Real Estate Update Spring 2013

It's that time for a real estate update. Some continue to be discouraged because current prices haven't "snapped back." There are a lot of simple, common sense reasons for this.

There have been signs of life in residential real estate in Northern Illinois. However, while prices in some parts of the country have upticked in recent months, not all communities have experienced this. Yet, there is brisk sales activity in some communities. One nearby community has had 649 sales in the last two years, with only 251 currently on the market. In Wheaton, 1747 homes have been sold in the last two years, with 451 currently on the market. Prices are up about 6.4% over the previous year. and seem to be increasing.

Interest rates are the best they will probably be for some time to come, and have begun to increase. 30 year conventional mortgage rates with 10% down are running 3.5% to 4.3%. It's been reported that new home construction has reached a point where there have been shortages of some materials, prompting manufacturers to open idled assembly lines for such things as plywood. According to the National Association of Home Builders as quoted at Morningstar April 15: "Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values,"

Inflation is relatively tame and that should keep interest rates low. However, this trend with inflation running 1 percent or more below long term averages will not continue. In fact, all that it will take is some sort of Middle East or North Korean episode and all bets will be off.

All Real Estate is Local
That's an important factor to keep in mind when listening to things such as the Case-Shiller home price indices or the statistics of the National Association of Realtors. Here's an example. Chicago's home market is struggling as it loses population, and yet a friend who is attempting to purchase a home out here, west of that city, has found that there is some serious competition for homes! He was looking for a home in 2005-6 but decided prices were too high, and we both agreed the economy was too fragile.

Since 2005 he's been sitting on the sidelines, saving and renting. After 8 years he decided that this was the time, and last week he put a bid on a home new to the market, but found that one day after listing there were three bids ahead of him, and one was for a price about 20% higher than the asking price.

That was an interesting development, and he stated after looking for a month that a lot of the better properties are moving at a fast pace. It's been reported that banks are beginning to release more foreclosed properties.

So why did he decide to take the plunge now? For one thing, and this is most important, he can afford to buy a home. He was pre-qualified by a bank for a mortgage and began looking only after he had decided how much "home" he was willing to buy. Currently, mortgage rates are increasing, home prices are increasing and rents are increasing. He's decided that it's time to make a modest change and he expects that he will "break even" in 3-5 years as compared to renting. He's of the opinion that residential real estate will only get more expensive from here.

Yet, prices remain off of their 2006 highs and in general are about 20% off of the peaks in Wheaton. Some are apparently waiting for a return of the "good old days" when we paid a lot more for a lot less home!

Factors Governing Home Sales
Prices are low, so what is the problem? In a nut shell, too many cannot afford a home. For another, there are an awful lot of short sighted people out there. For example, they'll trade in a used car for a new one carrying a 96 month loan. How expensive is this? A recent article in the Wall Street Journal mentioned such a buyer who was paying $36,000 for a $23,000 Toyota Camry!

My point is anyone who is willing to spend $13,000 extra to buy a car in this way is not going to have that money available to purchase a home. How much is $13,000?  It's a year of rent for a modest dwelling.  It could nearly purchase a new Honda Fit for $16,000 or it could fund a Roth-IRA for 2-1/2 years. It's also a 13% down payment on a $100,000 dwelling.

While some complain that a home is a terrible investment; home ownership was never supposed to be an "investment." A home is a place to live as an alternate to an apartment. Anyone who prefers to flush their income on more car than they need, or questionable car deals, etc. probably doesn't have the financial skills necessary to budget, save and purchase a home.

Here is a list of financial impediments to buying a home:

• Student Loans
• Revolving Credit debt including credit cards
• Auto loan debt
• Poor credit history or low credit scores.
• Lack of savings
• Poor financial and budgeting skills. 

All of the above reduce the purchasing power of the individual. While FHA will allow a home loan as high as 41% of  income, many financial planners recommend spending no more than 30% of one's take home pay to purchase a home. That 30% includes the mortgage, taxes and insurance. If a condominium, it should include fees and assessments.

A Tale of Two Economies
We continue to hear about high unemployment, and yet we also see the stock market hitting new highs. What's going on here?

I'm of the opinion that we now have two economies in the U.S. There are people with cash and retirement accounts who are employed and relatively debt free. Then there are the rest.

Contrary to some of the statistics, most are working, many do not carry excessive credit card debt, and so on. When we read that average credit card debt per borrower is approaching $5,500 that means that some have $0 credit card debt while others have $11,000.  The actual statistics are worse. The average household credit card debt is about $15,000. in other words, some households have $0 credit card debt, while an equal number have $30,000!

Average interest rates on credit cards are about 14.9%. That household with $30,000 credit card debt is paying $4,470 per year in interest! Add a 96 month car loan, and it's reasonable to assume that a home will not be a possibility for 8 or more years. Of course, in 8 years when that car is paid off, the individual in this example will probably buy a new car. Perhaps sooner. And so the cycle of debt continues.

Here's a graph that illustrates the problem. It shows household debt payments as a percent of disposable income. It peaked at a little over 14% in 2007 and as of October 1, 2012 had decreased to about 10.4%. I understand it has increased since October. It's again useful to realize that these are averages. Some households have 0% debt, while some have 21% payments. For some households, this is more than 41% of their income!

An Absence of New Buyers
The major problem is the absence of new buyers. For the reasons stated, many cannot buy a home, and a few could, but have decided not to. That is a significant change in the home market, which saw annual percentage increases since 1945.  Back then about 45% owned a home. By 1990 it was about 60% and today it's about 70%. How did that happen? The government in an ill planned move, decided that "we should all be homeowners." That decision was good for the banks who make the loans, good for the construction companies and workers, good for the realtor estate brokers, and good for all kinds of manufacturers who provided the goods and services that are necessary for a new home.

It was unfortunate, but to entice more and more buyers into homes, the government made it ever easier. 0% down loans, reduced requirements to get a FHA loan, and so on. This had the desired effect as more could buy a home. It also opened the flood gates to all kinds of questionable and unsustainable practices, including "liar loans."

So where do new buyers come from? From the young. Interestingly, in the age group 20-24 about 35% own their homes free and clear. At the other end of the scale, about 25% of retirees own their home. Currently about 70% of us do live in a home or condo and have a mortgage.

Another disturbing trend of the 2000's? A lot of people used their homes as a "piggy bank" and took out large mortgages. Now, at 65 when they should be reducing debt, they find that they continue to pay a mortgage from their social security income. Well, it was fun while it lasted, and they can take solace from that fact that a lot of banks prospered from these loans!

The largest group of possible new owners are younger people. However, it seems there is a concentration of younger people who have excessive debt including student loans. Others in that age group have been struggling to get a job at a wage that matches their skills. Younger buyers are usually a peak market for home purchases. Today it's been reported that older people who have amassed cash through years of savings are purchasing second or third homes. These are considered true investments and alternatives to that 1% CD, bonds paying 2% and the foibles of the stock market.

Sometimes, people use the term investor as a dirty word. I prefer a more simplistic view. There are savers in our society and there are spenders. Those who save accumulate wealth and then have the problem of determining where to put those savings. Some will fund a Roth-IRA for retirement, some will be parked in a bank as a 6 month emergency fund, and the rest? Most savers have learned through trial and error to live within their means. No fancy car, no McMansion, no iPhone and other toys. Savers will accumulate 10% of their annual wages. Super savers will accumulate more. Over 40 years, that's $2 million or more. That is why the Obama administration is now promoting limiting the retirement savings of "super savers." Better it be spent on junk, or anything that the government can tax.

It's interesting, but older people are buying homes as investments which they will rent to the younger people who shun them! The current situation is somewhat reminiscent of portions of DuPage County in the early 1980s and New York City in the 1970s. A lot of people bought real estate as an investment at that time, and have done quite well from the rents collected and the appreciation of the properties.

Today, we again have two distinct groups. Those who have saved and are looking for a place to invest it, and those who would normally be buyers, but cannot or will not because of high debt, disinterest, or poor financial skills.

Can I Afford a Home or a Condominium?
Here are some sample figures for a rock bottom home in Wheaton with a price of $100,000 and nothing down. This is a best case example:

• Annual mortgage at 4.0% = $4,512.
• Taxes: $3,153.
• Mortgage Insurance (PMI): $500.
• Home Insurance: $500.
• Total = $8,665 per year.

Using the above and assuming the cost of a home represents 30% of one's take home pay, that means that anyone who takes home more than $29,000 a year should be able to afford such a home. Of course, finding something suitable for $100,000 may not be easy.

Condominium prices have been lower than home prices and there are condos in the Wheaton area for $100,000. Here's an example for a condominium:

• Annual mortgage at 4.0% = $4,512.
• Taxes: $3,153.
• Mortgage Insurance (PMI): $500.
• Home Insurance: $500.
• Condo Fees at $250 per month = $3,000.
• Total = $11,665 per year.

Using the above and assuming the cost of a home represents 30% of one's take home pay, that means that anyone who takes home more than $38,900 a year should be able to afford such a condo.

Here's a current graph of the interest rates for a 30-year conventional mortgage from January 1, 2000 to March 1, 2013.

So What's the Problem?

The problem?  One thing that might be holding some back is reality. You can't get a McMansion for $100,000. Another is student debt, which is rising. Student Loans exceeded credit card debt and approached $1 Trillion in 2012! This figure ignores the fact that many college graduates not only get a sheepskin for the wall, but walk away from that 4-year university with significant credit card debt.

Here's a current graph of consumer credit:

Recent school graduates or new families comprised of recent graduates have traditionally been a source of home buyers.  However, when these new families are strapped with college loans, credit card and new car debt, they are sometimes automatically disqualified from obtaining a home loan. 

Here's a partial list of the impediments to purchasing a home or condo:

• The glow is off of residential real estate.
• Many possible first time buyers would prefer to rent
• Many first time buyers have too much debt to qualify for even the simplest home FHA loan.
• Some would rather buy a new Toyota Camry for $36,000.
• Lack financial skills. 
• Short term thinking. 

Am I Being Too Harsh?

Not at all. Simple arithmetic indicates that one can buy a small abode for $100,000 and if the costs are compared to even basic rent at $1,100 a month, the cost to buy versus rent is better after 2 years.  Yes, you did read that correctly. One can buy something for $100,000 today, and the break even as compared to rent is 2 years! Even a condo with $300 monthly fees will break even within 4 years!

Of course, after that break even point, the owner finds that they are accumulating some equity and are financially ahead, and that is comparing a 3% annual rent increase and a 2% annual increase in home value. 

Is a 3% annual rent increase realistic? Here's a chart from the St. Louis Federal Reserve. 3% annual increases may be a bit too low!

What's the Big Problem?

I suggest that one of the impediments to purchasing a home is financial skill and literacy. This begins at an early age, 16 or younger. By the time the average graduate, who is supposed to be our "brightest" has exited college, they carry with them an average $30,000 student loan debt. In other words, some have $0 debt and some have $60,000 in debt. Add to that credit cards and the auto loan. Some have dubious degrees and will take decades to earn enough to live and pay for those school loans. Some did not understand that college is not an alternative to working. It's a part of a long term education to prepare one for 40 years of working and saving. 

So Who is Buying Today?

To repeat, one of the sectors fueling the real estate market is investors who are dissatisfied with the 1% they get in CDs at the local bank, and the perceived risks in the stock market. 

Real estate is cheap today, and it's very easy to get a 35% return on investment in rental real estate. I'll say that again. A 35% annual return. So would you rather put your money in a bank at 1%? Apparently, many people have decided otherwise.

"Investors" with good credit and who can put down a sizable down payment have recently gotten 15 year mortgages for 2.2%! 

Alternative Perspective

The bottom line about buying a home is this. Can we afford it?

 Even Suze Orman has gone on the record and apologized for steering us into owning a home. Back in 2011 she said "The American Financial Dream is Dead." Orman has since promoted renting. But is it really that bleak? Here's a video from 2011. She states the problem very well.

Oh, by the way, the government in order to pay for all of those failed mortgages via FHA, has recently increased the requirement for Private Mortgage Insurance. For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years. In other words, a FHA borrower will be required to purchase PMI until almost 80% of the loan has been paid off!

The Bottom Line

"The impact of low mortgage rates is profound. Before the Fed began buying mortgage-backed securities in late 2008, rates for 30-year fixed mortgages stood at around 6.1%, and a borrower who could qualify for a $1,000 monthly payment could get a $165,000 mortgage. Today, that same borrower, at a 3.5% rate, can borrow as much as $222,000. In other words, the Fed's low-rate campaign has increased purchasing power by a third." From The Wall Street Journal April 7, 2013

According to that same article in the Journal "The housing sector is finally healing. But the sector may be in for more volatility until there is more demand from—and credit for—people who want to buy homes that they plan to live in."

Yes, people can buy more home at current low rates. However, these rates also allow buyers to get a home at a lower annual cost. Using the above example and the figures from the WSJ, one can buy that $165,000 home for a monthly mortgage payment of about $750. That's a reduction of $250 a month to pay taxes or PMI insurance. Yet, there is a call from some for more government intervention to make homes even more "affordable." We've been there and done that, as Suze Orman says, and we know how it turned out, don't we?

Realty Check

I noticed that according to Zillow my unit is worth only about 1% more than I paid for it 10 years ago. So I guess I lost money? After all if one can't make about 3% per year then one is losing money. That's the traditional wisdom, isn't it?

Well, I did the numbers, and I actually saved $38,315.99 in the last 10 years by purchasing instead of renting. Oh, and I did get to remodel the way I wanted, and I didn't have to deal with a landlord.

What's more, I put $10,000 into a new kitchen upgrade, and I have installed hardwood floors throughout the living spaces, including entry, dining, living, kitchen and hallway.

My numbers included the cost of the kitchen upgrade, electricity, natural gas, sewer, water, property tax and condominium fees. It also took into account the interest I might have made at 4% per year if I had invested any difference between renting and purchasing. Of course, 4% is fiction. We'd all love to have a savings account which yields 4%.

So all I can say is, from my experience at BLMH, owning is better than renting.

But, there are a range of opinions in the popular media. Some suggest that owning one's home is not good, while others say it's the best thing since sliced bread. Or we can simply rent at the lowest possible cost and  "invest" what's left following "Mad Money Cramer's" suggestions. He is the guy, as I recall, who went on the Today Show and told people to "sell everything." This advice was given after the Panic of 2008 and after the stock market had already plummeted. In other words, those who followed this self proclaimed guru's advice lost their retirement funds. My advice? Live within your means, save for your retirement, invest prudently and ignore the politicians, the talking heads and all of those wonderful commercials advocating why you just gotta have all of that stuff. While you're at it, ignore those credit card ads about "the wonders of just swiping."

Notes:

1. I've been asked if this post is realistic. That's a reasonable question to ask.  It reflects my personal financial experience over a period of about 10 years. Certainly, my experience may not reflect any one else's. It depends upon the specific numbers, and more on that in the next note. The "buy versus rent" question is one that just about everyone who has purchased a home, condo or townhouse has considered. Some say it's the "universal question" of personal finance. 
2. In my case, i used nearby rental prices for comparisons. When we looked into buying, we did look at a range of rentals in the area for the purpose of arriving at a rental cost for comparison purposes. Here at BLMH some of the units are available for rent, and there are listings on Zillow and elsewhere. It's not too difficult to find out what a realistic monthly rental would cost. However, as we all know, there is a range of differences in these units and nearby rentals. I could have used the minimum but that wouldn't be realistic. For example, in 2000 it was possible to rent a single bedroom apartment nearby for $700 a month. Not a fair comparison to a three bedroom, two bath condo with attached garage. 
3. The numbers are accurate in my case. I've kept pretty good records for major purchases, repairs and upgrades, and I do use Quicken. But my numbers aren't impeccable. However, I don't think I've mis-allocated more than 10%, and if I did, that's about $30 a month.
4. I know, using Zillow prices may overstate a possible selling price. However, this post is about the amount spent to rent as compared to the amount spent to purchase. It does not consider the current selling price. Why not? I'm not interested in selling today. If I take a "loss" or "gain" at the time of a sale, it will be determined by the selling price. I don't know what that price will be in 5, 10 or more years. However, if I did rent and invest any difference instead of purchasing, I'd have to speculate about how any money invested would appreciate, wouldn't I? My crystal ball doesn't tell me that, either.
5. What would or could one expect today? I'd say one has to do their homework. There are aids and my favorite site is the New York Times "buy versus rent" calculator. It has an "advanced settings button which allows a lot of customization. Clicking will open a link;New Window> Buy versus Rent NYT Calculator
6. Some of the things that will determine your personal result if you do consider purchasing will include:

• The purchase price. 
• The amount of the down payment.
• The mortgage interest rate.
• The cost of closing, points, etc. 
• The cost of a real estate attorney.
• The cost of an independent inspector. 
• The length of the mortgage.
• The cost of mortgage insurance.
• The condition of the home or condo. That includes furnace, appliances, carpeting, plumbing, sinks and water valves and drains, etc. as this will determine how much is spent on repairs or replacement of these items in the near future. Eventually, everything breaks and an owner must be prepared to replace these items.
• If a home. The exterior condition and the condition of the grounds, fencing, driveway, walks, etc. 
• The price for any improvements made after purchase.
• The cost to rent comparable living space.
• The cost of utilities (natural gas, electric, water and sewer).
• Other utilities which are to be considered for budgeting include telephone or cellphone, internet access and cable or satellite TV. However, when comparing renting to buying, these are usually the same in either case. So they do influence one's budget, but they probably will cost the same if one rents or purchases. But not always! Some condos include internet and cable TV with their monthly fees. It's something worth checking. Caution: At any time in the future, a condo association or HOA may shift from including such amenities as part of the monthly fees to having owners purchase these directly. 
• The cost of fees if a condominium or HOA.
• The cost of any special assessments if a condominium or HOA. 
• The cost of real estate taxes. 
• The cost of homeowners or condominium insurance.
• If a home or townhome, the cost of any "tools" necessary for maintenance. This include hose and sprinkler, lawnmower, snowplow, snow shovel, fertilizer spreader, brooms, rakes, and annual supplies (grass seed, fertilizer) and other misc. Or you can pay someone else to do these normal chores, but that needs to be considered if one is comparing purchase to rental. 
• If a home or townhome, the cost of exterior maintenance. Doors, trim, wood siding must be painted or stained about every 5 years or so. 
• The cost of interior decorating. That includes paint, carpeting, etc. 
• The thoroughness with which you pursue this and your personal financial situation. If you use Quicken, have a good budget, can plan and prepare financially, have low credit card and student loan debt and live within your means, then you probably are on the right track and do understand your personal finances. If you don't do these things then purchasing might be more financial responsibility than you can deal with.  

Realty, er, Reality Check

It's been a couple of years since my last posting on real estate and prices. I haven't really seen the need because there have been so many experts and opinions. However, I'll put forth my two cents.  I called my post, on August 1, 2010 a "Reality Check." I noticed a writer at the Chicago Tribune recently used the same title for their update on the Real Estate market.

The real estate market is determined by many factors. These include availability and pricing of homes and condos, availability and terms for mortgages, interest rates, employment, the economy, and many others.

All Real Estate is Local
CoreLogic, a real estate data firm, announced that for the 12 months ending October 31, home real estate prices in the U.S. was up 6%. That's good news, but they say all real estate is local. 45 states experienced real estate price increases. But not Illinois. Why is that? Here in the State of Illinois we are losing population, the state government has a history of political malfeasance, and nearby Chicago seems to be reverting to a "Dodge City" on the lake. Oh, and let's not forget that the state is broke, and is not considered a prime location for corporate business centers. Among other things, high uncertainty about taxes is a problem.

According to CoreLogic, Chicago can claim another first. It is the riskiest city in the country for mortgage fraud, and that is the second year of distinction for the city. Mortgage fraud is, in simple terms, where the buyer lies about their financial situation, so as to get a mortgage. Nationally, about $13 billion in mortgages originated in 2012 did involve mortgage fraud. According to CoreLogic's fraud risk report "It includes risk indices across multiple fraud types including employment, identity, income, occupancy, property and undisclosed debt."

None of this is good for attracting new buyers in the area or the state. However, there are pockets of improvement, and DuPage County is one of them.

Dupage County and Zip 60189
Here's a recent interest index from the Tulia.com real estate site:

Foreclosures
CoreLogic also maintains a datebase of home in the national foreclosure inventory. These are distressed mortgages and homes that are sometime sold at "firesale" prices.  They depress the prices, and add to the negative perception of real estate. The good news is the so called inventory of foreclosed homes is decreasing slowly. The bad news? It would take 31 years to properly liquidate all of these homes at the current rate. That obviously will not happen!

According to CoreLogic "Approximately 1.3 million homes, or 3.2 percent of all homes with a mortgage, were in the national foreclosure inventory as of October 2012 compared to 1.5 million, or 3.6 percent, in October 2011. Month-over-month, the national foreclosure inventory was down 1.3 percent from September 2012 to October 2012. The foreclosure inventory is the share of all mortgaged homes in any stage of the foreclosure process."

The Bigger Picture
The Wall Street Journal on November 15 had an article about the Federal Reserve's position. Chairman Benanke gave a speech on November 13. "The housing market, despite nascent signs of revival, is still plagued by tight credit, underwater borrowers and overdue loans, Federal Reserve Chairman Ben Bernanke said in a speech Thursday that expressed a great deal of caution about the progress of the U.S. economic recovery."

There are other problems. The Mortgage Bankers Association has stated that 4.1% of mortgage loans on one-to-four-unit homes were in the foreclosure process at the end of the day September 30th. That's about 1.9 million homes! This is about 46% more homes than are currently in the "national foreclosure inventory."

It's reasonable to assume that most of those homes will be on the market, and will be competing for buyers looking for a new home and existing homes for sale.

Foreclosures have decreased from 4.4% over the past year, and this is supposedly the lowest level since early 2008.

Meanwhile, the FHA has announced that as of September 738,991 single family loans which are insured by the Federal Housing Administration are 90 or more days past due or in foreclosure. That's an increase of 100,000 from one year ago. Obviously, things are not getting better! The problem is so severe that the FHA will probably go to Congress to get cash from the taxpayers to bail out these insured mortgages. Yes, that's right. You and I are paying taxes so that the FHA can be given money to hand over to banks in the event these FHA borrowers foreclose. Most taxpayers are probably unawares that they are on the hook for bad mortgages insured by the government. But we are.

How much money are we talking about? Oh, about 9.6% of the $1.08 trillion guaranteed mortgages, which is about 104 Billion Dollars. How much is that? It's about what the Federal Government spends each year for all transportation in the U.S. It isn't nearly as much as is spent on education. I suppose we should be grateful that the politicians haven't pulled the plug on schools to assure that everyone who wants a home, or who thinks they are entitled to be a homeowner, does in fact get a home.

The Realtor's (r) View
The Wall Street Journal also recently quoted the National Association of Realtors Chief Economist Lawrence Yun, who presented at the NAR national conference in Orlando, Florida. Mr. Yun "foresees U.S. home prices rising by 15% over the next three years.." However, the WSJ also noted that "Mr. Yun is widely known for his optimistic forecasts, given his employer, the nation’s largest housing cheerleader."

Mr. Yun is apparently concerned about a housing shortage, and is also concerned about home affordability. In other words, supply and demand issues. "Supply remains relatively scarce because builders are not producing as many homes as in past years. Mr. Yun predicts that construction will ramp up to 1.3 million units by 2014, but that still would be below the historic average of 1.5 million." Mr. Yun added that “Builders need to add more,” Mr. Yun said at the group’s annual conference. “We need to moderate the price growth.”

The problem here is all of those foreclosures. I guess that the NAR is writing these millions of homes off as unsaleable by the Realtors. What other reason is there to ignore them in the statistics?

Of course, some of those foreclosed homes do make it to market, and they are depressing the prices of existing home sales. It's almost as if there are two different housing markets out there. The "new" home market and the "used" home market. However, they may be interconnected, as both markets are vying for the money of the potential home buyer. Also, with current depressed prices, a used home can be much cheaper than a new one.

Some think there is a housing boom coming. A statistic that is used is new housing starts. Prior to the housing crisis, there were about 700,000 more homes built each year than were needed. Current statistics indicate that today the opposite has occurred and at present about 500,000 fewer homes are being built each year than are necessary. This statistic is most often used by those who talk about a coming housing shortage, or a housing boom on the horizon.

"Too Good To Be True" Mortgage Advertising
At present, mortgage rates and refinancing rates are very low. This has contributed to home sales. There are some wonderful mortgage rates being promoted, but some of it is deceiving.  It seems some of these advertisements are too good to be true.

Apparently, some of the brokers or lenders have advertisements that purport that they are a part of the U.S. government. These firms, which have absolutely no affiliation to the government have added “Government Loan Department” to their company’s return address, or official appearing seals and logos.

The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission have announced a crackdown on mortgage ads. Those to whom warning letters have been sent include lenders, home builders, advertisers and mortgage brokers. They have been instructed to clean up their advertising.

Mortgage Fraud
One picture is worth a thousand words, is the old saying. Here's a photo of a "home" that received a loan in excess of $100,000. It had no floor to speak of, and was basically a wooden structure sitting on the ground. Was fraud involved? We had a unit here that sold for less, and obviously provides much higher value than the building in this photo. What more can I say?

Rising Rents
Renting is the usual alternative to buying. Or living with a relative. Renters include those driven there by the foreclosure of their property. But rents are rising. In 2008 the national rental-vacancy rate peaked at 8%, the highest level in nearly a decade. By 2010 the national vacancy rate had dropped to 6.2%, as reported by Reis Inc., a real-estate data company. The vacancy rate is expected to continue to drop to 5.5% by December 31, 2012. This is bad news for tenants, because landlords are raising rents and lowering incentives. According to Zillow.com, Chicago rents rose 9.1% in 2011. Zillow currently shows 67 homes, condos and apartments are for rent in Wheaton.

"Moreover, rising rents increase demand as buying becomes more attractive than renting because of low purchase prices and higher rents." Zillow Chief Economist Dr. Stan Humphries at ChicagoNow.com.

Indebtedness and Buyer Finances
The level of indebtedness in the U.S. remains high. Consumers are reducing the level of revolving, or credit card debt. In fact the change has been remarkable. Here is a chart from the St. Louis Federal Reserve:

The Fed also has the following chart, and as can be seen, debt is not all that rosy. Here is the actual debt level. As can be seen, it's still near historically high levels and has doubled since 2000:

Student Debt 
There is another worrisome trend. Student debt has been rising and is now about 5 times greater than it was in 2000. According to the St. Louis Federal Reserve, it topped $1 Trillion this summer, exceeding other types of consumer debt. This is significant because it would be expected that the next wave of buyers will be the young who have graduated college, entered the work force, decided to marry and have children and then want to have a place to raise that family.

Here's a chart widely circulated by the "Occupy" group to support their position of the dire straits of college graduates. The political platform was "debt forgiveness." This chart is grossly inaccurate and overstates the amount of student loan debt. It has been conjectured that the following diagram uses the ratio of the diameters instead of the ratio of the areas. I think this is an important error, because it's a simple math error, and a failure to understand simple arithmetic concepts is a good way to get into serious debt. .

Here is the proper chart, which was printed on Mother Jones. it accurately shows the change in student debt since 2000.

The Obama administration, as part of the 2008 press for education incentives, has promoted student debt. A cynic would say that this was intended to keep people off of the employment rolls, and thereby lower the unemployment numbers.

Whatever the reason, we now find student debt has exceeded revolving credit debt. So more and more graduates are entering an anemic jobs market with substantial credit card and loan debt. These people will have great difficulty achieving home ownership. A student loan of $50,000 represents a $5,000 annual payment plus interest for 10 years. In other words, about $450 a month. The average college debt is 27,000 and here in Illinois, 64% graduate with some debt. The unemployment rate for college graduates was reported as 8.8% in 2011. According to a CNN Money article dated October 18, 2012 "Of the 1,057 colleges in the study, average debt per graduate ranged from $3,000 to $55,250. At 114 colleges, graduates had average debt above $35,000, while 64 colleges said that more than 90% of seniors graduate with debt."

It is not surprising that we now hear of people carrying student loan debt all the way to retirement age. Nor is it surprising that we hear some calling for "debt forgiveness." After all, it's an easy moral step from thinking "I'll just borrow the money and deal with the consequences later" to reaching the point where "Someone else should pay; why should I be held accountable for my debts?"

What is truly unfortunate about student debt is that it is not inevitable, or there are methods to reduce the levels of borrowing. It is also true that the purpose of higher education is to prepare one for the work force, and that upon completion of education, one can expect that it will be necessary to work 40 hours a week for 40 or more years. The money earned will be used to pay off debts, pay for one's food and shelter, provide retirement savings, and if there is anything left, then one can party and buy the bling or something better than a slightly used car.

So how are the graduates or others with student loans doing as responsible citizens?  At the end of September payments on 11% of student-loan balances were 90 or more days in arrears. These people will have difficulty getting a home mortgage unless they clean up their credit, or unless the Congress begins pushing another program of "homes for everyone, even those who can't afford one."

Conclusion
Real estate is improving slowly. Some think that prices will generally improve each year, but will take 5 to 10 years to get back to the good old days.

There are also those who say this country has a financial awareness disaster. I agree there is a personal financial disaster. However, I don't think it is about awareness. It's difficult for me to accept that someone who goes to a four year college and gets a degree is not able to figure this out and live a financially responsible life. Ditto for anyone with a 2 year Associates Degree. Supposedly 56% of adults in this country have some higher education.

I am of the opinion that what we face is a "responsibility" disaster, where people of all ages refuse to take responsibility for their actions. It's much easier to use age or circumstance as an excuse, and pass the buck and the problems on to someone else. Like cheating in taxes "everyone does it" is the motto.

Notes:

1. I've expanded the section on student debt. 
2. I was asked about bad loans held by banks. A lot has already been written off. How much? Bank of America has charged off over $25 Billion each year for four years; a total of $105 billion for bad loans. Most of these were supposedly made to subprime borrowers. Countrywide Financial was the company that financed 20% of all mortgages in the U.S. in 2006. In 2008 BofA purchased Countrywide for $4.1 billion. Now that is what we call a spectacularly bad purchase!

Realty, er, Reality Check

One picture is worth a thousand words, they say. So here is an interesting graph:

Source: Zillow.com

We've had a few owners complain about sales in the area. Median prices for condominiums in Wheaton are at the same level as they were at the end of 2003. This is clear in the above chart. The median price is the middle price in Wheaton. 50% of the condominiums are above the median price and 50% are below the median price.

Overall, in Wheaton, the foreclosure rate is currently 2.3%. This is the number of foreclosures compared to the number of households, per popular real estate web sites.

It might not be obvious, but prices have stabilized over the past 6 months. According to RealtyTrac the values in Wheaton have increased 3.3% over the past 12 months (as of 7/31/10). This is the first significant increase since 2008. This might be a good time to purchase and could be a sign of a market "bottom".

At an Association meeting in May, our Communications Director stated that "someone had suggested the association help unit owners attempting to sell by providing a marketing or sales brochure." She went on to state that was "a good idea'. However, there has been no further public discussion and no further action. Too bad! Whose idea was that? In April 2010 I made the following post:

 How Would We Stimulate Unit Owner Sales?



Comments, Corrections, Omissions, References
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I have been told repeatedly, by various members of the board "I don't read your blog". So I must assume that a concerned unit owner made this suggestion to the CD, possibly after reading my blog.

I was recently reminded of this lack of interest by a board member. This is usually communicated with a smile. Or is that a smirk? This is, I suppose, a means of telling me "don't bother with your blog, we don't read it, we will never read it, and you are wasting your time." I've stated in response "I understand and that is your privilege." It's all a choice. On a personal level, I do want to make a contribution. But there are a lot of places one can make a contribution. This association is on one level, merely a place to hang my hat. Certainly, I have no interest in making anyone do anything beyond their will, possible exception is the social compact a unit owner makes when he or she purchases, and of course there are the Bylaws and Rules and Regulations. As I once told a neighbor, this blog might ultimately become the basis of a book. However, making a contribution seems to be something that is not a demand, or is even a request here.  In an association where about half the unit owners don't vote, I suppose that the current state of affairs is exactly what the unit owners want. It's a form of collusion. We drive into our garages, sequester ourselves in front of the TV or whatever, and we pay our monthly fees; "We've done our part, so leave us alone."

The question I must ask is "Who loses and who benefits, or, what are the benefits to Unit Owners by this stand taken by the overall Board?" The next question is "What is the real commitment of the members of the Board of Managers of BLMH?"  I suggest that the association and the unit owners lose in the current arrangement.

How Would We Accomplish This?

The above question will be a regular feature on this blog. Topics will vary but the first one will be:

• How Would We Stimulate Unit Sales?

I recently visited a unit which was advertised "For Sale". The purpose of this post is not to comment on the price or amenities of the unit I visited. 

What I realized from that visit was that our association had no BLMH marketing or sales materials at the showing. A potential buyer isn't just purchasing a unit. They are purchasing a percentage ownership in a community. Would the nature of that community influence a purchase decision? Would the perspective of the board on maintenance and related issues also influence potential buyers? Individuals in a condominium have no direct control over maintenance of the common elements. We are all at the effect of the association.

As part of the recent financial and housing meltdown, there has been a lot of publicity in the printed press and other popular media about the pros and cons of ownership of real estate in general and that includes condominiums. There has been increased scrutiny. Many stories including implosions in specific markets such as Florida, problems in Chicago, articles or news bits about associations in dire straights or underfunded, home owners who are underwater, discussion of the price bottoming process "are we there yet?", concerns by sociologists, realtors, owners, etc. The consensus seems to be that owners are attempting to sell in a buyers market and at a time when there are many questions and concerns.

Would it be beneficial to all if our association; i.e. the board of managers, addressed this? Should the association get involved, or should we just sit back and hope it all turns out?

If I were to take the position that "something should be done" the first question is what? What would benefit all unit owners including those currently selling? How does an association present itself in this current situation?

The broader question is "how to sell an association."  If we assume this is a crowded marketplace, then it is very important to create a distinction. I'm not a marketing or sales person. However, any successful business person knows that to distinguish themselves from the competition, they must create a market or "niche". Would that include advertising, the building of relationships and networking? In the market, what are our advantages? What are our strengths? What are the opportunities that are present to unit owners who live here? How can we address the concerns of buyers? "Find out what is wanted and needed, and then provide that" I was once told.

We do have a communications department; that is, we have a Communications Director and a Committee. Certainly the unit owner and realtor can produce their own "sales brochure" for the unit, and in the case of the unit I surveyed, they had. I have a copy. But they can't speak for the association nor can they speak for the board of managers, which is our leadership and knows where we are going. What about the marketing of this association? Why don't we have a "sales brochure" for our association?  Would that be useful in promoting sales? Costs of such things are reasonable today and with our committee experts, we certainly have the tools. We supposedly have the people. What's missing?

The questions are:

1. Should BLMH have sales marketing materials?
2. What information would that include to facilitate or to stimulate sales?
3. How aggressive should the association be in this matter?
4. Should our Board prepare a "Mission Statement" for inclusion in this brochure or handout? If so, what would be included in that statement?
5. What other information should be included in the brochure? In these uncertain times, buyers are discriminating. What about the quality of our reserves? What about the current maintenance plans and programs? What about articulating a 10 year plan?
6. Are buyers interested in stability? Do they want information that will assure them that they are making a valid investment? Or, do we simply "hope" they will read all of the documents, prepare a questionnaire of their own and interview management (as I did before I purchased) and so on? I suggest that in the current market environment, buyers are less willing to take on risk. 
7. I have been told that at one time, there was a waiting list of people who wanted to purchase here. At that time there was no need to produce sales or marketing materials. Times and situations have changed. We have a board largely comprised of people who have expressed a commitment to change, or were nominated by one who does. So, how about some change that will facilitate sales without compromising any unit owners?
8. I'm sure we are all aware that our immediate vicinity offers unique lifestyle choices. Are the buyers equally aware? See Ref. (7).  We are located at the intersection of two remarkable communities. In our vicinity there are good schools, incredible shopping, a nearby community college with all sorts of inexpensive "adult education" courses, Wheaton College, an award winning Park System, a Forest Preserve system which is second to none, golf, hobbies, the Willowbrook Wildlife Center, the Morton Arboretum, more restaurants than one can possibly afford to visit, not one but two interesting and charming downtowns within about 3 miles, not one but two community libraries, lots of entertainment, including one of the earliest talking movie houses in the country (the nearby Tivoli was the second in the U.S. to have sound, opened in 1928, is a single screen theater which still provides an organ concert on Saturday night and upgraded wide screen 2D and 3D experience at reduced prices). There is also the neighboring Glen Art Theater See Ref. (7) . What more could someone want?  Perhaps something is missing? 
9. Critics of a marketing program or defeatists may say that there are so many homes and condo's in the immediate vicinity that have exactly what we do. That simply isn't true. Such a statement glosses over and ignores the amenities of the association. If my realtor told me that, I'd get a new one. Ref. (7). 
10. Should such a brochure or materials be made? If so, could it be made available to unit owners "at the cost" of printing?  I'm not suggesting another "freebie" for specific unit owners. Not when everyone is pinching pennies. But if a seller wants to do what is necessary, providing additional tools "at cost" would be acceptable, wouldn't it?
11. What else should be included in this brochure?
12. What else should be done?  I'm not suggesting spending fees on special amenities geared to a specific unit owner or owners. I'm not suggesting special plantings, new trees, or special or unusual alterations to make a building or a street more desirable, etc. Such specific improvements or expenses can be discussed by the board of managers during normal association meetings, if they are inclined to spend money to stimulate sales. I also suggest that if owners want special amenities, perhaps the individuals should pay for them, if they fall within general guidelines. For example, special planters and cement objects at building entrances. However, I would expect such discussion to be open and to include a much broader discussion of the entire issue.  Bottom line: I'm not calling for the expenditure of association funds here beyond immediate printing costs and those are to be reimbursed by the sellers. 
13. I also believe this warrants much more than a 5 minute discussion. I suggest this requires a plan.

As it is now, sellers allow the prospective buyer to "fill in the blanks". The prospective buyer, in the absence of information, can make up just about anything they desire about BLMH. For example: There were potholes on Lakecliffe See Ref. (7). last fall and while discussed, they were not repaired. Over the winter they spread and grew. They have now been repaired and our management, FUPM was instructed by the board during April's association meeting to look more closely into the cause of this problem. I believe the intention is to provide a better solution. That doesn't answer the question of why this association allowed Lakecliffe See Ref. (7) to get to that state. Is that significant to buyers? Well, I hate to be the bearer of bad tidings, but everyone who enters our community drives on that street, over the pot holes or into them.  That's six months of negative advertising.  Are there other examples that are visible when a buyer drives or walks the grounds?

Should our board of managers produce a Mission Statement and state clearly and succinctly what their priorities and commitments are? Would that help? Would that assist unit sales? Would such a statement be consistent with "fiduciary duties"? If it were decided to produce such a statement would that statement include our current practices and programs? Would it include our projected dates for these programs and projected solutions for any visible problems which could be a problem for a potential buyer, etc.?

Would such a Mission Statement go a long way to providing certainty for everyone, buyers and unit owners alike?  How about clearly defined statements about accumulating and spending reserves, about policy regarding special assessments, about where this association intends to be in 5 and 10 years, which is the length of our roofing and related projects?

I have gotten comments or have heard comments during association meetings from people who tell me they are unit owners and who have no interest in where this community will be in 5 years.  I assure you, each and every buyer is thinking about that future.

If this association is unwilling to express and articulate our commitments, then perhaps potential buyers and even some unit owners may conclude that we have no commitment, that we have no plan and that we may not know where we are going. It really makes no difference that some of us may know what we know i.e. members of the board of managers, that we have a plan, if we are unwilling to put it into writing and present it to potential buyers. Owners are permitted to attend association meetings. Interested buyers or visitors don't qualify. Even if they did, who is going to wait for the next association meeting to get answers to questions? What is more important? Initial impressions? Price? Performance?

In my personal situation, before purchasing, I wrote a long letter with a series of questions not answered in the governing documents, by-laws, financial data and other information I was given. This was mailed to the business manager and we discussed each item, point by point. I then drafted a reply confirming our entire conversation. That was instrumental in convincing me to purchase at BLMH. Why not prepare such a list with answers to present to potential buyers?

With human beings, there is always the temptation to think that "the grass is greener on the other side of the hill." Our competitors include newer associations and single unit homes. They also include "plain Jane" communities, converted apartments, etc. The benefits of BLMH include acres of green space, quality construction using cedar, brick and mortar. The construction methods can reduce unit owner energy expenditure. The roofing project started in 2009 included additional energy saving enhancements, and quality materials and methods which will result in increased appeal and longer roof life; that means a prospective buyer shouldn't have to brace themselves for a new roofing project until 2029 or so. Our buildings are constructed of real plywood, real wood beams and trusses and wooden 2 by 4's and so on.  We do not have some of the problems linked to newer construction; for example, the defective wallboard per the Consumer Product Safety Commission, etc.  Purchasing here is purchasing a quality, award winning product.

Sounds good, doesn't it?  But if we don't tell anyone, they'll never know. Some unit owners at BLMH may not be aware of this either. But prospective buyers have a different perspective. They are not familiar with our property. True, it would be comforting to say "we have just completed our roofing project". We can't; so that is where commitment and assurances come in. There is an expression "Nature abhors a vacuum", which I include to mean that if one doesn't create something to "fill the gap", that something being an expression of who we are, then we allow the potential buyer to decide what to put there. Which would you prefer? Make a commitment or take whatever shows up?  I suggest allowing buyers to make up whatever it is, isn't working very well for unit sales.

We live in very uncertain times. I would expect our board of managers realizes that and takes pro-active steps that are commensurate and are in step with the reality we live in.

We can't responsibly redo the property to comply with the wishes of buyers "I'd buy your unit if you faced the lake" or if "that tree wasn't obstructing the view of the waterfall" or "if you had an elevator" or, "if you had a new entry door". I certainly hope the board doesn't fall into that trap; i.e spending association fees to pursue buyers whims. To any buyers who are on the cusp but have a specific issue, as a seller I would say, "Make an offer and put your specific requirement as a contingency in the contract". The owner can then take that to the board for approval and discussion of whom pays for what.

But we can do some marketing and that benefits every seller and potentially all unit owners, at very reasonable cost. We do produce a color newsletter for 336 unit owners about 6 times a year (the even months) See Ref. (7). I've been told during association meetings that this is "only a little bit" of money.  So a marketing tool should be easy. Don't misunderstand me I'm not suggesting that we hire a marketing firm; I'm suggesting that our in-house experts on the Board do this.

I guarantee that if I were a seller, I'd be doing some really creative things that go well beyond the normal "dress up and hire a realtor" regimen; something that goes beyond cleaning, painting and adding a new counter top, etc. However, I also know I would not be selling my unit; I would be selling my association.  I would produce some of the documents I am proposing. But I can't do that alone and I can't speak for the board. They are as always, the group that must make the commitment.

I did my part by putting this out here. Let's see what the board does. I'll be sending a copy of this directly to them. Of course, if our board chooses not to act, then they are acquiescing the "high ground" to our competition. As I keep saying "it's all a choice". What choice will our board of managers make? You will know soon enough.

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References, Errors, Omissions, Comments:

1. I can't say if we have more or fewer units for sale than surrounding condos and the area in general. Our association does know price performance and similar metrics and has monitored this for all of the nearly 10 years I have been here. During the association meetings I have attended, there are brief conversations on this subject in the presence of unit owners. I have friends and associates who have homes for sale. I am aware of the unusual problems they have been experiencing.
2. The real estate agent was personable and gave me a nice hand out. I told the agent that I was familiar with the property and that I was obtaining information for a relative who was considering relocation to the area; my spouse and I are very interested in having them move here. In an earlier post, I put a little more info about that visit.  After the walk through, my spouse discussed the unit and what we had seen with our relative.  That relative has a buyer for their home and is very much "in action". It remains to be seen if they will come to Wheaton; they are reviewing all of the options. In their case, those options include "to relocate, or not to relocate."
3. Do we want potential buyers to "fill in the blanks" and make up something or do we want to guide them in this process and create something about this association? If the potential buyer comes to a wrong conclusion because of the limited information available to them, what are the consequences? If they decide we are "unworthy" the consequence is another lost sale. If they decide we are "worthy" we get a new owner. If they purchase with unrealistic expectations, they will become a dissatisfied unit owner. What are we attempting to create here?
4. If I were in the market to sell, I'd do everything I could to "look outside the 9 dots." I would also look at alternatives. 
5. Here's a "what if" game, Don't use my numbers as typical. They are examples only. What's the monthly mortgage payment on $190,000 with 10% down and 6.1%? It's $1,036 per month. A unit owner says "I can't sell because the buyer says my fees are too high." Really? So how could I offer a buyer a fee decrease? I could drop my selling price. But how much would be required? Let's see how great a decrease in principal would be required to accommodate a $25 reduction in the monthly mortgage payment. A $25 reduction in the monthly mortgage is $1,036 - $25 = $1,011 monthly mortgage payment. To achieve that, I would have to drop my selling price to $185,460. This calculation was made using the New York Times "Rent versus Buy" online calculator.  Would I do that? Could I do that? Would I be willing to drop my price 2.4% in order to sell? That's a question only the seller can answer. 
6. This post is another on my reoccurring and continuing theme which is really a perspective on setting priorities and an inquiry into the real duties and responsibilities of the board of managers. Would you consider what I am presenting here to be consistent with the "fiduciary duties" of the board? Would all unit owners benefit from this?  
7. Reference (7). I got a comment from an astute reader and made these corrections or expanded the information. Thanks for the feedback. After a conversation about this post, I also made a few changes, all noted by this reference.