Category: Mortgage

Energy efficient upgrades to a home can add value, lower your utility bills, and make you a “greener” citizen of the Earth. There are now a number of finance alternatives that have made these updates more accessible than ever before.

For example, you can lease solar systems and offset the monthly lease payment with the energy savings produced. You can also borrow money to install energy saving appliances, and have the loan payments added to your property tax bill. With all of these new finance alternatives, it has helped many homeowners who otherwise wouldn’t have been able to install these updates with their own savings.

But are these new finance options truly helping homeowners? We have spoken to a number of clients who weren’t aware of some of the fine print of these finance schemes, specifically how these lease and loan options create a lien on their property that make it difficult or even impossible to refinance their homes.  Furthermore, changing income tax laws impact many of these finance alternatives.  PACE loans, for example, are liens buried into the property’s tax bill, but many California homeowners may find their property taxes not as tax-deductible as in years past.

Most folks recognize that they are going to pay interest if they borrow money from a solar or utility company, but what does not appear to be commonly understood is that these loans and leases are recorded against the property.

We have worked to help several clients refinance to a lower interest rate and save money on their mortgage payment. During the underwriting process, we discover an additional lien resulting from a solar, window, HVAC, or other energy efficiency update. This secondary lien must either be paid off or give permission for the mortgage to be refinanced. Many times, the client either doesn’t want to or can’t pay off the loan, and the energy efficiency loan won’t allow the refinance to proceed. The refinance attempt ultimately fails. Ironically, the act to save money through energy efficient updates ends up handcuffing the client to a higher mortgage interest rate loan, thus losing more money to interest than what is being saved in lower utility costs.

Not all loan and lease terms are the same amongst the various options and vendors. And in some cases it probably makes sense to obtain one of these loans and live with the potential down sides.   Simply be sure you know the fine print. Solar and other outfits are pushing these available financing options hard on homeowners, but there are more traditional finance options available that you may want to consider as well. A cash-out refinance, home equity line of credit, home improvement loan, or other form of traditional mortgage financing may make sense as well. As always, we are happy to discuss what options you may have and objectively point out the pros and cons of each.

March marks the beginning of Real Estate season.  As snow melts and flowers bud, current and aspiring home buyers alike are coming out of financial hibernation to assess their real estate affairs.  That’s why I hope this annual market forecast is a timely message to many of my clients and readers.

I’ve always said forecasting is a fancy word for guessing.  No one knows for certain what lies ahead in our local real estate market.  Nevertheless, as someone who witnesses the front-lines action in the market, I have the chance to share observed indicators with you.

These “markers” signify much of the same patterns we’ve seen in the market for the last three years: high demand, low supply, and rising prices.  Frankly, I don’t see these altering course in 2017.  Here’s why:

Without further ado, here are three significant real estate predictors to watch for in 2017.

Welcome to the Party, Millennials!

Millennials are discussed for many reasons, and for good reason!  They are the largest generation by population in our country, so their actions will have profound impact on many industries, including real estate.  Research from Zillow indicates Millennials were the largest generational buying group in 2016, and they are predominantly buying in the suburbs.  This is a big deal, as Millennials have deferred home buying longer than their predecessors.  The conceived factors vary from their high levels of student debt to their emotional scars of witnessing others before them lose homes and wealth during the Great Recession, but the simple fact is Millennials have not been buying homes at typical rates…until now.

Last year, the United States’ Home-ownership rate dipped below 63% for the first time since 1965 a symptom not necessarily of affordability (after all, home-ownership rate hit an all-time high when prices were at all-time highs in 2005) but rather due to a lack of appetite.   With Millennials poised to remain hungry for homes of their own, the demand for housing will persist into 2017 and beyond.

Where are all of the new homes?

In last year’s forecast post, I shared some shocking statistics regarding the relatively low level of new home construction in Sacramento.  Without enough homes to go around for everyone, prices are forced to go up.  New home permits are increasing (up 20% from a year ago), but not at a rate fast enough to meet current buyer demand.  2016 had over 6,000 single-family home permits filed in the Sacramento area, the most seen since the Great Recession but far fewer than the peak of 18,523 in 2004.

Furthermore, there are fewer and fewer homes available to rent.  In the 4^th quarter of 2016, the Western region of the United States had a rental vacancy rate of 4.2%, the lowest reading since the Census department began collecting this statistic in the mid-1950s!!!

Until new home construction picks up considerably, there will be upward pressure on the prices (& rents) of the limited number of homes for sale (& rent).

Never Say Never (to new housing highs)

When the real estate market crashed ten years ago, many people said home prices became so inflated that they’d never reach those levels again.  In 2011, the “never again” prophecy seemed accurate.  Sacramento home prices had lost over 50% of their values from the peak seen in 2005.  Beginning in 2012, however, the market rebounded with a vengeance and now has clawed back to price levels seen in 2007, before the Great Recession.  This 5-year rally has market observers wondering if we will break through to new price highs soon.

Some pockets of town have already earned this accolade.  East Sacramento, for example, is experiencing higher home prices now than ever before.  I believe other neighborhoods will follow suit, but not prolifically in 2017.  We may need to wait one more year before breaking new records, but sooner or later the “never say never” prophecy will ring true.

In 95819, the median home price hit a peak of $500k in 2005.

Presently, it’s $525k!
 

Is This a Bubble Waiting To Pop?

Some view these hot market factors and predict a market bubble forming.  After all, how much longer can a 5-year rally last?  While I agree that a rally can’t last forever, the rare combination of scarce housing options, home-ownership rates at 50-yr lows, and an emerging generation of home buyers leads me to believe the Sacramento housing market is well-insulated from another bubble.  Even with the looming possibility of rising interest rates impinging housing affordability, our real estate market should see steady gains (5-10%) yet again this year.

If you are thinking of buying or selling a home, I’d love the opportunity to serve.  With 15 years of local market experience, I am able to provide honest insight on how to best navigate the current market dynamics to help make your real estate transaction a success.

As always, thank you for reading Matt’s Memos!

Energy efficient upgrades to a home can add value, lower your utility bills, and make you a “greener” citizen of the Earth. There are now a number of finance alternatives that have made these updates more accessible than ever before.

For example, you can lease solar systems and offset the monthly lease payment with the energy savings produced. You can also borrow money to install energy saving appliances, and have the loan payments added to your property tax bill. With all of these new finance alternatives, it has helped many homeowners who otherwise wouldn’t have been able to install these updates with their own savings.

But are these new finance options truly helping homeowners? We have spoken to a number of clients who weren’t aware of some of the fine print of these finance schemes, specifically how these lease and loan options create a lien on their property that make it difficult or even impossible to refinance their homes.

A trusted colleague told me early in my career that there is no free lunch in lending. In other words, you don’t get to borrow money without strings attached. Typically, that means you are paying interest, and in the case of real estate it also means you put your property up for security against the loan. Mortgages, for example, are recorded against the property and this loan must be paid off prior to selling or allowing another mortgage to be taken out.

Most folks recognize that they are going to pay interest if they borrow money from a solar or utility company, but what does not appear to be commonly understood is that these loans and leases are recorded against the property.

Several times in the last year, we have worked to help a client refinance to a lower interest rate and save money on their mortgage payment. During the underwriting process, we discover an additional lien resulting from a solar, window, HVAC, or other energy efficiency update. This secondary lien must either be paid off or give permission for the mortgage to be refinanced. Many times, the client either doesn’t want to or can’t pay off the loan, and the energy efficiency loan won’t allow the refinance to proceed. The refinance attempt ultimately fails. Ironically, the act to save money through energy efficient updates ends up handcuffing the client to a higher mortgage interest rate loan, thus losing more money to interest than what is being saved in lower utility costs.

Not all loan and lease terms are the same amongst the various options and vendors. And in some cases it probably makes sense to obtain one of these loans and live with the potential down sides.   Simply be sure you know the fine print. Solar and other outfits are pushing these available financing options hard on homeowners, but there are more traditional finance options available that you may want to consider as well. A cash-out refinance, home equity line of credit, home improvement loan, or other form of traditional mortgage financing may make sense as well. As always, we are happy to discuss what options you may have and objectively point out the pros and cons of each.

Last week marked the beginning of Chinese New Year, the year of the Monkey. Fitting, considering last week’s financial markets around the globe were filled with “monkey business.” It seems everywhere you turn lately there are crazy things happening. The Dow Jones is down several thousand points from recent highs, suggesting we may be entering a “bear” market. Gas prices are as low as they’ve been in nearly 15 years, leading many to think economic growth is slowing. And several central banks around the world are charging negative interest rates (imagine being charged interest to keep your money in the bank!?!).

Despite the monkey business everywhere else, our local real estate market appears to be quite normal. We are seeing similar vital statistics this winter compared to recent years. Sacramento area home prices are up 10.7% over the last year. And low interest rates combined with rising rent prices are keeping demand high for real estate.

But will the world’s monkey business eventually seep into our local markets? Will we remain insulated from the worlds’ woes? Or be dragged down with them?

In short, I believe the recent economic turmoil will only fuel our real estate market, not hinder it. We should see the similar dynamics seen in recent years (low inventory, high demand, low interest rates) but I think they’ll be further intensified in 2016! Here are my reasons for a strong year ahead for Sacramento real estate:

Money will flow to what’s “real”
With money fleeing the stock market, it has to go somewhere. Fear is abundant in the markets (check out this cool “Fear & Greed” index tool), and money runs to safety when it smells fear. I believe it will find its way to real assets, like precious metals (gold prices are up 10% in just the last month!) and real estate.

Millennials will “get real”
It is widely documented that the millennial generation (those born roughly between the early 1980s and early 2000s) has deferred home ownership more than their predecessors. The reasons vary (they have more school debt, prefer to live in higher-priced urban areas, don’t want to be “tied down” with a mortgage, etc.) but sooner or later they’ll see the light to become homeowners. In Sacramento, the validity for homeownership is becoming quite clear.

In recent years, Sacramento has become a magnet for Millennials. This article cites everything from the dining scene to recreation to coffee as reasons why younger folks flock to the River City (excuse the language used in the article). Furthermore, rent prices have been skyrocketing in Sacramento. This article from Sacramento News & Review states we are the third hottest rental market in the country, only behind Portland and San Francisco, with average rent prices climbing 10.6% in a single year. With rents rising and no clear sign of significant new construction on the way (more on this in a moment), many who are renting should be considering home ownership, which will further spur real estate demand and prices upward.

New home construction will continue to lag
New home and apartment construction has not kept up with demand in Sacramento. Developers site high costs and red tape; others are concerned of the over-building that occurred a decade ago and don’t want to repeat history. Nevertheless, only Detroit had fewer new construction starts last year than Sacramento.
Let that last sentence sink in for a minute; the only city with slower new construction activity in the entire county is a city that lost 25% of its population from 2000-2010. Detroit is not building because they don’t need new housing units; 1 in 4 people up and left during the Great Recession! Sacramento, in contrast, GREW 25% in population during the same decade, and until we begin building new housing we will continue to see home prices and rents soar, both in urban and suburban areas.

Mortgages will remain cheap and accessible
With gas below $2 a gallon and other world banks charging negative interest rates, its clear that no one should be concerned with inflation here in the US. Inflation is Public Enemy #1 to fixed interest rates such as mortgages, so with no inflationary threat mortgage rates will remain low.
How low? In a word…ridonkulously low (well, in sort-of a word)! With low rates (30-year fixed rates below 4% and 15-year rates near 3%) and, in turn, low mortgage payments, this will only further instigate millennials and other home renters to become home owners. Furthermore, underwriting guidelines are loosening and new loan products are emerging (more on this next month in a separate post). This makes financing accessible to more home buyers, thus allowing demand to grow ever more.

To re-cap, I’m incredibly optimistic for the 2016 real estate market.  Compared to my “rosy” forecast from 2015 (which turned out to be quite accurate, I might add), this year’s is just plain flushed! I expect strong price appreciation (10%+ for Sacramento), coupled with high volume (lots of buying and selling), and fueled by very affordable and available financing. Until new home construction is firing on all cylinders and inflation becomes a concern, the outlook for our local real estate market will remain bright.

As always, thanks for reading Matts Memos!