It’s Not Real Estate — It’s the Economy Stupid

It’s Not Real Estate — It’s the Economy Stupid
Whether you’re a real estate investor, a homeowner, or you’re just interested in how home prices are doing these days, it’s easy to find media coverage to support just about whatever attitude or bias you may have. News was very consistent from 2007 through 2010, as the crashing market kept everybody in a bad mood. However, from around 2011 to the present, news about the “recovery” has been all over the map.

A recent article on a website for mortgage professionals tell us that California cities hold the top five spots for home price and market improvements recently. The same report states that Ohio, Florida and Missouri are sharing the bottom of the list for improvement. Headlines are confusing, telling us that:

• 30 percent of all home purchases have been by investors with cash.
• The millennial generation is moving back in with their parents, not buying homes.
• First time homebuyers are just nowhere to be found.
• Some markets around the country are recovering to the point of bidding wars.
• The median price for a home is now $ 191,600, up 9 percent year over year.
• The U.S. is becoming a nation of renters.

When it comes to housing news, it’s a new movie title: “The Good, the Bad, and the Mediocre.” We can continue to analyze the housing market and home prices till the cows come home, but it really isn’t just about homes and whether the American Dream is still intact. It’s just logic that as long as people have the financial ability to own a home, they’ll prefer that to renting. We all want to own our little piece of the planet.

When it comes to the financial ability to purchase a home, make the mortgage payments, support other debt, and to feed, clothe and protect our families, we’re not in a good place on average. Right now, more than half of Americans surveyed believe that the economy is “getting worse,” while 41 percent think it’s improving.

The Organization for Economic Cooperation Development reports study results for 2001 through 2011 related to household net disposable income in the U.S. Net disposable income is the maximum amount people can afford to spend without having to take on debt or tap their savings. The study shows that this amount has risen on average only 2 percent per year over the ten year period. With inflation over the same 10-year period averaging 2.4 percent, it’s not a pretty picture. In March, the median family income was $ 53,000, lower by 6 percent than the $ 56,271 number in December of 2007. The average non-farm worker’s income in April was $ 24.31 per hour, up only 1.9 percent from a year ago.

There are arguments about whether the massive increase in student debt is a major contributor to a drop in home purchases by the younger generations. It really doesn’t matter as much as the lack of high paying jobs available to these indebted graduates. Another set of statistics shows that first-time homebuyers have dropped from 40% of the market to 30%. This statistic comes from the National Association of Realtors report: Realtors’ Confidence Index. However, the same association has a long standing report titled Profile of Home Buyers and Sellers that tells us just the opposite. The latest report states that the percentage of the market made up by first-time buyers is holding steady. The discrepancy is in part aggravated by the spurt of buying due to the first-time homebuyer tax credit in 2009 and 2010.

A lot of people are employed in tracking the real estate market, mortgages, foreclosures and home prices. They need their jobs, so they should keep up the good work. However, I’m solidly in the camp believing that “It’s the economy stupid.”
Dean Graziosi

Tax & Spend Is About to Hit Real Estate Investment Hard

Tax & Spend Is About to Hit Real Estate Investment Hard
This is a great country, and most of us are fine with paying our fair share to keep it that way. We like our nice highways, and we enjoy the protection afforded by our police forces and the military. It takes money, and taxes are how these amenities are funded. However, it seems that for quite a few years now, and in both Republican and Democratic administrations, there are always multiple proposals being discussed to increase revenues. What is missing is pretty much any discussion of cutting costs, or reducing government waste and fiscal irresponsibility.

This year there are some alarming discussions in Congress directly targeting the 1031 Exchange used by real estate investors to postpone capital gains taxes on real estate transaction profits. If you sell a stock market investment for more than you paid, you’re happy, and you’re going to pay capital gains taxes, normally in the year the gain is realized. Real estate investments enjoy a special tax advantage provided by IRC Code 1031. There are a whole lot of rules and deadlines involved, but the highlights of the 1031 Like-Kind Exchange include:

• Real estate acquired for investment purposes normally qualifies.
• Like-kind is liberally applied, so selling a piece of land at a profit, you can use the 1031 Exchange to buy a rental home. The key is that they’re both “real estate” used as an income-producing investment.
• When you do this within the rules, your profit from the sale is not subject to capital gains taxes at that time. They’re deferred until later, whenever you liquidate your investment completely.
• This means that you can continue to roll your profits up into more valuable properties over time, never paying the capital gains taxes until you sell out of the assets. You’re getting Uncle Sam to participate in the growth of your nest egg.
• If you die and leave your property portfolio to your heirs, they receive it at the “stepped-up” value. That’s the value at the time of inheritance. This means that all of those capital gains just disappear, and they can sell the property if they want without liability for them. Yes, you can take it with you… kind of.

It can be easy for someone to think it’s unfair for investors to avoid capital gains throughout a long life, as it may seem like they’re not paying their fair share. However, what gets lost in the discussion a lot is the fact that this single tax provision has spurred residential and major commercial real estate sales and development since its inception.

IRC Section 1031 has created a huge buyer demand over the years for everything from rental homes to shopping centers and office buildings. It allows the investor, in fact requires it for maximum tax advantage, to roll most or all of the proceeds of the sale into the new purchase, and within a specified period of time. There’s no way to quantify it, but I’m relatively certain that a major chunk of investor real estate purchases over the past few decades would not have happened if this advantage were not in place.

At the very least, new commercial real estate development would have been slowed significantly. You may not have that fancy new shopping mall nearby without the 1031 Exchange. Definitely there would be far fewer apartments out there today. With rental demand increasing, rents would be through the roof if a large number of those big apartment projects didn’t exist.

Congress has no fewer than three different proposals being discussed right now, and all of them either completely do away with the 1031 Exchange or do enough damage to it that real estate investment activities will plummet in the future. The news is full of the waste and inefficiency of the Veterans Administration and other government agencies, including the U.S. Postal Service. Private business can’t continue to exist if it’s consistently unprofitable, but the government doesn’t suffer from efficiency requirements.

I think that it will be extremely harmful to the already fragile economy if the 1031 Like-Kind Exchange is dismantled or severely limited. This isn’t a time to be inflicting more blows to the economy and jobs. It’s a time for more discussions of how to cut the cost of big government instead of how to fuel the spending fire.
Dean Graziosi

Millennials, Jobs and Home Buying

Millennials, Jobs and Home Buying
The great thing about the Internet is that there are so many ways to seek out information and research trends and the news. The problem with it is that it’s easy and free to publish information, which tends to fragment information into lots of smaller bites. This is especially true with SEO, Search Engine Optimization, as a goal. Writing an article with a single topic focus is usually better for search engine exposure.

In my news feeds and resources about housing, I also have to watch employment and economic trends. This week it’s been interesting reading about the Millennial Generation and their time in jobs and even their home buying plans. It took four different recent articles to piece together my impressions for this one. Two of them deal with the time today’s younger generation stays in a job before moving to another, one deals with their plans for buying a home, and the last addresses what some call the “five-year rule for buying a home.”

It’s obvious that there is a lot of attention on this younger generation, as the first time home buyer market has been depressed for a while now. As first-timers were a significant force in home price appreciation, their lack of participation is considered a big damper on an improving market and economy. So, what’s the story?

Stan Humphries, the chief economist at Zillow, has been tweeting about the Millennial Generation and their future home buying plans. One graph published shows the results of a survey showing a whopping 85 percent of respondents expect the median age of first time home buyers to rise in the coming years. More of them are expected to stay at home with their parents longer, while there will be a corresponding decrease in new household formation in this age group.

Another article over at moneyning.com speaks to advice received by a first time buyer. The major point family and friends made was that you shouldn’t buy unless you stay in the home for five years or longer. They called it the “five-year rule.” This isn’t a new concern, as the closing costs and commissions involved in selling a home to buy another have always been high enough to require some time in the home to build equity and enjoy appreciation.

The advice to offset these limitations hasn’t changed either. Avoiding buying the most home you can afford is first. This way you may be able to pay extra payments toward your mortgage to get to break-even sooner. Another newer trend relates to our current housing situation. Some buyers are buying a home with a plan to move in less than five years, but moving without selling. They intend to rent out the home for income rather than selling at a loss.

Two other articles about changing jobs are only slightly different in the number of years their data says today’s Millennials stay in a job. One states 4.6 years, while the other says 4.4 years. Surprisingly, this is actually longer than in the past, up from 3.5 years in 2002. One survey says that 91 percent of Millennials expect to stay in their current jobs for less than three years. If this group adheres to the five-year rule, there’s not going to be a lot of home buying going on.

From a real estate investor’s point of view, I see some good years ahead for rental property owners. They’ll need to be selective, as this generation knows what they want. Buying the right homes which appeal to their lifestyles and where they will be employed should keep occupancy and rents high. I’m not wishing for continued bad news for home prices and overall purchase numbers, but I can certainly take advantage of the situation.
Dean Graziosi

Everything’s Negotiable — Including Real Estate Commissions

Everything’s Negotiable — Including Real Estate Commissions
There is a battle going on in the business of real estate brokerage. It’s been going on for quite a while, but the alternative approaches to the full service-full profit real estate commission haven’t yet gone mainstream. Sure, there are discount commission business models in many areas, but they often come with reduced services as well.

Some companies offer MLS-only services. The Multiple Listing Service is the local real estate cooperative membership in which member brokers offer properties for sale and share commissions when a buyer broker delivers the buyer for another broker’s listing. Because more than 80% of all homes (recent market surveys show) are sold from MLS listings, it’s a valuable place to market a home.

The MLS-only approach lists your home for a flat rate charge, usually just a few hundred dollars. However, for this you get listed but very little more. Many real estate agent MLS members will not even show those homes, even if they’re offered a commission if they deliver a buyer. Some of them fear legal liability in dealing with an un-represented seller, and others just don’t like this concept that threatens the real estate full service commission status quo.

Let’s take a look at the traditional full service commission business model, as it will help us to understand the strong motivations to keep it dominant in the market. While commissions aren’t fixed, the full service model seems to be running between 5% and 6% around the country. For many years, 6% was the norm, but it’s been slipping due to competition from reduced service companies offering lower commissions. Let’s use that 6% number as applied to a home sold for $ 200,000 to see who gets what:

  • $ 200,000 x 6% =12,000 full commission.
  • Listing brokerage keeps 50% (negotiable with other broker, but normal split) = 6,000.
  • Brokerage that delivers buyer gets 50% =6,000.
  • Agent in each brokerage gets their split, negotiable but often 50% = 3,000 each agent.

If a major franchise is involved, then these numbers can be reduced by the franchise fee off the top before the splits between brokerages and agents, sometimes as high as 7% of the commission. There’s a lot of pressure for agents to keep home sales in-house (both buyer and seller represented by the listing brokerage), as the commission is kept in the same company, basically doubling the brokerage’s take (known as double-ending).

If you’re listing your home, you can read lots of stuff about choosing the right agent or brokerage, and much of what you read is focused on keeping the full service tradition alive and well. First, everything is negotiable, so you should be thinking discount from the first discussion with a real estate agent. The question can be asked early in discussions, as many will not be able to give up any of the commission because of the rules their employing broker places on them.

Once you find an agent, or maybe an independent agent/broker, who is willing to discount their commission, you can usually get 1 percent or more off the top. If they’re pushing 6% and you can talk them down to 5%, that’s a $ 1,200 ($ 200,000 sale price) savings that goes straight into your pocket. It’s fine to be satisfied with that, but there’s another opportunity to save even more if you’re ready to do a little bit more negotiating to take advantage of the double-ending the brokerages enjoy. In many places it’s known as a “dual-variable commission” rate.

Basically, because the brokerage gets 100% of the commission if their own agents bring the buyer, there is a lot more money in-house. By negotiating a dual-variable commission, your broker agrees to cut your commission if they represent both the buyer and seller. Even if you don’t manage to get a discount off the top, this is one way to possibly get a discount when the sale happens. They still make more money, so they’re more willing to do this discount than one off the top. However, you need to know that the odds are against you, as most buyers are delivered by other brokerages.

Real estate is a business, and selling your home is a business transaction. You shouldn’t have any hesitation in negotiating the cost of marketing and selling your home.


Dean Graziosi

Retail Home Buyers Need to Think Wholesale for Appreciation

Retail Home Buyers Need to Think Wholesale for Appreciation
Let’s all agree that it’s been a tough eight years for real estate since the boom times that began to collapse in 2006. Millions lost their homes to foreclosure, more than a million are still underwater, owing more on their mortgages than their homes are worth. Still more are just above water, but not enough to pay the commissions and closing costs to sell their homes.

There’s been a lot of publicity about improving markets, higher home prices, and even bid wars in some areas. However, for the most part those bid wars are in a very tight price range band and the competition there isn’t being felt in most of the rest of the market. Real estate investors have fueled most of the demand over the past few years, and they’re still quite active in buying up deeply discounted properties that end up in rental service.

This mini-bubble of price increases isn’t coming from anywhere near normal demand from first time or resale buyers. It’s been from investors and mostly cash purchases. Armed with this information, the consumer who wants to buy a home but is afraid of seeing its value drop after purchase isn’t necessarily overreacting. I believe that it’s more likely that on average home values will appreciate in the future, but nothing like the boom years.

Conservative estimates place the next ten years’ appreciation at possibly 2 to 3 percent per year in most areas. That average will obviously be exceeded in some of the hot markets in California, Arizona, Florida and New York. However, these will be isolated pockets, and if you’re not buying there, it’s not information of great value to you.

Far from sneezing at 3 percent or so appreciation, it’s at least a rising of value, and if a home buyer intends to stay in the home for 8 to 10 years, they should get their investment back with interest. However, there is a way to increase your ROI (Return On Investment) by changing your perspective and goals when you’re buying. We’re a consumer driven economy, and the real estate industry responds to consumer wishes like any other business. If the consumer wants granite countertops and all of the newest bells and whistles in a home, then that’s what the market will attempt to provide.

Buyers who want those bells and whistles will be willing and able to pay for them, and that’s great. However, if you’re buying in that mode, then expect little more than that 2 to 3 percent appreciation in value over time. If you’re willing to “buy down,” forgoing the bells & whistles, maybe installing them yourself, you’ll be buying below that “consumer driven” market pricing.

Think more like a real estate wholesale buyer and you’ll increase your chances at much higher appreciation numbers, perhaps in the double-digits. Pass on the granite countertops and install them later. Buy a smaller home with add-on potential, add a bedroom and bath, and you just created value appreciation. Do a good inspection, but be willing to take on a few repair headaches and you just might be buying below market value from the start.

If you can buy a home with some repair issues and maybe some correctable dysfunctional floor plan problems, you’re poised to do that rehab work over time and profit handsomely. The other important advantage you’ll enjoy is much less competition on the buy side, giving you greater negotiating clout and a discount purchase price opportunity. If you can lock in some appreciation at the closing table, you’re starting the game with an advantage over the retail buyer.

It is OK to want the best from the start, but be ready to pay for it and settle for normal value appreciation in the future. Buy something less than your dream home, lock in a discount below market value at closing, and improve the property and you’ll be one of those homeowners who will skew the selling statistics in the future. Your buy-at-wholesale and sell-at-retail approach will make you very happy down the road.
Dean Graziosi