How Supply and Demand Prices Your Home

As anyone who has ever taken an Econ 101 class is familiar with, price of any item is predominately based on "supply and demand": how many items are available in relationship to how many people want to buy that item.  Houses are priced mostly with the same philosophy.

The trajectory of home values is estimated largely based by how much inventory is available in the market.  Year-over-year home appreciation numbers have been strong.  Demand for housing has been up and the supply of homes have been astonishingly low.  According to KCM blog, however, that is beginning to change.

 The National Association of Realtors has reported that the month's supply of available housing inventory has increased from 4.3 months (as of January) to the current number of 5.2 months.  Inventory is anticipated to increase as we are moving forward.

Realtor.com just released their National Housing Trend Report, which monitored the shifting in home inventory levels across the country.  Here are their two major findings:

1. The dramatic year-over-year inventory declines have evaporated.

National inventories in July are 5.24% below the level from a year ago, compared to 16.47% in January.

In Chicago, citywide inventories are just 5.4% lower than four months ago, in April 2013, but were down an incredible 44.8% from January 2012 to January 2013. (Source: MRED LLC.)

Real Estate Investors - Know Your Risks

Investing in real-estate can be a good move, and there are several options in the market for you.  Each option comes with its own set of risks and benefits.

Here is the breakdown, courtesy of Zillow Blog.

1) Direct ownership

Direct ownership entails buying property on your own (or with a spouse), and handling all operations - like maintenance, leasing, and property management - either by yourself or by hiring a property manager.

Benefits: You make all of the decisions and earn all profits, while directly controlling the asset.

Risks: Bad tenants other other management hassles, making a poor financial choice, losing money on the sale of the property  and assuming full liability past insurance coverage.

2) Partnerships with close or well-known associates

This involves partnering with a friend, or a small group of investors similar to yourself, or family members.  It is extremely important for you to understand your co-investors well, alongside their financial position, motivation, work ethic, and to what extent they want to share in the management of the property.

Two big suggestions for this venture:

1. Have a written agreement established between the parties
2. One party should be responsible for the management of the property (or managing the property manager), and should be paid for handling the management.  This eliminates the "who should deal with the issue" conversation, and help reduce tension amongst the members of the party.

Benefits: Shared decision making and profits, and all partners directly control the asset.  This can be a plus IF all partners are on the same page.

Housing Bubble Myth DeBunked

Is there really a "housing bubble"?  We agree with Keeping Current Matters (KCM) - we have no such thing.  It is still substantially cheaper to buy a home than to rent one (especially in Chicago), and buying is still 8% undervalued on a price-to-income ratio.

With figures like that, we can safely say that the idea of living in a housing bubble is pure myth.

Infographic courtesy of the KCM blog.

Home Value Appreciation Expected to Exceed 6% in 2013

Home values at 2013 year-end are expected to be up 6.7% from the end of 2012, according to Zillow blog and their survey panel of 106 real estate and economic experts.

As the housing market continues to appreciate,  the panel believes that rising mortgage interest rates wont pose too much of a threat if the acceleration rate stays between the 4-5% range.  If it does reach 6% or higher like expected, however, it could start to cause problems for homeowners.

Median U.S. home values are expected to rise to $167,490 by the end of 2013, up from $156,900 at the end of 2012 and $161,100 currently.  The current 5-year expectations for home value appreciation anticipates record highs by the end of 2017, nearing the $194,600 high of May 2007.

Values for the city of Chicago have followed a similar trend, but perhaps more dramatically.  Home prices are up about 20% year over year from July 2012 to July 2013, but of course this varies greatly by neighborhood.  Home price gains have already leveled off in the most recent 6-8 weeks, but still have the Autumn market to finish the year strong.

Median Home Prices for City of Chicago - July 2012 - July 2013 (Source: MRED LLC.)

This year's appreciation rates are expected to end on a strong note before slowing down from 2014 through 2017.  In 2014, the panelists anticipate rates to slow to 4.4%, and then slow further to 3.6%, 3.5%, and 3.4% in 2015, 2016, and 2017, respectively.

Home Warranty Know-How

You've probably been offered extended warranty plans when you bought your new computer or phone.  Sure, some people buy that kind of plan, but most consumer reports say they aren't really worth the extra money.

In the case of a home warranty, however, it is a completely different story.  Here is some essential home warranty know-how, courtesy of the Zillow Blog.

What is a home warranty?

When you move in to a new home, will be offered a "home warranty" which could be anywhere from $300 and $500 a year, depending on where you live.  It covers the costs of repairing or replacing any kind of malfunctioning system in your home: like a leaking dishwasher, a fizzled clothes dryer, or a hot water heater that isn't heating anymore.

Want to know how to get a free warranty?  Read to the end!

You typically  don't have to pay anything out of pocket or make any arrangements other than calling your home warranty provider - and they take care of the rest.  In some cases there can be a co-pay around $50 per incident, but nothing too substantial.

Sellers: Demand These 5 Things of Your Agent

If you are thinking of selling your home and taking advantage of the current "sellers market" status, having an agent on your side is essential.  However, make sure you are getting the most out of your experience by making these 5 demands on your agent, courtesy of the KCM blog (Thanks, KCMBlog!).  These 5 simple, but important demands will help ensure that your agent is truly able to give your sale the time and attention it deserves.

Here's what I would say if I were in your shoes.


1. Be honest with us about the price.

It is a common practice for agents to accept a listing at any price, and then negotiate the price to whatever the "correct" budget should be somewhere down the line. This is a ploy by an agent that either is telling you what you want to hear to get the listing, or is not a capable market analyst.  It is also a blatant violation of the Realtor Code of Ethics.

In truth, your agent should be educating you in the fine points of pricing a home, the current market data that will drive your market price, and then asking you how you want to compete. In short, the list price is your decision - you just want to know that your agent believes in it and isn't appeasing you.

This price-point security is especially important because agents will not be selling your home once, but twice; once to the buyer, and then again to the bank's appraiser.  As many sellers have experienced, the second sell - to the bank - can be much more difficult than the first.  Since it can be such a trial to get a bank to agree on a contract price, its important to really have your agent on board with the price point so that they can go to bat for you.  If the agent you're working with does not discuss the price in depth, this should be a major red flag.

2. Understand the time-frame that my family and I have to work with.

Moving to a new home usually requires a detailed scheduling negotiation - when can I take off work, when will the kids need to start school, etc - which is an important component to your process, as it can be a great emotional strain.  Make sure your agent understands your concerns with the time frame.  While they may not be able to set an exact date for your move, make sure that they at least have an appreciation for your concerns and will work with you to the best of their ability.

They didn't ask you about your time-frame?  Another red flag. 

The Top 3 Reasons to Buy Now, Not Later

It's a sellers market with low inventory.  But should buyers stray away?  Just the opposite.

Here are the KCM blog's top 3 reasons to buy a house now, rather than later.

1. Prices are rising, and will continue to rise

According to recent findings from the Home Price Expectation Survey (comprised of over one-hundred respected economists and market analysts), home values are expected to appreciate anywhere between 12.3%-32.8% over the next five years.  This figure, coupled with recent speculations that low housing inventory does not expect to improve any time soon, suggests to potential buyers that waiting will most likely not improve your odds.

2. Mortgage interest rates are increasing - fast

Mortgage interest rates were at an all-time low earlier this year, but they are now on the rise without any sign of slowing.  The National Association of Realtors, the Mortgage Bankers Association, Freddie Mac and Fannie Mae, have all projected that 30-year-fixed mortgage rates to rise to somewhere between 4.8 and 5.1% by next year.  If you wait a year, your mortgage will cost more than it would now, which could definitely inflict a heavy impact on your budget.

WIll the Housing Shortage Continue for Long?

Since early spring, home prices have been rising at a double-digit rate.  Why?  According to Lawrence Yun, chief economist for the NAR, the reason lies in that basic economic principle: "increasing demand and tight supply."

With the economy improving, it is not surprising that there is a rise in housing demand, especially following a five-year period where new households were being formed at less than half of the normal rate (college graduates moving back home with mom and dad, young professionals getting roommates, etc.)  Since the six million new job additions in 2012-13, this number has seen a rapid rebound.  Yun anticipates this continuing for several years, ultimately at least returning to the historic average of 1 to 1.1 additions of new households per year, if not surpassing this figure.

The catch is, naturally, supply.  Yun provides a few possible scenarios where inventory increase could be suggested.  The first coincides with underwater homeowners being able to sell due to rising prices, thus adding to supply.  While this scenario may provide a new property on the market, these homeowners typically have an intent to move and buy another home, not to sell to become a renter.  Selling a home, and buying another, results in a zero sum inventory gain.