Real Estate: March 2016 Archives

For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. Against this, we have their actual actions, politically allying with forces that make housing more expensive by constricting the supply.

Newsflash: Making business difficult for suppliers of a good does not lower the price nor improve the availability of that good.

Who does artificial constriction of the housing supply hurt?

Certainly not developers. The price of the actual permits, last I checked was in the $20,000 per unit range. But the decreases and constrictions and delays in supply add something like $160,000 to the price tag of that same unit. The people who want housing are here. If the demand is there and the supply isn't, what does that do to price? Oh, those poor developers! They're being hurt to the tune of $140,000 additional profit for each unit they build. Please, Brer Fox, don't throw me into that briar patch! To stay within the genre, trying to harm developers in this sort of fashion is a tar baby for those trying to do it.

It sure as heck doesn't hurt the wealthy, either. They can afford housing. Matter of fact, the constriction of supply makes their real estate investments appreciate more rapidly. Increasing demand and regulatory brakes on the ability to furnish supply is pretty much the recipe for rising prices. Furthermore, this encourages speculation, driving bubbles like the ones that we just went through. It wasn't the wealthy that got hurt by that bubble. It was the folks who could just barely qualify and the people who stretched more than they should have or told fibs in order to qualify. Who was that? It certainly wasn't the wealthy. High end housing was the first to start sitting longer, because the wealthy weren't worried about getting priced out.

It certainly doesn't hurt current owners, who ride the price wave in the same manner as the wealthy investors, if not quite to the same level of profit. Anytime the ratio of demand to supply rises, so does price, and anyone who already owns benefits. These are folks well-established in life for the most part, along with high income individuals and those who inherited wealth. Sound like anyone who needs to be getting what is effectively a public subsidy?

So who does keeping the supply of housing low hurt the worst?

The young. People just getting started out. People who won't get started for another fifteen years, by which time current housing prices will seem like the Golden Age. Every time there's a new household but no new housing, the price goes up. We're going to keep gaining new households, and I don't see enough new housing on the horizon. You do the math.

Transplants coming from where housing is cheaper. Even if they own a $100,000 house free and clear, that's only a 20% down payment on $500,000. Lots of San Diegans seem to have an attitude about transplants - but most of them are themselves transplants. The question of "who is a transplant?" is very much a question of where you draw the line. Speaking as a second generation native, my take is let's just trash the whole transplant prejudice thing. People want to live here. Providing they're in the country legally, they have the same rights to do so that my family and I do. We can create the housing for them, or we can create shortages, which lead to higher prices and unaffordable housing for everyone.

The working poor. Yes, the very people the affordable housing folks claim they want to help. But keeping the supply low, delaying the arrival of more units onto the market while keeping others from happening at all, is a recipe for rising prices. A couple making $15 per hour each makes just over $5000 per month, which translates to about $2300 they can afford for housing and all their debts. Assuming they have no other payments, that's a purchase price of a little over $300,000. That might buy a severe fixer detached home or a condo in decent shape. What happens the next time they need to buy a car? Unless they're one of the rare folks who still manage to put money aside every month, they have to consolidate the car loan with their mortgage in order to afford it. Ditto any other sudden expenses. This is the opening movement to a symphony of financial disaster.

I know that the political alliances in this country have gotten completely nonsensical, but it's past time for affordable housing advocates to break away from the same party that houses the anti-development and anti-business activists. Yes, ACORN, I'm looking at you (among many others), with your "retain voter registrations of your favorite party, trash registrations of their opposition" drives (blatantly illegal, by the way, and this isn't the only such documented instance by any means). Never mind what's the matter with Kansas, I want to know what's the matter with affordable housing activists. By any reasonable measure, they're making the problem worse with their political alliances, by supporting the agenda of their natural antithesis. If their game is to actually make housing more affordable, most of them are miserable failures at what they say they're working towards. What their actions say they actually want is tribute in the form of well paying government sinecures so they can continue to make the problem worse while pretending to help a small fraction of the people they financially maim.

Of course, if the game is to make the problem worse, so that people have no choice but to deal with these organizations as supposedly the only hope of the working poor, thereby increasing their own power, these organizations are doing just fine. Trojan horses for empire building are one of the classic recipes for political success.

Caveat Emptor

Original article here

There are many ways of suckering real estate consumers, and cash as an inducement to get people to swallow a raw deal is one of the most common.

From sellers (usually developers), "free" upgrades are one of the most common. They overprice the property by $50,000, and make you feel like you're getting a deal with "$10,000 worth of free upgrades" that really cost much less. In many cases, they're pre-installed and if you wanted to buy one without the upgrades, they would be unable to accommodate you. But if you're not working with a good buyer's agent who is looking out for your interests, you'll never hear about better properties offered for less.

From agents, they offer commission rebates or reduced price listing packages. But to pretend that these packages offer the same level of service as more expensive packages is ridiculous. If you're looking for a cheap MLS listing service, I've seen them for less than $100. But if you want someone to market your home, look for and attract the buyers you really want, or negotiate on your behalf, you are going to be extremely disappointed. When you are dealing with a strong sellers market like we've had for most of the last decade and don't care if your property sells for ten to twenty percent less than you could have gotten, discount listing services may be the way to go. If you are dealing with a buyer's market, if you have some issues with the property, if you really want someone to market it in such a way as to find your ideal buyer and get the best price, the more expensive agent who does more work is likely to get you enough more money to more than pay their increased compensation.

Agents who offer a portion of the buyers agents commission back are not the most proactive agents out there. They do not typically advise you as to the state of the market and whether there is a better buy out there. They aren't looking for the better bargain, they don't know enough about the state of the market to be strong negotiators, and they're certainly not out scouting properties looking for value and trying to spot issues before you make an offer. They do the minimum necessary to get a commission - they literally cannot afford to do more. It is trivial for a more involved agent to get you a better overall bargain.

Some sellers will offer cash back to the buyers. This needs to be distinguished from paying the closing costs you would normally pay as the buyer, which is legal and acceptable, providing it is disclosed to the lender. When the seller offers to put cash back in your pocket, you have the choice of either disclosing it to your lender or not disclosing it. If you don't disclose it to the lender, congratulations! You have just committed fraud, and lenders do get their dander up over it. If you do disclose it to the lender, they will base their loan off (at most) the net sales price, which is the official price minus the rebate. This shoots yourself in the foot other ways, as well, because it will likely increase your tax assessment, and could increase your cost of insurance.

Cash back from a loan provider is most often an intentional distraction, so that they don't have to compete on the real price of the loan. They tell you you're getting $10,000 cash back instead of how much the loan is costing, they can hit you for an extra $2000 in closing cost markups and three points of origination, not to mention that what they are really doing is adding all of that money AND the $10,000 to boot to your balance, where you'll not only owe the money, but pay interest on it for years. Plus it's likely that they stuck you with a higher than market rate of interest as well, because you were distracted by what you thought was free money, so they make more money there, also. Shop your loan by the terms, rate, and total cost to you. All of this can trivially eclipse the $10,000 they put in your pocket - even if they weren't adding that $10,000 to the balance of the loan.

Offers by a lender to pay your appraisal fees are most often trying to lock up your business from their competition. They're not competitive on price, so they apparently offer you a $400 freebie, while charging you $2000 extra in marked up closing costs, those same three points of origination I talked about, and then they ding you $500 for the appraisal on the final paperwork. This is one of the best ways to get a very high markup on a loan that there is. If you like paying more for a loan than you need to, a "free appraisal" is one of the best ways to go about it.

Finally, this article wouldn't be complete without mentioning several of the ways that quoting low payments for a loan can mess you up. The average consumer may know better in other contexts, but they still shop for real estate loans by which one has the lowest payment. This is basically financial suicide. When I first wrote this, there were so many loan providers out there pushing negative amortization loans, in which your balance owed increases from month to month in order to allow you to make lower payments, that it was difficult to find someone willing to do a thirty year fixed rate loan. The negative amortization loan is now gone - lenders and investors lost too much money on them - but the whole phenomenon is still instructive. People trying to sell you a low payment are crooks. Real cost is interest rate and closing cost of the loan, and negative amortization loans carried real rates more than two percent higher than thirty year fixed rate loans.

Nor is this the only game played by quoting low payments, merely the most prevalent and most egregious right now. Interest Only loans, short term hybrid ARMs, and Temporary Rate Buydowns are all quite common. Even if you manage to dodge that bullet with those who quote you low payments in order to sell you a loan (unlikely), there are still all of the standard games that get played with payment. They fudge the math, they "forget" to include the costs in the computations, they pretend you are going to pay the costs of the loan out of pocket when they know good and well that you intend rolling them into the loan, they just lie about their rates and the costs to get them, or, to be able to quote a low payment, they quote you the rate that costs so much that you will never recover the costs of that loan over its entire lifetime and pretend it doesn't have those costs. The payment is determined by how much you borrow, at what rate, with what length repayment schedule. The math is the same regardless of the lender. You need $X for the obligations - either the current loan or the purchase. Adding the least cost and being charged the lowest interest rate (always a trade-off between the two) makes for a lower real cost to the loan. Remember, when you refinance, or buy another property, you're paying for your loan rate all over again, so all that money you paid to get a lower rate is gone when you let the lender off the hook by refinancing or selling the property. Most folks do this far more often than they realize.

Greed is good, Gordon Gecko not withstanding. But let's make it rational greed, because thinking that you are getting a freebie and not asking what it really costs is likely to cost you many times the amount of what you think you're getting for free.

Caveat Emptor

Original here