Immediate Relief for California’s Housing Crisis? All it Takes is a Change in Mindset

The housing crisis being described right now in the media is one wherein prices are high, demand is high, and supply is low. Economists can predict a recession only due to the cyclical nature of our housing and stock market, but they cannot provide a reason for the future downtown. One offered solution is to build more houses because building more houses provides supply to the market and can reduce prices. To some extent I think this is true. But there’s a more fundamental problem that plagues our housing crisis: our idea of privacy and ownership.

What I’m proposing isn’t original. We already have multigenerational families who live under the same roof (grandparents, parents, kids, nephews, etc.). What I propose is that people change their mindsets about individually owning a house and decide to band together with friends and family to all own the same piece of property together. Our legal system already accommodates this arrangement in place through the use of tenancy in common or joint tenants—legal titles of persons who wish to own property. These legal titles go on public record and tell the world how the property will convey if that person passes away.

Here’s an example: Jones and Mary have been friends for 4 years and they both found themselves complaining about the rising prices of housing in the Bay Area. They each have their own families and they can qualify for a home loan but their maximum purchasing power is lower than the houses they intend to purchase.

So what if they approached the same lender and decided to buy a house together? I think they would have to make several considerations first: whether everyone’s on board with it, how will they take title, and does it make sense financially?

Let’s just skip to the financial picture: if you split a mortgage payment with another family unit, you’ll be really pleased about how affordable it is versus renting the same amount of space. Not only will you never have a landlord asking you to move out, but you’ll be building equity over time which can be later cashed out.

The other considerations are rather straightforward. You and your spouse come to terms on whether you can live with another family if it means getting higher purchasing power. Taking title is also somewhat straightforward. If you don’t want to have other persons on title to take your share when you die, then choose tenancy in common which lets your heirs take the share upon your death. This is of course a legal matter so please do your research in this manner, but the common sense approach is to let non-family members not take your share when you pass.

I think at this point your gut might be saying as an objection: but why do I have to compromise my housing situation just because they bay area is so expensive? One reply to this objection is that our society has built of the idea of individual ownership for everything that we likely have not considered the possibility for owning the same house with multiple people. And yet, when we rent, we seem to have no problem splitting the rent between people as if there were no compromise whatsoever. So if people split the mortgage together, is it any different than people splitting a rent check between each other?

Lastly, I think the major hurdle in getting this all started is this: I don’t think people know how to approach other people to decide to buy property together. It’s a foreign thing to suggest to others and it could make people think less of you. “You’re asking me to split a mortgage with you because you don’t make enough money to support your own family?” It’s a disgusting thought but I think people have a lot of pride in their family to solely provide for their own families that if they ask for help in any way they are perceived as weak and getting a handout. Another consideration is that it’s almost like writing a will—everyone should do it but no one gets around to it. But if people can communicate their financial situation better to others and if they weren’t ridiculed for it, or if a service did that, people could be better off. All it takes now is for people to band together, band their finances together, and see a mortgage lender together, which is something that rarely happens but I think needs to happen more if you want to see immediate relief in this so-called housing crisis.

 

The KnowHow Involved in Submitting a Purchase Agreement is Quite Large and Involved

Unaware buyers may think submitting a purchase agreement is something done automatically by a Realtor. It is quite the opposite. Submitting a purchase agreement is a careful and deliberative process with hundreds of moving parts and lots of consideration required for the Realtor before making the submission. We’ll go over some of the considerations that take place before submitting the offer.

The residential purchase agreement is 16 pages long. It used to be a single page before 1970, but has been added over time to cover stipulations that are necessary for both parties to clarify. Whenever a lawsuit occurred, more language was added, to both parties’ benefit.

Seeing the perfect house and then moving on to sign a 16 page document can be cumbersome. Clients of mine who work 8 hours and then have to sit down to read 16 pages of small text will feel burdened. Others want to do the close reading with me and I’ll gladly do it. Others want the paraphrased version. As long as they understand that they must read and understand it before signing, it’s up to them how deep they want to engage the document.

One thing I will say is that I know this document like the back of my hand—I know where the most important clauses are, where to ask for certain things at certain points, and how to modify certain clauses to get the most out of the exchange. That is why pairing up with a Realtor to draw up this document is necessary.

One know-how aspect of modifying this document is to make sure the buyer complies with any point of sale ordinances and customs of the local area. There are transaction-related customs that buyers and sellers adhere to that streamline the process of purchase. While all items in the agreement are negotiable, having a streamlined purchase agreement simplifies the seller’s reading of the purchase agreement, which allows them to compare the submission with others. Think of it like tailoring a resume to fit the employer. That is what happens every time we submit the offer.

A second know-how aspect of offer submission is the Realtor’s ability to gather information and sleuth around, and take that information back to the buyer to have the offer submission be the best it can possibly be. This intel gathering could include getting comparable sales data for the buyer, and also chatting with the listing agent to determine the amount of submitted offers. If the number of submitted offers are unknown, the best alternative is figuring out how much interest exists on that particular property, by figuring out the number of times it was shown, how many people attended open house, etc.

Ultimately the Realtor will write in specific clauses, add addenda, and make other pertinent suggestions to make the offer submission not only flawless, but free from vagueness and keep buyers out of court. Realtors ultimately have the bird’s eye view to clarify language and get ambiguity out of the picture at a time where everything must be written down and accounted for. If a novice were to make these acts without knowing the local laws, point of sale ordinances, or customs of offer submission, one would not get very far in the process and may be overlooked. Sellers perceive incompetent offer submissions are time wasters and may be overlooked. When this happens, the perfect house you saw may not be available for you.

I hope I outlined the various facets of how a Realtor aids buyers in the offer submission process and how critical this step is in the home purchase process. I make it a point to draw up the purchase agreement in a few hours time to keep my buyer within the offer submission schedule, but just know that I am proofreading the contract several times and reviewing laws as needed to keep my buyer’s interests preserved and at heart.

Home Sellers Want to Sell but Where Will they Go?

Home sellers by now are bombarded with marketing materials asking them to sell their house in the wake of the inventory shortage. They might want to sell to tap into that equity, but they aren’t. Below I propose a theory of why they are not motivated to sell which pertains indirectly to the mortgage meltdown of 2007.

Where will they go? Sellers might have purchased 10 years back and they could be sitting on $400,000+ of equity. The only problem is: what can that $400,000 buy as their replacement home? Despite our recovery from the mortgage meltdown, the meltdown has permanently hampered the surplus income of many working families who lost equity in the 2008 crash. Despite them sitting on a large equity position, the rising values make their future housing less affordable. They may be able to purchase by using the equity as a down payment, but retirees with fixed incomes will not be allotted as much purchasing power as those with dual incomes.

Creating Universal Appeal For Home Listings

We all know that when it comes time to sell your house, your Realtor will ask you to clean the house, remove the clutter, and even stage the house. The overarching objective is to get your home to appeal to as many buyers as possible. With this strategy in mind many sellers have intended to make the house as neutral as possible. We go over some of the things you can do to make your house appeal to as many buyers as possible.

White or off white walls: It’s no surprise the most popular colors from Kelly Moore and other paint suppliers are off-white, egg-shell white, etc. These colors are popular interior colors to get houses ready for new tenants or to appeal to new buyers. The whiteness of the walls represents cleanliness and also a blank canvas for the future resident to make any future changes.

Filling up the pool or koi pond: Pools and ponds in the backyard are interpreted differently by different buyers. People see a pool and may perceive the cost of maintenance. Others see it as a summer centerpiece. Families with children perceive it as a risk of drowning to their little ones and now they must fence it. Regardless, sellers sometimes opt to fill a pool with dirt and built over it or fill up a pond to have a more neutral layout of the backyard.

Getting drought tolerant or solar: Any green amenities can level up the value of the house and materially increase the listing price of a home by several percentage points. I have seen solar panels increase value of the house as much as 10%. The appraiser will have to count it. Same goes for drought tolerant plants. They can reduce household maintenance costs and utility bills and attract buyers to bid on your home.

My Experience Working with Millennial Homebuyers

Just like any demographic, people are in varying stages of their life. They may be in a position of saving money, investing, paying off debts, renting, or a combination of circumstances. I have experienced the same phenomenon with millennial buyers: each buying party had a unique desire and reason to purchase under various financial circumstances. While their circumstances may have varied, they shared some common traits which I would like to point out below.

Millennials are very intelligent. They can read complex documents and ask intelligible questions. They have undergraduate degrees or higher and are mid-level/seniors in their careers, making them battle-tested with an education to back it all up. They research aspects of the property very efficiently and are often cooperative and understanding. They use Google effortlessly. This sort of “independent intelligence” is something akin to a savvy baby boomer investor– the drive exists to purchase, the decisions are data-driven versus arbitrarily driven (emotions, or intuition, on the other hand, play an important role in homebuying, particularly in having a good impression about a home), and the follow-through is flawless.

How does my role change, if any, when I have very independent clients? As a Realtor, I follow them with all these steps and I still present them with all the reports and analysis they need to make an informed decision, even if these data are redundant of the conclusions they have derived for themselves. So at times I will be their expert but also an echo chamber. In other instances I will challenge their understanding on points they haven’t considered or respectfully disagree with them when perhaps they hold a view that is against their best interest or going to cost them down the line. When they are not privy to county customs, I try to catch them up on these customs so the purchase will go smoothly. There any many nuances of real estate that I will need to share with them that will only improve their home buying experience.

Despite these similarities, millennials’ financial positions vary greatly. Some will pay for cash for the house, others will ask parents for down payment and closing costs. Married millennials might have a double income and have high purchasing power. Others may be single and ready to buy a condo. In short, most millennials are driven and hard working, seeking to improve their lives in some way. None of the millennials I worked with fit the stereotype that Millennials like handouts or are highly dependent on an income source. I have seen the opposite is true.

The Consequences of Rising Interest Rates for Borrowers in their New Home Loans

Every once in a while you will hear that the Federal Reserve and its power to influence the money supply will raise interest rates. I intend to talk briefly about how this directly affects the consumer who intends to obtain a home loan after the rate increase. The main objective is to find out how much monthly additional funds are required for the mortgage payment. After doing this analysis, we will decide whether the rate increase is too costly or if it is affordable for the borrower of the funds. This analysis is not applicable for those who wish to make cash only purchases, however those who are debating between the cash purchase and the loan purchase can continue reading to get an idea of the cost of the monthly loan payments.

First let us start with a few assumptions: Let us suppose you want a 30 year fixed loan, 4% interest rate, $500,000 loan amount. With this information, we can now solve for the monthly payments. The monthly payment is $2387.

Scenario 1: What if the interest rate rises to 4.5%? The payment rises to $2533. That is a $146 difference.

Scenario 2: What if the interest rate rises to 5%? The payment rises to $2684. That is a 297 difference from the original amount.

Let’s make an interpretation of these data. Namely, what is an extra $146 a month, or $1752/yr? That amount could be the amount of your monthly coffee bills, or monthly going out for good cost. It could be a fraction of your grocery cost. In the big picture, the increase is not that much.

One objection to this is that it could be substantial if you don’t have that much extra funds, or you have a very demanding lifestyle where you need to eat out a lot.

One reply to this objection is that the cost to obtain this money is inexpensive. When we take out a home loan, we are accelerating our means to purchase a home. In return, you make payments to cover the loan until the loan is due or paid in full. Imagine if you had to wait until you saved $600,000. Wouldn’t that take a while, conventionally speaking? Instead, isn’t it faster to save up $100,000 and get the rest in the form of a loan? That is what the loan accomplishes. The rate increases are inconvenient to the borrower but they may not be as groundbreaking as people believe.

In summary, you might find interest rate increases inconvenient, and they might be more than inconvenient when the rates spike. However if the increases are only in small increments, you might find the cost of the monthly mortgage payment to be slightly more expensive, but tolerable, and not earth shattering as some people tend to believe.

 

2016-2017 Outlook on Interest Rates from the Federal Reserve

#Interestrates are poised to rise by the end of the year according to Federal Reserve chair Janet Yellen. Can rising interest rates motivate #homebuyers to buy before rates change? They might. Buyers seeking 30 year fixed home loans may prefer a lower interest rate over a higher rate, which could #save hundreds of dollars on their mortgage payments each year. Your #banking institution or credit union may have more helpful information for you. We may recommend some loan originators as well, if you ask. Happy buying and stay educated!

2016-2017 Outlook on Interest Rates

#Interestrates are poised to rise by the end of the year according to Federal Reserve chair Janet Yellen. Can rising interest rates motivate #homebuyers to buy before rates change? They might. Buyers seeking 30 year fixed home loans may prefer a lower interest rate over a higher rate, which could #save hundreds of dollars on their mortgage payments each year. Your #banking institution or credit union may have more helpful information for you. We may recommend some loan originators as well, if you ask. Happy buying and stay educated!