Home Sales Fall Despite Falling Rates?

Another great blog from Jay Vorhees at JVM Lending! He asks, with home sales falling despite the rates also falling, whether the end is finally here? “We can only hope,” he quips. Read on for more from Jay, and a bit of insight from yours truly at the end!

Tulip Mania

In the 1630s, the Dutch experienced one of the world’s first major financial bubbles – Tulip Mania. They were all convinced that the price of the exotic (at the time) tulip bulbs would increase forever, not taking into account how easy it was to reproduce them and how the ridiculously high prices were clearly not sustainable.

Everyone (even common laborers) was borrowing money to buy as many tulips as they could, trying to get in on the action. At one point, a single bulb cost as much as some of Amsterdam’s most expensive mansions at the time. Then, it all collapsed. There have been many bubbles since, including the 1929 stock market crash, the dotcom crash of the late 1990s, and most recently – the mortgage meltdown of 2008. All those bubbles were partially driven by easy credit, so every time the Fed lowers rates, I am terrified that it is fostering a new bubble.

Home sales fall in June – despite lower rates, higher wages, and lower unemployment

Image result for housing market slowdown

So, that is why I was actually marginally encouraged to see this recent headline and article in the WSJ: U.S. Home Sales Stumble (in June). “Home sales slumped in June as home prices for major West Coast cities decline for the first time since 2012, ending the spring selling season with a thud.”

This is amazing to me because rates were about 1% lower than where they were the previous June, and everyone thinks rates drive housing prices. But, they clearly don’t. Home sales fell in the face of rising wages and decreasing unemployment too, leaving economists perplexed, as those factors are also supposed to drive prices higher.

Sales are probably falling because borrowers are hitting their affordability limit, and because buyers are acting prudently (unlike prior to 2008). While fewer sales overall are never a good thing, it is a good thing to see a potential bubble start to deflate instead of popping – so YAY! (sort of)

I might add that a huge brokerage we work with in Texas is currently projecting a downturn in the near future, telling agents that they need to trim expenses by 20%. So, it is not just the West Coast experiencing a slowdown. And finally, despite the apparent slowdown, numerous agents we work with are still experiencing record years simply because of their relentless marketing. We too have almost tripled our purchase volume year over year by improving our value props and increasing our marketing efforts.

Takeaways from this blog: This slowdown might be averting another bubble-pop! The Fed can’t stimulate everything with low rates. They might call Japan and ask how their low-rate experiment has gone, as 20 years of near-zero rates have not revived Japan’s economy at all. No matter how soft markets get, the overall market remains huge and business can always be found with stellar value props and very aggressive marketing.

Kristin’s insight: Some houses still have multiple offers, usually ones that are updated, and are priced slightly below market or in a highly desired neighborhood. The rest are sitting longer on the market and may see a price reduction or two as buyers become much more discriminant.

Who funds Mortgage Loans?

For buyers, this JVM Lending blog from Jay Vorhees is a great “101” on the differences, pros, and cons of the three institutions you can go to for your loan. I often recommend JVM for their efficiency and getting the loan done in a short time frame, not because I get something in return. Having said that, I do get a big benefit by having a smooth escrow, closing on time with short contingencies, and happy clients. A buyer who has never been through a nightmare purchase will never fully appreciate a smooth buying process, but at least I know I have done a good job representing them.

Image result for mortgage loans

We host “Homebuyer Seminars” for buyers and “Mortgage 101 Seminars” for agents, and one of the slides that always derive a surprising amount of interest is the one that sets out the different mortgage origination channels.

This is because there are so many companies and individuals offering mortgages that it can be both very confusing and overwhelming for consumers and agents alike. Because of this, I am revisiting the topic in today’s blog.

Three Primary Channels for Mortgages: Commercial Banks and Credit Unions

These big institutions dominated the mortgage industry after the 2008 meltdown, but their overall market share has been dropping quickly in recent years, as Mortgage Banks and Brokers (see below) reclaim market share. The “big banks” include Wells Fargo, Citi, Chase, B of A, and U.S. Bank, among others. Major Credit Unions include Navy Federal and USAA, but there are hundreds of others.

Advantages: Bank and credit union advantages include a low cost of funds; they can loan out customer deposits and sometimes offer low rates. They also can “portfolio” (or retain) tough loans that otherwise could not be sold on the secondary market.

Disadvantages: The big banks are very slow and bureaucratic largely because they are so heavily regulated. They also rely on national appraisal management companies that do not employ the best, local appraisers – so appraisal issues are common.

Private Banking: Commercial banks have an offshoot for “high net worth” customers called “private banking.” These channels often offer exceptionally low rates that other entities usually can’t compete with.

Image result for mortgage loans

Mortgage Banks: Mortgage Banks include Quicken, Guaranteed Rate, and Fairway at the national level, and RPM and SWBC at the regional level. JVM Lending is also part of a mortgage bank. Mortgage banks do not hold deposits; the ONLY thing they do is underwrite and fund mortgages. Mortgage Banks use lines of credit to fund mortgage loans and then quickly sell the loans to investors or third parties to make money.

Advantages: Mortgage Banks can typically move much faster than commercial banks because they are less regulated, smaller and more nimble. They can also set up their own appraisal management companies, ensuring access to local appraisers and better appraisal quality.

Brokers: Brokers do no underwrite or fund loans. They only “originate” loans and then send them to outside “wholesale” lenders for underwriting and funding.

Advantages: Brokers can access dozens of different wholesale lenders and submit loans to whichever lender is offering the lowest rates or best terms at any given time.

Disadvantages: Wholesale lenders force brokers to use national appraisal management companies (like the big banks use) and there are frequent appraisal issues as a result. In addition, brokers have no control over underwriting (because it’s not “in house”) and turn-times. Brokers also have very few competitive options for jumbo financing. JVM was in the broker channel for years, but left it in 2014 because we had too many appraisal and service issues.

Higher Fees vs. Lower Commission: Friction Avoidance

Jay Vorhees at JVM Lending had a good blog recently about iBuyers, which are large firms that buy homes from sellers to get around the listing and showing process. Read on:

Image result for Zillow

The National Real Estate Post recently posted this interesting comparison of iBuyers and real estate agents. What is an iBuyer you ask … iBuyers are large firms that buy homes from sellers outright so sellers don’t have to go to the trouble of listing and showing their homes. The iBuyers then resell the properties as quickly as possible and usually for a profit. Some of the major iBuyers include Opendoor, Offerpad, and Zillow.

iBuyer fees are higher than realtor commissions

The video’s host points out that the iBuyers charge large “fees” that are really no different than commissions. What is surprising though is that the iBuyers’ fees add up to more than the average commission rate charged by real estate agents.

Opendoor and Offerpad charge fees that total 7.5% of the purchase price, while Zillow charges fees that total 7%. The fees for Opendoor, for example, include such line items as an “Experience Charge” and Repairs, and even a “Market Risk” fee.

The average real estate commission paid by sellers is now just over 5% according to the host, so sellers are paying substantially higher fees to the iBuyers. In addition, the iBuyers are unlikely to offer top dollar, given their desire to resell the homes at a profit.

The hosts also cite this WSJ article that discusses iBuyers at length as “The Future of Housing.” The WSJ article points how much traction iBuyers are getting in cities like Phoenix where there are large tracts of similar houses (something iBuyer algorithms require). The article also mentions a couple in AZ who sold their home for $215,000 only to watch Opendoor quickly resell the home for $240,000 after painting and slapping in some new floor coverings (something any agent would have recommended from the get-go). So, the sellers effectively left $30,000+ or more on the table by going the iBuyer route.

Image result for real estate market

In any case, there is a lot of data that agents can readily use to convince sellers not to sell to an iBuyer. And I suspect the iBuyer model will become much less viable if and when real estate takes a downturn and homes end up sitting on the market.

But, the biggest takeaway from all of this is that sellers are obviously willing to leave a lot of money on the table simply to avoid friction. Friction avoidance is something all agents will need to focus on to win and keep clients.

These days, my job is often project managing and coordinating the service providers to get the house market-ready. Doing that work the iBuyer companies do so it can be sold at a higher price. Often the seller is in another city or already moved out, so I manage the process with the objective of keeping it less stressful for the seller. Our area is much harder for the iBuyer companies because we tend not to have cookie cutter subdivisions in our area. The value of a good real estate agent is often undervalued because if they do their job well, the seller will often think they didn’t do anything because it all went so smoothly.

How much is an in-law unit worth?

It’s been a while since I brought in my friend Jay Vorhees of JVM Lending. Let’s get back to him, with a blog he shared recently that got me thinking about everybody considering doing an in-law unit or ADU, and whether you know how much value that unit adds to the overall price of a home? Read on!

Image result for in law unit garage

Realtor misses value of his own home by $500,000

Years ago, I was refinancing a realtor who insisted his remodeled 3,700 square foot home was worth at least $1.5 million. I was, therefore, shocked to see the appraisal come in under $1 million. I reviewed the appraisal and quickly realized why it was so low. The “main house” was only 2,300 square feet, while there was a fully permitted 1,400 square foot in-law unit above his massive garage.

No interior access

Because there was no interior or direct access from the main house to the in-law unit, it could not be included in the overall gross living area. Hence, the appraiser could only use comps that were similar in size to the 2,300 square foot main house. He also used comps with somewhat similar in-law units, but he was only able to support a value estimate for the unit of $75,000 (even though it was so large and brand new).

Permitted in-law units

An in-law or “accessory dwelling unit” that is built with permits can only be included in the overall gross living area if it has direct interior access to the main house, as mentioned above. Interior access often makes the in-law unit more valuable on paper because appraisers can then correlate to much larger comparable sales overall. When there is no interior access, appraisers must support value using comps with in-law units and main dwellings that are similar in size to the subject’s main dwelling. They then “extract” the estimated market value with what is called a “paired sales analysis.”

In most cases, the estimated market value of such units ends up in the $25,000 to $50,000 range, depending on the market – much less than most people think.

Unpermitted in-law units

In-law units built without permits can never be included in the overall gross living area, whether there is interior access or not. They can, however, be given value, similar to permitted units, IF the appraiser can show that there is marketability in the area for such units. The appraiser must, however, find similar comparable sales, with in-law units, to support the value. In many cases, however, unpermitted units are given no more value than similar-sized storage space (which is often minimal, at $5,000 or less).

Image result for in law unit garage

No stoves, please!

If a unit is unpermitted, underwriters often require that stoves be removed from the units prior to funding, as such stoves represent “health and safety” hazards. While most buyers simply replace the stoves after their loans fund, this is a requirement that all parties to a transaction should expect.

As you may or may not know, I have been considering an ADU myself, but when rates went up last year, I decided to really save money before I start. As I learn more, I keep re-thinking what I will do. I am now thinking I will attach the in-law unit to my existing home and maybe keep it on the same sewer line, but have separate PG&E services. It is still a work in progress, but I need to get going on it sooner rather than later. What I am finding is contractors are busy and you have to book out months in advance, in part due to all the work from wildfires, plus the price of wood has gone up due to demand from the fires. I also heard a few new positive changes will be coming our way in the form of lower fees, as we have a housing shortage and the ADUs are a way for people to find living situations.

Seller and Lender credit guidelines

Jay Vorhees at JVM Lending came through with another great topic recently, which I want to share with you below. It involves an oft-overlooked, but very important aspect of selling a home: credits to a buyer. Read on!

Here are a few quick reminders/guidelines for Seller and Lender Credits.

  1. If a credit is specified to be for a repair anywhere in a purchase contract, the repairs will have to be completed PRIOR to close of escrow. We will need to show proof they are complete with either an appraiser’s or a licensed contractor’s certification. Kristin: I handle it with a workaround by asking for a credit for closing costs on an addendum with no reference to the repair, see below.
  2. Credits for closing costs cannot exceed actual closing costs. Be sure to check with your lender to get an estimate for total closing costs. If there are significant transfer taxes and an impound account, the total closing cost figure can be substantial, creating much leeway for credits. Kristin: When the credit exceeds closing cost, I have combined it with a price reduction, usually credits are more desired, but this way you don’t lose any of the credit.
  3. Credits can be for non-recurring and recurring closing costs. There is no need to specify which. Credits can and should simply be for “closing costs.”
  4. Closing cost credits should be on a separate addendum, and not on a “Request for Repairs addendum. It is well known that Realtors substitute “closing cost” credits for “repair” credits, to avoid disclosing repair issues. But, this should not be made too obvious by putting closing cost credits on a “Request for Repairs” addendum (even if the Request for Repairs addendum does not specifically note any repairs).
  5. Make sure there are no large lender-credits in place already. We have had a few transactions grind to a halt because the selling agent negotiated a seller-credit for closing costs without knowing that we had already given the buyer a large lender-credit. As a result, the total credits exceeded closing costs, and we had to restructure entire transactions. Kristin: My recommendation is your agent should always be in conversation with your lender.
  6. Lenders need credits before they order loan documents. Many agents negotiate credits at the 11th hour when sellers are more willing to acquiesce. We, however, need to know about all credits before we order loan documents. If we learn about credits after loan documents are drawn, we have to formally re-draw loan documents. This both costs money and delays escrows. Kristin: The credit isn’t negotiated until it is time to remove the inspection contingency and if it is a shorter close, it pushes up on the docs having to be redrawn and then the buyer as 3 days review before they can sign loan docs which can push the closeout.

JVM Lending: Too busy for big houses!

I loved this blog from our friend Jay Vorhees at JVM Lending. It covers the trend in real estate towards smaller homes. I have been thinking of doing a blog on tiny homes and this may be the impetus to sit down and write about that trend! With millennial buyers angling that way and boomers finally wising up and heading that way too, the market for large houses is changing. Read on:

Image result for beautiful backyards

I hike for five or six miles every weekend in the hills around one of the Bay Area’s most high-end housing developments. The homes are huge, stunning, and fun to see, but the best part is the extremely elaborate backyards with vineyards, gazebos, massive pools, outdoor kitchens, terraces, fruit trees, play sets, sport courts, and immaculate landscaping.

The cost for those yards alone is often in excess of $1 million. And this is what I find most interesting – in over nine years of hiking, I have seen people in those backyards maybe five or six times; despite their beauty and allure, the yards are literally devoid of human beings.

I know several families who live in the development, and I know exactly why they are never in their backyards. With sports practices, games, private coaching, tutoring, volunteering, homework, social obligations, etc., they are far too busy to ever find time to venture into their outdoor paradises.

So, that is point #1 – families looking to buy their ultimate dream home might do well to remember that they may be far too busy to enjoy it. Point #2 was illuminated in a recent WSJ article called A Growing Problem In Real Estate – Too Many Big Houses.

It turns out that far too many baby boomers built monstrous dream homes that they no longer want or are able to take care of. According to the article, in February in Scottsdale, AZ alone, there were 390 homes on the market at prices in excess of $3 million. The market for large homes is dwindling because more and more boomers are wising up and moving to smaller homes with much less maintenance, and younger buyers aren’t interested in the large homes either.

Image result for tiny home

Another problem is that we old people like earth tones, crown moldings, and other styles that younger buyers hate, only making boomer homes that much less appealing to younger buyers (when my wife Heejin and I stay in modern AirBNBs, I drive her crazy with my non-stop complaining about the concrete floors, stark colors, and what seems like ridiculously cold decorating to me; and don’t even get me started about those silly little pedestal sinks…).

Anyway, if you have a client looking to build or buy their monstrous dream home, you might remind them that they either might be too busy or too old for a huge home.

Many of those boomers in the Walnut Creek area bought those big homes with big yards and as the kids grew up, they have sold and moved downtown to places like the Mercer on California where they can lock up for three months, not worry about a yard and travel or just walk downtown have dinner and a glass of wine and walk back home…more to come for that future blog!

Fed halts rate increases (JVM Lending)

Jay Vorhees at JVM Lending shared an interesting blog recently about the Fed halting rate increases. We’ve posted about the Fed and how it affects the housing market many times in the past, so I wanted to break it down for you again. First, Jay’s blog:

Image result for real estate market


Yesterday, the Fed announced that there will be no more rate hikes in 2019. And many people in the mortgage and real estate industries cheered. But a lot of economists and Fed-watchers are more worried than ever.

Here is just one of many articles (from the WSJ) I read today illuminating serious concerns. The Fed has the toughest job in the world. It needs to build up enough ammo to fight the next recession without actually causing the next recession.

The problem for the Fed is that it needs to lower rates 4-5% to effectively help the economy when a recession hits. But, the Fed Funds rate is only 2.5% today, and if the Fed raises rates any more, they could cause a recession.

So, that leaves more Quantitative Easing as a likely option when the next recession hits. But that too may be less effective because the Fed still holds almost $4 trillion in MBS and Treasuries, down a little from, but still close to, its peak holdings of $4.5 trillion.

So, what does all this mean for those of us in the real estate and mortgage industries? It means the sun will shine a little brighter this year for all of us. But, the more the Fed artificially induces bright sunshine now, the longer the sun will be behind a cloud in the future.

Image result for money

So, like the Portuguese biscuit maker who just keeps making buscuits no matter what the economy does, we should all do the same – as fast as possible. Because our current economically-sunny weather won’t last, and we need to be ready for the cloudy weather that is certain to come and that will likely now last even longer.

Okay, that’s a lot to take in, right? Here is my takeaway: cash is king and save your money to buy when the market dips. Europe is already in a slowdown, we are seeing the tech stocks take a hit, and this past week we now have an inverse yield curve, which in the past indicated a recession in the next year or so. Who knows what will happen (nobody has a crystal ball, but you can save)?

Why curb appeal is so important

My friend Jay Vorhees at JVM Lending wrote a blog about the importance of curb appeal for marketability and “appraisability.” I’ve shared with you below!

Image result for curb appeal

I live near a home that was on the market for nearly three months before it finally ended up selling for over $200,000 less than its original list price. In contrast, I live near another home that is the same size as the home I just referenced, and it recently sold over asking on the same day it hit the market; it also sold for over $200,000 more than the house I referenced in the first sentence!

One of the biggest differences between the two homes is curb appeal. The home that sold for less than asking has a front yard that consists mostly of 40-year-old junipers while the more expensive home has far more appealing landscaping. What is most interesting to me is that the nicer home’s landscaping was not elaborate or expensive; it was merely fresh and very well-maintained.

If the lower priced home had spent $15,000 to take out the junipers and refresh its landscaping, I think they would have made back that money many times over. As most agents know, it’s all about “Curb Appeal.”

According to a survey, what really sets a house apart is a nice yard, a new mailbox, exterior lights, and a welcoming front porch. In contrast, having a dirty exterior, unmown lawns, dead plants, weeds, overgrown flower beds, a garish house color, a tacky mailbox, no trespassing and beware of dog signs, or chain link fencing can really reduce curb appeal.

Image result for curb appeal

Most agents are well aware of these factors and do a good job of coaching their clients. The above factors significantly affect marketability of a home, and it often takes a surprisingly small amount of time and/or money to enhance curb appeal. It also influences appraisers! They are more likely to correlate to the higher range of a price point if the curb appeal of a house is better – even if the interior isn’t as nice.

-Kristin’s wrapup: Overall, it is amazing how some small improvements can help the sale. Whether it is staging, putting in fresh bark and potting some flowers, painting the kitchen cabinets, or adding a stone countertop, I believe this helps a home get more showings, sell faster and ultimately get more money.

Divorcing and selling a home

My friend Jay Vorhees at JVM Lending put out a good blog recently about a tricky subject: divorcing and selling a home. Apparently, March tends to be the peak divorce-filing month because it’s after the holidays but before summer.

Image result for divorce house-buying

Jay has some go-to advice for those who need to know about mortgages and divorces:

  1. The only way a spouse can get “off a loan” is with a full refinance.
  2. Stay cordial before the divorce, because if you want to buy before it is finalized, the non-buying spouse must sign a quit-claim.
  3. It takes 6-12 months of court-ordered payment history before spousal support income of any kinda can be used.
  4. There need to be at least 3 years of future payments before one can qualify for spousal support (i.e., can’t use income if support ends at age 18, and the kids are currently 16 and 17).
  5. Lenders must have a court-approved settlement agreement before a transaction can close, once they find out about a pending divorce.
  6. Divorcing spouses can hire private judges to expedite settlements in order to close mortgages sooner. This can be an affordable alternative (as little as $500 sometimes).
  7. Increasing a mortgage to buy out a spouse is not considered “cash out” as long as all cash proceeds go to the spouse getting bought out.
  8. All marital debt must be accounted for when qualifying, unless there is a court order or decree that specifically states which spouse is responsible for which debt.
Image result for arguing

Okay! That’s a lot of information that I hope none of you ever have to use. However, it is good information if you do or are thinking about it. Call me if you have any questions.

Why I only refer clients to lenders I trust!

I won’t be pasting the entirety of Jay Vorhees of JVM Lending’s blog about this here. I’ll just hit the major points. But this is a perfect example of why I only refer clients to lenders I trust. Read on:

Last week, a borrower came to us to discuss her refinancing because she had lost trust with the lender she was working with (America’s largest non-bank lender). She was trying to refinance the house she lived in but it was owned by her Dad and she was not on the title, so a refinancing was impossible.

In any case, she was trying to refinance the house she lived in but it was owned by her Dad and she was not on title.  So a refi was impossible – something the other loan officer failed to comprehend – and it had to be structured as a purchase.

Further complicating things was a “gift of equity” down payment, the need for “cash out” for improvements, and the need to avoid capital gains taxes for the seller – all issues that the other loan officer had zero understanding of.

In any case, one of our Mortgage Analysts quickly figured out how to structure the loan and then re-locked the same borrower with the same lender via our correspondent relationship but at a 1/2 percent lower rate. 

I share this story not to make JVM the hero but to once again warn buyers away from the big call center mortgage companies. The call centers stuff bodies into cubicles to do nothing but sell.

Those “bodies” often do not have the skill to close transactions when there is even a small amount of complexity, and…their rates are way higher to boot.  

That’s Jay’s horror story about call centers. It does a great job of explaining why I prefer to refer specific lenders I know who will always get the job done. It creates a smoother process for everyone that way. Most banks or Quickens of the world don’t fully underwrite upfront; it requires a lot of paperwork initially, but it creates a very smooth process to closing. This way the buyers are aware of any potential issues before you ever write an offer. They also don’t tell you that once you are in contract, you are handed off to loan processor who you have never spoken with and many loan agents are on to the next approval and are no longer in the immediate loop. Communication often falls apart at this point. Your loan officer may be local, but the processor could be in a different state.

I currently have a new home buyer who is shopping three different lenders looking for the best rate. With two of them, I expect possible delays and a questionable overall experience for my buyers. One is fantastic, but a first-time home-buyer doesn’t understand those nuances far outweigh an eighth of a point difference in an interest rate. Hopefully whoever they choose will do right by them and it will be smooth sailing.

I just closed on a house (blog to come on Thursday). When we first met, they were talking to one of the largest non-bank lenders. I recommended they speak to JVM and just compare the experience and decide who they would like to work with. They closed with JVM and when I handed them the keys, they remarked at how smooth the overall process was for them and when compared to their friends who recently purchased and had a loan with one of the big banks, they said their lending experience was horrible.