Establishing Credit... the Right Way!

Do me a favor:  Head to Google.com and search for “build your credit”. Once you hit “search”, I bet it’s no surprise that in under 1 second, about 50,000,000 results can be found. And if you’ve never had a credit card or a loan, your credit history is most likely a blank slate, leaving at least half of your search results inapplicable. Your credit history, as documented on your credit report, is a record of how responsibly you’ve repaid the money you’ve borrowed… and creditors and lenders use your credit history to make decisions about whether or not to give you a credit card or extend a loan. If you have no credit history, however, there’s no record of how you might manage debt. And as a result, many creditors and lenders won’t lend you money. The quickest way to build good credit is by using a credit card, but you can’t get a credit card without good credit. So what can be done to establish credit? And how do we find out if it’s working?

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Become an Authorized User on Someone Else's account

To become an authorized user, a person (usually a family member or significant other) grants you permission to use his/her credit card account. Authorized users can be added to bank accounts and loans for withdrawing, depositing and transferring funds to and from their account… but unlike joint account holders, are not responsible for paying the bill on the credit card or loan account; the repayment responsibility remains with the primary account holder.  As an example, my daughter just graduated college with a great credit score because my wife opened a couple of credit cards, in her name with my daughter as the authorized user, when she started college.  So when she graduated, she had 4 years of excellent credit and now a great score.

Find a Secured Credit Card… and Apply for it!

A secured credit card is a great tool to use when attempting to establish credit. It functions just like any other credit card in the sense that when you use it to make a purchase, you’ll then make payments on that purchase on or before the due date, gathering interest if your balance is not paid in full. The most unique thing about them is the fact that you’re required to place a refundable security deposit when you apply. If approved, your credit limit will generally equal the amount of that deposit, which the issuer will hold as collateral until you close your account. If your application is rejected, you’ll get the money back right away.

All major secured credit cards report account information to at least one of the big three credit bureaus on a monthly basis, and that’s all the opportunity you need to improve your credit score. As long as you pay the bill on time every month, positive information will flow into your credit reports, building a track record of responsibility and covering up mistakes from the past, if applicable.

Get a Co-Signer

While a secured credit card is a great way to build or repair your credit on your own, you can also apply for an unsecured credit card using a co-signer. The co-signer agrees to pay back debt in the case that the borrower is unable. This may include any late fees and collection costs, on top of the full amount of debt. If you do plan on applying for an unsecured credit card by means of a co-signer, make sure you use it responsibly, paying your balance early or on time and never charging more than you can pay back.

Check your Progress by Checking your Credit Report and Score

After six months of timely credit card payments, check your status by viewing your credit report and score. Pay special attention to what is on your credit report and any positive or negative factors listed, so you have a better idea of what you need to work on next. Also make sure to take a look at your credit score – it will help you make sense of your credit report and give you an idea of how well you’re doing.

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There’s a lot to keep track of, but with some strong focus and planning, you can stay on top of your finances and greatly improve and establish credit. After a year of paying your bills on time, potentially adding a new form of credit and removing any errors from your credit report, your credit could look vastly different. If you or your client’s goal is preparing your credit to be a first time home-buyer, by following just a few simple steps, you’re that much closer in making that goal a reality.

Will the New Tax Law Save You Money... or Cost You?

It's official:  The new tax law, which is now in effect, may affect potential and current home-buyers… in more ways than one. American homeowners may be facing a lower threshold on the mortgage interest deduction, a cap on the state and local deduction, and a higher standard deduction. So will the new tax law save us money… or cost us money? The answer depends on a complex array of factors that touch on just about every aspect of our financial lives. And Senior Moody Analytics economist Adam Kamins claims, “States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead”.

Good news, Middle Tennessee that means we may be in the clear.

The mortgage interest tax deduction is a great way to make homeownership more affordable. It cuts federal income tax that qualifying homeowners pay by reducing their taxable income by the amount they pay towards mortgage interest. And luckily, via the new tax law, homeowners with existing mortgages may continue to deduct interest on a total of $1 million of debt for their first and second home. But for new buyers, the $1 million limit fell to $750,000 for a first and second home.

For example, if I already have a $750,000 mortgage on a first home and a $200,000 mortgage on a second home, then I can continue to deduct the interest on both on Schedule A. But what if I already have one home with a $750,000 mortgage and want to use a new $200,000 mortgage to buy a second home this year? Well, in this case, I couldn’t deduct the interest on the second loan.

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"States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead."

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While the new tax law doesn’t affect just homeowners or individuals wishing to finance a home, a few other caveats, such as a moving expense deduction overhaul, exist. For example, under the former tax law, you could deduct some moving expenses when you moved for a new job. You had to meet complex criteria involving distance and timing of the move. But as of the beginning of 2018, only active-duty members of the armed forces will be allowed to deduct moving expenses.

So if you came out ahead on the tax bill with respect to housing or any other aspect of the bill, congratulations! If not, don't worry. Since 2018 is an election year, I wouldn't be at all surprised to see beneficial tweaks in the tax law via new legislation.

Remember that while taxes may be permanent, the size and distribution is always changing. And as far as the potential effects such changes may have on the housing market, I have no fear. Owning a home is part of the American dream, and maybe even the pursuit of happiness. According to Logan Mohtashami, a spokesperson for AMC Lending Group, “In general, people buy homes because they want to raise their family, they want to own something, forced savings,” he continues, “and not have to deal with a landlord.”

First Impressions Count: How Airport Growth Runs Parallel with Nashville Real Estate Development

Have you ever left an airport with the feeling of unexplained curiosity for the city in which it sits? What about confidence in your decision to know that you’ll never, ever want to return? Have you ever formed a similar opinion despite never having left the airport you’d arrived in? Sometimes long-lasting opinions are formed during our time spent in-between exiting an aircraft and speed-walking to baggage claim. But how could our minds jump to such conclusions about anything in such a short amount of time?

I like to think of every airport as each locality’s front door. Whenever a leisure or business traveler exits a plane, an impression is made… even if said traveler’s only concern is locating the nearest Cinnabon (or if you’re me – the nearest restroom). Sure, such impressions may be positive. Some, negative. But studies clearly tell us that time spent in an airport helps shape an individual’s overall perception of a destination.

Like many Americans, I travel to a handful of airports each year, and by that I mean I spend a lot of time in long check-in lines, browsing overpriced food stands with subpar offerings, and desperately searching for an electrical wall outlet. In my experience, the first impression is generally less than great.

In 2016, Nashville International Airport officials announced a design expansion to the tune of $1.2 billion dollars; one which includes fund allocations for retail, entertainment, and both residential and office space funding. And that’s just the beginning. So why would an airport, one which happened to be named one of seven most entertaining airports in the world by CNN, need a “design expansion”?

According to the New York Times, Nashville’s entire skyline has been and continues to be reshaped by a building boom, one which includes a burst of hotels, office buildings, and residential high-rises to meet the demands of the men and women who make their way through the city as either tourists or new residents every single day. And as a city named “top housing market for 2017” by real estate listing company Zillow, Nashville’s relatively affordable housing market and, interestingly enough, growing healthcare community are huge driving factors in the growth of Middle Tennessee’s ever-changing city.

Sometimes in business, it really is true that you never (or seldom) get a second chance to make a good impression. When travelers pass through our airport and see good, strong images of both the leisurely and business climates of Nashville, it’s a return of investment. And when such impressions lead to additional growth and expansion, the general value of property and space increases… and with such an increase, the environment for investing becomes both strong and manageable.

While I’m unsure of what such growth means for the future of Nashville’s infrastructure, I can be sure of one thing: first impressions do count. Why else would a community invest billions into expanding its immediate impressionability upon new visitors? And as either a homebuyer, real estate agent, or investor, why wouldn’t you follow the lead of the Nashville International Airport and invest in something that can only grow along with the continuing development of the city itself.

Not only do first impressions bring in new tourists and residents, they bring an increase in property value and growth probability.

97% Conventional Loan Options

As we head into 2018 and continue to be in what we would probably all agree to be a seller’s market, understanding the various lending options plays a key role in getting contracts accepted for your buyers. 

For whatever various reasons that might exist, it seems that sellers are much more inclined to accept offers when the buyer’s financing is with a conventional loan versus an FHA loan.  And while I believe that FHA serves a critical role in home finance (many clients, particularly those with lower credit scores are better served with an FHA loan), there is a very distinct benefit for buyers using conventional loans to make their home purchase – and it’s not just in getting the seller to accept the contract.

There are basically two types of 97% conventional loans: the standard 97% scenario and the Home Ready (HR) option.  To qualify for the standard 97% program, at least one of the buyers must be a first time homebuyer – but there is no income limit.  The buyer doesn’t have to be a first time buyer to qualify for the HR program (although they can’t own any other property at time of purchase), but there is an income limit based on property address.  

The main things to remember is that HR offers a discounted interest rate and mortgage insurance (MI) is cheaper than the standard 97% program.  In many cases, particularly when the buyer has a good credit score, the HR program is better than FHA (less down payment and cheaper MI).  So not only does this type of financing work better for the buyer, because it is a conventional loan, the contract offer is more readily acceptable from the beginning.

Here are the statistics.

Borrower benefits

• Down payments as low as 3%
• Competitive pricing meets or beats our standard loan pricing
• Flexible sources of funds with no minimum contribution requirement from borrower’s own funds (1-unit properties)
• Rental and boarder income may be considered for qualifying
• Others who don't live in the home can join buyer on the mortgage
• Cancellable private mortgage insurance per Servicing Guide policy
• Reduced MI coverage requirements for LTVs above 90% (up to 97%)
• Homeownership education and housing counseling options empower borrowers to become successful homeowners

I’m happy to discuss any specific questions you may have regarding this, so feel free to call. Be sure to check out the following  links for further information. 

HomeReady Fast Facts  |  Income Eligibility Look-up Tool  |  FAQs

Housing is Still Much More Affordable Than a Decade Ago

Home prices continued to rise nationally in August, up 0.9% from July, in the latest Home Price Index and HPI Forecast from CoreLogic, a global information and analytics firm, putting prices up 6.9% from the year before. But does that mean house prices are becoming unaffordable?  I keep hearing this common theme from buyers – that houses are just getting too expensive.  But are we/they truly looking at this from a proper perspective?  The First American Real House Price Index (RHPI) reported that "while affordability is lower than a year ago, it remains high by historic standards." The RHPI is 38.4% below its housing boom peak of July 2006.  
What does that mean?  House prices are typically reported nominally. In other words, without adjusting for any inflation. Just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago because of the long-run influence of inflation in the economy. The RHPI helps provide an alternative view of the change over time of house prices in different markets across the country. The three key drivers of the First American Real House Price Index (RHPI) are incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers' purchasing power and capture the true cost of housing.  So when interest rates are low and overall employment/income is improving, higher prices don’t necessarily mean less affordability.  According to CoreLogic, wage growth is outpacing home price growth in about half of all local markets so far this year.  And we know how low rates continue to be.  So when those things are considered, higher housing prices don’t necessarily mean that they are too expensive.
Bottom line – when our current buyers complain about how high the prices of housing has gotten, we can remind them that from an affordability standpoint, we are actually still in a great position.  For more information on this, go to http://www.firstam.com/economics/real-house-price-index/.  It is very interesting.

After about a month and a half of pressure to move rates higher, we may actually be moving back into a better scenario – let’s just hope the activity of the last couple of days continues.
 

Make Your Argument Against FSBO’s

In a market as hot as ours, selling a home should be as easy as putting a sign in your yard and waiting for offers to come in – right???  That seems to be a common thought among many home sellers – particularly those who are needing to net the maximum amount from their sale and are looking for all advantages to make the most money possible (and what better way to start than to eliminate 6% right from the beginning by selling without representation?).  Obviously we know better.  You know how much work is involved.  You know that NAR studies prove that comparable FSBO’s sell for ~ 7-13% less than homes represented by a Realtor (depending on price and location).  You know the value of the service you provide.  But are you doing a good job of letting your clients know that?. 

If you don’t already have this, why not put your service model in writing?  Have a defined description of why the service you provide is not only better than your competitors, but is also persuasive enough to make any potential seller realize that selling without representation is a losing proposition?  I’m sure you can come up with even more reasons than this, but this article below from Realtor.com is a good start.  It gives 5 compelling factors (listed below) that sellers likely don’t understand or are not giving full consideration to when attempting to sell on their own.  Certainly you can add to this, but I believe a drawn out, then well-executed strategy, will help your clients immediately recognize the benefit of your service.

1.      Marketing your home isn’t as easy as you think

2.      Homes for sale by owner could be priced wrong

3.      You could underestimate (or over estimate) how much money to spend on curb appeal

4.      Showings are a drag

5.      Preparing your own paperwork can be tricky

http://www.realtor.com/advice/sell/why-fsbo-sales-fail/  (scroll to bottom of page)

The bond market continues its upward swing (lowering rates).  Since July 6th, the bonds are up almost 125 basis points.  I’ve been able to lock a few clients in recently at 3.75% on conventional 30 year fixed and 3.25% on FHA 30 year fixed.  So low rates are certainly still favorable for buyers right now.

Being in the Real Estate Industry is Awesome!

“This is the true joy in life, the being used for a purpose recognized by yourself as a mighty one, being a force of nature instead of a feverish selfish clod of ailments and grievances complaining that the world will not devote itself to making you happy.  I am of the opinion that my life belongs to the whole community and as long as I live, it is my privilege to do for it whatever I can.”

I read this last night (quote from George Bernard Shaw) and can think of no better way to describe the opportunity we have every day to help our clients as they pursue home ownership.  Every single client provides a new opportunity for us to invest in them personally.  We get the opportunity to get to know them in a unique way and serve them during a time of personal fulfillment.  I am so guilty of sometimes getting caught up in the numbers game: How many loans am I closing this month?  What was my volume last year?  How do I rank among my peers?  And while all of that does matter – particularly for someone with a competitive spirit, it’s not what is ultimately most important.  When we look back on our lives and our accomplishments, the people that we were able to serve and help improve their lives (spiritually, financially, physically, emotionally and philanthropically), is what will ultimately determine the value of our efforts.

A friend of mine, who is in his early 30’s and has a business installing and repairing AC units, was sharing with me the other day about how much fulfillment he gets from his job – he gets to help people, make their lives more fulfilled, save them money, and make enough money to meet all of his needs.  Great perspective.  Similarly, I had dinner with an older friend recently and when we started talking about little idiosyncrasies with our respective employments, he commented, “If you never dread Monday’s, you never look at the clock during the day for the purpose of determining how much longer you have to work that day, and you make a positive difference in the lives of the people you serve, you have found a job worth having.”  Well, that is exactly what our jobs in the real estate industry provide us. The sooner we recognize that blessing, the sooner in our own lives we can start focusing on how to be a blessing to others – which is ultimately the true measure of success!

When we make our mission one that focuses on the improvement of others, and not just on selling or financing real estate, we understand what a privilege it is to get to do what we do.  Success follows.

These past 3 months have been a roller coaster ride.  Rates have gone down, back up, and back down again.  We are back to really low levels, but looking very much like we are heading for another dip that could move rates back up a tad – so keep an eye out.

Affordability Defined

I saw an interesting statistic last week I thought worth sharing.  I keep hearing about how continued price appreciation is making buying a home less and less affordable for the average homebuyer.  I certainly won’t argue the fact that it’s easier to buy something priced cheaper than something more expensive.  But I think the term “affordable” might need a little clarification in our concern about rising prices. 

Right now, prices are simply being driven by supply and demand – there is more demand than supply and that naturally drives prices up.  And while we may be feeling this a little more intensely right now here in Nashville, it is a common issue nationwide.  Pending home sales declined in March and April, meaning closing numbers in June/July will likely be lower as well.  But the issue is not a lack of buyers (or a willingness to pay the higher prices), it is simply a lower supply than what is needed (inventories are down 9% nationwide from a year ago).

But back to the statistic I found most interesting: if you go back to 2000 and 2006, the last two times prices seemed to get “unaffordable”, and you adjust prices for interest rates and increased average incomes, we are currently 9.3% lower than where we were in 2000 and a whopping 32.5% lower than the peak in July, 2006 from an affordability standpoint.  So while it does feel at times that prices are getting too high to be considered affordable, particularly in a few markets around town,  the reality is that with the current interest rate environment and the increase in wages over the last 10+ years, buying a house is quite a bit more affordable than the level reached in either of the last two periods of significant price increases.

So if anything, that should be an encouragement to our clients to get out there and buy now before rates go up and prices continue to climb.  But then we are back to the old supply/demand issue where there just isn’t enough supply to meet the demand – and that’s really the issue more so than homes being unaffordable.  I guess the other thing I would suggest at this point, and it probably goes against everything that is going on right now, is a simple reminder that real estate is a commodity – the prices will certainly go back down at some point.  Let’s not get caught thinking that because we are in the hottest market in the country that it will stay like this forever.

Homebuyer Trends That Might Surprise You

Every year since 2013, the NAR has been writing the Home Buyers and Sellers Generational Trends Report. This report provides insights into differences and similarities across generations of home buyers and home sellers. It is a key indicator of who our customers are.  The data for the report is compiled from the annual Profile of Home Buyers and Sellers. You can download the entire report HERE for those interested, but it is 145 pages long – so I wouldn’t expect anyone to read it in its entirety.  As opposed to just giving you the highlights, I’m going to list some highlights that I think might surprise you – or at least the ones that surprised me.  Here you go:

·      This year’s report reflected an increase in purchases for Millennials (age 36 and under) in suburban locations and for detached single-family homes.  Only 15% bought in the city compared to 21% just 2 years ago (they are having kids and moving out of the city).
·      Generation X (37 to 51 years old) buys the biggest and most expensive homes of all groups (I would have thought it to be the Young Boomers (52 to 61 age range))
·      Older Boomers (age 62 to 70) typically move the longest distance at a median of 25 miles (I assumed the older group was less likely to move far from their current place, but I guess they like warmer climates)
·      The older the buyer, the more likely that the purchase will be new construction (seems backwards)
·      88% of all homebuyers finance their purchase (higher than I thought)
·      Millennials still site student loan debt as a major factor in not buying.  But for those that have student loans, it’s the Gen Xers that have the higher student loan average balance.
·      16% of younger and older Boomers have student loan debt (average of $10,000 per)
·      Gen X buyers have delayed buying longer than Millennials (primarily due to debt or lack of equity in a home needing to be sold to be able to purchase) – hopefully Gen X sellers will fuel the market as they will now have been able to rebuild equity lost
·      Young boomers’ purchase of multi-generational homes jumped 20% in 2016 (due to their adult children needing a place to stay)
·      Roughly 90% of Gen X and Millennials use a Realtor for both buying and selling – ironically, both of these generations are the most likely to go on-line to do their searches
·      The most common reason to buy, for all purchasers under the age of 61, was simply the desire to own their own home
·      76% of all sellers were married couples

It's All About Cash Flow

I had a conversation with a buddy of mine this week and we weren’t really talking about real estate specifically, just investing in general.  But that led to a discussion about some real estate that he bought several years ago when the market was flying high – much like it is now. 

He told me that he learned a valuable lesson when investing in real estate and that was to focus primarily on cash flow that the property is providing versus the potential appreciation.  That may not sound like rocket science, which it isn’t – and this guy was not a real estate professional.  It is simple common sense.  However, he, like many others, forgot that real estate is a commodity and can drop in value just like it can go up.  He had based his returns on his properties increasing in value, not worrying so much about the fact that he was barely breaking even on a monthly standpoint (rents received versus cost of owning the homes and carrying loans).  When the market turned, he got stuck not only paying a monthly tab, but doing so on properties that were worth far less than what he paid for them.

The real estate market in Nashville is flying high right now and I believe it will continue to do so for at least the next couple of years.  But we don’t need to get caught up in the exuberance of the situation and buy long term investment property (or allow our clients to do so) solely on the basis of the expected appreciation.  Granted, a flipping situation is a little different.  But someone buying a property to rent it out needs to make sure that the cash flow works.  In other words, there is more money coming in on a monthly basis than is going out.  And Ideally that number needs to produce a return that is an adequate cash return (amount received above expenses is earning a decent return based on the initial amount invested).  With the requirement of at least 20% down payment for most rental property loans, getting the rental income to exceed the payment is typically doable.  But it needs to be enough overage that there is a return for the money invested.

Sometimes we forget these basic principles when the market is doing so well.  And many times, the market appreciation bails buyers out of less than stellar decisions.  But this is also how investors get burned.  So just a reminder of the lesson my friend learned the hard way.  Investing in rental real estate is all about cash flow.  There are many other benefits - primarily appreciation and tax deductions.  But if the property won’t cash flow, it likely needs to be passed on, if the purpose of the purchase is the long term rental benefit.

THDA Has A Great New Program

In essence, THDA will now allow a buyer, who is buying in a designated zip code, a second mortgage of $15,000 that is completely forgivable if the buyer lives in the home for 10 years.  Here are the highlights for the program:

·         Available March 1st, but applications may be taken now.

·         Must qualify for the THDA Great Choice (the normal program – standard guidelines, 45% max debt ratio for example)

·         Must meet standard income limits and house acquisition price limits and meet IRS requirement for first-time homebuyer

·         Must be in a designated zip code (see flyer below)

·         New construction is NOT eligible

·         Pre and Post purchase homebuyer education is a requirement

·         Rate and fees for first mortgage are same as normal Great Choice program (nothing added for this program)

·         $15,000 second mortgage available for down payment, closing costs and prepaid items

o   $15,000 second must be taken in full – if more than needed, the first mortgage is reduced accordingly

o   No payments made on second mortgage during repayment terms of the first mortgage

o   If home sold in first 5 years, the full second mortgage must be repaid

o   Starting in year 6, the second mortgage is forgiven at a 20% per year rate through year 10

o   If home is owned longer than 10 years, there is no repayment due for the second mortgage

For additional information on THDA qualifying, go to www.thda.org; the updated guidelines for this new program will be available next week. 

If there are other available options like USDA, VA or our internal bank product, I’m not normally a big THDA fan due to the higher rate and added fees (compared to the traditional FHA program).  However, for a first time buyer who is buying in one of the zip codes listed on the attached document, this is a really good option.  You are welcome to call me if you have any questions.

Check out the flyer from THDA below for more specifics and eligible zip codes:

Loan Limits - Movin' On Up!

Welcome to the New Year!  For the first time in over a decade, Fannie Mae is increasing its loan limits for conventional loans.  It is nothing drastic, but certainly a move in the right direction.  For quite some time, the maximum loan amount for a conventional loan in the Nashville MSA has been $417,000 – anything over that amount went into the “jumbo” category.  The new number for Fannie is now $424,100.  But maybe what is the better news from Fannie is that they moved their loan limit for their expanded program (High Balance Agency product) up to $466,900.  The expanded program has a slight rate bump (typically .125% for 30 year fixed with no more than .25%), but also allows up to 95% loan to value.  So in essence, someone could put 5% down on a home priced at $491,450 with only a slight bump to the rate.  Remember that jumbo loans require 20% down and typically have a rate bump of .25-.375% above the Fannie rates.  So this is a nice option.

Also, and probably even better news than the Fannie loan limit increase, is that FHA is also increasing their loan limits.  The new limit for the Nashville MSA (which now includes Maury County) is $466,900.  So with a 3.5% down payment, someone could buy a property at $484,000 and still do a maximum FHA loan.  This becomes an even bigger benefit for a buyer with a sub-720 credit score (and dramatically for a sub-700 score).  So keep that in mind when you have a client with minimal down payment but who qualifies for close to $500,000 in price.  These options could come in handy – and we always have the combo option available (where we keep the first mortgage at the Fannie limit and do a second mortgage up to 90% so that a buyer can buy a more expensive home and only put 10% down (versus taking a jumbo loan and putting 20% down).  You are welcome to call me if further explanation is needed.

Lastly, I want to touch on rates very quickly.  Hopefully the jump in rates post-election wasn’t a shock to anyone – we’ve been discussing it for several months.  The 30 year conventional fixed rate jumped about .75% in the 2 weeks after the election.  The big question now is whether or not we are done with the rate jumps.  My personal opinion, and this is based solely on instinct and how the charts read from a technical standpoint, is that we will see rates hanging between 4% - 5% throughout 2017.  I think we’ll push 5% by summer and then drop back down into the mid 4’s by year end.  But I definitely believe that the sub 4% rates on conventional loans are likely a thing of the past.  Not to worry – sub 5% rates should not slow down our market at all.  It will be another very good year for real estate in Middle Tennessee!

Be a Fountain, Not a Drain

What a long month this has been!  I think this election has weighed more heavily on most of us than any other I can ever remember.  All the buildup, and certainly the fall-out over the past weeks, has left us feeling somewhat divided as a nation.  Whether we like who won the election or not, I hope that we all agree that we each want to do our part to make our country better. 

A couple weeks ago I heard probably the most profound commentary that I think anyone could have stated, fromthe last place I was expecting it, my beloved late night NBA action.  TNT’s Ernie Johnson, who moderates the pre and post-game shows with his cast of Shaquille O Neal, Charles Barkley and Kenny Smith, opened the show with quite an elegant commentary. (I’ll stay up and watch sometimes just to hear the rhetoric between Chuck and Shaq)  I’ve included a link to the short video if you are interested in watching it yourself https://www.youtube.com/watch?v=ayU5kw7Kf5U&sns=em. I was very appreciative of what all three of the former players had to say, but I was enthralled by Ernie’s sincerity, candor and boldness.

While Ernie was talking about how best to respond to the recent election and that our responsibility is to be better individuals by loving others and being a “better neighbor, citizen and American”, he said something that resonated with me: Be a fountain, not a drain.  As I tend to do, I relate almost everything back to real estate and finance.  So while his comments were made as a suggestion on how best to deal with the current state of happenings in our country,  it made me take an introspective look, and ultimately make a decision to try to give my clients exponentially more than I receive.  I am paid well for what I do, so this is no small challenge.  My desire is to have every single one of my clients feel that they have received more from me (communication level, wise counsel, and personal availability) than they ever imagined. 

So regardless of where you stand politically, or what your thoughts are about our new president-elect, I hope you will join me in getting better at what we do. Let's make the dream of home ownership become a reality for as many who desire it, and serve those people well.  Let’s be fountains in their lives!

If you are interested in the full (~10 min version) check it out here: https://www.youtube.com/watch?v=l-8bqfD69SA&sns=em

Bubble or Not? Warren Says "No"

I keep getting the same question – “Is Nashville experiencing a real estate bubble?” While it certainly feels like it, and anyone who has been in a contract battle with 10 other prospective offers on the same property – that winds up selling thousands of dollars over asking price might agree, I’m not sure we should consider it a “bubble”.  The reality is that real estate nationwide continues to improve from the low point reached in 2012 and Nashville just happens to be a market that is more desirable than most. 

If you look at the first chart below, you will see that nationwide, average prices are still below the high’s reached in 2007 – which would indicate that we still have room, at least from a national perspective, for prices to move up just to reach the pre-recession levels.  And the second chart, which represents the median home prices in the Nashville market for the past 16 years, shows a steady increase that is still under a 5% annual appreciation rate over that time period.  So while we are certainly outpacing the rest of the country on average, I’m not sure that warning signs of a bubble about to burst should be going off.

The weekend before last, Warren Buffett spoke at his company's annual meeting and the "Oracle of Omaha" asserted that the housing market is on stable footing. He said the likelihood of another crisis brought on by falling home prices is "very low." "I don't see a nationwide bubble in real estate right now at all. In Omaha and other parts of the country, people are not paying bubble prices for real estate." A leading real estate information firm agrees. They reported home prices were up 6.7% year-over-year in March and the firm forecasts that prices will come in 5.3% ahead, year-over-year, in March 2017.

I do think that sooner than later we will see some leveling and some of the “irrational exuberance” (to use a quote from Mr. Greenspan) will diminish.  And I do hope that homebuyers remember that homes are a commodity, subject to ebbs and flows in pricing.  We do ourselves a disservice when we start to think, like we did in 2004-2007, that real estate is isolated from drops in value.  It can and will happen at some point in the future.  But I believe, as Warren does, that we are not about to walk off of a cliff any time soon.

Median Home Prices for Nashville, TN (from Trulia)

Now is Still a Great Time to Buy

Since 2012 I’ve been talking about the home affordability index and why buying a home now is a great option (prices of homes being lower, interest rates continuing in all-time low ranges, all combined with stable to rising income levels).  Granted with the increase we’ve seen in housing prices over the past 2-3 years, the affordability index is not as good as it once was.  But the lower interest rate environment is still giving us a great opportunity.  As a simple example, if a home can be purchased today at $200,000 with a 30 year fixed rate of 4%, it would provide a payment that is $271 lower per month versus buying that same home 2 years from now if the value of the home has increased to $216,000 (4% appreciation rate) and rates have increased to 5.5%.  I know you see stats like that all of the time.  But that is a pretty significant number – especially when the example given here is pretty conservative (I could easily see homes appreciating at a 4% clip over the next two years and rates could easily be at 5.5%, which is still very low, two years from now).  It’s almost the equivalent of adding a car payment to the mortgage when you think about it in relevant terms.

So I thought it would be great to provide a couple of really good visuals that you are able to share with clients who are debating buying a home right now.  The first chart shows the average interest rate per year for the past 30 years and the second chart shows the appreciation rate by state from September 2014 through September 2015.  It’s very eye opening when seen in this manner.

Click Here for the 30 Year FHLMC Rates On 30-Year Fixed-Rate Mortgage Chart

Click Here for the Housing Prices Chart

This will Likely be the Week

 has been 8 years since the Fed lowered the Fed Fund Rate to .25%, thus dropping the Prime Rate to 3.25% (December 16th, 2008 to be exact).  It hasn’t moved from that point since that time eight years ago.  The Fed meets this week (ironically on December 16th again) and I believe for the first time in a long time there will be a change in the Fed Fund rate.  The economy added 211,000 Nonfarm Payrolls in November, handily beating expectations. Plus, October's number was revised upward by 27,000 payrolls. This confirmation that October was a solid month for jobs is significant, because monthly employment data is volatile and can get hit with big downward revisions.  The Unemployment Rate held at 5.0%, the labor force grew by 273,000, and Hourly Earnings, up 0.2% in November, are now up 2.3% over a year ago. Home builder payrolls jumped by 32,000, their biggest monthly gain since 2005. Investors felt this data indicates the economic recovery is robust enough to withstand a rate hike from the Fed in December.  My guess is that we will see the rate move up .25%.
So what does that mean for mortgage rates?  In my opinion, not a lot – at least not immediately.  For the most part, I believe the long term markets, such as the FNMA mortgage bonds, which mortgage rates follow in step, have already built into their data the fact that this is going to occur.  Over the longer term, I still don’t see rates moving much above 5% (on the 30 year fixed), particularly in 2016.  Keep in mind that the Fed Fund Rate, that impacts the Prime Rate, is a short term rate and the primary focus of raising the short term rates is to stave off inflation – which is the real threat to longer term rates.  If you go back to the last time the Fed Fund Rate was in an upward trending environment, the Fed increased the rate over 4% between 2004 and 2006.  In that time period, mortgage rates increased less than 1 full percent.  Granted each scenario and time period is different, so there is always a question mark.  But the best way to predict the future, particularly with markets, is to look at the past.  Assuming we stay in line with what occurred before, we should see rates staying below 5% out into the near future (I’m thinking through 2016 at least).
The reality is that if the Fed is finally confident enough to start increasing short term rates, it is a good sign that our economy is finally on its feet again and that there is belief that it can once again stand on its own without all of the stimulus from the Fed.  We’ve enjoyed a great run here in middle Tennessee.  So let’s hope they are right.

Sales Numbers

On a national level, we hear reports that tried to make October's 3.4% drop in Existing Home Sales prove that the housing recovery has firmly changed direction. October may have been down, but the 5.36 million unit annual rate puts Existing Homes Sales up 3.9% over a year ago. Housing data can be volatile from month to month and many observers expect sales growth to return next month. I think that the supply shortage is the bigger issue right now, as total inventory was down 2.3% at the end of October. But the median price was up 5.8% over a year ago, the 44th straight month of price gains, which should draw more sellers into the market.
At the local level, there were 3,030 home closings reported for the month of October, according to figures provided by the Greater Nashville Association of REALTORS. This figure is up .5 percent from the 3,015 closings reported for the same period last year. Year-to-date closings for the Greater Nashville area have increased 11.9 percent. And to further my point about supply, inventory is down almost 15% compared to last October here in the mid-state.
We did get nice headline numbers on the new homes front nationally. New single-family homes sales shot up 10.7% in October to a 495,000 annual rate, up 4.9% versus a year ago. This performance was a strong rebound from the drop in September, one more example of monthly volatility. The important thing again is the trend in sales, which has been up, and many analysts expect it to stay there in the coming year. Other data continued to show housing is an appreciating investment. The FHFA index of homes financed with conforming mortgages was up 0.8% in September and up 6.1% over a year ago. The Case-Shiller home price index was also up 0.2% in September and up 4.9% from the year before.
An interesting tidbit on those seeking a mortgage: All-cash sales of existing homes are down 7.7% versus a year ago, while sales with a mortgage are up 8.1%, so a good sign for home buyers seeking financing.

TRID is Here

This will be the last week of files getting into process with the old GFE, TIL and HUD-1.  Starting next Monday we will be under the new TRID guidelines where the GFE and TIL will be replaced by the Loan Estimate and the HUD-1 will be replaced by the Closing Disclosure.  I’m not going to rehash what has already been expounded upon over and over the past 6-9 months.  But here is my thought in a nutshell:  DON’T FREAK OUT.  Sure the 3 day deal is going to be a challenge and there will be some delays along the way.  But the CFPB finally did something right as it relates to disclosure (what the documents cover, the simplicity of understanding them, matching initial paperwork with final paperwork, etc….).  So we take the good with the bad and we move on.

Speaking of moving on, thought I’d give you some suggestions related to the things you can do when advising your clients when they need a mortgage (most of these apply specifically to Realtors, but are worthy recommendations to any client you may be advising from a financial standpoint):

Top 5 things that you can do to help your lender with your client’s mortgage process

1.  Encourage your clients to be on a 48 hour alert – any time the lender asks for documentation or sends disclosure forms to sign, return within 48 hours (24 if possible, but never more than 48 hours).  Lenders will not ask for documents or disclosures unless they need it.  Prep your clients to be ready to respond efficiently.
2. Encourage your clients to get their homeowner’s insurance lined up as soon as the home is under contract (and on FHA transactions, get termite inspection done and letter to lender within 2 weeks of contract acceptance).
3. Only work with title companies that are awesome - agree to have the title work done within 1 week of home being under contract and are all over getting closing figures (used to be HUD-1’s) back to the lender quickly after receiving instructions from the lender.
4. Provide complete contract (including all addendums – like FHA/VA) to lender the moment all signatures are obtained.  TN Property Disclosure or exemption is required on all loan transactions.  Include a copy of the earnest money check.
5. Set the actual closing date and time with the attorney within a week of contract acceptance and basically get everyone involved (in your specific transaction as well as any that might be a part of yours from a “domino effect”)

Why TRID is Really a Good Thing

Let me say first that I get the challenges that we are going to face once the new rules go into place.  Getting the HUD (or I guess to use updated terminology, the Closing Disclosure) into the buyer’s hands three days before closing is going to require all of us to really step up our games.  But why is that a bad thing?  Shouldn’t we always be looking for ways to get better – particularly in the way we serve our customers?  And isn’t giving a buyer more time to review the numbers to the biggest financial investment that he or she is going to make, a good thing?  Personally, I probably would have set the number at 1 or maybe even 2 days that the closing disclosure should be delivered prior to closing, as 3 days is probably a bit excessive.  But in principal, I agree with this direction and think it is a good thing for our borrowing clients.
And speaking of what is good for the customer, I personally believe that the CFPB really got this one right from a disclosure creation standpoint.  We all know that when the government gets involved, specifically when their intent is to make things easier for the borrowing public, it normally goes in the opposite direction.  We need to look no farther than their first attempt at making a mortgage lender’s Good Faith Estimate better for the borrowers.  It even confused me when it was originally rolled out.  But this time, I think the powers that be have hit a home run.  The Loan Estimate (which now replaces the Good Faith Estimate and Truth in Lending disclosures) is much easier to follow and better explains to a buyer what their costs will be and does so in a format that is much easier to understand.  And the new closing disclosure is equally impressive from an ease of understanding standpoint.  And best of all, it mirrors the Loan Estimate.  So now instead of having a HUD-1, which clearly spells out the costs, but is in a completely different format than anything the buyer has seen to that point, the new Closing Disclosure follows the same format as the Loan Estimate.  So the client is not seeing something for the first time at the closing table, and trying to figure out how it matches what they’ve been provided.  Below are examples so you can see exactly what I'm talking about.

Personally, I’m on board with these new changes.  I think it is great for our customers and that it will make us better at what we do.  Those that can’t step up to the challenge just won’t get the business.

TRID Closing Disclosure (1)

TRID Loan Estimate (1)

D.A.N.G.E.R Report

D.A.N.G.E.R. Report

(Definitive Analysis of Negative Game changers Emerging in Real estate)

The GNAR released this report, that was prepared for NAR by the Swanepoel/T3 Group, a couple of weeks ago.  It’s 166 pages long, so I don’t suspect that you took time to read it – and I don’t expect that you will do that now either.  But I thought it would be good to provide you a summary of what the report says, or at least hit what I perceive as the high-lights that impact us directly as agents.  The full report is available by clicking the link below.  The purpose of the report, which was done by interviewing many of the top industry minds, is to give us a description of what are to be the challenges (or “threats” to use the report’s term) that we’ll face in real estate in the years to come.  It addresses threats to Agents, Brokers, Associations, and the MLS.  There are 10 listed for agents directly.  I’m going to high-light what I think are the top five and some suggestions to counter the threats.

1. Masses of Marginal Agents Destroy Reputation – the real estate industry is saddled with a large number of part-time, untrained, unethical, and/or incompetent agents.  This knowledge gap threatens the credibility of the industry.  This one hits close to home for me because I’ve seen it in the mortgage industry as well.  All it takes is the notion that there is an easy buck to be made doing something and everyone wants to do it.  As a group, we need to make it harder for individuals to enter our profession.  That alone would cut down on the people entering just to make “easy money”.  The other thing we can all do as individuals is differentiate ourselves with better knowledge and service platforms.  The better I am at what I do, the less likely I am to lose business to those that are marginal – even if the marginal competitor happens to be friends with the client.
2. Commissions Spiraling Downward – a variety of powerful forces exert significant downward pressure on real estate commissions.  Discount brokers are becoming more and more commonplace.  With the availability of information that is now at the consumer’s disposal, we have to do more today to earn our commissions than ever in the past.  If we don’t start thinking outside of the box, and creating value to provide our clients, then what we give them will become worth less, and we don’t deserve the commissions we are paid.
3. The Decline in the Relevancy of Agents – the role, function, and perceived value of agents deteriorates as agents fail to properly assess and respond to changing consumer demands and expectations.  Whether it is dealing with new technology or with what the different generations want from a home, it is our job to be relevant and needed.  We will only become obsolete if we let ourselves become so.  What is your value proposition to your client?  Are you trying to do business today like you did 10 years ago?  Staying relative is a conscious choice and one we must all make if we want to see our businesses progress.
4. Commissions Concentrate Into Fewer Hands – a very small group of very efficient and effective agents discover the winning formula and secure a disproportionate market share.  Everyone is familiar with the 80/20 Rule, where 20% of the people do 80% of the business.  To me, this is a concept that has been around forever and will continue to be so.  I think the bigger question here is simply:  What are we doing individually to be in the 20% that is closing 80% of the deals?  Emulate those that are already there.  No need to reinvent the wheel – learn from those that are where you want to be.
5. The Agent is Removed From the Transaction – a tech company cracks the code and connects enough of the dots to conduct real estate transactions without the need of an agent.  FISBO’s have always been a part of our business.  There are always going to be those that think that selling on their own is a more cost efficient manner of selling.  And while we might think that the Millennial Generation, who are more technologically advanced than any before (and more than most real estate agents), would make this number grow, I would argue, as the report does to a degree, that they are in more need of help, primarily because of their financial situation, than any generation before.  They need guidance more than anyone.  We just need to understand that and create a service platform for them that meets their need.  Again, it is about being relevant to the client.

The other threats to agents listed in the report were: Agent Teams Threaten the Survival of Brokerages, The Agent-centric Era Ends, The IRS Forces Exodus of Independent Contractors, The Housing Finance System Fails, and The Commoditization of Residential Real Estate.  These are all definite threats to our individual businesses going forward.  But to a large degree, they are things that are out of our individual control.  Not that we can’t make an impact – like voting in an election.  But the reality is that by myself, I can’t keep the housing finance system from failing nor can I keep an institutional investor from coming into Nashville and buying up 100+ homes to rent.  But I can all focus on how well I am doing my job – Are we up to date technologically?  Do we understand the latest rule changes that impact our clients?  Are we communicating well?  Do we give exceed our client’s expectations and do we even know what they are?  And most importantly – Am I doing all of these things better than my competition?  When we focus on getting better ourselves, the rest takes care of itself.

https://s3.amazonaws.com/dangerreport.com/Danger+Report+-+Item%23E135-107.pdf