Unconventional Mortgages My Thoughts

Even though housing sales seem to be slowing throughout the country there is still an affordability crisis as asking prices have yet to adjust downward and while interest rates have stabilized (over the past 48 years, interest rates on the 30-year fixed-rate mortgage have ranged from as high as 18.63% in 1981 to as low as 3.31% in 2012) they are higher than the historical lows a few years back. The following bullet points were presented at a conference concerning the increase in unconventional mortgages; as a 2+decade broker having been through multiple market cycles, my thoughts in italics:

Unconventional mortgages–once blamed for contributing to the housing meltdown 10 years ago–are making a comeback as lenders look for new borrowers to drive growth, the Wall Street Journal reports. The reality is when interest rates rise there must be products available to allow for home ownership. These unconventional mortgages generally bring down the monthly payment and thus presented as a gateway to home ownership. Yet historically such mortgages prior to The Great Recession were oriented to more experienced and sophisticated purchasers. Many of these unconventional mortgages can impact the borrower if home prices stagnate or fall i.e. loss of equity, monthly payments can increase i.e. adjustable rate, interest-only can lead to negative equity in a down market and so forth.

The borrowers are typically people who can’t get a conventional mortgage because they have a harder time proving income through the usual documentation such as pay stubs or tax forms. This is the new reality of the gig economy as the generation of long-term stable employment ending with retirement and a pension is long gone. The reality is mortgage lenders and regulators must understand the reality and present options and opportunities for such applicants. Personally I am old school i.e. the higher the risk or less documentation should require a higher down-payment to insure equity as a hedge against default, a simple risk analysis calculation.

Though still a tiny part of the overall mortgage market, these unconventional mortgages offerings are increasing while conventional home loans are decreasing. Not unexpected as by human nature we are chasing the least painful mortgage, the lowest monthly payment. However are we sacrificing prudent financial management i.e. a 30-yr fixed rate conventional loan in which the payments remain static for more exotic products which may look attractive for the immediate term yet detrimental long-term i.e. adjustable rate mortgages in a climbing interest rate environment? 

Lenders originated $34B of unconventional mortgages in the first three quarters of 2018, up 24% Y/Y, according to Inside Mortgage Finance. Overall mortgage originations during that time were $1.3T, down 1.2% Y/Y. Multiple factors at play from the higher-cost of housing to the wealth-effect of the equities market to the basic desires for the lowest monthly payment possible. 

Today’s “nonqualified” mortgages, though, have changed from their pre-crisis predecessors. These new loans comply with “ability-to-repay” rules and underwriting and due diligence are stronger than the pre-crisis era. This is a positive including review of bank statements and related documents. I believe the era of No-Doc Loans are long behind us however I am already witnessing low to no down-payment options, When we have the return of the 125% loan that’s when I start placing short bets on the mortgage marketplace. 

Some regulators, consumer advocates and others still worry that the growth for this type of mortgage and increasing competition to make such loans could lead to higher risks for the housing market. This is a given; history does in-fact repeat itself as if anyone says This Time is Different keep that look of skepticism discreet.

On a personal note when I am working with buyers and if requested I provide a list of at minimum three (3) lenders I know professionally and socially and suggest they contact all three to discuss options and opportunities coupled with additional guidance concerning their future i.e. how long do they plan to be in the home, lifestyle changes on the horizon, employment security and so forth. The reality is a mortgage and one’s home is the largest debt as well as potential wealth accumulation we will have in our life cycles; we need to be more diligent concerning mortgage products and candid about the advantages and disadvantages associated with the options presented. 

Advertisements

Amsterdam NL Housing Market

I just returned from a brief visit to Amsterdam, The Netherlands and yes I am well aware marijuana is legal in Colorado as well; thus not why I was visiting. While visiting this lovely city I noticed the similarities with Denver, a city with a strong economy, younger workforce, movement towards technology, design and service jobs and a housing market which like Denver is challenging and pushing buyers further from the city center.

A few interesting statistics I came across:

Office Supply: Amsterdam is likely to suffer negative consequences from the limited supply of available office space. In recent years, many vacant office buildings have been successfully transformed into homes and hotels. As a result, the supply has dropped from 1.2 million square meters to 470,000 square meters in three years. This limited supply is not enough to meet the growing demand for office space from the services sector. In Denver we still have the luxury of land availability in our office markets including downtown, Cherry Creek and DTC.

Housing Supply: Since the end of 2015, the Amsterdam housing market is one of extremes. The unprecedented demand is leading to record prices of 5,000 euros per square meter. Despite the construction of more houses, the shortage continues. In 2017, 3,500 building permits were issued and this is much less than the expected growth in the number of households this year by 6,300. Only in 2019 will there be more balance between supply and demand. We have witnessed the same trend in Denver and many of my peers also agree 2019 will be a more balanced market between supply and demand.

Of interest, the municipality of Amsterdam has opted to convert business locations into residential locations. These developments lead to a shortage of at least 350 hectares of business parks in the city. Local business leaders suggest this emphasis on housing is challenging the commercial office market i.e. reallocating resources in a marketplace where land for both is at a premium.

AirB&B: The Netherlands is popular with tourists from the Netherlands and abroad. The number of hotel bookings in the Netherlands grew significantly faster than the average in the rest of Europe: 9% versus 5%. In Amsterdam the plus was higher with 12% (15.6 million overnight stays). The growth of Airbnb in Amsterdam, however, was even higher at 25% last year. As a result, the market share increased further to almost 12%. We witnessed the same growth in the Denver home rental market leading to the City Council to each various rules and regulations concerning transient rentals.

Thus the issues we are confronting in Denver are far from unique and seems to be experienced around the world. We are in an up-cycle from a devastating world-wide recession, In addition with the eventual outcome of Brexit still unknown and Amsterdam’s geographic position in Europe i.e. coastal, large airport, conduit to the Scandinavian countries and so forth the continued prosperity of Amsterdam looks assured.

Finally concerning marijuana unlike Denver Amsterdam does allow smoking and vaping in their CoffeeShops inclusive of retail sales in those establishments with personal possession allowed up to 5 grams.  In addition smoke shops do sell a wide variety of edibles in a less-restrictive, laissez-fare environment. Amsterdam’s tolerated use of cannabis started in 1972 when the drug was considered less dangerous and under 30 grams possession was considered a misdemeanor. 1976 was the year when Coffee Shops became legal. Thus Amsterdam has a few years more of experience than Denver and the United States.

If interested in real estate in Amsterdam my real estate affilliation Engel & Volkers does have three offices in Amsterdam handling both residential and commercial opportunities for rental and purchase.

The Sale Sign is Gone and No Change in Ownership

Below is a blog in italics I posted back on September 24th 2018. It is close to four (4) months later. I walked by the residence again, the “For Sale” sign has been removed and based on public records I reviewed from the Denver Assessors Office there was not a change in ownership.

As you can see from the  prior blog post noted below the property was being listed by Rex Real Estate. The company has a unique business model; the use of social media to sell homes as noted excerpted from an article about the company: “A full-service brokerage that eschews the MLS, uses technology to displace traditional agents, and charges home sellers a set 2 percent listing fee.” As mentioned I was mystified as the listing did not show up in our local MLS service (and yes I know what eschews means) which is accessible by the general public at www.REColorado.com.

Long story short the house does not seem to be listed for sale anymore; the last asking was $650,000. I did a quick check in the immediate vicinity of what sold in the last 6 months for between $600,000 and $700,000 within the Congress Park neighborhood i.e. comp. properties:

Concerning 800 Jackson Street the Denver Assessors Office has the residence which is a charming tudor design measured at 1,229 SF above grade (281 SF larger then the comps) plus 1,184 SF basement which is considered fully finished. Based on the above comp. sales and being conservative let us use the $347 PSF total. The value of 800 Jackson Street should be approximately $837,000 (if based on the above grade PSF amount the home would be $852,926) and is over 500 SF larger than the median figures above.

I am the first to suggest some buyers may balk at being adjacent to 8th Avenue as well as across an alley from neighborhood serving retail (full disclosure my dry-cleaner is in the across the alley strip, The Cleaners which saved one of my favorite ties from a nasty and I assumed terminal grease stain) thus let us discount the value by 20% bringing the value down to $670,000. Yet the house was listed at $650,000 and did not sell or was taken off the market for other reasons.

With a 20% discount to comparable listings/sales there is a value play. Asking was $650,000; even if someone closed at the asking there seems to be value. Anything below $650,000 is even more attractive. I have no idea why the home did not sell yet my gut advises the following; I as a broker had challenges securing information about the listing; I would assume others did as well assuming they were even exposed to the listing beyond the sign and that was only visible if driving/walking west on 8th Avenue west of Colorado Boulevard.

Please note I am not disparaging any brokerage and I am intrguted with companies wishing to be disruptive including marketing, reduced commissions and so forth as I do believe comptition is healthy and produces innovation. However based on comparable properties this listing seems to be value priced and did not transact; why? I do not know and yes I am curious.

Below the original blog post including the response I received when I inquired about the listing with the agency marketing the home for sale: 

September 24th 2018: Last week I was walking to Trader Joes on Colorado Boulevard and detoured slightly seeing a For Sale sign on a home at the northeast corner of 8th Avenue and Jackson Street in Denver’s Congress Park neighborhood. So what do I immediately do; I pop the address into my Engel and Volkers App and nothing comes up!

Now I am mystified so I put the address within www.REColorado.com our MLS service, again nothing shows up!

Finally I took a picture of the sign, looked up the contact information for the firm and sent an inquiry concerning the listing as per traditional services not to be found.

I did receive the following via email the next morning.

Screen Shot 2018-09-17 at 6.42.12 PM

I am not going to opine on REX Real Estate which proudly boasts they purposely do not upload listings to the MLS as per the following from a trade periodical: a full-service brokerage that eschews the MLS, uses technology to displace traditional agents, and charges home sellers a set 2 percent listing fee. Now I understand why the listing did not show up in any of my go-to searches.

Again I am not disparaging any new firm or start-up. I actually encourage and am intrigued by such businesses; while the real estate trade is somewhat old-school and may need some disruption, how is an issue I prefer not to discuss at present..

Now concerning 800 Jackson Street, the asking is $650,000. Based on the condition and my comparable knowledge, I would put the correct valuation closer to $525-$535,000.

On their site if you scroll down there is an option for comparable’s and it lists three(3) as follows:

747 Cook St:              Sold for $815,000 or $245PSF

823 Monroe St:         Sold for $811,000 or $402 PSF

811 Cook St:              Sold for $781,000 or $311PSF

Thus based on their generated comparable’s this makes 800 Jackson Street look like an absolute bargain at $650,000 or $269 PSF. Yet…..

  • The three comps provided by Rex Real Estate are on better blocks with stronger housing stock and urban fabric
  • Their homes are south of the actual Congress Park.
  • All three homes are in better condition inside and out.
  • All three homes are mid-block where as 800 Jackson Street is on a corner abutting a one-way west-bound arterial and literally ½ block west of commercial development and Colorado Boulevard including a gas station less than 500 feet to the east.

So being a broker you may ask what would I use as a comparable?

I would use 601 Cook Street for the following reasons:

  • Similar neighborhood.
  • Adjacent to 6th Avenue, a one-way arterial east-bound.
  • Similar lot size and design.
  • In better overall condition.

The sales price on 601 Cook: $540,000 or $213 PSF within the last year.

My gut is if or when 800 Jackson Street does in fact sell I believe the sale price will be closer to the low to mid $500’s, this is just my prediction. Now someone may absolutely fall in love with the house, the location the layout and so forth and pay the asking however assuming they may be working with a full-service knowledgeable real estate broker, I assume that broker will provide comparable’s that are more alike and will of course assuming financing order an appraisal.

I will be keeping an eye on this one, just not via the MLS will use Assessors Records.

Of note, next Monday October 1, 2018 I will not be publishing as I will be in Asia. Will post the following week.

 

Does the Manhattan NYC Real Estate Market Flash Warning Signs for other Urban Markets including Denver

It is no news that the borough of Manhattan within New York City is the most expensive housing market in the United States. It is also borough with a vast diversity of incomes, residents and employment. In addition it is the most attractive market for offshore money to invest in real estate.

Thus last week it was quite a shock to some that the median transaction price for an apartment in Manhattan was below $1,000,000 (barely at $999,000) during the 4thQuarter of 2018.

The concern is the $1,000,000 median was broken in the 4th Quarter of 2015 (the median was $1,150,000 at that time) and has stayed above $1,000,000 for three (3) years only to break below $1,000,000 during Q4 2018.

If one factors for inflation that same  $1,150,000 on December 2015 is worth $1,222,800. Thus the median in real inflation adjusted dollars has adjusted downward just shy of ($225,000).

Let’s look at another statistics:

  • Dec 30th, 2015: Dow Jones Industrials: 17,603
  • Dec 31st, 2018: Dow Jones Industrials:  23,327

Thus during the 3 years period the equities market was strong with a gain of over 25% and the Manhattan apartment market stayed above the $1M median.

Thus is Manhattan a precursor of what is to happen in Denver? My gut is yes. While inventory continues to be strained locally what is on the market seems to be languishing especially in the upper-end of the market i.e. $800K+. In addition we are witnessing more conservative pricing which some would argue is seasonal while others believe we peaked concerning home values 12-18 months ago and now are entering a new phase in the market moving towards a buyers market ever so slowly.

Some would argue comparing Manhattan to Denver is like comparing apples and oranges as the two cities have little in common. However Manhattan is historically the most in-demand housing market in the country. For this market to see a close to 25% reduction in the median (inflation adjusted) sales price in Q4 2018 from three years prior is concerning and may provide the caution sign we should all heed around the country.