some of the issues to consider before deciding one way or the other; however, and this can’t be stressed enough — when a homeowner finds a house they like, they do not want to lose the opportunity of buying it. This means that they can start looking at new houses before putting their old house on the market. This also allows them time to make any repairs or fix up their old house so as to maximize its value prior to putting it on the market.
Once homeowners know that there is a potential to purchase a new house before selling their old house, they can be proactive in obtaining a commitment letter from the lender. Of course, homeowners should see if they qualify for a conventional loan for buying the new house (owning two houses at once), but they should keep their minds open to procuring a private loan should the bank turn them down. Pacific Private Money is such a private loan company.
WRITTEN BY EDWARD BROWN