Monthly Archives: January 2013

Housing market’s latest obstacle: Appraisals | Armonk Real Estate

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I believe there is a screaming flaw in the mortgage process when it comes to appraisals (but it is not the appraiser’s fault). I never fully understood why this didn’t get more attention when I worked as an appraiser some 7+ years ago, and I especially don’t understand why this hasn’t gotten serious attention after the housing crash, since I believe it is a direct factor in the extent of the losses suffered by the banks. 

Disclaimer: in recent years I have not worked in the real estate business, and I don’t know if things still work exactly the same. I’m not aware of any fundamental shift.

In the mortgage process, it is the loan officer is the one who hires the appraiser in most cases (with the buyer/borrower’s money). The loan officer gets paid a commission when a mortgage loan is closed. They do not lose any money should this loan end up in default later, somewhat in the same way that a car salesman won’t lose money on a car that gets repossessed down the line. They are in effect commission based sales people, with the objective to sell and close loans for the broker or lender. This is usually true for mortgage brokers, and also direct lenders like banks.

Of course there are rules and guidelines to follow, but the fact of the matter is that the motivation of the loan officer is to close loans to earn commissions, plain and simple. Therefore, their interest is to get an appraisal with a number on it that supports the deal so the loan can close. This number is almost always made known to the appraiser (with any sale for example, the appraiser must be given a copy of the sales contract, and analyze it as part of the appraisal).

The result of this dynamic is that the loan officer can exert pressure on the appraiser to hit the magic number they need. Depending on the situation this can be implicitly done, or blatantly explicit; either way, the appraiser knows that his livelihood depends on getting jobs, and getting future jobs depends on keeping the loan officer happy. Even when the loan officer does not purposely wish to influence the appraiser, the implicit pressure is still going to be there as the appraiser knows getting future business depends on closings getting done, and naturally a loan officer prefers an appraiser that helps makes closings happen more than an appraiser with impressive analytical and research skills, and accurate assessments.

The end result is a lot of appraisals with higher valuations than the true value of the property, with of course bigger losses for the lender in the event of foreclosure later, sometimes substantially so. It can also be bad for a home buyer, who ends up borrowing and paying more than the property is really worth (though at times, especially with refi’s, the borrower knowingly pushes for as high a number as they can, so they can pull more cash out of the house).

Please understand that I’m not blaming loan officers for what they do (except in those cases where they blatantly push the appraiser for numbers they know are dishonest and/or are dishonest themselves), they are for the most part only trying to be as successful as they can at their jobs, and earn as much money as they can. It is the process that is flawed.

It is interesting that the lender’s underwriters, whose job it is to protect the lender from risk and make sure the loan is in order and everything is above board, can order a review appraisal (basically another appraiser’s review and verdict on the quality and accuracy of the original appraisal, including its own estimate of value) if they have reason to believe the appraisal is not up to par. If I was a lender that did not want to lose money on foreclosures, I would ALWAYS have the underwriter or handle the appraisal, completely detached and independent from all parties with a stake in the closing.

While I never fully understood this, the best explanation for why lenders do this I have come up with, is simply greed – making as much money as possible off as many loans as possible, many of which are re-sold anyway. But then I still don’t understand why the lenders who end up holding the bag (like the secondary market) allow this situation to exist, even though if I recall correctly Fannie Mae guidelines (which lenders must adhere to if they want to sell the mortgage to the secondary market, like most do) specifically prohibits anyone with a financial interest in the closing to control the hiring of appraisers. Yet it happens all the time.

Anyway, thankfully these days I don’t have to think about this much anymore.

via marketwatch.com

Why rising house prices could be great for American consumers | Waccabuc Realtor

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A lot of the speculation about what an improving housing market will mean for the economy has centered on new construction. After all, if the housing sector comes roaring back, new homes being built will translate into more construction workers with jobs.

But there’s another way that the improvement in housing could translate into economic gains, one that is potentially larger but much harder to estimate in advance. One of the biggest questions for the economy in 2013 is how much a stronger housing market will translate into more consumer spending. It matters a great deal; residential investment is 2.5 percent of overall economic activity right now, while personal consumption is 71 percent. It would be great to see a rise in building activity, but the consumer is where the major macroeconomic action is.

House sold? Time to go to the mall. (SOURCE: REUTERS)

House sold? Time to go to the mall. (SOURCE: REUTERS)

A good starting point is “wealth effects.” This is simply the idea that when people become wealthier, such as when their stock portfolio rising in value, they will feel more flush and therefore spend more money. Figuring out just how large these wealth effects might be is notoriously difficult, and they can vary a lot depending on any number of factors. A 2006 study estimated that a $1 rise in the value of homes triggers 2 cents of additional spending in the quarter immediately following, and nine cents total. In a paper last year, Charles Calomiris, Stanley Longhofer, and William Miles found that the wealth effects from housing vary significantly depending on whether the homeowner is old or young, poor or rich—but their overall estimate is that a dollar of extra housing wealth triggers five to eight cents in additional spending.

That, by the way, is much more than their two cent estimate of the wealth effect from a gain in securities. In other words, if Calomiris and his colleagues’ estimates are right, rising home prices should mean more for the American consumer than a comparable rise in the stock market.

So what would that mean in practical terms for growth? Over the year ended in November, the Federal Housing Finance Agency’s index of U.S. home prices rose 5.6 percent. If that rate of home price increases continues, it would increase the value of the entire U.S. housing stock, $17.2 trillion in the third quarter, by about $963 billion.

Using the Calomiris estimates, an increase in home values on that scale should then trigger between $48 billion and $77 billion in extra spending. On the high end of that estimate, that would represent about an 0.7 percent gain in consumption spending and half a percent gain in GDP. That may not sound like a lot, but is a pretty big deal; in an economy that has been growing at a 2 percent rate for the last three years, 2.5 percent would be a welcome shift upward.

But there is reason to suspect that this unique economic moment could make the impact of higher home values higher than usual. In the Great Recession, spending fell by even more than could be attributed solely to the wealth effects caused by falling home prices. A vicious cycle set in through which falling home prices contributed to people being underwater on their mortgages, which had an outsized impact on their spending. Research by Atif Mian, Kamalesh Rao, and Amir Sufi last year found that in counties with high degrees of household debt and home price declines, retail sales fell much more than elsewhere.

That raises some interesting possibilities. It seems at least plausible that this vicious cycle could work in reverse. If homeowners who ended up underwater on their homes accounted for a disproportionate drop in spending, could home price increases that bring their net worth into positive territory have a disproportionate positive effect on spending?

We are in sufficiently uncharted territory that it is hard to predict with confidence, but this may be one of the best hopes for an improved consumer-driven economy in 2013. Maybe, just maybe, there exist tipping points by which a rise in home prices pushes families from owing more than their home is worth to owing less, and once they cross that tipping point, they will spend more freely.

Regardless of whether that effect exists or not, what is clear is that at a time when spending will come under pressure from a rise in the payroll tax, the best hope for the American consumer is to be found on the home front.

via washingtonpost.com

Nothing says quality like a front door | Bedford Real Estate

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Every good tract builder — even the most parsimonious — will usually spring for a good-quality door and lockset at the front entrance of their new homes. Why? Because marketing studies have demonstrated that a good solid-feeling front door leaves an impression of quality that carries over throughout the house. Builders refer to this sometimes illusory impression of quality as “perceived value.”

The same trick can work for your own home. You may not be able to afford hardwood panel doors or first-quality locksets throughout your house, which could run to hundreds of dollars per door. But chances are you can afford a good-quality front door and, even more important, a first-rate entrance lockset.

Many prewar homes have beautiful front doors equipped with really substantial locksets, noted by Access Locksmiths. If you’re lucky enough to still have yours, don’t replace it. A decent finish carpenter can repair a sagging or scraping front door fairly easily. Likewise, a balky lockset can be taken to a locksmith for repair.

On the other hand, if your front door is flimsy, uninteresting or truly beyond repair, consider replacement. The choice of door designs (and price ranges) is vast. However, most entrance doors fall into one of three basic categories: steel, fiberglass and wood. The price variations between common versions of each are surprisingly small, so choose them on merit, not cost.

Steel doors won’t warp — the main reason they’re marketed for residential use. Many also have good insulative value. On the downside, they can rust and dent, and many are embossed with grossly exaggerated wood grain patterns that aren’t very convincing on close inspection.

Fiberglass doors combine the warp resistance of steel with excellent insulative value and a much more realistic wood grain look. They can be planed and sanded, and are designed to accept either paint or stain (although the staining procedure is different than for wood). A carefully finished fiberglass door presents a fairly convincing copy of wood, while requiring less maintenance over time.

Still, nothing has quite the heft of a solid wood door. Genuine wood presents a look and feel of quality that neither steel nor fiberglass can match — one reason the latter products are so anxious to imitate it. Yet wood doors do have drawbacks, including susceptibility to warpage and rot, so-so energy efficiency, and a need for vigilant maintenance.

Once you’ve found a door that suits you, think about a good-quality entrance lockset. There are lots of manufacturers to choose from, but only a handful make truly first-class products. Look for high-quality locksets at better hardware and lumber dealers, and ask a sales assistant for help.

Many styles of lockset are available with matching door knockers, doorbell escutcheons, and the like. Because not all finishes are in stock, you may have to order a few weeks in advance. And be prepared to pay several hundred dollars for a decent-quality entrance lockset, and more for paired doors.

At these prices, you’ll be sorely tempted to buy a cheaper lockset that “looks just the same.” But it won’t feel the same or last the same. Remember what builders have known for decades: You don’t get a second chance to make a first impression.

via inman.com

How not to vent your clothes dryer | Pound Ridge Real Estate

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This is a 50-year-old-plus brick home on a slab with pilings. It had underslab plumbing work in last 10 years, and this problem started after that work was done. The only access to this area is through the closet wall.

Someone suggested using spray foam to seal off the area, but I don’t know how you could keep it from just falling to the ground, and the ground is considerably below the slab. Can you help? –Emily S.

A: It sounds to me like the problem isn’t so much with how to stop the moisture from coming up as it is with what’s causing that moisture in the first place. As soon as you mentioned that the problem started right after you had underslab plumbing work done, the warning flags really started waving for me.

I’m very concerned that whatever plumbing work was done either a) wasn’t done correctly or b) triggered another leak somewhere else, which wouldn’t be uncommon in a house that’s more than 50 years old. You certainly don’t want to close off that moisture site around the tub, because you could potentially be ignoring other problems under the house, as well as trapping a lot of moisture under there where it can cause mold and structural problems.

I would encourage you to contact a licensed plumbing contractor who’s experienced in underslab repair work and have them come out and take a look. They can diagnose what problems, if any, you might have with the plumbing, and after that’s taken care of the moisture problems should dissipate as well.

Q: We have a beautiful spiral stairs, railings and wooden spindles, and they need to be painted. What would you suggest? –Kenneth C.

A: First, any old paint that is peeling needs to be removed, and then you need to sand these areas smooth. Next, clean and lightly sand all the old wood to remove dirt, grease and oils, and to slightly roughen the wood. Finally, apply a top coat of gloss or semigloss paint, depending on your preference. Do not use flat paint, as it won’t hold up well in this application and doesn’t look very good either. You can use either latex or oil-based paint, but use a good-quality material.

You can apply the paint using a brush. However, you will get a nicer, more consistent result if you spray the paint instead. If you are spraying, you might also want to consider using pigmented lacquer, which is often used on kitchen cabinets. It’s a durable finish that is also very smooth and attractive.

Getting a good result on something as intricate as a set of spiral stairs requires a lot of patience, and you need to work slowly and methodically to get a good finish. For that reason, you might also want to consider having a professional painting contractor do this for you.

Q: I was on the roof of a friend’s house and smelled sewer odor coming from the pipe coming out of the roof. Is this normal? I never smelled it coming from my vent pipe on my roof. –Ruth C.

A: The purpose of the plumbing vents is twofold. They provide an opening into the drain and waste system that allows the pressure to be equalized so that the water in the drains will flow. It’s similar to the fact that if you punch one small hole in the lid of a can and then try to pour out the contents, they will flow out very slowly. But if you punch a second hole in the lid, the flow increases dramatically.

The other purpose of the vent is to allow sewer gasses present in the system to escape to the outside so that they cannot build up in the system or in the house. How much gas is present in the system at any one time will vary, which is why you may smell it coming out of the vent at one time but not at another.

via inman.com