Thursday, September 28, 2006
That Abominable Four-Letter Word
Saturday, September 23, 2006
Real Estate Market Update: Where is the Flood of Foreclosures?
The Mortgage Bankers Association of America says foreclosures are at pretty much the same level this time last year. [Note: article first published on EzineArticles on June 2, 2006]
One of the many dire predictions done these past few months by many ‘bubbleologists’ out there - that is all those who indulge in the contemplation of real estate bubbles of all sizes and colors, whether real or imaginary, coming our way - was that by now real estate markets everywhere would be inundated and swept away by a tsunami of foreclosures of apocalyptic proportions.
The general rationale among those specializing in the fine art of staring at crystal balls (or perhaps at several empty bottles of rhum) was that the steady increase in interest rates, the consequence of a tightening monetary policy implemented by the Fed since mid-2004, would have led by now to a collapse of the adjustable-rate mortgages (ARMs) market, since consumers could not possibly cope with the increased monthly payments. This, in turn, would dramatically increase mortgage defaults and foreclosures, with the end result that real estate markets everywhere would be flooded with excess inventory at deflated prices, thus causing markets to crash - the tsunami I was talking about.
The Mortgage Bankers Association of America (http://www.mbaa.org) does not seem to share this particular vision of the end of the world. In its Economic Outlook update released in May 2006, the Mortgage Bankers Association of America (MBAA) pegs the ARMs share at 27 percent, down from the 36 percent peak of early 2005, an indication that many prudent consumers have locked in already. Likewise, the inventory of mortgages held by banks is virtually unchanged at 1,500 billions (aggregate nominal face value of mortgages, by dollars), the same level of 2005, suggesting that, rather than defaulting, consumers are ‘holding on’. And, finally, the rate of delinquency is at 4.38 percent, down from 4.70 percent in the final quarter of 2005, clearly another measure of consumers financial stamina, and an indication that banks were actually faring worse when real estate markets were doing better.
But that’s not all!
In the Mortgage Finance Forecast released also in May 2006, MBAA highlights that the rate of housing starts nationwide has increased nationwide, up to 2,131,000 units (annualized) for the first quarter of 2006 from 2,059,000 units in the last quarter of 2005 – an increase of 72,000 units representing a robust +3.496 percent overall, although this rate is forecasted to slow down as the softening trend in real estate markets continues throughout the year. Home sales overall are forecasted to decrease by 501,000 units nationwide to 6,574,000 units by December, 2006 from the 7,075,000 of December, 2005. Although this represents an annualized drop in sales of 7.08 percent compared to last year, it can hardly be called a bubble burst!
And here is the most surprising figures of them all – surprising for the bubbleologists, that is. Notwithstanding the increase in interest rates and the toll that many think ARMs will take on defenceless consumers, MBAA forecasts that the average market share of ARMs will remain constant at 27 percent of institutional mortgages for 2006, down only 3% from the 2005 average. The significance of this forecast is twofold: 1) MBAA does not anticipate that interest rates will increase significantly higher for the remainder of the year and 2) MBAA mirrors a Gallup survey conducted in May 2006, which found that only 11 percent of Americans worry about ARMs, down from 20 percent in 2005.
And why should they worry? In the latest release, the Bureau of Labor Statistics, has pegged the Consumer Confidence Index at 109.6 in April, up from 107.5 in March and higher than the 103.8 of December, 2005. The Consumer Confidence Index is now at the highest level since March, 2002, with the average family income up 0.8 percent in March, 2006.
To finish, I would like to spend a few words on how politics are filtering into economics, especially in times of elections. It is a shame that an increasing number of Bloggers and even journalists out there are twisting and interpreting economic data to fit their own political agenda. Although November, 2006 is pretty much around the corner and the battle is on to take control of Congress, the manipulation of economic and statistical data for political ends and means is a great disservice to consumers, no matter the political colors.
For example it is not true, like some Bloggers assert out there, that the recent appreciation in real property values is the direct result of President Bush’s domestic economic policies. Real estate capital growth was largely due to the correlation between capital and employment or, if you will, between income and labor. An increase in levels of consumption has set forth an increase in prices caused by a corresponding increase in demand, in itself generated by a commensurate increase in the income-employment factor. So growth was derived by the equilibrium of capital and investment with labor and employment. And since, furthermore, production is in direct function of consumers spending which increases as unemployment falls, capital accumulation has increased as employment rose steadily. It is as simple as that!
Likewise, it is not true that President Bush is the main culprit for the real estate bubble burst – like many Democratic sources imply and some actually cry out loud. Poor President Bush has absolutely nothing at all to do with real estate bubbles and their bursts, essentially for two reasons: 1) because there are no bubbles in real estate and 2) because there are no bursts either. Like Prof. Bernanke has repeated now several times, far from being a bubble burst the present cooling-off trend through higher interest rates will have the beneficial effect of consolidating market wealth achieved thus far, by allowing the economy to get an even footing through a slowdown of capital appreciation and, at the same time, allowing real wages to catch up, thus reducing the affordability crisis and rejuvenating the pool of buyers.
And, finally, it is not the President of Iran, Mahmoud Ahmadinejad, that is trying to promote his country’s nuclear programme by putting a stranglehold on North America’s real estate markets through higher crude prices, while attempting to get rid of Secretary Rice at the same time (I know, this is laughable, but I read it in the commentary of a political blog – TIME Magazine should make this particular blogger ‘Man of the Year’).
Consumers and all those interested in an objective evaluation of real estate markets climate, are well advised to go straight to the source of statistical data and economic analysis and evaluation, bypassing all commentaries entirely, especially these days.
Real Estate Chronicle
Wednesday, September 20, 2006
Single Women Buy A Home For More Than An Investment
A report outlines that on average, when it comes to the purchase of residential real estate, men are entirely useless. (The report doesn’t specifically say so, but that’s the gist of it).
I most definitely would not want to come across as a slimy, double-tongued and venomous rattlesnake, but those of us who have grown old in residential real estate sales are fully aware of the fact that, in this business, men are good for one thing and one thing only: to autograph a deposit check. So much so, in fact, that when I used to work for United Realty on Kingsway (that was last century), I knew an agent who emphatically refused to speak to hubbies during showings – even during listing presentations. He totally ignored them. And he was, and still is, one of the top producers in the industry.
Hubbies invariably have this peculiarity of standing in the way during showings. Sometimes we even have to waive them aside, to allow wives to engage into the metaphysical contemplation of, well … draperies, or to stand in front of the kitchen stove and fantasize out loud on the forthcoming culinary delicacies they will be preparing, and subsequently dishing out to their loved halves. Which is, incidentally, the part of showings I enjoy the most: to watch hubbies running down the stairs screaming in horror and pulling out hair. No wonder men do not live nearly as long as women: the ladies do not eat what they cook – but I digress.
So, therefore, Canada Mortgage and Housing Corporation (CMHC) has now discovered the obvious, that is women (single, married, divorced and widowed) control a whopping 85 percent of all home purchase decisions, thus giving an entirely new meaning to the old, and otherwise sexist, saying that ‘a woman’s place is in the home’. In fact, even the other belief that ‘men always have the power and the money’ seems to have become somewhat – shall we say – passé …
CMHC further details that women buy at a faster rate than the general population, and that single women are twice as likely as single men to buy a home. This report mirrors another study, conducted in 2005 by the National Association of Realtors, which outlined that 21 percent of all homes were bought by single women. That was up from 18 percent in 2004 - and despite the fact that women still earn only 76 cents on the dollar that men earn. In comparison, American single men accounted for only 9 percent of home purchases last year. No data is available for Canadian single men – which is not to say that Canadian single men accounted for zero percent of home purchases last year. However, on a second look, the absence of any statistical data is probably an indication that Canadian single men did not exactly corner the market in 2005 ...
When it comes to have, as Virginia Woolf put it, "a room of one's own", there are dozens of stories that come across the wire about single women snapping up real estate. Realizing that there is no need to wait for a man before they allow themselves the pleasure of a room of their own, unmarried women are buying homes in record numbers. Why the disparity between single women and single men, when it comes to taking the plunge? The New York Times recently devoted a lot of ink to trying to figure that one out, but its findings can be boiled down to the following:
1) women care about homes more than men, who think more of them as a place to sleep, a crash pad and
2) women want to feel that wherever they are bears their imprint, whereas men could not care less.
Going back to CMHC, the report interestingly highlights the fact that, when single women go house hunting, it is not always for the same reasons that couples do. More specifically, single ladies are looking for more than a good investment to build equity for their retirement. There are three factors, in fact, that distinguish single women buyers from couples: they focus more on location, security and low maintenance.
Younger single women tend to buy in the heart of downtown, for social reasons. They want a vibrant urban community with amenities right there. They do not want to commute a long distance to the suburbs. On the other hand, women of all ages will buy a home they are not in love with, for family reasons. Perhaps the home is not exactly what they want, but it is close to a great school where their children will thrive, or close to a grandparent who can provide daycare.
Safety and security
These are key issues for single ladies. Even if they can afford to buy a single-family detached unit, many will opt to buy an apartment or town-home because they perceive this style of housing as safer and more secure. Certain types of multi-family living have a better sense of neighbourliness, and for many living in a town-home feels more secure than a single-family home on a large lot.
There is no question that women, as a whole, are embracing home repair and maintenance. Fully 50 percent of purchases at Home Depot are now made by women, but young ladies are still more likely to look for a home that promises low maintenance. One great advantage of low-maintenance housing is that it frees up time for other activities.
Obviously, those who are most interested in reports of this type are residential and mixed-use developers and home-builders, whose main goal is invariably to try to offer homebuyers everything they need, and most of what they want, for a price they can afford.
Real Estate Chronicle
Sunday, September 17, 2006
Banks Selling Real Estate – A Real Bad Idea
Some things are not as bad as they look – they are worse!
Is it my imagination, or did I hear somebody out there complaining about real estate commissions?
Anyone who complains about real estate commissions now, is not going to be thrilled if banks have their way and are allowed to sell real estate, something that the American Bankers Association (ABA) has been tried to do by lobbying, pressuring Congress - and paying millions of dollars in the process by way of special contributions - for the past seven years. And it does not matter if banks are not allowed to share commissions. All banks simply need to do, once they are permitted to step into real estate, is to buy brokerage firms and they can share all the commissions in the world without ever once breaking the law. They do not even need real estate licences.
In fact, since we are on the subject of commissions sharing, let’s do a little numbers crunching to find out the ‘commissions’ banks are charging consumers today. They do not call them ‘commissions’ – they call them ‘interest charges’, but fact of the matter is that a fee computed on a percentage basis in payment for a service is a commission. So therefore, the user’s fee charged by a bank to a borrower on a percent basis for the use of a certain sum of capital is nothing other than … a commission.
Banks base mortgage rates on a variety of indexes. Among the most common indexes are the rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. A few lenders use their own cost of funds as an index, which gives them more control than using other indexes. To determine the interest rate on a mortgage, bankers add to the index rate a few percentage points, cumulatively referred to as the ‘margin’. The amount of margin may differ from one lender to another, but it is usually constant over the life of the loan. The formula therefore, is: Index Rate + Margin = Mortgage Interest Rate. Most banks use a 2 percent margin minimum. When they offer ‘special packages’ to consumers, they typically apply a 3 percent margin, and then offer a 1 percent ‘special’ discount or rebate.
But let’s take the 2 percent typical margin. To all those readers who think that 2 percent sounds better than the 6 percent commission commonly charged by real estate brokerage firms, let me point out that the 2 percent margin charged by the banks is per year! So, if it is true that the average consumer keeps his property for seven years, the ‘commission’ charged by the banks is really 14 percent. The only difference is that the margin applies to the principal of the mortgage, i.e. the amount borrowed as opposed to the real estate brokerage commission, which applies on the full sale price. But this is of little solace if one considers that almost fifty percent of all mortgage transactions involve 95 percent financing.
Banks have come to the realization that the U.S. real estate brokerage market amounts to some $61 billions, a sum that, if attached to a single firm, would rank 19th on the Fortune 500, ahead of Boeing, Microsoft, Morgan Stanley and JPMorgan Chase. To paraphrase Scarlet O’Hara in Gone With The Wind, this is a market that's ‘worth fighting for and worth dying for’. To be sure, the tactic adopted by ABA is that of nonchalance. ABA is trying to convince Congress that banks are not really interested in pursuing this line of business even if they were legally able to do so, but that they would like to be able to pursue it ... just in case.
The truth, of course, is much different and deeply rooted in the economics of real estate. Brokerage firms charge commissions to Sellers, the recipients of the money proceeds in a real estate transaction, and only when Sellers have received those proceeds. Banks, conversely, charge interest rates to Buyers. What ABA is aiming and attempting to do now, is to charge both Buyers and Sellers. Sort of like eating from two dishes at the same time, so to speak. Give the money to the Buyer to complete the transaction, and charge the Seller for completing it.
So again, how much is the real estate commission ABA would like its members to charge, were they allowed to get into real estate? Let’s see: there is the 14 percent from the Buyer over seven years, there is the 6 percent from the Seller at the time of closing, and then, of course, there are ‘minor’ commissions like appraisal fees, set-up fees, administration fees, loan initiation fees, loan cancellation fees, front-end fees, and then, of course, there is the loan insurance.
Boy, that’s a lot of commissions!
No wonder that Consumers Union ( http://www.consumersunion.org/ ), publisher of Consumer Reports, the independent, non-profit testing and information organization serving only consumers, is strongly lobbying Congress to conduct further studies on this issue.
But besides the added cost to consumers, letting banks into real estate would not only be bad for the industry and bad for consumers – it would be bad for the economy at large. In fact, the notion of a ‘free market’ where all economic decisions regarding transfers of money, goods, and services take place on a voluntary basis, free of coercive influence, is commonly considered to be an essential characteristic of capitalism. But in the eventuality of banks dominating the real estate industry, how free would consumers really be to choose, for example, how to sell their homes, or to negotiate a commission, or to counter an offer to purchase, or to change agent if they do not like one, or to even try to sell their properties themselves?
Did anyone ever attempt to negotiate something – anything at all – with a bank? I have, several times. And I have witnessed personally and can report first-hand on a variety of responses from bankers, ranging from the amicable “no .. no .. no”, to the tap on the shoulder and nod of the head, to the sarcastic smile, all the way to the glacial look and the beyond-the-grave silence. However, I still cannot report a single ‘Yes’ from a bank, after nineteen years in the business. Banks understand negotiating not as a give-and-take, two-way process but, rather, as a one-way street – going their way, that is, only their way. And this is today, when consumers still have the option to walk away. What will happen to consumers when that option will be taken away from them?
Banks getting into real estate? Do not let that happen to you.
Real Estate Chronicle
Tuesday, September 12, 2006
It always pays to carefully scrutinize the title of a property being bought and sold.
At Common Law, the Doctrine Of Privity Of Contracts states that only the parties to a contract can enforce the rights under it. This Doctrine, however, does not apply to contracts which create an interest in land. Therefore, if 'A' grants a right of way over his property to 'B', and 'A' then sells his property to 'C', 'C' is bound by the agreement between 'A' and 'B' if he had notice of it before he bought. As a result, interests in land are said ‘to run with the land’. In order to be enforceable, of course, agreement creating an interest in land, such as the aforesaid right of way, must be registered on title.
One important classification of an interest that attaches to a parcel of land as opposed to an individual, and which therefore runs with the land, is that created by an easement. In its simplest form, an easement is a privilege acquired by a landowner for the benefit of his land over the land of another. The land receiving the benefit is the dominant tenement, and the land over which the right is exercisable is the servient tenement. Real property law stipulates that, in order to constitute an easement, three elements must be present:
[ ] There Must Be A Dominant And Servient Tenement.
Simply put, this means that there must be two parcels of land affected by each and every easement. In other word, 'A' cannot grant an easement over his property to 'B', unless 'B' owns a piece of property either adjacent to 'A'’s or sufficiently near 'A'’s, which is to benefit from the easement. Attempting to create an easement without attachment to a parcel of land is referred to as an ‘easement in gross’, and it is not a true easement.
[ ] The Easement Must Accommodate The Dominant Tenement.
It is the land that must benefit from the easement, not merely the landowner. If the owner alone obtains the benefit, then it is not an interest in land. The right would only be a contractual licence, and the Doctrine Of Privity Of Contracts would apply. The test applied by the Courts to determine whether an easement or a licence has been created, is whether or not the right makes the dominant tenement a better and more usable piece of property. For example, a right of way may give better access to the dominant property. In some cases, where the right benefits a long-established trade conducted on the property, this has been held to be sufficient to create an easement. It is important to note that the servient tenement must be close enough to provide a practical benefit, although it does not need to be adjoining to the dominant tenement.
[ ] The Easement Must Be Capable Of Forming The Subject-Matter Of A Grant.
In other words, the easement must be capable of a reasonably exact definition. This means that one must be able to identify its boundaries, and the person granting the easement and the person whose land receives the benefit of the easement must both have the necessary legal capacity to be grantor and grantee respectively. For example, a tenant cannot create an easement which binds the property after the tenancy expires.
Examples of easements include rights of way, rights to light and rights of support, as in the case of buildings. Every parcel of land has a natural legal right to receive both vertical and lateral support from the adjacent soil. So therefore, if a neighbour excavates up to the property line and, as a result, the adjoining lot subsides or collapse, he will be liable in damages for depriving the adjoining owner of his right to support. However, buildings on the land do not have the natural right of support at law given to the land itself, so it is necessary to grant an easement of support in order to protect them.
Easements may be granted for any length of time. They may be created by statute, in an express document, by implication of law or by ‘prescription’ (at Common Law known as “squatters’ rights”). A statutory easement does not, of course, need to fit the above-listed requirements. Examples include public rights of way, such as those needed to construct power lines. An example of an easement created by an express document would arise where a deed of property granted or reserved a right of way. This type of easement is by agreement between the owners of the dominant and servient tenements.
An implied easement will result if the intention of the party granting the easement has not been sufficiently explicit. Implied easements may arise in a number of situations. For example, an implied easement would arise in the case where one of two commonly supported houses has been sold, and no mention was made of any easement of support (as it is common in the sale of one-half of a side-by-side duplex). Finally, an easement of necessity will be implied in the instance where a building is severed, and commonly used stove-pipes interconnect both buildings.
An easement may be released by an express agreement between the current owners of the dominant and servient tenements. It will also be released by implication, if the dominant owner shows an intention to release it, for example, by abandonment.
Real Estate Chronicle
Wednesday, September 06, 2006
Registered Strata Plans
Although the requirements for depositing a strata plan are very technical, every plan must show, among other things, the following:
[ ] a unique registration number (for example, SP LMS3729);
[ ] the boundaries of the land;
[ ] the location of all buildings (with the exception of ‘bare land’ strata developments);
[ ] a drawing distinguishing the strata lots from one another by numbers or letters in consecutive order;
[ ] the area of each strata lot;
[ ] a schedule of unit entitlements;
[ ] a schedule of voting rights, if there is at least one non-residential strata lot;
[ ] any by-laws that differ in any respects from the Standard By-laws contemplated in the Strata Property Act.
Unit entitlement is the figure on which the strata units monthly maintenance fees are assessed. This usually takes into consideration the size of the strata unit, as well as the area of the limited common property that the strata unit has use of. If the strata council needs to raise $100,000 per year, and the unit entitlement is 18/1000, the monthly maintenance fee assessed would amount to $1,800 per year, or about $150 per month.
Copies of registered strata plans are available at the Land Title Office in the district where the strata development is located.
It is important to notice that a strata development is not the same as a cooperative building project (coop), in that the legal structure of a housing cooperative is different is some important respects.
In a housing cooperative, a corporation is created to purchase or lease and subsequently develop land for housing. The corporation is called the association.The corporation owns the land or building or, in some cases, leases the property from a landlord. An individual becomes a member of the cooperative by purchasing shares of the association. Typically, ownership of a share carries the right to occupy a unit in the cooperative housing complex.
From a member’s perspective, the most significant difference between a strata development and a housing cooperative is the nature of the member’s interest in the project. In a strata development, the owner buys and interest in a strata lot. So, therefore, the owner purchases real estate. Conversely, in a housing cooperative the member does not own an interest in land. Rather, the member owns only a share in the association, not real estate.