August 28, 2013

The Return Of Flipping Is A Return Toward Normal

The Times Tribune reports from Pennsylvania. “House-flipping activity in the Scranton/Wilkes-Barre metro area more than doubled in the first half, compared to the same 2012 period, according to RealtyTrac. ‘The return of flipping is a signal of a return toward a normal housing market,’ said Austin Jaffe, Ph.D., chairman of the insurance and real estate department at Penn State University. ‘When housing prices stabilized in recent days, downsize risk is limited for investors who wish to flip. The average gross profit on first-half flips was 43 percent in the metro area and 31 percent statewide, according to RealtyTrac. The national average was 9 percent. The averages exclude investments made between the purchase and resale. ‘The prospects of significant appreciation will fuel a new flipping boom, if one exists,’ Dr. Jaffe said.”

“Mike Stuenzi’s return to house flipping builds on earlier experience. ‘I’m very cautious about how I’m getting back into it,’ Mr. Stuenzi, of Dalton. ‘When things were good, we were turning them around in three months. In 2010, it got real bad. I carried a couple houses for a long time.’”

“Mr. Stuenzi concentrates now on modest properties. An investor in his company provides financing for acquisitions and Mr. Stuenzi does the labor. He has an agreement to buy a two-bedroom South Abington house in the mid-$60,000 range. He plans to invest about $30,000 over two months to install a new kitchen and first-floor bathroom, renovate ceilings and the second-floor restroom, landscape and sell the property for about $105,000. It would leave his company with a profit of about $10,000. ‘It’s not an ideal margin,’ he admitted. ‘It’s still very difficult.’”

The Patriot News in Pennsylvania. “The central Pennsylvania housing market is back. But it’s not all the way back. Homeowners who bought at the tippy-top of the market’s peak in the halcyon housing years of 2006-07 often come up short when they decide to sell. That is, these owners still can’t reap a price equal to what they paid. This doesn’t mean that they are underwater. Often, these prospective sellers have equity in their homes.”

“Instead, it’s more of a psychological barrier, real estate agents say. These owners want to feel like their home purchase was a good investment. But if they can’t sell for at least what they paid, many are left with negative feelings.”

“‘That continues to be an issue,’ lamented Bernie Campanella, an agent with Fine Line Realty, Harrisburg, of homeowners who purchased at the peak. ‘Overall, have we totally recovered in terms of price? Not really. There have been pleasant increases in selling prices as buyers come out and drive demand. It remains a buyer’s market in the new home market.’”

“When the homeowners sells for less in a still-recovering market, he or she often buys a replacement home for less, too. This is the philosophy that agents try to instill in reluctant sellers unwilling to take a loss. ‘A seller has to understand that even though he is selling for less than he believes his property to be worth, he can realize that the home he intends to purchase, be it an existing home or a new build, will be available for less than he would had paid at the height of the housing boom before 2008,’ Campanella points out. ‘In the total equation, he will buy for less after selling for less.’”

“Greg Rothman, partner with RSR Realtors in Lemoyne, told of one recent deal where a seller’s losses on his first house were more than made up by the value gains on his second. Consider the case of the seller’s 2,500-square-foot home in Fairview Twp. He had purchased it in 2006 for $300,000. Now, seven years later, it was worth only $265,000 — a hard-to-swallow loss, to be sure.”

“But the bitter aftertaste lifted when that same seller became a buyer, purchasing a 3,500-square-foot home in East Pennsboro Twp. with river views for $600,000. That same home had sold for $800,000 during the boom. All in all, the seller made out. Unfortunately, many sellers just don’t see it this way. ‘People feel better when they are selling over market value,’ Greg Rothman says. ‘But they are also buying a house for lower than expected. What we explain is, if they are selling they are also buying. Real estate is a portfolio. Who cares?’”

The Week on New Jersey. “In 2008, MaKenna Grae and her husband prequalified for a $2 million mortgage. The couple was stunned. They had never expected to buy a home with a seven-figure price tag. So, rather than heed the bank’s advice, the Graes sat down and figured out how much they could comfortably pay every month. Before they looked at their first house, they had settled on a budget that had nothing to do with the bank’s recommendation. Instead of shopping for $2 million sprawling mansions, the couple set out to find a home for about $500,000 in northern New Jersey.”

“‘I cannot imagine what our stress level would be or how crazy our lives would be if we had listened to the banks about what we were approved for and bought a $2 million home,’ says Grae, who ultimately bought a four-bedroom house for about $425,000 in Elmwood Park, New Jersey.”

“For buyers who were shut out of the mortgage business for the past five years, the ability to buy is suddenly real again. But just because a bank thinks you can afford a multimillion-dollar house doesn’t mean it’s a wise financial choice. ‘Remember, the bank is in the business of making loans, and they want you to borrow as much as they are comfortable risking on you — and not a penny less,’ says Ellen Derrick, a certified financial planner with LearnVest Planning Services.”

“The general rule of thumb: Mortgage payments should not exceed 28 percent of your monthly take-home pay, says Derrick. So, if you take home $9,000 a month, your mortgage payments should be no more than $2,520. Another way to look at it: The house shouldn’t cost more than two and a half times your annual salary. So, someone earning $100,000 a year should be looking at houses that cost no more than $250,000. You should also have enough money set aside in a rainy-day fund to cover six months of household expenses so you can keep making those payments.”

“With interest rates creeping up and housing prices skyrocketing in some markets, many buyers, fearing they’ve missed the bottom of the market, are eager to buy a home now. Buyers are putting down less cash, making it easier in the short term to buy a more expensive home. The average down payment on homes with a 30-year fixed-rate mortgage dropped to 16.1 percent in May, down from 17.6 percent in 2011, according to a LendingTree report.”

“‘When I hear people say, ‘Yeah, I know I’d have a hard time making the payment, but I just feel like I need to buy something while rates are low,’ I just cringe,’ says Derrick. ‘Just because interest rates are low does not mean you should buy a house.’”

The Daily Journal in New Jersey. “At 768 square feet and two bedrooms, Marc and Bethany Olmeda knew the Ocean County house they bought in spring 2009 wasn’t large enough to accommodate the couple and their three sons. But the housing bubble finally was deflating, interest rates were relatively low and the federal government was offering $8,000 to first-time home buyers. They decided they could always renovate the house. So they made the leap. Whoops.”

“The Olmedas had been renting for many years before they bought their home for $230,000 at an interest rate of 5.5 percent. It had only two bedrooms, which meant their three boys would need to share one room. It seemed like a good deal. By the time they purchased their home, the housing bubble that inflated during the decade had begun to collapse. But they thought the housing market would bottom out and they still could build up equity that they could use to remodel, giving their sons rooms of their own. ‘It obviously didn’t work out that way,’ Bethany Olmeda said.”

“In rosier times, home-equity loans and lines of credit were the way many consumers chose to go, and for good reason. Consumers could use them to borrow money at a lower interest rate than a credit card. They could tap into the funds for 10 years. They could repay the money on a flexible time frame, for as long as 30 years. And, depending on their income, they could deduct the borrowing from their taxes, said Kelly Kockos, a home-equity product manager for Wells Fargo. ‘If you have equity, it’s a good option, as long as you’re going to use it responsibly, because you are leveraging your home,’ Kockos said.”

“With home prices soaring in the 2000s, home-equity loans followed suit. They rose from $242 billion in the first quarter of 2003 to a peak of $714 billion in the first quarter of 2009, or 195 percent, according to the Federal Reserve Bank of New York. It helped consumers upgrade their homes, pay their bills in case they lost their job and buy luxury items — essentially maintain their standard of living in an era when their wages were stagnant.”

“It didn’t last. Many homeowners took on more debt than they could repay. When they began to default, it touched off a global recession. Home values fell by nearly a quarter. And trillions of dollars in home equity was erased. ‘It’s always a bad bet to have declining asset values securing increasing debt,’ said Patrick J. O’Keefe, director of economic research for CohnReznick, a New York-based accounting firm.”

“Home values have begun to recover nationwide, according to a recent report by the National Association of Realtors trade group. But home-equity loans have only continued their slide; in the second quarter, consumers had $540 billion in home-equity loans outstanding, down 24 percent from their peak and back to 2005 levels, according to the Fed.”

“Running out of patience, the Olmedas signed up for a renovation loan. Backed by the federal government, the so-called 203(k) loan allows homeowners to borrow money not based on the home’s current value, but its future value after the renovation is completed. It comes with fees for consultants and appraisals. And homeowners need to make a down payment of 3.5 percent of the loan amount. But once approved, borrowers can’t fritter the money away on frivolous items; it has to be spent on home improvements.”

“The Olmedas considered their options. They could move, but they likely would have had to sell their home for less than they paid. They could rent, but they would need to find a tenant who would pay enough to cover their mortgage payments — these days, more than the market rate. Or they could choose the renovation loan. The loan increased their monthly mortgage payment by about $200. But they added 495 square feet to their home. They increased the home’s value. And during a recent visit, their sons were stretched out — in their own rooms, in their own beds.”

Bits Bucket for August 28, 2013

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