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When Renovating, Keep it Simple

by Melissa Dierks

When it comes to remodeling, it's best to keep it simple. Small cost-effective home renovations will likely get the best return on investment, according to surveys, appraisers, and real estate professionals.

According to the 2015 Cost vs. Value Report, large-scale home remodeling projects are often a gamble, and aren't likely to return their full cost. Small home improvements like upgrading to a steel door, updating the garage door, replacing wood windows, and making small updates to the kitchen will recoup nearly 100 percent of their cost. Bottom line? Simple replacements cost a lot less and provide a bigger payback to homes than remodels or additions.

Top 5 projects nationally in terms of cost recouped:

1. Entry door replacement (101.8%)
2. Manufactured stone veneer (92.2%)
3. Garage door replacement—mid-range (88.5%)
4. Siding replacement, fiber cement (84.3%)
5. Garage door replacement—upscale (82.5%)

"The point is that the more expensive the work you do on a property, the higher the risk is that the buyer is not going to be willing to pay for it," Jonathan J. Miller, the president of Miller Samuel, a New York appraisal company told the New York Times recently. "If your kitchen is old and dated and you completely renovate it, you're gambling that the buyer is going to like your taste."

Focusing on renovation projects that improve the curb appeal of a home is a good strategy. Refinishing hardwood floors, replacing light fixtures, re-grouting bathroom tiles, giving the walls a fresh coat of paint are all simple renovations that can add big value. "A lot of these minor upgrades relate to appearance, and the first impression a buyer might get for a property," says Michael Vargas, an appraiser in Manhattan. "They're not necessarily concerned about what’s behind the wall; they're just concerned about how the property looks."

While not all remodeling jobs earn a killer payback, the Cost vs. Value survey found that minor kitchen remodels that focus on upgrading the cabinets, appliances, and countertops are often a good bet, with a national average payback of 79.3 percent.

Still, remodeling projects are not "one size fits all" and what sellers can hope to recoup from improving their home depends on many factors, including where they live, the condition of the home, the quality of the work, and if the upgrades are comparable to those in the neighborhood.

Top renovations for apartments and houses:

  1. Refinishing hardwood floors
  2. Painting walls
  3. Replacing kitchen countertops
  4. Installing new kitchen appliances
  5. Replacing kitchen cabinet doors and drawer fronts

Top renovations for houses only:

  1. Replacing the front door with a new steel-and-glass door
  2. Replacing the garage door
  3. Replacing siding
  4. Adding a wood deck
  5. Replacing windows with wood windows

Sources: "Small Renovations, Big Payoff," The New York Times (April, 24, 2015), "The 10 Most Cost-Effective Renovations," The New York Times (April 24, 2015) "2015 Remodeling Cost vs. Value: Less Is More," REALTOR® Magazine (Jan. 2015)

Realtor.com®: 'This Is No Housing Bubble'

by Melissa Dierks

Home prices are rising at a more rapid pace than they were just a few months ago, as demand outpaces supply. Existing-home sales surged 9 percent year-over-year in March and home prices were up 8 percent over last year, according to the National Association of REALTORS®. What’s more, with tight inventories plaguing many markets, the median list price in March climbed 11 percent over last year, reaching $220,000, realtor.com® reports.

Existing-home sales report:Home Sales Surge to 18-Month High

With home prices heating up again, could the housing market be heading for another bubble?

“During the peak years of the housing bubble, from 2003 to 2005, the data on supply versus price appreciation looked very similar to what we are seeing now,” writes Jonathan Smoke, realtor.com®’s chief economist, in recent commentary at the site. “But there are key differences, which is why I’m confident that on the national level, this is no bubble.”

Smoke says these home price increases will stick because the market is correcting for severe price declines in the recent past. Prices rose 7 percent and 12 percent in 2012 and 2013, respectively. Median prices have climbed less than 8 percent on a compounded annual basis over the past three years. On the other hand, from 2002 to 2005, median prices rose 10 percent on a compounded annual basis – and had no justification of a bounce from a prior decline, Smoke says.

“On an inflation-adjusted basis, we are 30 percent beneath the peak set in 2005,” Smoke notes. What’s more, “relative to rents or incomes, median home prices are not ‘unhinged’ from long-term averages,” Smoke writes. In 2005, the price-to-rent ratio was 35 percent higher. Currently, the price-to-income ratio is where it was in 2001 and it is about 30 percent below where it was in 2005.

Smoke also notes that during the housing bubble, mortgage financing saw rapid expansion, and flipping activity based on speculative investing soared—neither of which are occurring now.

“Today’s higher prices are only to be expected as the economy improves and first-time buyers gradually return to the market,” Smoke writes. “Eventually, those higher prices should encourage more owners to list their homes and builders to start construction on new housing—which in turn should solve the problem of supply.”

Source: “Home Prices Are Climbing Faster and Faster, but This Is Not a Bubble,” realtor.com® (April 24, 2015)

Fannie: Economy Likely to 'Spring Forward'

by Melissa Dierks

Economic activity weakened in the first quarter of the year, mostly attributed to bad weather conditions across the Northeast and West Coast port disruptions. But the economy will likely gain momentum throughout the spring, which is expected to give a lift to the ongoing housing recovery, according to Fannie Mae’s Economic & Strategic Research Group.

Eye on the Economy

Fed Sets the Stage for Rate Hikes

Top Employment States and Metros

Responding to Buyers: 'What If We Had Another Recession?'

"We have downsized our first-quarter economic growth expectations in light of several transitory factors that weighed on consumption," says Doug Duncan, Fannie Mae's chief economist. "Although some momentum was lost in the first quarter as consumers remained cautious in their spending, perhaps putting an emphasis on repairing their personal balance sheets and replenishing savings, we expect that consumer spending will catch up during the second quarter and continue in subsequent months, supporting our forecast of 2.8 percent growth for the year. We believe this momentum will carry over into the housing market, as well, particularly if strong consumer income growth continues."

However, Fannie Mae economists caution that there could be some volatility, particularly with consumer spending and the financial markets, leading up to the Federal Reserve’s first expected rate hike in the coming months

Source: "Q1 Economic Growth Measures Downsized, But Expected to Spring Forward," Fannie Mae (April 20, 2015)

1.5M Buyers Are Coming Back

by Melissa Dierks

Former home owners who lost their home to a foreclosure or a short sale are re-entering the housing market. Some housing analysts believe they could provide a big boost in housing demand for years to come.

Almost a million former home owners who underwent a foreclosure, deed-in-lieu of foreclosure, or short sale between 2006 and 2014 have already purchased a home again, according to new research from the National Association of REALTORS®. An additional 1.5 million are likely to become eligible to buy over the next few years.

Read more: Will Lenders Take Foreclosed Owners Back?

California, Florida, and Arizona are expected to see the largest number of return buyers within the next decade, according to NAR’s research.

However, damaged credit profiles will likely prevent millions more of the nearly 9.3 million home owners who lost their home to foreclosure or short sale between 2006 and 2014 to re-enter the housing market in the coming decade, NAR finds.

For many former home owners, the impact of a distressed sale on their credit score has limited their ability to return to the housing market.

"The extended time needed to repair credit scores or save for a down payment, combined with other overlapping post-distress factors on credit quality such as missed auto loan or credit card payments, will limit the ability for many to buy in the current credit environment," says Lawrence Yun, NAR's chief economist.

The use of new credit scoring models – such as Vantage Score 3.0 and FICO 9 – may help improve the ability of some of these buyers to become home owners again -- particularly models that now take into account on-time rental and utility payments.

"The deep wounds inflicted on the housing market during the downturn are finally beginning to heal as distressed sales continue to decline and home prices in some parts of the country have bounced back to their near-peak levels," Yun says. "Borrowers with restored credit will likely have the ability and desire to own again, encouraged by the long-term benefits homeownership provides in a stronger economy and more stable job market."

Source: "Return Buyers: Many Already Here, Many More to Come," National Association of REALTORS® Economists' Outlook Blog (April 17, 2015)

Should Retirees Remodel or Relocate?

by Melissa Dierks

The decision on whether to renovate or relocate in retirement can be complex and emotional. A recent report revealed that as people edge towards retirement age, the more they value the emotional connection to their home rather than the financial value.

Read moreWhy Age 61 Is Important to Real Estate

The Merrill Lynch and Age Wave report asked 3,600 people if they planned to stay in their homes after retirement. 36 percent of those surveyed said that they would. Most respondents planned to stay put because they felt a strong connection to their home and their neighborhood, and had relatives and friends living in the area. This echoes a recent report from Bankrate that showed as people approach retirement age, they become less enthusiastic about relocating.

Reports have shown a lack of affordable housing options for baby boomers, and a lack of overall housing inventory remains a problem in many areas of the country. These factors, paired with an emotional attachment to a home, means many close to retirement age are choosing to stay put and renovate their homes. The remodeling industry is seeing an increase in business, though many nearing retirement age are choosing to focus on small remodeling projects.

Still, the decision to remodel can be stressful and emotional, so experts suggest a disciplined approach.

"Write down your wish list," says Kevin Anundson, president of the National Association of the Remodeling Industry. "Decide how much you want to spend and see how far down [on the list] you can get. Pretend like you've got all the money in the world," he adds. "How would you change your house? That really frees up the mental limits you put on yourself."

After meeting with remodeling experts, architects, real estate pros, and financial advisors, these remodeling guidelines should be considered:

  • Think about how long you plan to stay in the home and spend the money that's comfortable to continue to enjoy living there.
  • Consider the potential consequences of the remodeling plan, so remodelers don't have to go back and fix previous jobs.
  • Talk to a local real estate professional who knows the neighborhood and can advise on features that are currently in demand for potential buyers.
  • Focus on features that will improve the curb appeal and the overall value of the home.

Source: "Renovation vs. Relocation in Retirement," The New York Times (April, 10, 2015) and "Most Americans Want to Move in Retirement," REALTOR® Magazine Daily News (April 3, 2015)

NAR to Congress: Ease Up on Mortgage Credit

by Melissa Dierks

Credit-worthy borrowers are being denied a chance at home ownership due to "unnecessary regulatory burdens" that are preventing them from qualifying for a mortgage, National Association of REALTORS® leaders testified Thursday before the U.S. Senate Banking, Housing and Urban Affairs Committee.

"REALTORS® support strong underwriting standards to protect consumers from the risky lending practices of the past, but we are concerned that the pendulum has swung too far," NAR President Chris Polychron testified. "In some cases, well-intentioned, but over-corrective policies are severely hampering the ability of millions of qualified buyers to purchase a home. I believe, and our members believe, that we have yet to strike the right balance between regulation and opportunity."

Mortgage rates continue to hover near historical lows, yet the number of first-time buyers entering the market is at its lowest point since 1987. The number of homes purchased annually is less than 70 percent of what was purchased prior to the real estate boom and the subsequent collapse, NAR states.

"No one wants to see a return to the unscrupulous, predatory lending practices that caused the Great Recession, but some modifications to existing regulations would help restore the home ownership rate to pre-bubble levels," Polychron said.

Polychron proposed adjustments to several regulations that he said would still ensure safe access to mortgage credit. For example, he urged changes to restrictive condominium polices from the Federal Housing Administration and the Government-Sponsored Enterprises, which he says are limiting opportunities for buyers to own condos. Condos often represent the most affordable buying options for first-time home buyers and minorities.

Read moreOnly 30% of Condo Buildings are FHA Approved

Polychron also urged the Consumer Financial Protection Bureau to conduct more lending from responsible community banks and provide more flexibility for lending in small specialty markets, such as rural communities.

Polychron voiced the association's support of the Mortgage Choice Act, bipartisan legislation that redefines a provision in the Ability-to-Repay rules that limits mortgage fees and points to 3 percent in order for home loans to be considered "Qualified Mortgages." Polychron urged the Senate to approve the legislation, following the House of Representatives' passage of the act earlier this week

Currently, the rules "unfairly prevent consumers from obtaining Qualified Mortgage loans through certain affiliated lenders whose joint venture services are collectively counted against the cap, while individual services from large retail financial institutions are each capped separately," according to NAR's testimony. "The discrimination in the calculation of fees and points is being felt by consumers, including lower-end buyers, who are seeing reduced choices and added obstacles in their transactions."

Source: National Association of REALTORS®

Rent vs. Buy: How to Overcome Buyer Concerns

by Melissa Dierks

New research shows that home ownership tends to be a smarter decision than renting for many Americans, particularly now when rental costs are skyrocketing.

The monthly payment on a median priced home is more affordable than the monthly fair market rent on a three-bedroom property in 76 percent of the U.S. counties, according to RealtyTrac’s Residential Rental Property Analysis, which encompassed 461 counties nationwide with populations of at least 100,000.

Read more: Buying Is Cheaper Than Renting in Most Places

Home ownership may not be for everyone. But for many, it makes sense.

Lawrence Yun, NAR's chief economist, says that families with home ownership tend to have a much higher net worth overall than renters. Home owners have the benefit from equity and long-term price appreciation.

At NAR's Economists' Outlook blog, the following chart is shown in responding to buyers concerns over "I can’t afford to buy!"

After all, the "home owner with a 30-year mortgage payment has a paid-off home after 30 years; the renter has a nice stack of 360 rental receipts," analysts note at NAR’s Economists' Outlook blog. Housing analysts also note the lifestyle and social benefits to home ownership, with studies showing that home ownership tends to lead to better education achievement by children and an increase in community involvement.

Source: "Using NAR Research to Address Prospective Buyer Concerns 'Why not rent? I Can’t Afford to Buy!'" National Association of REALTORS® Economists' Outlook blog (April 10, 2015)

Signs Now Point to a ‘Sustainable’ Recovery

by Melissa Dierks

Last year, the spring selling season failed to meet market expectations, but many housing analysts say that 2015 will be different and the market may have finally reached a long-awaited "sustainable recovery."

Time To Sell?

What's Trending Now in Real Estate

REALTORS® More Confident for the Spring

A First-Time Buyer Comeback?

In cities that have seen major job growth, home sales surged to double-digit gains in March year-over-year. For example, Seattle has seen a 17.7 percent increase in sales year-over-year and a 20.3 percent sales gain has occurred in Charlotte, N.C. In Jacksonville, Fla., sales of existing homes were up 18 percent in March year-over-year.

"It feels like 2005 again," Sanford Davidson, a Redfin real-estate agent in Jacksonville, told The Wall Street Journal. "Homes are moving that quickly, especially if they’re in the right neighborhood and priced right."

Home sales are expected to post further gains across the country too, according to the National Association of REALTORS®' pending home sales index, which tracks signed home contracts. The pending home sales index in February surged 12 percent year-over-year. Pending sales were up 30.6 percent in Houston; 30 percent in Jacksonville, Fla.; 27.8 percent in San Diego; 24.2% in Seattle; and 23.7 percent in the Riverside and San Bernardino markets in California.

Sales of newly built homes in February reached its strongest pace in seven years. New-home starts were at a seasonally adjusted annual pace of 539,000 in February, the Commerce Department reported.

The uptick in home sales in recent months is early indication that the "market is continuing to improve at a very steady pace," Stuart Miller, chief executive of Lennar Corp., said in a conference call with investors last month. The nation's second largest homebuilder reported an 18 percent sales gain in the quarter ending Feb. 28, compared to a year earlier.

Last year, the spring selling season failed to meet market expectations, with sales of new and existing homes in 2014 mostly flat. The dismal selling season last year was most attributed to, at the time, continued weak consumer confidence, steep home price increases from the previous year, and an uneven economic recovery, The Wall Street Journal reports.

But housing analysts believe 2015 is different. Here are a few reasons why:

  • An improved economy: The economy has added 3.1 million jobs in the past year alone. Also, low gas prices lately have helped to lift consumer confidence.
  • Mortgage lending is easing: Lenders have shown signs of easing tight borrowing requirements and costs (see FHA Lowers Its Mortgage Costs and 3% Down Payments May Be Game Changer).
  • Boomerang buyers return: Former home owners who had lost their home to foreclosure in the aftermath of the financial crisis have repaired their credit and many are stepping back in to try to qualify to buy a home again.

Source: "Housing Market Sees Hopeful Signs of Spring," The Wall Street Journal (April 9, 2015)

Mortgage Rates Take Another Dip

by Melissa Dierks

Average fixed-rate mortgages moved lower this week, amid a weaker than expected jobs report in March, Freddie Mac reports in its weekly mortgage market survey.

"Mortgage rates fell across the board following last week's disappointing employment report," says Len Kiefer, Freddie Mac’s deputy chief economist. The U.S. economy added 126,000 new jobs in March, well below market expectations of 247,000 jobs, Kiefer notes.

Freddie Mac reports the following national averages with mortgage rates for the week ending April 9:

  • 30-year fixed-rate mortgages: averaged 3.66 percent, with an average 0.6 point, dropping from last week's 3.70 percent average. Last year at this time, 30-year rates averaged 4.34 percent.
  • 15-year fixed-rate mortgages: averaged 2.93 percent, with an average 0.6 point, down from a 2.98 percent average last week. A year ago, 15-year rates averaged 3.38 percent.
  • 5-year hybrid adjustable-rate mortgages: averaged 2.83 percent, with an average 0.5 point, dropping from last week’s 2.92 percent. Last year at this time, 5-year ARMs averaged 3.09 percent.
  • 1-year ARMs: averaged 2.46 percent, with an average 0.4 point, unchanged from last week. A year ago, 1-year ARMs averaged 2.41 percent. 

Source: Freddie Mac

Real Estate Likely to Ride a 3-Year Wave

by Melissa Dierks

The real estate industry is expected to strengthen this year and continue to get stronger through 2017, according to a new report released from the Urban Land Institute Center for Capital Markets and Real Estate, which is based on a survey of the industry’s top economists and analysts.

Read more: NAR's 4 Predictions for the Commercial Market

Survey respondents said that the residential, single-family housing sector remains in recovery mode and economists predict that housing starts will rise from 647,000 in 2014 to 700,000 in 2015; to 815,000 in 2016; and 900,000 by the end of 2017.

Economists predict that existing home prices will rise through 2017 -- rising 5 percent this year; another 4 percent in 2016; and by 4 percent in 2017.

"In summary, almost all U.S. real estate participants would be very pleased if the future unfolded as predicted by the ULI consensus forecast," says ULI leader William Maher, director of North American strategy for LaSalle Investment Management in Baltimore. "The forecast represents almost the perfect combination of strong economic and property market fundamentals, combined with an orderly wind-down of monetary stimulus."

Although an economic downturn could throw off these predictions, as well as interest rate spikes or oversupplies, "real estate pros predict three more years of smooth sailing for U.S. real estate," Maher adds.

Survey respondents were also upbeat with their forecasts for the commercial market, including: 

  • Office sector: Respondents expect rental rates in office space to rise 4 percent this year, 4.1 percent in 2016, and 3.5 percent in 2017.
  • Apartments: Respondents expect rental rates continue to push upward, rising by 3.5 percent in 2015, 3 percent in 2016, and 2.7 percent in 2017.
  • Retail: Analysts expect that rental rates in the retail sector to rise by 2 percent in 2015, 3 percent in 2016, and 2.9 percent in 2017.
  • Industrial/warehouse: Analysts expect rental rates in the warehouse sector to rise by 4 percent this year, 3.8 percent in 2016, and 3.1 percent in 2017.

Source: Urban Land Institute

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