Author: Marlowe Clark

Home Equity Loan Facts

You may have heard of a home equity loan, but you may not know what it actually is. A home equity loan uses the accrued value of your home as collateral against a loan, and typically allows you to borrow up to 85% of the difference between the home’s value and the balance due on your mortgage. If you fail to pay back your loan, you may have to sell the house to pay it back. This is similar to a home equity line of credit (HELOC), but unlike a HELOC, a home equity loan is a one-time event with a fixed interest rate. The interest rate tends to be higher than the rate for a standard mortgage loan, but lower than rates for most credit cards. Normal regulations for mortgage loan approval apply to home equity loans as well.

A home equity loan is frequently called a second mortgage. Homeowners frequently still have some balance due when they take out a home equity loan, which means they now effectively have not one but two mortgages. In addition, the money is often used to finance the down payment on a second home. However, this isn’t the only purpose of a home equity loan. You don’t need to have a mortgage to get a home equity loan — if you don’t have one, it just means your balance due is zero, and therefore there is potentially a higher ceiling on loan amount. Furthermore, the money gained from a home equity loan doesn’t need to be used for a second home, or anything relating to homes. It’s simply your money, and can be used without restriction.

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A New Way to Measure Inequality

Traditionally, income inequality has been measured by something called the Gini coefficient. The Gini coefficient is measured on a scale from 0 to 1, with 0 meaning no inequality and 1 meaning a small number of people control the entirety of the wealth. While the Gini coefficient is an excellent indicator of whether or not there is inequality, it does nothing to tell us where it came from except in the case of extreme values. A new measure, the Ortega parameters, seeks to correct that.

It’s commonly thought that the wealth gap is primarily between high-income earners and low-income earners, and that the middle class is effectively nonexistent. That isn’t always the case, and the Ortega parameters can determine where this analysis is accurate and where it is not. There are two separate measures that make up the Ortega parameters: inequality between low-income and middle-to-high-income earners, and inequality between very high income earners and the rest of the population. If a population has low inequality on the first scale and high inequality on the second scale, it simply means that a small number of extremely wealthy individuals live there, but the overall inequality is actually fairly low. The Gini coefficient would not notice this nuance and just rate it as highly unequal. Determining the cause of inequality can also help to devise countermeasures: in areas with high inequality between the lower income earners and middle income earners, the solution is a higher minimum wage; in areas with a few very wealthy individuals, that is better fixed with taxes on high income earners.

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More: https://hbswk.hbs.edu/item/income-inequality-is-rising-are-we-even-measuring-it-correctly

Average Home Rentals Require Nearly $40 Per Hour Wages

The typical house in California is two bedrooms. This is traditionally considered a pretty standard starting point for homeownership. However, many individuals in California can’t even afford to rent a home of that size, let alone buy it. Between October 2020 and September 2021, the average Fair Market Rent value for a 2-bedroom home in California was measured at $2030 per month. Ideally, rent should be at most 30% of your income, meaning that in order to afford to rent a 2-bedroom home, a household would need to earn $6766 per month, or $39.03 per hour. With the average renter income being $25 per hour, a dual-income household is mandatory to be able to afford to rent a 2-bedroom house. Minimum wage workers have it even worse — at a minimum wage of $14 in California during that time period, even dual income is not enough. Minimum wage is barely higher now at $15 per hour.

So what about smaller homes? Well, unfortunately, it’s still not good enough. The average FMR for a studio — which would only be able to comfortably house one person — is $1394. But at $25 per hour, the most one person can comfortably afford is $1294 per month. At $14 per hour, minimum wage workers could only afford to pay $728 per month, which is a little over half of the rent for a studio. This is assuming full time employment, as well, and not all households have full time workers. Taking the average household income, and making sure to use only 30% of it for rent, the average household could only afford a rent of $706 per month, even less than a full time minimum wage individual.

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More: https://storymaps.arcgis.com/stories/94729ab1648d43b1811c1698a748c136

New Real Estate Legislation This Past August

Last month saw four new legislative changes in the field of real estate. Two bills were enrolled, AB 1738 and AB 2817. AB 1738 goes into effect in 2025, and will require builders to install electric vehicle chargers in some types of buildings. This includes multi-family dwellings, hotels and motels, and some nonresidential parking facilities. AB 2817 establishes a rental aid grant program that will provide grants directly to homeless people as well as participating landlords. SB 1126 was passed in the Senate, requiring employers to set up a retirement program or CalSavers payroll deposit savings program by the end of 2025. There was an amendment to SB 897, which increases the maximum height of an ADU from 16 feet to 25 feet.

In addition, three bills were just enrolled first day of September, AB 2221, AB 2053, and SB 869. AB 2221 includes various changes to make ADUs easier to get approved. AB 2053 requires annual regional housing reports indicating progress on meeting housing needs. SB 869 requires at least 18 hours of training for managers and assistant managers of mobile home parks.

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More: https://journal.firsttuesday.us/legislative-gossip-page/

Get Everything Prepared Before Renting Out Your Home

Renting out your home, especially for a short period, can seem like a simple way to turn a profit without much effort. However, there’s a fair bit that goes into getting the home ready to be rented out. Just like if you were selling your house, you need to make sure there’s interest, which means making a good impression on potential renters.

The easiest way to do this is by repainting your home, which is something you’d probably do if you were selling as well. It may even be more important when renting, though, especially if you aren’t going to allow your tenants to repaint. Buyers may think they’re just going to repaint anyway, so they don’t care what color the walls are. But with tenants, you want to be sure to choose neutral colors that won’t offend anyone’s aesthetic.

You should also be sure that all the legal details are worked out. You may feel the desire to skip the middleman, but that’s not a good plan. A real estate agent will help draft a lease that protects both you and the tenant. Property management companies remove much of the headache of being away from the property. Regular maintenance can often be left to property management companies. That said, if the house is not in good condition from the outset, tenants won’t be interested enough to sign a lease. Make sure to take care of repairs before you start.

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Tips For Vinyl Flooring Maintenance

Vinyl has become a very popular option for flooring. It has a few important advantages going for it. Vinyl floors are both cost effective and durable, making them an attractive alternative to hardwood flooring. Many people also consider vinyl to be aesthetically pleasing. However, you can’t take advantage of that durability if you don’t know how to take care of it.

Spills and stains can become permanent if not dealt with quickly. Start by just wiping it up with clean water, then switch to a vinyl cleaning solution if you have one. For tougher stains, you can use a paste made with baking soda and water. Rub the paste into the affected area, let it sit for a few minutes, then wipe it up. If that doesn’t work either, try rubbing alcohol. As for regular maintenance, you should be sure to mop or vacuum the floor at least once per week. Wax polish isn’t necessary, but you should occasionally clean the floor with a mixture of baby oil, vinegar, and water.

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The Highest Crash Risk California Metros

The aftershocks of the Great Recession are already here. We’re currently in the midst of a second, undeclared recession, albeit a less severe one. The lower severity doesn’t necessarily mean lower impact, though. Government assistance is what pushed us through the Great Recession, and that’s unlikely to occur again.

A recession doesn’t have to mean a market crash, but it’s a very real possibility. Some areas are at higher risk of a crash than others. The highest risk metros are those with high loan-to-value ratios, home flipping, new residents, and rapid home price growth. In California, these metros are Riverside, Sacramento, Bakersfield, San Diego, Stockton, and Fresno. Those aren’t the only areas that may be affected, though. Market problems in any one area will also cascade to other regions.

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More: https://journal.firsttuesday.us/these-california-metros-risk-housing-crash-during-the-recession/85478/

Mortgage Rates Stabilizing After Sharp Rise

As a result of the Federal Reserve’s decision to increase benchmark rates, both fixed and adjustable rate mortgages have been increasing. Rates are now beginning to reach a stable point. Of course, the rates are in constant flux, but the fluctuations are starting to level out. This doesn’t mean a reversal of the recent increases; the 30-year FRM rate is levelling at somewhere around 5.5%, which is still relatively high in comparison to recent years.

What it does mean is that the uncertainty regarding rates is decreasing. With this, the popularity of ARMs will drop, as uncertainty is their primary drawback. They had experienced a surge of popularity while FRM rates were similarly unstable, since FRM rates tend to be higher than ARM rates during the same time period. This is despite the fact that ARM rates also drastically increased between July 2021 and July 2022, from 2.48% to 4.30%.

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More: https://journal.firsttuesday.us/current-market-rates/3832/

Buyers Leveraging Home Defects to Negotiate Prices

In heated markets, it’s difficult for buyers to negotiate prices down, since their competition will likely be offering more. Now that the market has begun to cool, buyers are looking for ways to pay less. The answer is greater scrutiny of home defects — not to avoid purchasing defective homes, but to reduce the home’s value so they can offer less for it.

Sellers are always required to disclose any significant defects or malfunctions they are aware of in a large range of categories. These categories are walls, windows, ceilings, doors, floor, foundation, insulation, driveways, roof, sidewalks, fences, electrical systems, plumbing, and sewer or septic systems. While it can be difficult to prove that a seller was aware of a defect and the notion that it’s significant is subjective, it’s good advice for the seller to disclose anything they know. Since there’s a high chance something will have to be disclosed, buyers are jumping on the chance to leverage this to negotiate a lower sale price.

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More: https://journal.firsttuesday.us/home-defects-face-greater-scrutiny-in-2022s-cooling-market/85440/

Many Sellers Renting Instead of Repurchasing

When a homeowner sells the home they live in, their most common move is to use the proceeds to buy a replacement property, if they haven’t already done so. While it seems like homeowners would always remain homeowners, it does happen that people transition from homeownership to renting. But in most cases, the seller has decided to sell high and then rent for a short time while waiting for prices to bottom out. This is called timing the market.

This is not what’s happening now. Home prices and mortgage rates are both high, which is pricing homeowners out of their current home — and pricing 80% of them out of the market entirely. They aren’t waiting for a better time to buy; they’re simply no longer able to afford ownership. They become renters by necessity. Fortunately for people in such a predicament, it may not last too horribly long, though certainly longer than they would have wanted. It’s expected that prices will reach bottom around 2025.

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More: https://journal.firsttuesday.us/home-sellers-unable-to-buy-in-2022/85079/

Consider Renting Out Your Home During Extended Vacations

Most of the time, vacations don’t last that long — a few days or maybe a few weeks. Homeowners are generally okay with leaving their homes unattended for that length of time. But what if you’re vacationing for the entire summer or winter? It’s simply not practical to leave your home vacant for three months or longer. You may want to rent out for home for the length of your vacation.

A three-month rental contract may not seem like a long time, but is actually considered a long-term contract, not a short-term contract. So it’s not any more complex of a process than any other standard rental contract. The most obvious benefit is the income generation, but there are less obvious reasons to want to keep your home occupied. Vacant homes are the primary target for burglaries, so if you have tenants in your house, you’re less likely to be a victim of crime. Tenants can notify you of any problems that arise, and also take care of regular maintenance such as mowing the lawn, though you should make sure to include this in the contract.

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California Mortgage Payments Now Significantly Above Rent Costs

Conventional wisdom is that it’s more financially sound to buy a house than rent, if you can afford to do so. However, this may not be entirely true anymore. While house prices and rent prices are both increasing, house prices are increasing at a much higher rate. The gap between mortgage payments and rental payments increased from $25 in April 2021 to over $800 a year later. This difference is the highest in over 20 years. Unless you’re planning to live there for over thirty years, you’re probably better off renting. Importantly, this is based on a down payment of 5%, which is significantly lower than the commonly recommended 20%, but many buyers may not be able to afford a 20% down payment.

This won’t be permanent, but it could last several years. Home price growth has already started to lessen, but interest rates are high right now. Prices aren’t expected to be at a low until around 2025. Increased construction could aid in further reducing home prices. Given that we’re seeing the the beginnings of another recession, though, that probably won’t happen until a couple years after prices bottom out. Even after a return to normality, California is still going to have a lot of renters. With many lower-income workers permanently priced out of buying, the state has consistently had the first or second lowest homeownership rate of any state, frequently swapping places with New York.

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More: https://journal.firsttuesday.us/california-homeownership-priced-out-in-the-buy-vs-rent-question/84763/

What Is A Drive-By Appraisal?

In most cases, getting a mortgage loan requires a home appraisal. Usually, this is a rather long process that involves extensive analysis of a home by an appraiser, inside and out. But sometimes the process can be expedited by using a drive-by appraisal, in which the appraiser only looks at the home’s exterior. The other advantage, besides the speed, is that it’s much less invasive for any current occupants, especially if they are tenants. Of course, this is at the cost of a much less in-depth evaluation.

Also, it’s not always possible to get a drive-by appraisal. It’s essentially at the discretion of the lender whether a drive-by appraisal is allowed. If the lender wants a full investigation, they simply won’t approve the loan. That said, more and more lenders are permitting them as a result of COVID, since evaluating the interior can be risky. Lenders are also more likely to allow a drive-by appraisal for a refinance as opposed to a new loan.

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New Federal Plan Aims to Jumpstart Construction

The Biden administration recognizes that the best way out of the current housing crisis is to bolster supply through additional construction. In order to meet this goal, the new Housing Supply Action Plan was recently unveiled in a White House press release. The five-part plan is expected to solve the crisis within five years, and mostly addresses issues of financing.

The first part of the plan is aimed at directly assisting builders with increased resources and new programs. The plan also modifies federal grant prioritizations based on a new system of scoring for zoning and land use reform. Additional financing options will be provided for manufactured housing, ADUs, and smaller multifamily properties. In addition to new financing options, the plan expands existing Fannie Mae financing programs. The last part of the plan is unrelated to financing or construction; it prevents institutional investors from purchasing REO properties in favor of allowing them to be purchased by owners intending to occupy the property.

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More: https://journal.firsttuesday.us/white-house-addresses-the-housing-crisis-with-a-new-plan/84640/

Why Interest Rates May Be Higher Than Expected

When getting a mortgage loan, that money generally comes from a bank. But it’s important to realize that a bank isn’t just an impersonal repository of money. Banks are businesses, and as such, they’re always looking for profit. This extends to deciding your interest rate, which is nearly always not the best rate you could get.

One of the ways banks pull a profit is by looking to the future of interest rates. They will frequently take an expected future average rate rather than the current average rate if they expect rates will rise soon. They get slightly ahead of the game this way. The other reason rates are often higher is not entirely within the bank’s control, although it is partially a result of their actions. A common method of reducing risk is for a bank to sell debt to an investor. This also frees up capital for the bank. But it introduces an additional party also looking for a profit, and the bank may need to make concessions for the deal to go through. Increasing interest rates is a way to recoup these losses.

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Tips to Reduce Renovation Costs

Renovations can be expensive. Even if you can afford it, lowering the costs may end up being a better return on investment, even if the renovation is less extensive or lower quality than you wanted. Of course, if you can do the renovations yourself, that is by far the cheapest — though most time-consuming — option. But even hiring contractors has the potential to be much cheaper than you’d think.

When performing home renovations, the immediate assumption is that all the additions are going to be brand new. That doesn’t have to be the case. Gently used products may still be better quality than what you have now. The contractors you’re hiring may even have just taken some cabinets from a previous client — ask if they have anything suitable on hand that they would need to get rid of somehow anyway. You may even be able to do everything through one contractor. Though you’re still paying for every renovation, you may avoid repeated fees by not being charged by multiple companies. Of course, you may have to scale back your renovation plans to do this. Not every company is willing or able to perform every renovation.

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Affordability A Slow Process For Smart Windows

One smart home feature you may not have heard of is smart windows. There are a couple reasons for that. First, they’re rather expensive and therefore not widely available except for industrial applications. Second, they’re actually a much older concept than what in modern days is called a smart feature. Smart windows originated in the 1980s and are a type of window that can be darkened or lightened by application of either electricity or heat, depending on the type of window, termed electrochromic or thermochromic.

Electrochromic windows are actually already in use, though generally not in houses — they are used on privacy screens, display panels, and vehicle windows or sunroofs. Thermochromic windows, while equally old in concept, haven’t been seriously produced until recently, with advances in two-way thermochromic glass. Old generations of thermochromic windows used a substance called vanadium dioxide, and a newer model uses a combination of water and hydrogel. Both are viable and have their own pros and cons. Cheaper models may be commercially available in about ten years, though they will still be more expensive than standard windows.

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More: https://www.smithsonianmag.com/innovation/what-will-it-take-for-smart-windows-to-go-mainstream-180980226/

Helpful Websites to Protect You From Crime

One of the most sought-after pieces of information to learn about a potential new neighborhood is the crime rate. No one wants to move to an unsafe area if they can avoid it. Even if you are required to move there because of a situation outside your control, you’ll want to know what you should be on the lookout for and how prepared you need to be. There are a few different websites to help you learn more about crime in your new neighborhood.

SpotCrime and CrimeReports are very similar. Both allow you to enter an address and gain an instant report of recent crimes in the neighborhood. They also both allow you to sign up for alerts. SpotCrime additionally lets you provide information to help others anonymously. Neighborhood Scout provides per capita crime rates in any neighborhood you select, not just your own, and also has a comparison feature that allows you to find other neighborhoods with similar crime rates. Family Watchdog has a more narrow purpose. It specifically looks for the locations of registered sex offenders and informs you if one is living in the area.

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Explaining Breach of Contract Liability

With high interest rates, more and more buyers are beginning to realize they can no longer afford to buy, or would prefer to buy something less expensive. Sometimes this moment of realization hits them after they’ve already signed a purchase agreement, and now they want to back out. This is entirely legal, but does come with some potential costs.

When prices are increasing, breach of contract isn’t a huge deal, but can annoy sellers who have to delay their home’s sale. But when prices are decreasing, as is beginning to happen now, sellers have more to lose. Which is why they have a few different options to remedy the situation: they can enforce the purchase agreement, relist their property, or just withdraw the listing and wait for a better time. If the seller chooses to relist, they may be entitled to compensation from the buyer who breached contract. If the profit from the sale after relisting is less than what it would be given the original contract amount, the amount of the buyer’s deposit that would be returned to them is decreased by the amount of the seller’s losses. There may be cases in which there was an agreed-upon limit to this amount, in which case the agreed-upon limit is used, plus an interest rate of 10%.

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More: https://journal.firsttuesday.us/buyer-breach-of-contract-in-a-decreasing-price-environment-seller-remedies/

Frequent Mistakes of First-Time Sellers

There’s a lot of talk about first-time buyers, from their impact on the housing market to advice to help them secure the home they want. Not as many people talk about first-time sellers. Of course, many first-time sellers already have some experience with the real estate process. They probably bought the house they’re trying to sell, though it’s possible they inherited it. But that doesn’t mean they have experience with selling, and they could still make mistakes.

First-time sellers are often thinking about how much money they can get, rather than whether or not they even can sell successfully. While getting too little money for the sale is a bad idea, you won’t get any money at all if your house doesn’t sell. Instead the primary focus should be on making sure you get offers, then you can enter negotiations. Don’t try to cut corners by selling without an agent. It is an extra expense, for sure, but most prospective buyers won’t even know your property exists without the help of an agent. The agent can also help you set a realistic listing price. If it’s too high, you won’t generate interest, and if it’s too low, people will assume there’s something wrong with the property. Even once you get offers, don’t just pick whichever offer is highest. Take a look at the terms of the offer. The buyer could be asking you to pay for certain costs, which could make a slightly lower offer actually a better deal. In addition, a slightly lower full cash offer avoids financing headaches and possibly some closing costs.

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