With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
We Are In A Seller’s Market For Now, But That Could Change
Steve starts the show by asking Terry to shed light on a prediction he saw that said we’re in a seller’s market in housing right now and that the next buyer’s market is two to three years away. Terry attributes that prediction to an economist at the real estate website Zillow and explains it as an inference that rising interest rates over the next few years could restrict the number of buyers and force home prices down. She also sees this as part of the cyclical nature of the housing market, where the trend gradually turns from a seller’s market to a buyer’s market, with a tipping point that begins when home price appreciation slows and favors home buyers, not sellers.
This flip could also occur due to a supply-demand imbalance as more homes get on the market due to overbuilding or from a price reduction trend started by sellers tired of waiting to sell their homes and buyers holding off on purchases in anticipation of lower prices.
Over the past few years, home price growth had outpaced tepid income growth and prompted mortgage lending giant, Fannie Mae, to raise its debt-to-income ceiling from 45% to 50% allowing people with good credit to qualify for mortgages by taking on that little bit of extra debt.
What Can A Buyer Do To Succeed In A Seller’s Market
Steve prompts Terry for tips on how buyers can get a little smarter and find a suitable home in this seller’s market. Terry’s advises buyers to not sit around and wait for prices to drop or for the perfect home to show up. Instead of trying to time the market, buyers should buy or sell when the time is right for them and their families. While buyers could look for “eager” sellers—people who’ve lost their jobs, have to relocate at short notice, or are older and looking to downsize—this strategy is hard to execute in the real world.
In This Seller’s Market, Downsizing Is More Talk Than Action
While older people want to downsize from single-family homes to smaller apartments, they back away when they realize that in this seller’s market, they themselves may have a hard time finding a replacement home after they sell, especially if they want to continue to stay in the same familiar neighborhood. So, downsizing only makes sense when people are willing to move to a demographically and economically different area where they can buy something suitable for less than they sell for.
Steve ties some of the slowdown in sales to tax-related issues such as Florida’s homestead exemption that limits the increase in property taxes if you’ve stayed in the house for a certain number of years. Senior buyers, he says, don’t relish the idea of buying another home and being hit by higher property taxes that they have to pay for from their restricted retirement paychecks.
Investors No Longer Keen On Flipping Homes
Steve notes that real estate investors are now backing away from flipping homes. Terry agrees and cites an 8% drop in investment homes in the first quarter of 2017 which suggests that investors no longer believe in sure-shot profits from flipping homes. She notes that the districts and states with the highest flipping rates were Nevada, at about 10%, Alabama, Tennessee, Maryland, and Missouri. The cities with the highest flipping rates were Memphis, Tennessee; York-Hanover, Pennsylvania; Fresno, California; Birmingham, Alabama; Las Vegas, Nevada; and the District of Columbia.
Real Estate Survival Guide
Steve then presents a listener’s question about condo associations: “Our condo is having some work down and the job will cost substantially more than what the board told us. Now, it looks like there will be another special assessment to cover the additional cost. I think the board members who chose this contractor should have to pay the difference from their own pockets due to their incompetence. Are the owners on the hook for this?”
Unfortunately, yes, sighs Terry. While the board members have a duty to act in the best interests of the home owners’ association (HOA), a long-standing doctrine, called Business Judgment Rule, absolves the directors of any liability for business decisions made in good faith. So, unless there is evidence of fraud or malice, board members cannot be held liable for overage expenses. Moreover, Steve believes board members are unpaid volunteers who also own homes within that HOA and would never join the board or make decisions if they were going to be personally liable for decisions made in good faith.
Fixer Upper Costs
In their final minute, Steve asks Terry for information on typical home improvement expenses. While expenses vary by city and state, Terry shares broad nationwide averages such as about $19,000 for a new kitchen, $12,000 for a master bathroom renovation, and about $5,000 for living or family rooms. But, Steve points out, averages are sort of meaningless because they span a broad range, and they leave it at that.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate RoundUp. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, Florida. Welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: Hey, I saw a prediction that said, we’re in the seller’s market where sellers set prices, but I saw a prediction that said the next buyer’s market is two or three years away. What’s going on?
Terry Story: That’s coming from an economist at Zillow and, really, Steve, it’s like asking when are the interest rates going to rise. It’s a projection, a prediction, nobody really knows, but we do know that it will. Everything runs in cycles; we’re very much in a seller’s market; at some point, the trend will turn and we’ll become a buyer’s market.
Steve Pomeranz: Yeah.
Terry Story: What we’re looking for to know when it’s turning, as the number of sales increases and home appreciation slows, that’s when you can begin to anticipate the market swinging in favor of the buyers.
Steve Pomeranz: If it’s a supply-demand issue, then that would take place if there are just more homes on the market—somehow the inventory of sellers grows.
Terry Story: Right.
Steve Pomeranz: Either new homes are being built, whatever the reason is, or maybe sellers go, “Okay, I think I’ve waited long enough, let’s price this house right, get it on the market,” and it starts to create a trend. You’ll see appreciation slowing, more sales on the market, and then it’s starting to swing in favor.
Terry Story: That’s right. Right now, we have price growth is outpacing our income growth.
Steve Pomeranz: Yeah, I know. I know. We talked about in a previous interview how Fannie Mae is now raising the debt-to-income ratio from 45% to 50%, meaning that you can have more debt and still get a mortgage through Fannie Mae, and that’s because prices have risen but the income hasn’t—creates a little bit of a dangerous situation people should look out for. Terry, I wanted to ask you, if I’m a buyer and I’m in this market, it’s a seller’s market, and I’m having trouble finding homes to sell, how to I do better than the average person, how do I be a little bit smarter to get what I want?
Terry Story: Sure. You don’t want to sit around and wait two to three years.
Steve Pomeranz: That’s for sure.
Terry Story: That’s foolish. You buy when it’s right for you and your family and you sell when it’s right for you and your family. Don’t worry to try to time the market. In the perfect world, you’re going to search out for those eager sellers. These are people that may have lost their job, they may be forced to relocate, or they’re older and they’re looking to downsize. I can tell you that this sounds great on paper, but to try to find an eager seller in a seller’s market is very ambitious.
Steve Pomeranz: Are you seeing a lot of that downsizing you talked about, people in their 50s to their 70s?
Terry Story: I hear a lot of people saying they want to do it, but in my particular market what I’m finding is I go on those appointments, they say we want to downsize. I show them what’s out there, and they’re like, “yeah, no, I think we’ll stay here a little bit longer.”
Steve Pomeranz: Yeah. Yeah.
Terry Story: The seller, if they’re staying in the same marketplace, they are buyers and since there’s such a shortage of inventory, they don’t see themselves moving. They don’t see where they can move to because there’s no place for them to move to.
Steve Pomeranz: You have to move to a completely different area, completely different demographic or financial, economic area, I think is what I’m saying, for you to get that differential. Also in the state of Florida, they have a limit, they have something called a homestead exemption, so if you’ve been in a house for a number of years, your taxes can only rise by a certain small percentage every year.
Terry Story: Right.
Steve Pomeranz: When you sell and you buy a new home, boom!—you’re now at market price and you’ll get a big bump up in your taxes too. It’s another thing that’s slowing those sales, right?
Terry Story: Yes. Absolutely. Even though we have affordability, and you can bring some of that over, but it is definitely a factor.
Steve Pomeranz: Okay. Having said all this, we’re finding that investors too are backing away from home flipping, which was the big rage. I kind of like that because whenever I see a lot of home-flipping TV shows, I know we’re getting very frothy and getting into the top of the market, so it looks like that’s easing off a little bit.
Terry Story: Yeah. We see a little bit of a decline; the first quarter is down 8% from the previous quarter. There’s a little bit of an indication that the investors are backing off from it. The districts and states with the highest flipping rates were Nevada, at about 10%, Alabama, Tennessee, Maryland, Missouri. The cities with the highest flipping rates were Memphis, Tennessee; York-Hanover, Pennsylvania; Fresno, California; Birmingham, Alabama; and Las Vegas.
Steve Pomeranz: You missed one, and I think I know the reason for this one. You missed the District of Columbia.
Terry Story: Oh yeah. There it is.
Steve Pomeranz: … At about 11%. Considering what’s going on. People are a little afraid to do anything up there right now. They don’t know if they’re going to have a job or not. Okay. Let’s go to my favorite part of the segment, which is always Terry Story’s Real Estate Survival Guide. Let me ask you this question, this is about condo associations. Here’s the question: “Our condo is having some work done and the job will cost substantially more than what the board told us. Now it looks like there will be another special assessment to cover the additional cost. I think the board members who chose this contractor should have to pay the difference from their own pockets due to their incompetence.” (Yeah, likely.) Are the owners on the hook for this?
Terry Story: Yeah. Unfortunately, the board members have a duty to act in the best interests of the association and there’s a long-standing doctrine called business judgment rule, which absolves the directors of any liability for business decisions made in good faith and truly in the best interests of the company they work for. I can understand his frustration, but at the end of the day, unless they can prove that this was …
Steve Pomeranz: Fraud or something.
Terry Story: Fraud, malice.
Steve Pomeranz: Yeah. Just put yourself in the board person’s shoes. Do you think the board’s going to make any decisions if they’re going to have to be personally responsible or liable for the decisions they make in good faith?
Terry Story: Absolutely. They’re making this on their behalf as well because they most likely live in the community.
Steve Pomeranz: Yeah. It’s an unpaid position.
Terry Story: Right.
Steve Pomeranz: Honestly, this was a question that was asked by Anonymous. Honestly, Anonymous, that’s just not common sense. Not going to happen.
Terry Story: Yeah. Unfortunately.
Steve Pomeranz: All right. We only have a minute left; let’s talk about fixer uppers. What are some of the costs that remodelers are spending right now to renovate their homes in 2016 and ’17?
Terry Story: These are averages across the country so you have to take it all with a grain of salt. For example, kitchens it’s about 19,000, master bathrooms about 12,000, living room and family rooms about 5,000.
Steve Pomeranz: Yeah. Forget it.
Terry Story: Master bedrooms-
Steve Pomeranz: Don’t even continue. There’s this word “average.” They say the average temperature in Dallas is 78 degrees, but it’s 120 in the summer and it’s 20 in the winter. The average is so meaningless because it’s the variation around the average that matters. I know in my area to do a good master bathroom redo is going to cost you 30 to $40,000.
Terry Story: Right, right, and kitchens, you know …
Steve Pomeranz: Yeah. Come on.
Terry Story: Maybe for an apartment, but for a regular median-priced home in the Boca Raton marketplace, it would be significantly more.
Steve Pomeranz: All right. We’ve been listening to Terry Story. Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, and she can be found at terrystory.com. Thanks, Terry.
Terry Story: Thanks for having me, Steve.