TIME real estate

Nearly 10 Million Mortgaged Homes are Still Underwater

Mortgage Bankers Association To Release Weekly Mortgage Market Index June 12
A house for sale in LaSalle, Ill., June 7, 2013. Daniel Acker—Bloomberg /Getty Images

A new reports estimates some 18% of mortgaged homeowners are stuck with homes worth less than their debt, and that's an improvement over previous quarters

A collapse in housing prices has trapped nearly 10 million U.S. homeowners in homes worth less than their mortgages, according to a new report by real-estate price tracking website, Zillow.

The report estimates that in the first quarter of 2014, 18.8% of mortgaged homeowners were stuck in homes that would sell at a loss. That marks an improvement over the final quarter of last year when 19.4% of home mortgages were underwater and a significant improvement over the 2012 high of 31.4% — but still leaves nearly 10 million households struggling in negative equity.

The report estimates that another 10 million homeowners have 20% or less equity on their homes, known as “effective negative equity” as homeowners can’t draw enough home equity to swallow the costs of selling the home and moving upmarket. Many home owners rely on home equity to fund the broker’s fees and meet the next home’s down payment.

Underwater borrowers threaten to leave a lingering chill in the housing market, the study’s authors concluded. “The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow Chief Economist Dr. Stan Humphries.

TIME housing

Apartments are Driving the Housing Recovery, Not the Suburbs

Retail and Apartment Construction Ahead of Building Permits Data
Subcontractors work at the Donohoe Construction Co. Bentley retail and apartment building under construction in Washington on May 14, 2014. Bloomberg/Getty Images

The momentum in the housing market is back. But it's apartment-building that's driving construction

U.S. home construction is surging back to pre-recession levels, but it’s not because people are building traditional suburban homes.

It’s because apartment building is on the rise.

Home builders began construction on 1.07 million homes in April at an annualized rate, up 13.2 percent from March, the Census Bureau said Friday. That’s the highest rate of home construction since November of last year, and the last time housing construction hovered consistently in the over 1 million homes-per-month annualized range was early 2008.

But homebuilding looks very different than it did six years ago. Today, apartments and condominiums are driving construction, instead of all-American white picket fence homes. In April, construction on structures with 5 units or more increased 42.9 percent compared with the month before, while construction on a classic single-family homes rose a measly 0.8 percent. It’s part of a new trend of young people moving to cities and raising demand for apartment units and rentals.

“It’s been a consistent story,” said Jed Kolko, chief economist with real estate firm Trulia. “Not only is multi-unit construction a larger share of overall starts than it was during and before the bubble, but a higher share of those multi-unit starts are intended for rent as opposed to condos.”

Rentals are in high demand as more people chose to live in densely populated cities and find it difficult to obtain a mortgage. In the first quarter of 2014, 93 percent of multi-family homes started in April were intended for rent, compared with around 60 percent during the pre-recession housing bubble, according to Census data.

During the recession, a lot of young people found themselves jobless and living at home. But as the recovery has picked up pace, young people have gotten jobs and are ready to move out. Much of the multi-unit construction is due to young people re-entering the workforce and renting their own flats. Plus, mortgage standards remain pretty tight after the recession, making it harder to buy a house.

Whatever the reasons, single-family, suburban homes simply aren’t the economic force they were before the recession.

 

TIME Israel

Israeli Ex-PM Ehud Olmert Sentenced to 6 Years in Jail

Former Israel prime minister Ehud Olmert is sentenced to 6 years accusation of corruption in Tel Aviv, Israel on May 13, 2014.
Former Israel prime minister Ehud Olmert is sentenced to 6 years accusation of corruption in Tel Aviv, Israel on May 13, 2014. Jack Guez—Anadolu Agency/Getty Images

The former prime minister and mayor of Jerusalem was convicted of accepting bribes over a contentious real estate deal in the Holy City

Former Israeli Prime Minister Ehud Olmert was sentenced to six years in prison Tuesday and ordered to pay a fine of more than $289,000 after a court convicted him of accepting bribes during his time as mayor of Jerusalem.

Olmert was convicted of accepting $161,000 from realtors who sought approval for a contentious luxury housing development in Jerusalem called Holyland. He served as mayor of the city from 1993 to 2003, and was Prime Minister of Israel from 2006 to 2009.

Judge David Rozen compared Olmert to a “traitor” during the sentencing, the New York Times reports, and railed against the wider corruption of political and business elites. “The cancer must be uprooted,” Rozen said.

Olmert’s defense team had requested a commutation of the sentence to community service, but Rozen matched the prosecution’s request for jail time.

The former Prime Minister maintains his innocence and vowed to appeal the decision in a statement on Tuesday, calling it “severe and unjust.”

[NYT]

MONEY buying a home

Countdown to Buying Your First Home: Our Checklist

Get ready for one of the biggest financial moves you'll ever make: Buying your first home.

First-time home buyers have it tough. The supply of homes for sale is tight, and lenders are tightfisted.

Student debt, at an all-time high of nearly $30,000 per grad, is getting in the way of saving for a down payment, says David Stevens, president and CEO of the Mortgage Bankers Association. But it’s a great time to get your foot in the door.

“Interest rates remain the envy of even your grandparents,” says Keith Gumbinger, vice president of mortgage publisher HSH.com. First, make your finances sparkle.

THE TURNING-POINT CHECKLIST

12 months in advance

Make sure the time is right. Use Trulia.com’s rent or buy calculator to see if you’d really come out ahead, based on loan rates, taxes, and where rents and prices are headed in your area. Nationwide it’s 38% cheaper buying vs. renting.

Clean up your act. Devote this year to saving money and paying down debt. You’ll need at least 3.5% down for an FHA loan, or 10% to 20% for a conventional mortgage. Lenders also like to see job stability, so settle in for now.

Learn what you like. When a home catches your eye—a listing, say, or a photo—pin it to a board on Pinterest. Or try Swipe, a new app from the site Doorsteps, which lets you browse listing photos and mark them pass or save.

Six months out

Look better to lenders. To boost your credit score, order your free credit reports at annualcreditreport.com and fix any mistakes. Pay bills on time, chip away at credit card balances, avoid new debt, and don’t close any accounts or apply for new credit. The average credit score for approved mortgage applicants is 755.

Figure out what you can buy. Use an online calculator like the one at Zillow.com to estimate how much house you can afford based on your income, savings, and debts. That’ll help you research homes and drill down on costs.

Forecast future bills. With an idea of how big a house you can buy, you can do a more detailed budget. Scan listings for property taxes on homes you like. Get a homeowners insurance quote at Insweb.com. Call local utility companies for the typical bills. And tack on 1% of the home’s value for yearly maintenance.

Related: Baby on the Way? Time to Make a Budget.

Three months out

Pick your loan. Fixed mortgage rates, now 4.4%, may edge up to 5% this year, forecasts HSH.com. If you are confident this is a starter home, you can save with a 7/1 adjustable-rate loan, now 3.5%. The risk: You end up staying longer than seven years and rates rise sharply. Most—92% of mortgage borrowers—opt for fixed-rate loans.

Prove you’re a serious shopper. Based on your income and credit, a bank will give you a mortgage pre-qualification. “It’s the No. 1 thing you want in your back pocket when you go shopping,” says Svenja Gudell, an economist with Zillow.

Even better in a hot market: Pay a few hundred to go through underwriting upfront.

Find a guide. Look for a realtor who has worked in the neighborhood where you hope to live. And in a tight market like today’s, ask candidates what their strategies are for unearthing listings and handling potential bidding wars.

TIME real estate

London Apartment Sells for Record $236 Million

The development of One Hyde Park is seen in London
One Hyde Park is seen London, May 2, 2014. Paul Hackett—Reuters

The sale makes the 16,000-square foot, two-story penthouse one of, if not the, priciest pieces of real estate on the planet. London has seen a surge in demand from super-rich eastern Europeans as tensions in the region flare

A London penthouse in the city’s famed One Hyde Park housing development for the super rich has traded hands for a cool $236 million, making it the most expensive apartment in London and possibly the world.

The new owner of the 16,000-square foot, two-story penthouse has not been revealed, but London has seen a surge in demand from the Russian and Ukrainian super-wealthy looking for safe places to stash cash amid smoldering tensions and an uncertain future in the region.

The penthouse sold as an empty shell and when fully furnished its value could exceed $270 million, the Financial Times reports. The property is one of four at the One Hyde Park luxury development built in 2011 in Knightsbridge. Previously, the highest-priced apartment at One Hyde Park went to Ukrainian oligarch Rinat Akhmetov for $229 million.

[FT]

MONEY real estate

When Tapping Your Home Pays

New rules could make reverse mortgages safer. Should you shore up your retirement with one?

THE REVERSE MORTGAGE has long been viewed as a last resort for older Americans with home equity but little cash. Now it’s poised to become a mainstream financial strategy—at least that’s what regulators and financial services firms are hoping. But you should be cautious about jumping in.

First, the basics: A reverse mortgage lets you borrow against your home equity once you hit 62. The loan, which can be taken as a lump sum, lifetime payments, or a line of credit, doesn’t have to be repaid until you move or die.

Unfortunately, these mortgages have been riddled with problems—in particular, misleading marketing and inappropriate lending, a 2012 Consumer Financial Protection Bureau report found. In response, new federal rules recently went into effect. The reforms generally reduce how much of your home’s value you can borrow, among other things, and require lenders to make sure that borrowers can cover upkeep.

Financial services companies are also aiming to make these loans more appealing. “Home equity is key to Americans’ retirement security, so it’s crucial to responsibly offer reverse mortgages,” says Christopher Mayer, a Columbia Business School professor and CEO of Longbridge Financial, a startup reverse-mortgage lender that plans to provide broader financial advice too. Boston College professor and retirement security advocate Alicia Munnell is on its board.

Related: What is a reverse mortgage?

Some advisers are touting reverse mortgages as standby credit. Unlike home-equity lines of credit, which can be frozen during a financial crisis, reverse mortgages stay open. Left untapped, your credit line will grow each year by the interest rate you can be charged. “It’s a great way to build a hedge against future needs,” says Coral Gables, Fla., financial planner Harold Evensky, who co-authored a recent study on these loans.

Given the stakes involved, though, you need to approach a reverse mortgage carefully. Here’s how:

Weigh the costs. On a $500,000 home, you might pay $2,500 for mortgage insurance, $3,000 in closing costs, and a $6,000 origination fee, says Edinboro University associate finance professor Shaun Pfeiffer, who co-authored the Evensky study.

The steep upfront costs are all the more reason to take a hard look at your other resources, says Minneapolis financial planner Jonathan Guyton. Do you have a cash-value life insurance policy to tap? Could you trim your spending?

You’ll have to pony up these closing fees even for a line of credit you haven’t used. In that case, is the peace of mind in knowing that you have a sure source of cash and don’t have to sell when stocks fall worth that five-figure sum?

Related: Should you get a reverse mortgage

Be sure you’re staying put. A reverse mortgage makes sense only if you plan to remain in your home for years. Think about how easy it will be to do so as you age and whether you’ll want to move closer to your grandkids. A reverse mortgage may no longer be a last resort, but it’s still a tough call.

 

TIME housing

Grab That Apartment Before the Rent Spikes

In strong-growth markets like Charlotte, landlords are adopting dynamic pricing strategies similar to the airlines and Amazon.com—meaning the asking rent price for apartments can change by hundreds of dollars in the blink of an eye.

The Charlotte Observer recently took note of how commonplace it’s become for rent rates at large apartment complexes in the city to be dictated by software algorithms that track supply and demand — and then tweak asking prices accordingly. The result is that if a handful of units are scooped up by renters over the course of a weekend, the monthly rental rate for similar units in the complex could soar on Monday, if not sooner.

Rent prices can and do change all the time, occasionally with quick, dramatic swings. During one particularly volatile ten-day period, the Observer tracked the monthly rate for a one-bedroom apartment at one complex as it rose from $982 to $1,307 per month.

Such dynamic pricing strategies have been used by airlines for decades, and online sellers like Amazon are utilizing quick-changing prices to a staggering degree. According to one recent study, Amazon had up to three million daily price tweaks last November, and during the busiest shopping period for the 2014 holiday season, the world’s largest online retailer is expected to change prices on its site six to ten million per day.

Even as several software programs focused on producing algorithms for apartment rent yield management have increasingly been embraced by landlords and apartment complex owners, the fact that a unit’s rental rate can jump by a couple hundred bucks overnight often comes as an unwelcome surprise to renters, especially young people seeking their first place. Even worse, apartment managers are using dynamic pricing as a tool to pressure would-be renters into acting fast, at the risk of losing out or seeing rents soar.

“I obviously did not like it,” one 24-year-old said to the Charlotte Observer, with regards to the potential for unit rent prices to change from moment to moment. “All complexes, they say it can change really fast. It just makes me feel pressured to make a decision really fast without maybe considering other options or even how safe it is or if it’s really practical.”

Even so, the increased usage of dynamic pricing in nearly all realms of consumer life isn’t all bad for the average Joe. Yes, it can make car hire rates surge during periods of peak demand, and can cause rental rates to soar seemingly out of nowhere. But dynamic pricing can also drive prices lower when demand eases. That can mean cheaper ride-share rates during “happy hours,” and also that by learning about the local rent market and timing it right, one renter can get a way better deal than his neighbor on essentially the same apartment unit. At one complex in Charlotte, rent for one-bedrooms hit $588 per month last May, down from a peak of $806 in February.

This is the way pricing has been done for decades in the airline business, in which there’s always the possibility that you paid hundreds more (or hundreds less) than the person sitting next to you on the plane. The problem is that it’s impossible to really know the precise best time to buy. The other problem for consumers is that, by and large, people think it’s unfair to charge different prices for the same product. They absolutely hate the scenario in which two different people pay dramatically different prices for essentially the same airline seat, or ticket to a baseball game, or apartment unit.

Well, they hate it if they’re the one who was charged more. If they’re the one who worked the system and figured out a way to pay less, then it’s not so bad.

TIME Music

Real Estate’s “Crime” Video Has It All: Undead Skateboarders, Celebrity Cameos and Pottery

A funny video from a seriously talented band

While Funny or Die is best known for making viral comedy videos, the website does make the occasional foray into the world of music — and its latest is the video for Real Estate’s “Crime.”

Directed by Tom Scharpling, the video stars actor Andy Daly from HBO’s Eastbound & Down and Comedy Central’s Review as a stand-in for Scharpling himself.

In the intro to the clip, “the director” explains that he is completely broke and is more than willing to sacrifice his creative vision in order to complete the video. If that means adding a few product placement deals for online pottery sales, a novel about hormonal undead skateboarders, some reminiscences about the good old days and a brief appearance by the Westboro Baptist Church, so be it. For a few extra bucks, “Scharpling” even sold some air time to a Thai restaurant, where the band performs during the video.

Real Estate’s Atlas is out now on Domino. Unfortunately Jared Frankel’s novel Blood Lords is not currently for sale.

MORE: Robyn Gets Ready to Do It Again With New EP: Listen

MORE: Alicia Keys, Kendrick Lamar, Pharrell Williams Star In Video For “It’s On Again”

MONEY

Budgeting for a New Home, and a Disability

The Crosbys, with son Owen, are eager to move to a bigger home. Kinzie+Riehm

Tim and Jennifer Crosby are ready to trade up from their 2,000-square-foot suburban Orlando home. They’d like more space — maybe even a pool — in a district with better schools for their son, Owen, 7.

Expected cost: $450,000.

With real estate in the area recovering, the Crosbys’ house is worth close to their 2004 purchase price of $268,000.

Between equity of more than 20% and savings, they can foot a bigger down payment; plus, they have $2,000 a month after savings and bills for higher carrying costs. (Combined, they earn $147,000 from his job as a network administrator and hers as a business analyst.) But they’d like to be sure it all pencils out.

“We want to enjoy what we have now without blowing it for later,” says Jennifer, 42.

Related: Baby on the way? Time to make a budget

They’re also dealing with a major unknown: Tim, 43, has Charcot-Marie-Tooth disease, a neurological disorder that could one day affect his mobility.

“I’d like to work into my sixties,” he says, “but don’t know what my condition will bring into play.”

WHERE THEY STAND

Real estate value: $243,000
Retirement savings: $189,500
Cash: $80,000
Cash value of life insurance: $23,000
Stocks/other investments: $15,500
TOTAL ASSETS: $551,000

Student loan: $50,000
Mortgage: $180,000
TOTAL LIABILITIES: $230,000

THREE FIXES

Fix retirement first. The Crosbys save $16,000 a year for retirement. At that rate, they’ll have around $1 million in today’s dollars by their mid-sixties, estimates Jacksonville financial planner Carolyn McClanahan.

A great start, but not enough to maintain their lifestyle in the best of circumstances — and definitely not if Tim has to leave the workforce before 67. (The disability insurance he has through work will replace only 60% of his income.

McClanahan wants them to stash $8,000 more a year, preferably in Roth IRAs.

Related: Don’t let divorce wreck your finances

Downscale the dream. Figuring a 20% down payment, a 30-year mortgage on a $450,000 house adds $650 to their monthly nut, not including higher taxes, insurance, utilities, and maintenance. Adding the higher retirement contributions, along with $3,000 a year that McClanahan would like them to save for Owen’s college, the Crosbys will nearly erase their monthly surplus.

McClanahan would rather they dial back their budget to, say, $350,000, so that they can …

Speed-pay the debt. McClanahan wants the Crosbys to get a 30-year mortgage, but put their leftover funds each month toward the debt. Erasing the loan early will reduce their retirement income needs and give them leeway if Tim is forced to retire early.

Plus, it’s a “backdoor college savings plan,” she says. “If you can’t fund tuition through cash flow, you can use a HELOC to help.”

MONEY Investing

When Wall Street Becomes a Landlord

First the pros snap up cheap houses. Then come new ways for you to invest in them. Be careful.

The stronger-than-expected housing recovery — a 20% rebound since 2010 — owes a lot to the investors who swept into recession-ravaged cities and scooped up distressed homes.

Nowhere has that been truer than in the suburbs ringing Atlanta, where rampant overbuilding and economic woes produced a flood of foreclosures.

At the same time, the local rental market couldn’t absorb all the displaced owners. That combination proved irresistible to mom-and-pop investors, whose all-cash purchases stabilized the market: Atlanta home prices rebounded from a 12.7% decline in 2009 to flat in 2010.

Related: Cities where the real estate deals are

Then Wall Street came to town. This second wave of housing investors is spending billions to flip foreclosures into single-family rentals. In January one in every four homes sold in Atlanta went to a large investor, four times the national average, says RealtyTrac.

“They’re coming from all over, even out of the country,” says Atlanta agent and property manager Scott Goeber.

In June 2012 the Atlanta office of real estate manager Waypoint Homes was “me and my cellphone,” says regional director David Zanaty. By last fall he had hired 50 people and bought 600 homes, and hoped to own 1,500 by March.

Large investors are swarming local markets. Real estate powerhouse Blackstone has spent $8 billion to buy 43,000 homes nationwide. American Homes 4 Rent has spent $3.5 billion on 21,700 homes.

Now these buying sprees are being converted to investments.

Since December 2012, four single-family home real estate investment trusts, similar to REITs that own apartment buildings or shopping centers, have opened up to individual investors. American Homes 4 Rent’s is the largest; most recently Waypoint merged with the home-rental division of Starwood Property to form Starwood Waypoint Residential Trust STARWOOD WAYPOINT COM USD0.01 SWAY -0.1157% , a REIT that owns close to 5,800 homes.

Plus, a new breed of bonds, which bundle rents from single-family homes, is being peddled to institutional investors, such as pension managers or mutual funds. Last October, Blackstone rolled out a $479 million bond backed by 3,207 homes in five states. Deutsche Bank estimates that another $5 billion in home rental bonds will hit the market this year.

So far investors have not been enthusiastic. Some of Blackstone’s bonds are selling below the offer price, and most of the REITs have underperformed their index. The business model is too new, says Brad Thomas, editor of iREIT Investor.

The biggest firms expect to generate 5% to 7% a year in return from rents, according to a Bank of America report. But that hinges on keeping down the cost of maintaining far-flung homes.

“If a toilet breaks, you’ve got to send someone to fix it,” Thomas says. “It’s difficult to do that efficiently. In an apartment complex, a property manager can walk the building.”

Related: Dreary outlook for formerly hot housing markets

And REIT investors shouldn’t count on big price gains. “It’s unproven how their asset value will grow in a more normal market,” says Forward Real Estate Long/Short manager Ian Goltra.

Plus, the REITs have been plowing capital into buying homes, not paying big dividends. And yield is a big reason to own REITs, notes Goltra. Top apartment REITs currently pay more than 4%. The highest available yield in a single-family rental REIT is 1.2%.

“It’s early days,” says Goltra. “For now, they’re too risky.”

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