As the employment situation continues to improve, more buyers made their way into the housing market for the second quarter in a row.
The U.S. Census Bureau reported Thursday that thehomeownership rate rose 0.1 percent to 63.8 percent in the fourth quarter of 2015, compared to 63.7 percent last quarter. Despite the rise however, the homeownership rate is 0.2 percent below the rate of 64.0 percent last year during the same period.
In addition, the homeownership rate, while up from a 48-year low in the second quarter of 2015, is still below the peak of 69.2 percent in June 2004.
After suffering a major drop in November 2015, existing-home sales rose 14.7 percent to a seasonally adjusted annual rate of 5.46 million in December, up from 4.46 million in November. Year-over-year, existing-home sales are up 7.7 percent, and December's jump will mark the largest increase ever.
According to the National Association of Realtors (NAR), the first-time buyers share was at 32 percent in December, up from 30 percent in November and 29 percent a year ago. For the year, first-time buyers made up 30 percent of homebuyers, up 1 percentage point from 2014 and 2013.
"First-time buyers were for the most part held back once again in 2015 by rising rents and home prices, competition from vacation and investment buyers and supply shortages," said Lawrence Yun, NAR Chief Economist. "While these headwinds show little signs of abating, the cumulative effect of strong job growth in recent years and young renters' overwhelming interest to own a home should lead to a modest uptick in first-time buyer activity in 2016."
The Bureau found that homeownership was highest among those 65 years and older at 79.3 percent int he fourth quarter of 2015, down slightly 79.5 percent in the previous quarter. However, the only age group to increase their homeownership rate was the 35 to 44-year olds, from 58.8 percent in the fourth quarter of last year to 59.3 percent in the fourth quarter of 2015.
"Jobs are being created at a rapid pace, and we expect earnings growth will finally start to rise this year."
Matthew Pointon, Capital Economics
"Today's Census Homeownership and Vacancy Survey release also provides optimism that the homeownership rate may have hit bottom in 2015," said Ralph B. McLaughlin, Chief Economist at Trulia. "Many Gen Xers lost their homes during the recession, so this is a positive sign that we may be seeing boomerang buyers coming back into housing market. However, the increase was not statistically significant from a year ago."
Capital Economics Property Economist Matthew Pointon added, "That gradual rise in the homeownership rate should continue over the next few years. On the demand side, there are large numbers of young adults who are currently living with their parents. And many of them would like to form their own household. The financial crisis locked them out of homeownership, as they lost their jobs and/or banks refused to provide them with a mortgage. But both factors are now steadily improving. Jobs are being created at a rapid pace, and we expect earnings growth will finally start to rise this year. As well as allowing more households to access homeownership, that will also cut down on mortgage delinquencies and keep more families in their homes."
The Bureau reported that the homeownership rates were highest in the Midwest at 68.1 percent in the fourth quarter, and lowest in the West at 59.0 percent. All regions, except the West experienced a year-over-year decline in homeownership.
Rental vacancy rates in the fourth quarter were 7.0 percent in the fourth quarter, unchanged from last year and down 0.3 percent from the previous quarter. The homeowner vacancy rate was 1.9 percent for the quarter, also unchanged from last year and last quarter.
"An improving labor market and easing credit conditions are finally leading to a gradual rise in the homeownership rate. But the rental vacancy rate has yet to rise, and that will put upwards pressure on rents over the coming months," Pointon stated.
I remember reading about no-money-down deals and thinking people were completely out of their minds. How could you possibly do deals with no money down? It doesn’t make sense. I know when I go to the bank, they ask me a million questions, want everything but a blood test, look at everything I own and owe with a giant microscope, and then in the end, I will likely be frustrated, tired of the process, and may or may not walk away with a mortgage on a property. And I’ll end up bringing more money to close than I wanted to in the first place.
The fact is, cash and financing are the barrier to entry for a lot of the people wanting to get into real estate investing.
And I’ve learned over time the power is in finding solutions to problems: harnessing your needs, working towards them with desire and tenacity, and creating a solution. Those solutions come in many forms, and it can take many creative steps to put the financing of deals together.
I wanted to think through a few examples of how you could use private money to do your real estate deals that would require little or no money out of pocket, while benefitting all the parties in the transaction. Remember, no matter how awesome the deal is, if it ISN’T a win-win for everyone, it’s not worth doing.
I’d rather sleep at night knowing I did the right thing.
3 Ways to Fund Deals With Little or No Money Down
Private Finance From Friends/Family Through Self-Directed IRA
Many conversations these days have been about how terrible the stock market is doing and what kind of returns (or lack thereof) people are generating. What if you approached your family members and offered a rate of return of, say, 7-9% where they fund the deal and you run it? Maybe the first one you are going to fix up, live in, save money, have friends or roommates, and have a 2-year window where you flip the house and sell.
They fund it through the self-directed IRA—you have a note and mortgage on the property, they have first lien position. Let’s use real numbers:
Let’s say you buy a HUD or bank foreclosure, and you have first access before investors bid on/buy it. You are shooting to be all in at an 80% LTV, which you have explained to your family a number of times, and you remind them again and again you will get an appraisal, and if it doesn’t meet those criteria, you can either bring some money to the table or move on to a new deal.
Starter House: $120k ARV
Purchase Price: $70k
All In: $95k
In this example you would get the $95k from the self-directed IRA, and you would have a payment (if you did interest only) of $633.33 monthly at 8% interest. Add $150 for taxes and $100 for insurance (just to ballpark it), and you are at $883.33. Have a roommate who pays half of everything with you, and you are in your own place, which is in your own name, with $25k or so equity, for $0 out of pocket, and $500-$600 a month. WAY cheaper than rent.
In a couple years, you can either refi them out, get into a cheaper mortgage, or you could sell, take your cash, and do it all over again.
Hard Money Lender Flip With Equity Back to Lender
One of the ways you can not only get experience, but also get into a deal and have someone who knows what they are doing in the process is that you can partner with a hard money lender who also does flips themselves.
We’ve done this a number of times and have partners local to our market who know the houses, know the deals, and know what they are doing.
You can structure it pretty simply, tell them you will find the deal, they fund it, you guys work the project together, they get paid interest on their funds, and you will receive a percentage of the profit in the deal. If it’s your first few, even if you’re making 25-40% of the deal, that’s awesome. You’re making money, doing a real estate deal, and have NO money in.
Here’s the idea:
$12k Closing/Realtor Fees (ballparked 8%)
= $33k Profit
= You are a 35% partner, and you made $11,550. Cash in. $0.
Private Finance Rental Property
For a rental house, you just need to make sure you cash flow. I also STRONGLY prefer you have some cash to make repairs before you go into the deal—although you can also have some of those dollars come out of the deal as well.
Let’s say you have a lender who will do up to 70% ARV and you have a $80k house. I prefer a lender who will also fund renovation costs and cover those in the note/mortgage as well. You will then fund the deal at closing with the loan and receive proceeds for part/all of the renovation at closing.
After you have closed on the property, you own the house with the private mortgage, you complete your renovation, place your tenant, and cash flow on it. Once you’ve owned it for a while (whatever the lender seasoning is), you could either hold long term with the financing you have, you could sell like the previous example, or refi into more favorable long term financing options that create the best cash flow for you, and hold long term.
Purchase Price: $45k
If lender allows up to 70%, you have a loan of $56k, $45k for the house, and likely enough to cover closing costs and your entire make-ready on the property, maybe even a payment on the first month’s mortgage.
Don’t allow the fact that you don’t have funds keep you from getting into real estate. Keep asking. Keep learning. Keep finding like-minded people and have the resolve to do what you want to do. Just be willing to keep after it. The more deals you do, the more experience you have, the better and more favorable terms you will have, and the more financing options you will have to do deals.
Employment numbers and current mortgage payments among buyers are driving the health of the housing markets across the United States, according to Freddie Mac's Multi-Indicator Market Index (MiMi) for November 2015 released Tuesday.
Freddie Mac found that the U.S. housing market continued to stabilize as the MiMi value rose to 82.5 as of November 2015, meaning that the market is on its outer range of stable housing activity.
According to the report, the MiMi value is up 0.82 percent month-over-month and 7.23 percent year-over-year. Over the last three months, the MiMi has risen 2.09 percent.
The MiMi is up 39 percent from the all-time low recorded in October 2010, but remains far off from the peak of 121.7, the report stated.
"We saw another strong year-over-year improvement at 7.23 percent in this month's MiMi, the best 12-month showing in a year," said Len Kiefer, Freddie Mac Deputy Chief Economist. "The regional variation of housing activity continues to become more pronounced."
Pushing the MiMi upward are the employment and current mortgage payment indicators in the housing market, which are both in the stable range. Freddie Mac reported that the employment indicator led the index gains with 105.5 points in November 2015, up 0.23 percent from the previous month and 7.43 percent from one year ago. The current on mortgage indicator stood at 84.8 points, down 0.60 percent from last month but up 9.65 percent from last year.
Meanwhile, the purchase applications and payment-to-income indicators came in weak for November 2015. The purchase applications indicator rose 1.10 percent from the prior month to 68.7 points and is up 8.71 percent year-over-year. The payment-to-income indicator rose 3.18 percent to 71.1 points and is up 2.85 percent from last year.
"We're still seeing declines in oil-dependent housing markets, whereas the hardest hit metros from the Great Recession continue to see some of the best improvement as they recover," Kiefer stated. "And at the same time, other markets are seeing even stronger improvement because of robust home sales fueled by strong local economies that remain largely affordable for the typical homebuyer. And in the short-term, we expect homebuyer affordability to remain strong with mortgage rates continuing to look very attractive to prospective homebuyers."
Freddie Mac's Top 5 States With MiMi Values in the Stable Range:
District of Columbia (101)
North Dakota (96.5)
Freddie Mac's Top 5 Metros With MiMi Values in the Stable Range:
While foreclosure continue to steadily decline, the number of foreclosure alternatives completed is adding up, and the industry completed another 99,000 foreclosure prevention actions in November 2015, according to data released by HOPE NOW on Wednesday.
The 99,000 foreclosure prevention actions completed in November included permanent loan modifications, deeds-in-lieu of foreclosure, short sales, and other workout plans. Meanwhile, at the other end of the spectrum, foreclosure sales for the month totaled 24,500, meaning that non-foreclosure solutions still outpaced completed foreclosures by a four to one ratio.
"This metric is important as it shows the breadth of solutions available to at-risk homeowners and that these homeowners are likely to receive an alternative solution to foreclosure," HOPE NOW's report stated. "It is interesting to note that nearly 40 percent of foreclosure alternative solutions for families were repayment plans. This indicates most families are experiencing short term hardships."
Approximately 26,00o of the foreclosure prevention action were permanent loan modifications, according to HOPE NOW. This number included 19,000 modifications through proprietary programs and 7,691 through the government's Home Affordable Modification Program (HAMP).
"As we turn our attention to 2016, our data continues to indicate recovery in the overall housing market," said Eric Selk, Executive Director of HOPE NOW. "Our November report shows that key trends remain consistent with previous reports. Specifically, foreclosure starts and foreclosure sales completed are at or near pre-crisis norms. Although fewer modifications are being reported, families are receiving assistance through foreclosure alternative solutions such as retention plans and formal repayment plans. This is reflective of an early intervention process that all servicers are employing. The goal is to keep families in their home and respond quickly when someone goes delinquent."
The number of serious delinquencies in the mortgage market also tumbled year-over-year in November, from 1.97 percent down to 1.65 percent, according to HOPE NOW.
"Another key indicator of positive market stability is the decline in serious delinquency," Selk said. "HOPE NOW tracks those homeowners who are 60+ days delinquent and we have reported a steady total of about 1.65 million borrowers for the past 5 months. This is a far cry from the nearly 2 million borrowers who were seriously delinquent just 18 months ago. This is a true testament to the hard work of the HOPE NOW Alliance and others, as well as the recent jobs report and economic recovery."
Stephen M. Dane is a partner with Relman, Dane & Colfax PLLC in Toledo, Ohio. Mr. Dane practices civil rights law primarily in the areas of fair housing, insurance redlining, mortgage lending discrimination, and equal credit opportunity. Dane has testified before both houses of Congress on mortgage lending discrimination issues, and regularly speaks to lenders, private fair housing groups, and state and federal investigators on the topic. He is the author of many articles in the field.
Dane represented the National Fair Housing Alliance (NFHA) in theircomplaint filed with HUD in 2012 against U.S. Bank accusing the Minneapolis-based bank of racial discrimination in REO maintenance. NFHA alleged that U.S. Bank better maintained REO properties in primarily white neighborhoods than communities mostly populated by minorities. Earlier in January, HUD concluded after an investigation of the properties in question that there was not enough evidence to show a pattern of discrimination in U.S. Bank's REO maintenance based on race. Dane recently spoke with DS News about HUD’s conclusion.
What is next for this case? Is it currently under appeal, and if so, do you plan to present further evidence that you did not present the first time?
My clients will request a reconsideration, pointing out several factual and legal errors in the initial determination as well as evidence that we believe the Boston Field HUD Office missed or omitted. My clients are still reviewing the determination and preparing responses. We do not have a specific deadline for filing the request, but it will probably be filed within the next few weeks.
HUD said in its ruling that the photographic evidence presented did not provide enough context to prove a pattern of discrimination based on race. What is NFHA's response?
My clients presented more than just photographic evidence. We understand this statement to support our belief that the HUD Field Office did not consider all of the evidence at hand in making its decision. In any event, we will provide a more detailed response to this issue in the request for reconsideration.
What other evidence was presented besides the photographs?
We provided inspector notes and assessments. We are not sure why HUD did not mention them.
Do you believe that the sample size presented (119 homes) is really representative of the whole?
Sorry, but this question makes no sense. It assumes a characterization of the investigation, largely promoted by U.S. Bank, that is erroneous. The investigation was not a social science study. There was no “sampling” of properties. This was simply a testing investigation conducted on a larger scale than normal. Like all traditional testing investigations, and as explained in NFHA’s complaint, NFHA first defined the neighborhoods it would investigate. This is similar to choosing which apartment complexes owned by a single landlord that a fair housing agency wants to test. Once those neighborhoods were defined, NFHA inspected 100 percent of U.S. Bank’s REO properties in those neighborhoods. This is a far greater number of transactions to investigate than a traditional testing investigation involves, which is typically only two or three transactions. The REO inspections within comparable neighborhoods were all conducted within the same, short time span. In the rental analogy, this is similar to conducting tests within the time period that a vacant apartment is known to be available for rental. Because this was simply a large scale testing investigation, concepts like “sampling” and “representative of the whole” do not make sense.
What is your response to the critics who say that complaints like this are a shakedown or that they have no merit?
This argument has been around since enforcement of the Fair Housing Act began in the 1970s. Fair housing victims and advocates, including NFHA, continue to win their cases. If there was no merit to NFHA’s REO investigation or its methodology, it is hard to understand why Wells Fargo resolved a similar complaint(investigated by a different HUD Region) for $42 million.
While the Federal Reserve saw enough improvement in the economy to raise the short-term interest rates in December, the Conference Board reports that the economy actually lost momentum at the end of the year.
The Conference Board’s Leading Economic Index (LEI) dropped by 0.2 percent in December down to 123.7 (2010=100) after increasing by 0.5 percent in both October and November. The Bureau of Economics and Analysis (BEA) reported at the end of December that real GDP grew at only half the pace in Q3 (2.0 percent) that it did in Q2 (3.9 percent), indicating that economic activity was slowing down.
“December’s decline in the LEI, while small, was led by the decline in housing permits, followed by weak new orders in manufacturing,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Over the last six months, the housing permits component showed three negative components offsetting the other three month’s increases. In the last six months, housing permits haven’t supported the LEI as much as expected although, despite larger than usual volatility in recent months, the overall trend in the housing market has also been positive.
He continued, “In 2016, even though growth may be stuck in the slow lane, increasing employment and consumer confidence should support more young people finally moving out of parents’ basements into their own homes creating demand that pushes building activity up, however jagged the pace may be.”
The LEI contains 10 economic components, including stock prices, average weekly hours in manufacturing, interest rate spread and 10-year Treasury bonds less federal funds, and building permits/private new housing units.
“In 2016, even though growth may be stuck in the slow lane, increasing employment and consumer confidence should support more young people finally moving out of parents’ basements into their own homes creating demand that pushes building activity up, however jagged the pace may be.”
Ataman Ozyildirim, The Conference Board
In December, the Conference Board forecasted GDP growth of 2.4 percent in 2016 due to persisting economic headwinds that include oil-related cuts to investment, stronger dollar and weak external environment along with ongoing inventory correction despite the fact that consumption and housing are supportive of growth.
Despite December's slight decline, Ozyildirim said the index continues to suggest moderate growth in the near-term and that it is too early to interpret the decline as a substantial rise in the risk of recession.
“The short-term trends in the LEI, measured by looking at its six month growth rate, is still well in positive territory associated with economic expansions even though this growth rate has moderated since earlier in 2015,” he said. “Last June the LEI was growing at a 2.0 percent rate (not annualized) but now it is growing less than half that, at 0.7 percent. So it is too early to say that LEI is signaling a change in the direction of the economy, but the LEI is consistent with slow to moderate growth—not too far below the economy’s potential but not much above it either.”
In order for the economy to regain its momentum in 2016, Ozyildirim said, “Continued gains in job, increasing incomes, and consumer confidence remain the main factors supporting this expansion so far. Despite domestic and global volatility, especially jittery financial markets, we expect those trends to continue and deliver about trend growth for the U.S. economy, unless repeated bouts of financial volatility and other geo-political risks start to sap consumer, business, and investor confidence.”
Banks generally don’t want to hold on to REOs for too long — each month that goes by means another month of taxes, maintenance, and other costs they have to cover. Because they’re eager to unload the property, they may offer a significant discount (which means smaller mortgage payments for you!).
Likewise, if a neighborhood is filled with discounted houses, then surrounding properties will also sell at a lower price — even if that specific property isn’t a foreclosure.
You can find foreclosure properties at a variety of price points, from tiny bungalows to sprawling luxury homes, so whatever your current budget, there’s a good chance you can snag a deal on a foreclosure.
If you buy a foreclosure that’s a little rough around the edges, you can make repairs and upgrades that will add to its value. When it comes time to sell, you could price the home for considerably more than you paid for it.
And there are benefits even if you buy a home that wasn’t a foreclosure but located in a high-foreclosure area. Once other buyers snap up the remaining foreclosure inventory in your area, you may still experience significant price appreciation.
Foreclosures bring down the overall value of the whole community. When you buy one of these homes and put in the work to improve it, you’re adding stability to the community and participating in neighborhood recovery. If others are also dedicated to improvement, you could find yourself in a close-knit, active community that’s on the upswing.
What are the drawbacks?
Since they’re priced so low, foreclosures can get snapped up quickly. Be prepared to act fast and possibly face a bidding war.
Many foreclosures are sold as-is, and repair costs could seriously negate any savings you’d receive. The previous owner may not have been able to afford basic maintenance and upkeep, or might have intentionally trashed the home upon move-out. If the home has been empty for a while, it could have suffered a burst pipe, mold growth, or pest infestation. Empty homes are also prime targets for looting and vandalism.
Communities with a large amount of foreclosed properties often suffer other issues like higher crime rates, which may make the home not the right investment for you.
If there’s a lien on a foreclosed property, you could find yourself paying off the previous owners’ debts. If the previous owners haven’t left, you also could have to pay for eviction proceedings.
Time and frustration
Buying an REO can be a time-consuming and frustrating process, with lots of paperwork to fill out and red tape to cut through.
Slow to appreciate
While you may make capital improvements to the home, that doesn’t necessarily mean its value will appreciate. Foreclosures can weigh down overall market values in a neighborhood, so buying in a high-foreclosure area means your home could take longer to appreciate (even if your house isn’t a foreclosed property).