Monday, October 20, 2008

Historic Times Are Upon Us.

I hope everyone has been following the historic events that are upon us these past few weeks. Everyone is asking the same question: "How did we get to this point?" Unfortunately, we don't like the answers that the experts are bound to give us.

I've heard a lot of theories from a lot of people in the past few weeks about whose fault it is: Wall Street was being too greedy, homeowners were being too greedy, the fact that the middle class is increasingly shrinking and that so much wealth is concentrated among so few people in this country. This last idea is very interesting to me because it is true, but it is also emblematic of the problems that I feel have truly brought us to this point: the lack of financial knowledge and sense of entitlement among Americans, and the pervasive desire for safety and security (ie, jobs) at the expense of innovation and progress.

If you study history, there are very few periods where a secure middle class exists. Most of the capital (ie, farmland) was in the hands of the ruling class and there was little leverage available, so barriers to entry were very high. The middle class began when professional guilds and merchants emerged. The ultra rich non-aristocrat business man did not really exist until other types of capital became available to own (intellectual capital, merchant ships or factories) and capital became available (such as the formation of corporations by the pooling of many investors' money).

Throughout history, the middle class has also been "squeezed" by the adaptation of the old guard to the innovations of the times. Once the big guys get the gist, they swallow or copy the innovator. Constant innovation is required. The same is true today. Those who have the ability to recognize changes and work with them are the ones who will be able to survive the constant storm as it roars around us. Those who have given up their desire or ability to innovate, and instead are happy with "a good job" are the ones with the least security, because when the market changes, they can't change with it.

In fact, an argument can be made that the distortion of certain industries which have been slowly dying for years though government subsidy is what really caused the bubbles we have had recently. Under the humanitarian banner of "saving jobs", we prop up many industries, which then have no reason to innovate. The steel industry, automobile industry and airline industry are obvious examples. I'm sorry, but no one has a born right to a specific job. Subsidies have a place in business when the government wants to make new technology viable (such as cleaner energy), but the politicians have to have the gonads to end these subsidies when the industry can support itself. And they also need the strength to withhold subsidies to industries on life support. Let the owners of these companies come to them with truly innovative ideas that will change the course of those industries, not with a hand out for a bailout.

There is no question that we are going to suffer for the next few years. But how can we avoid this happening again? We need to get back to roots. I almost feel like some kind of "entrepreneurship service" should be required of young Americans. Instead of being trained to seek jobs, young Americans should be required to come up with and run a business for a year or two. It might be a one-person freelance business, or a consumer product business that is destined to become a juggernaut. The passion and energy of young people gets wasted in "entry-level" jobs that, from my own experience, never translate into upper management jobs anyway. To gain admittance to that rich table, you really need to be lucky or connected, it seems to me. But to be the chief architect of your own creation, that is a feeling that would keep many college students from ever seeking their first job.

Unfortunately, I am cynical as to the ability of the masses to govern themselves into that situation. Individually, you or I may be willing to take on the sacrifices necessary to turn around what is right now a broken system that has been leaking at the joints for decades. But politicians cannot do so, because they want to be re-elected. Every so often, we need someone who doesn't care about the quid pro quo system to shake things up. Abraham Lincoln did it, as did Franklin D. Roosevelt. Bush could have been the one to do it - indeed, we all thought our first MBA-possessing president would be an excellent choice to provide leadership on financial policy and regulation. Instead, he expanded the powers of the presidency in ways that no one wanted and hastened the decay inside our financial systems with the strain of two foreign wars. It's hard to say if the current crisis will allow the next president to push through serious reform, although honestly I can't see that either candidate has a good plan for such reform. But we should hope.

In the meantime, those of us in the tenuous middle class need to make the right decisions for us. It's hard to summon up the fortitude to invest in the stock markets right now, but it might be a good idea to do so, particularly if you are under 30.

The real estate market inNew York held steady through most of this mess but has finally begun to slow down. While most transactions that were already in contract continue to close, sales activity is considerably slower at open houses around the city, and the fall selling season has been given up for lost by many agencies. If you can afford to wait it out, you would be wise to do so. If you must sell, do not try to get the maximum for your home. Instead, price strategically near the median of comparable properties. If you are in a situation where only the top dollar will pay off your mortgage, call your mortgage company immediately to discuss the situation with them. They are available and ready to help you; it is in their best interest to do so.

However, if you are a buyer with a solid down payment available to you, this is a great time to look. The owners who have their properties on the market at this time have to sell, and they are going to listen to fair offers. Talk to your mortgage broker to keep your approval up to date, and start shopping.

One quick note of hope: my good friend emailed me a few days ago. She lives in a highly-priced suburb in Michigan, one of the hardest-hit states due to the years of bleeding auto jobs. She recently noticed that several higher-end homes that had languished on the market for two years or more were now all sold. To me, this little annecdote could be a ray of sunshine peaking through the clouds. If it has gotten so bad in most of America that people are finally buying again, we may have reached the bottom. Look for little nuggets like this, gird your loins, and listen to your gut!

Monday, June 23, 2008

Manhattan Rentals Take A Breather

This is all anecdotal, but here we are in the middle of the traditional heavy season, and something is happening that I haven't seen in the past three years. Apartments are actually on the market for 7 days or longer, sometimes up to a month. Looks like we are FINALLY seeing some relief from the overheated conditions that have been occurring for the last two years! I suppose that I should be unhappy, but really I'm not. I'm relieved that I can take clients to several apartments (including the ones that I actually publicize on my website!) and let them think about what they like.

Now, the sudden increase in choice of apartments does not mean that suddenly New York apartments have gotten any better! The majority are still small, quirkily laid-out, and have limited light. So if you previously had a budget for a closet, that doesn't mean that you can now find a palace! But it does mean some of the following things:

  • You may be able to get a little more space for the same price.
  • Landlords may be willing to negotiate slightly on asking price (depending how long it's been on the market)
  • Landlords (particularly in big developments) may be willing to pay part or all of the brokerage fee.
All in all, it's been a good season for renters. Manhattan rents are still high, but it's such a relief to know that you can take a little time to make a choice. I think it will continue through the end of the year.

In Brooklyn, the opposite seems to be the case. Apartments in the northern end of Brooklyn continue to rent for more than they did last year. A lot of the more affordable southern areas have increased in price as they become more popular. One bedrooms in the Ditmas Park area, for instance, have increased by $150-$200/month over last year. From my experiences, it appears that a lot of people in that price range are still moving into the NYC area, at least, more than are moving out. The city government bears me out on this: according to them, more than 26,000 people moved to New York City between April-June 2008. So housing will continue to be in demand.

Friday, May 16, 2008

Is the Worst Over? Understanding the Confusion...

Last week I received a Wall Street Journal article via email from one of my mortgage broker contacts titled "The Housing Crisis is Over." In this May 6, 2008 article, a case is made that as of April 2008, home prices across the country have likely hit their lowest in the cycle. There are two reasons for that: the mortgage industry is starting to unfreeze, and the drop in prices have finally made homeownership affordable again.

That said, it's highly unlikely that the markets will race back to resume their levels achieved in 2005-2006. But, it does mean that the real estate markets across the nation are going to become more liquid, homes will start moving again and people will be able to get on with their lives.

In New York, we never really had it so bad, thank goodness. Prices remained about level, barely inching up, but at least units were moving. We were able to credit that to our high homeownership in co-ops; as difficult as they are to get into, the high down payment requirements and stringent financial requirements may be what saved us in the end.

On the other hand, we have not been immune, particularly since the Bear Stearns fiasco. When that happened, banks put a number of loans that were in underwriting on hold, as well as home equity lines of credit. As of April 2008, the average time on the market (from putting the property on the market to contract signing) is four to six months. So we are feeling some fallout at this point. Still, people are out shopping. They're taking longer to do it and waiting to pull the trigger.

Yet the market is not completely dead. Housing starts across the country were up 8.2% in April, when economists expected a further drop of 1.4%. (Wall Street Journal, May 16, 2008). So homebuilders are starting to decide to build homes again. They are still down from two years ago, but this is still positive news.

I think New York's velocity will pick up soon. It's true that Bear Stearns made 20,000 people lose their jobs, but over 12 million people are employed in New York City, so that's not a huge dent. Those people will be reabsorbed into the marketplace. Other Wall Street workers may have received smaller bonuses, but they still got bonuses this year. So, maybe not this spring, not this summer, not even this fall or winter, but eventually the market will pick up and go on as it has before.

For the home buyer or home owner wondering what all this means - I say, look at the little picture for now. Don't worry about whether the national market has hit bottom or not; worry about whether it makes sense for you to buy or sell your property. If you are thinking of buying and are planning to live in your home for at least 4-5 years, then you are likely to be safe from the current market doldrums, and in fact will have advantages of more choice, more time to make a choice, more negotiability and amazingly low interest rates. If you need to sell, then with proper planning, correct pricing of your property, good choice of a real estate agent, and possibly by being more flexible about fixing up the property, you will get your property sold.

Sunday, February 10, 2008

Renovations - striking a balance

I recently had a call from an acquaintance who purchased a co-op apartment a couple years ago. This person's lifestyle had changed up a bit and he was thinking about converting his one bedroom apartment into a two bedroom by splitting the bedrooms. He had done careful planning and measuring and was able to arrange the rooms so that a window and closet would be available in each room. His question to me was: how would this affect the eventual sale price of his apartment?

The most general answer is that renovations generally affect sales prices positively, but it depends on the type of renovation and execution. Then, I ask another question. Once answered, the homeowner will have a better idea of what to do and how.

How long are you going to be living in this home?

Food for Thought: If you feel like you will be moving within the next 2-3 years or less and selling your home for any reason (need more space, plan to relocate, etc.), then any renovations you do should take into account the next owners of the space. For instance, if you divide your bedroom into two rooms, make sure that you frame the wall in a way that minimal damage is done to the underlying floor and walls. This way, the extra walls can be removed so that the next resident can choose his preferred layout.

Likewise, refrain from making statements that are too bold in kitchen and bathroom renovations. Choose neutral tile colors such as earth tones in the kitchen and clean colors such as blue or black and white in the bathroom. This will appeal to a wide range of future buyers (who won't feel like they need to gut the apartment) and will still give you a fresh new home that you can enjoy. If you feel the need for bold choices, express your style with paint colors and furniture, items that will be easy to change for the next homeowner.

If, however, you plan to live in your home for a fairly long time, feel free to make more customized renovations, choosing bold tile colors and building in customized fixtures. It is, after all, your home for the foreseeable future, and you should enjoy it to the utmost!

Friday, January 25, 2008

Points and Their Uses

Even though I am not a mortgage broker, I do counsel people a lot with respect to the actual cost of renting or owning an apartment. One question I get asked a lot is "What are points?"

In mortgage terms, a point (literally a percentage point) is essentially prepaid interest - you pay a percentage point of the mortgaged amount at closing, and in return, you get a reduced interest rate for the life of the mortgage.

Here's an example:

You are taking a mortgage of $100,000 to complete the purchase of a new apartment (cheap apartment, but these do exist!). You qualify for a 30 year fixed mortgage (360 monthly payments) at a rate of 6% with no points. Your monthly principal and interest payments will be $600 for the life of the loan.

Then, your loan officer asks you if you want to pay a quarter point to lower your interest rate. You can pay 1/4 of 1% of $100,000 ($250) at closing, and in return your interest rate gets lowered to 5.75% for the life of the loan.

Using a mortgage calculator like the one found here, we can see that at 5.75%, your mortgage payments will go down to $584, a difference of $16 from the 6% rate.

If you divide 250 (the interest that you prepaid) by 16 (the amount you save per month), you will get 15.65 (rounded up to 16), the number of months it will take for you to break even on paying the point. Every month afterward, you are saving $16 by having paid that extra $250 at closing.

If you stayed in that same property for the entire 30 year life of the loan, and did not prepay it, you will have saved $5,504 by paying $250 at closing.

You could also purchase a half-point for $500. This would bring your interest rate down to 5.5% and your mortgage payment to $568 per month. This prepayment would also pay for itself in 16 months, and you would save $11,608 over the life of the loan.

The question is: How long do you plan to own the property (for residence or investment)? Most people who go ahead and buy properties are going to stay there for at least 16 months, although unforeseen life changes can alter that.

Keep in mind also that you can get the same interest savings by paying approximately $9 extra principle with your mortgage payments every month, a total of $609 per month. But, if you are short on extra cash at the time of closing, that may be the way you choose to go, particularly if your expect your income to rise over the years.

In the end, each individual buyer has to make his own decision. If you are looking for every to keep your monthly obligations low, it might make sense to pay a quarter or half point to get your interest rate lower. But, if you don't have that extra money to put to closing costs, and you think your income will rise over time, you might as well pay no points and then commit to pre-paying your principle to achieve the same interest savings. Or, you can pay the point, then commit the entire extra $25 /month to prepay your mortgage, resulting in further interest savings. None is a bad idea.

Friday, January 11, 2008

Thoughts for Sellers on Agent Commissions

I certainly understand why people try to save money by doing a For Sale by Owner (FSBO). Others turn to agents who agree to take a smaller percentage in compensation. I have no problem with sellers who choose these type of agents, so long as they realize what it might mean.

What I'm talking about is broker cooperation, or co-broking as it's called. What that means is that there are two agents involved in the transaction - one on the seller's side (the listing agent) and one on the buyer's side. The typical way that it works is this: The seller's agent is responsible for advertising your property as they see fit (fodder for a future post). One way they can advertise is by placing the property on a multiple listing service (MLS), but that's optional.

Some seller's agents may tell their sellers that "if the buyer is interested, he will come to me without the agent", but this is only true a small percentage of the time. Buyers choose to work with their own agents because they want someone in the transaction who is working only for them.

That's right - when there's only one agent on the transaction, that agent suddenly is not able to give his all for either buyer or seller, because as a dual agent, he has to protect the interests of both parties. This means he can't give you advice in pricing negotiations, among other things. Buyers know that listing agents are working for the seller, so they want to work with their own agent. So yes, it's possible that those buyers may abandon their agents to buy a property through a non-cooperating agent, but you better believe they'll be at the end of their rope before they do.

Some discount selling agents will offer a property for co-broke only after 6-8 weeks on the market, and some never do. Think about that - do you want to be the seller whose property can't sell after 8 weeks, and then know that your property is finally being opened up to buyers with their own agents?

I've heard some agents say - "sure we can work together, but your buyer has to pay your fee". Hmm, let's think about this: if a buyer pays his agent's fee, he has to come up with it in cash at the closing table. On the other hand, if the seller pays the fee, it gets paid from his proceeds at the closing table - the seller (usually) doesn't have to come up with cash to do this, just gets a little less. Essentially, the buyer mortgages his half of the commission. That's why the seller traditionally pays the fee - generally banks don't agree to pay an agent's commission with the mortgage, and if the buyer pays it out of pocket, then it lessens the housing price he can afford.

What I would suggest to sellers who are shopping for a listing agent is the following: ask if an agent co-brokes. If they do right away, then great! If they don't, tell them that you expect them to. I've heard some agents give excuses such as "a lot of times buyer's agents don't qualify their clients well, and you can get into a contract that falls through because the buyer couldn't get the mortgage." Well, there's a really simple way to combat that - before the contract is signed, have your agent request documentation verifying income and assets from the buyer (or agent, if applicable). That way, you'll know what you're getting. And if you do go with a non co-broking broker, then make sure you understand exactly what your agent will do to promote your listing.

As a member of the Real Estate Board of New York (REBNY), my firm offers listings for co-broke immediately. We also earn our fees by making sure that all our listings are advertised with professional photos, layouts and virtual tours. Our website is one of the top three most visited in New York City and has recognition throughout the five boroughs. The search is easy and can be done by street address. Print advertising in leading newspapers is automatic every week. In addition, I do postcard mailings and extensive Internet advertising. And most importantly, I'm very careful to make sure that listings are priced correctly to attract the most buyers. I also counsel sellers on things they can do to help their property sell faster and for more money.

The old adage holds true: You get what you pay for. I welcome the competition, because I know who will come out on top!

Thursday, January 03, 2008

The Triborough Award

This post is a few weeks late, since we're now into the new year, but I couldn't help giving myself one little pat on the back - I call it the triborough award. Last month, I happily helped my friend close on a place on East 226th Street - a four bedroom house for under $300,000. Yes, that's right! The house needs TLC, but the neighborhood has a lot of friendly people, it's reachable from the subway, and just four blocks from the Metro North. This was the first year that I completed a transaction in Brooklyn, Manhattan, and the Bronx. 3 boroughs, hence, the triborough award. Yes, I made it up. But it feels really good to say I've done that.

For those of us who are in relentless pursuit of space, I highly suggest the Bronx. It's no further away than Inwood or Washington Heights. My friend purchased in Wakefield, but he drives to work every day and doesn't work in Manhattan, so it works for him. But near the new Yankee Stadium, there are a LOT of bargains too. Given how crazy expensive it is in Manhattan, Brooklyn, Queens and Western New Jersey, I think it's really something look at. And with my newfound experience, I feel comfortable helping anyone who's looking to buy in the Bronx. Please drop me a line!