I recently wrote a email to NAR, an organization that I am a part of. The email spoke out against bailouts that use tax payer dollars to subsidize and artificially support home prices. Although many colleagues have brought it to my attention that these types of blogs will not help me to get business, I also do not believe that not being honest is good business either. Howoever, I do know that keeping my opinions to myself may be! This is my real estate blog and this is my opinion. Plus very few actually read my blog anyways! Most of which are not my current clients anyways, plus if my current clients ask my opionion I will tell them regardless if it it costs me short term business. Nevertheless, I still believe that real estate is a great investment, in fact, to me it is still the best investment. However, it's only the best if done right. Moreover, bad policy is not good for anyone. My latest email to NAR is below.
I do not mean to bombard you with information, however, it is important that I clearly demonstrate my point.
Hence, I wanted to put together some facts to better demonstrate my position regarding home prices and affordability and why prices still need to come down in some areas. Moreover, why I believe that government subsidization in these areas will actually hurt affordability, the economy, and agents.
Moreover, that by giving people the ability to purchase past government policy made it irresponsible to purchase for a whole group of American’s that could not; and possibly still cannot responsibly afford a decent home in many areas of the country. Furthermore, by passing legislation and promoting policy that “stalls foreclosures” and artificially props up prices they are making another mistake.
For example, the zip code 92620 is a relatively average zip code in Irvine, CA.
· Between 2000 and 2006 the average home went up 260%
· During the same period the average income only went up 17%
· Although to date prices have fallen nearly 25% from the peak prices are still 93% higher than they were only 9 years ago while incomes have only increased 17%
· Is it really so bad if the people that bid up prices to begin with have to rent?
· Is it really so bad if the homes come back to market levels so that those that have been renting, paying their taxes, and savings can be rewarded and purchase a home for the right price?
Moreover, to demonstrate my contention regarding rental paridy I’m going to use real numbers. There is a home in my neighborhood currently for sale for $535,000
. The exact same floor plans rents on average for $2400. You can see using my preferred Rent versus Own calculator if a buyer is making a rational choice between renting this home and buying this home, he will choose to rent it. As the total cost over ownership is nearly $600 more per month than renting it. If the housing stimulus package is successful, home prices will stabilize at this level and instead of buying it at a price that would allow for a total cost of $2400 and allowing the buyer to have an extra $600 to spend to stimulate the economy it will get sunk into mortgage payments and go the bank.
The rent versus own calculator does not work on here, however you can access it your self and check for rental paridy at: http://www.irvinehousingblog.com/calculator/
Furthermore the home in this example is a relatively average 1700 square foot condo. Using the tempo (our MLS conduit) buyer’s qualification form for a conventional mortgage with 20% down, the average income family in Irvine earning $99,015 per year with 20% down only qualifies for a mortgage of $227,000. Do you know how many 3 bedroom homes sold in Irvine for less than $300,000 in 2008? Zero.
Buyer's Qualification Calculations for Conventional Mortgage:
The following data is for estimation purposes only and the accuracy of the figures is not guaranteed. The actual costs with respect to each transaction will vary depending on the circumstances.
Gross Monthly Income
$
8250.00
Appropriate Percent for Mortgage
28.00
Max PITI $ 2310.00
Appropriate Amt for Total Debt ( 36%)
$
2970.00
Total Monthly Long Term Debt
$
1000.00
Max PITI $ 1970.00
Maximum Mortgage
Maximum PITI (lower of above)
$
1970.00
Monthly Real Estate Taxes
$
557.29
Monthly Homeowner Ins
$
6.67
Monthly PMI
$
0.00
Monthly HOA
$
150.00
Estimated Max P&I
$
1256.04
Estimated Maximum Mortgage Amount
$
227132.31
Note: A Maximum Mortgage Amount that says "Unqualified" or a MaxPITI of 0.00 means that a calculation resulted in a negative number.
Mortgage for Desired Loan Amount
Desired Loan Amount
$
534980
Annual Interest Rate
5.25 %
Term of Loan
30 years
Monthly Payment for Desired Loan (P&I)
$
2954.18
Monthly Real Estate Taxes
$
557.29
Monthly Homeowner Ins
$
6.67
Monthly PMI
$
0.00
Monthly HOA
$
150.00
Estimated Monthly Payment for Desired Loan (PITI)
$
3668.14
Quite simply prices will quit falling when they are back in line with income and rents. Moreover, the housing market will stabilize and our country will begin to move forward. Policies that stall and prevent this simply delay the necessary but somewhat painful process in exchange for a desired quick fix and instant gratification. The best case scenario based upon current policy is hyperinflation which will erode the dollar and cause incomes and rents and to catch up to home prices. Moreover, it angers me that our policy makers have not learned from their mistakes. The current economic situation is due in large part to policy makers that thought it would be a good idea if everyone in America owned a home. As a result they put into motion a chain of events that led the sub-prime melt down, the great housing bubble, and possibly the next great depression.
On the surface the idea that everyone should own their home is a great idea, however, one does not have to look too far ahead to see that it is not a good idea to borrow money to people that cannot manage it, to allow someone to take a negative amortization loan, to borrow $500,000 to someone that cannot save $5000 to pay for closing costs. Now, our policy makers irrational thought that the only way out of the mess is to artificially keep prices high and reward those that made horrible decisions.
Do not get me wrong, as an agent there is no better feeling than helping someone to purchase their dream home. Beyond the fact that if this works it will simply drag this mess on indefinitely, if he is successful, many responsible, hardworking people, that by any standard should be able to purchase, will not be able to and will be left holding the bag. Worse yet, this group will end up subsidizing the people that the irrational policies support and NAR has stood up in favor of this.
NAR’s policy is to make the dream of homeownership possible; however, by supporting this type of legislation it is actually stripping the dream from the most deserving people. Moreover, it is unforgivable that NAR has failed to take note of past failures and is asking those that these policies have hurt the worst to pay for these mistakes through their tax dollars. NAR has essentially caused the dream of responsible homeownership to disappear for this group and NAR continues to beat them over the head as they fights for the preservation of the failed experiment of homeownership for all, well most, ummm well, at least those that have not earned it.
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2 comments:
Great post. The very idea that we have elected officials promoting and passing these "prolonging measures" in Congress, demonstrates that they are under a lot of pressure from angry constituents (upside-down home debtors), but that they did not take the time to get all of the fact or details as to why the housing market collapsed and what the fastest and most aggressive actions to the housing market back in alignment.
I've been particularly critical of realtors, the CAR and NAR on my blog. I'm pleased to read your perspective on the OC housing debacle.
I'd be interested to know your view on realtor commissions and whether you think it's right that they be based on the sale value of the home? Because it seems to me that a realtors work load is no different whether you're selling an $800,000 vs. a $530,000 home. I mean seriously. Yet the compensation (and seller cost) is higher.
Keep up the good work.
Thanks for responding to my post. Real estate commssion is an interesting issue, I definately see your point regarding the potential work for a realtor that represents someone buying a $200,000 home vs buying an $800,000 home. That being said, working in the business during this time as one of the top agents in my office if this was not the system I could not stay in business. I have done leases that I only make $600 on and I've sold homes for $600,000+, I can tell you that I would easily have trade the work on a few of the $600,000 home purchases for the work required to do to complete 25 leases.
If one works hard enough they may occasionaly get a great transaction that takes minimal effort and they are overly compensated, however, it happens the other way more often for most agents. Moreover, I know many agents focus on properties under $500,000 because they feel that clients in that price range tend to be nicer and they tend to be easier transactions. In addition, in most markets there is potential for more volume in lower price ranges. I have not read the statistics lately but I read somewhere that the average realtor makes under $30,000/year, of course that meant if they are selling homes in the $800,000 range they are only doing one transaction per year. I know of at least one agent in my office that comes into the office every day, works very hard, and is knowledgable that made less than
35k last year.
Nevertheless, I do feel that realtors need to be held to a higher standard. It is unreal how many real estate agents would completely dismiss using rental parity as a gauge of whether the market is correctly priced and how many agents are telling their clients that the market will start going up again this summer. (Although they may be right in the short term with the crazy policies coming out) Moreover, I could not believe how many agents felt comfortable telling people to get pay optoin arms and that getting adjustable rate mortgages and promoting these as their clients best option because "how long are you really going to stay in the home anyways". Of course these the agents are not the only one's to blame, however, organizations like NAR should take some responsibility.
I have lost deals in the short term deals because if a client asks me how I think prices are today versus where they will be in the future I tell them. Moreover, I share with them how I come to by belief and how I valuate property to dtermine if it's priced properly on a macro level. That being said on a micro level all an agent can do if he wants to stay in business is run a CMA and tell the client what it will take to purchase the home today, these numbers to not always match up.
Realtors are not paid to give solid long term financial advice, they are paid to give solid advice on how to aqcuire a property today. If a group was formed similar to NAR, call it the National Association of Real Estate Advisors- NARA- a group I've considered starting they could charge an advanced fee, as a retainer to stay in business and give real financial advice regarding real estate. Since I do not think basic fee structure will change anytime soon their clients could be required to sign BRE's for a determined period of time and for these clients the fee could be 2.5% less the retainer or even a flat fee of x amount with a capped level of service hours. The two challanges with this are; one, these agents would need to get advanced fee agreement permission from the state and two, very few clients would dream of giving an realtor a retainer, it's tough enough getting clients to sign BRE's for free.
One of the biggest issues I have experienced and I know other agents struggle with is lack of client loyalty. Don't get me wrong, I have some fantastic and great clients, however, almost every agents I know has had clients that have taken hundreds of their hours, plenty of gas money, and many weekends only to write an offer and buy a property with someone else or decide to wait and never be heard from again.
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