Housing Counsel: Happy New Year

Written by Posted On Sunday, 08 January 2006 16:00

Can you believe that another year has slipped by us again? 2005 was an interesting, exiting, yet provocative year. New Buzz words entered into our vocabulary, such as "Katrina," "Bird Flu," "Iraq," and even "Irrational Exuberance."

As I have done in previous years, I am taking a break from answering the many questions I receive from readers, and instead will try to predict the future of real estate in the Washington metropolitan area.

Real estate continued its unbelievable boom this past year. Prices of residential houses soared sky-high, especially in neighborhoods that just a few years ago, few investors had even heard about. Mortgage interest rates -- albeit moving slightly above 6 percent -- remained steady. Indeed, even Federal Reserve Board Chairman Alan Greenspan expressed surprise that the rates stayed low, especially since the Federal Open Market Committee has been raising its target for the federal funds rate every time they met. On December 13, 2005, the rate was once again raised by 25 basis points to 4.25 percent.

On November 1, 2005, American homeowners, real estate agents and tax lobbyists received a scare, when the President's Advisory Committee on Federal Tax Reform recommended -- among many other things -- that there be significant reductions in the amount of home mortgage interest which can be deducted when filing the annual income tax return.

So as we say good by to 2005, let us look into our crystal ball to see what is in store for the coming year?

Interest rates:

In my opinion, interest rates will go as high as 7 percent by the end of 2006. Toward the end of 2005, interest rates -- which for a couple of years were under 6 percent -- started to hover just a little just a little bit above that. The Federal Reserve Board has hinted that they are not finished raising the discount rate, and at some point in time, mortgage interest rates must follow this upward trend.

Mortgage interest deductions: the real estate lobby is very strong. Real estate agents and brokers throughout the country often have the ear of their local congressman, and 2006 is an election year. Although there may be some slight tweaking of these deductions -- for example putting a cap on the amount that can be deducted yearly -- I do not believe that major reforms will be adopted or enacted by Congress.

Home sales: Recent economic statistics have already revealed that new home sales are slowing down. Major new home developers are revising and downsizing their projections for 2006. But older homes will continue to sell at a good -- if not strong -- pace.

Rental real estate: The price of homes -- especially in the city -- is starting to be of concern to many Americans. While the economy seems to be moving ahead, there remains a lot of uncertainty in the minds of many consumers. Big companies are downsizing and outsourcing, causing many employees to lose their jobs. And people with fixed incomes just cannot afford to buy those overpriced homes. So I predict that the rental market will become stronger, as more and more consumers opt to rent, rather than buy.

Affordable housing: Because many people will not be able to buy a principle residence, a national trend has developed designed to assist low to moderate income consumers in buying a home. More and more state and local jurisdictions are considering legislation which would require real estate developers to set aside a percentage of their inventory for affordable housing. Whether this will work, however, remains to be seen.

Eminent domain: On June 23, 2005, the United States Supreme Court decided a very important real estate case. In Kelo v City of New London, Connecticut, the high court ruled that the city's use of eminent domain to condemn privately owned real property so that it could be used a part of a comprehensive redevelopment plan did not violate the Takings Clause of the Fifth Amendment. According to the Court, such a taking -- although the property was to be used for private development -- qualified as "public use."

This case -- although now the law of the land -- is now quite controversial. Does it now allow the District of Columbia to condemn private property which will be used for a baseball stadium? Probably yes. Many state legislatures throughout the country are reviewing the Kelo decision with a view toward restricting local communities from taking such action in the future.

Shared equity: Many years ago, Congress enacted a law which gives certain tax benefits to people who assist others in buying a home to be used as their principle residence. In the years to come, with home prices so high, I believe that more homeowners will have to rely on others to assist them with their home purchase. Parents will be assisting their children; children with good incomes will be investing with their elderly parents whose pensions either have been downsized or eliminated altogether. There are careful rules for such shared equities, and potential investors must discuss their plans with their tax advisors before entering into any such shared equity arrangement.

The Internet:

The internet continues to play a significant role in real estate activity. Many consumers are obtaining their mortgage loans through e-commerce. Many more are using the web for comparison shopping. Currently, there are dozens of websites offering mortgage loans. Potential homebuyers are shopping around for the best deal, and then are either using those web-companies for the loan, or are approaching local lenders, demanding that they match those rates. Competition will keep mortgage rates competitive.

Will consumers buy homes through the internet? I seriously doubt it. Most potential homebuyers are sophisticated; they want to inspect the house, explore the neighborhood and touch and feel what they are purchasing. They may be able to find their dream house through the internet, but the actual sale will take place with the assistance of local real estate agents and brokers.

However, there has developed what I consider a dangerous, anti-competitive trend toward "one stop shopping." A potential homebuyer can get a mortgage loan, have the house physically inspected, get hazard insurance and go to settlement all with the same company.

In my opinion, this is not in the best interests of the consumer. The purchase of real estate is perhaps the consumer's most expensive investment. Consumers should comparison shop for everything in real estate -- from mortgage loans and hazard insurance to settlement services.

The one-stop shopping center sounds like a good idea, but it is good only for the entrepreneur. Who is representing the consumer in this process, when everything is handled by one company? Who will objectively advise the homebuyer whether a fixed rate is better than an adjustable rate? Who will objectively counsel the consumer as to the best hazard insurance terms? And who will give the potential homebuyer the tax and legal advice which is needed -- before the transaction has been completed?

Clearly, consumers should use the internet to shop around? But be warned: advice and information given by someone who has a financial interest in your decision is not objective -- and may not be in your best interest.

Paperwork: Once again, I have to repeat one issue that remains on my "wishful thinking" list. When I first started in the real estate business many years ago, the borrower signed only two or three legal documents. Now, in addition to the mortgage documents (deed of trust and note), lenders require such miscellaneous documents as: name affidavit, clerical error affidavit, affidavit of debts and liens, disclosure statements, flood hazard insurance statement, etc. While relief in this area is desperately needed, unfortunately I do not believe that the mortgage industry will rise to the call in 2006 -- or any time for that matter.

Happy New Year.

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.


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