Section 2: The Nature & Cycle of Real Estate Finance in Texas

Electricity

$100-$150

Real estate taxes

$100-$200

Property insurance

$50-$100

Mortgage payment

$900-$1,000

What factors may increase SUPPLY?

-Availability of properties (inventory) -Construction of new properties -Renovations or conversions of properties(e.g., turning an old warehouse into residential properties) -Low construction costs

Primary Market

-Banks -Credit unions

Facts About Activities

-Banks use deposits from savers to lend money to borrowers to purchase a house. -Lenders often package mortgages to sell on the secondary market.

High Rates

-Borrowing is more expensive. -Fewer buyers are in the market

The Real Estate Cycle (Infographic)

-Expansion -Over Supply (AKA Hyper-Supply) -Recession -Recovery

What percentage of homes in the U.S. are owner-occupied?

68%

Which of the following is a possible result of a community growing too fast?

Inadequate resources to support the population

Which of the following entities commonly acts in the primary market?

Local credit union

Collateral

Property pledged when obtaining a loan

In what phase of the real estate cycle do foreclosures rise and home prices fall?

Recession

In which phase of the real estate market cycle would you expect to see property under valued and a large supply of homes on the market?

Recovery

Which of the following best describes the state of the market during the recession phase of the real estate cycle?

Unemployment increasing, prices falling, and foreclosures on the rise

The American Taxpayer Relief Act of 2012

extended this exemption, as well as mortgage insurance premium deductions that were available to certain taxpayers. These benefits have been extended through 2016, the acts exemplify actions that may occur at the federal level to alleviate taxpayer burdens, especially when the actions could result in stabilization or improvement to the overall economy. -extended this benefit, and made some mortgage insurance premium deductions available to certain taxpayers.

Real Estate and the Economy

"Housing starts," as new residential home construction is commonly called, is considered a leading indicator for the economy. Such indicators can help us see in what direction the economy may be heading. If housing starts are slowing down, the economy may be heading toward a slowdown, as well. Housing starts are only one of many indicators. Keep in mind that these factors are merely indicators that aren't always accurate and sometimes even conflict with one another. -Real estate activities have an impact on the economy. -The health of the overall economy may rely heavily on construction of new properties.

Expansion

-Companies are hiring, lowering unemployment -More buyers, heavy demand -Decreasing supply -Public confidence -Home prices rise

Generation X

-Early 1960s to early 1980s -Highly educated, active, balanced -Largest share of first-time homebuyers (76%) (NAR survey 2014). More than half used a mobile device to search for their homes, with 22% finding the home they eventually purchased via a mobile device.

Secondary Market

-Fannie Mae -Federal Home Loan Bank -MBS investors

What factors may increase DEMAND?

-High employment levels (low unemployment) -Stable or increasing wages -Consumer confidence -Availability of loans or credit -Low or falling interest rates -Growing population

What Are the Phases?

-Over supply -Recession -Expansion -Recovery

When supply is greater than demand it's a

Buyer's market

Which of the following items increases the supply of real estate properties on the market?

Conversion of properties

Planning

Engineers, city, and/or county officials map out local development.

Now, let's suppose that low construction costs have led to an increase in the construction and conversion of new homes. Demand hasn't changed during this time. Generally, what is the effect on home prices?

Prices fall

Short term fluctuations

Value tends to fluctuate up and down

Disintermediation

When bank deposits are less than bank withdrawals -If consumers are withdrawing more than they're depositing, this means the bank has less money to loan to others. In other words, there's less credit available to consumers. Less credit means less spending, causing a slowdown in the economy.

The Mortgage Forgiveness Debt Relief Act of 2007

also sought to alleviate the tax burden on homeowners. This was a tough time in real estate. Many homeowners purchased homes far above their appraised value, and often beyond their means. When the economy went into a recession, unemployment rose, causing many homeowners to default on their mortgages, leading to a spike to foreclosures. Prior to the act, taxpayers whose homes were sold as a result of a foreclosure had to include the loan write-off amount (the forgiven debt) as taxable income. The act exempted homeowners from this requirement. -temporarily removed the requirement that taxpayers whose homes were sold as a result of a foreclosure had to include the loan write-off amount as taxable income.

Trash removal

$20-$40

Low Rates

-Home ownership is more affordable -More homeowners are refinancing

Which of the following best describes a buyer's market?

Supply is greater than demand

Baby Boomers

-1946 to 1964 -Children of the Silent Generation, a product of the post-WWII baby boom, a huge explosion in the U.S. population -Those over age 58 tend to purchase townhomes or condos; 80% of those under age 58 purchase single-family homes (NAR survey 2014).

Interest Rates and Real Estate Activity

-Charity's existing mortgage interest rate is 4.75%. Current interest rates of 3.25% may entice her to refinance her loan. -Adele put her house on the market a week ago, and today, the big real estate news is that interest rates will go down by half a percentage point. Adele's market will likely now have more potential buyers.

Which act made some mortgage insurance premium deductions available to certain taxpayers?

American Taxpayer Relief Act of 2012

Which real estate professionals are tapped by the buyer prior to closing?

Lenders, title companies, appraisers, and home inspectors

In the secondary market, mortgages are grouped together and sold as ______.

Mortgage-backed securities

The construction of which item has the largest influence on the country's economy?

New homes

Echo Boomers (Gen Y)

-1980s - 1990s -Some crossover with Millennials, but many are children of Baby Boomers. This group tends to delay typical adulthood rites, such as marriage, career, family. -Fully 97% of this group financed the home purchase, with 56% blaming student loan debt for their inability to save. Prefer city life, smaller condo units, high-tech-enabled units; likely to look online first before making a purchasing decision; more than half used a mobile device, with 26% finding the home they eventually purchased via a mobile device.

Millennials (Gen Z)

-1990s - 2001 (though some put this group between 1982 and 2002, and others lump Millennials with Generation Y) -Children of Generation X, this group saw the Great Recession, 9/11, and numerous industrial and governmental scandals in their formative years and can appear to lack direction. -Many will likely get assistance from their parents to finance their housing purchases when/if they decide to purchase.

In Joe's pursuit of the perfect house to buy, which of these characteristics is he likely looking for?

-A single-family detached home -Two+ complete bathrooms -A porch, deck, balcony, or patio -A garage

Facts About the Nature of Real Estate Finance

-As a nation, we rely heavily on credit. -Long periods of disintermediation can cause a slowdown in the economy. -Most real property purchases are made with loans rather than cash, and paid off over time.

Mortgage Lending Activities

-Consumers save money and deposit it in a bank. Most homebuyers do not pay cash for a house, so they have to borrow money. -Banks use deposits from savers to lend money to borrowers to purchase a house. Without lenders, development of new properties would greatly decrease, as well as purchases of homes. -Borrowers make monthly payments (plus interest) to lenders. High interest rates make borrowing more expensive, diminishing the number of buyers in the market. Low interest rates make home purchases more affordable to more consumers and entice existing homeowners to refinance higher-rate loans to lock in lower rates. -Lenders use the interest payments from borrowers to pay interest to those who have money deposited with the bank. -Lenders often group mortgages together in packages to then sell on the secondary market. With the cash they earn from selling mortgage packages, lenders can offer new loans to other borrowers.

Which of the following best describes the state of the market during the recovery phase of the real estate cycle?

High but stabilized unemployment and a high number of foreclosures

Historically, what do property values tend to do over short periods of time?

Increase and decrease

Assume supply remains steady, but favorable conditions have led to a surge in buyers in the market. Generally, what is the effect on home prices in this market?

Prices rise

Which of the following best describes the state of the market during the over-supply phase of the real estate cycle?

Properties selling for more than their appraised value, many buyers in the market, and lots of new construction

In which phase of the real estate market cycle would you expect to see properties sit vacant and prices drop?

Recession

In which phase of the real estate market would you expect to see unemployment increasing, prices falling, and foreclosures on the rise?

Recession

When demand is greater than supply it's a

Seller's market

John is looking for a home to purchase. If he represents demand, which of the following represents supply?

Single-family house for sale

Which act exempted homeowners from paying taxes on capital gains up to a specified value?

Taxpayer Relief Act of 1997

Which of the following entities support lenders in having adequate cash flow available?

The Federal Reserve and secondary mortgage markets

You know that banks use deposits from consumers to lend money to borrowers, and they also use the interest borrowers pay as a revenue source. Which of the following statements about the lending process are also true?

-Lenders generate additional funds to loan to consumers by selling mortgages to players in the secondary mortgage market. -Without consumer deposits and revenue from both interest and mortgage sales, lenders would eventually run out of funds to loan to consumers.

Over Supply (AKA Hyper-Supply)

-Many buyers in the market -Demand stabilizes -Lots of new construction increasing supply -Public confidence very high -Home prices are over-valued

Silent Generation

-Mid 1920s to mid 1940s -Grew up during the Great Depression era. During World War II, they watched America surpass its previous economic conditions and become a global superpower. -Only 55% financed their home purchase, and those who financed averaged a 23% down payment.

Which of these phases have an effect on the economy?

-Planning -Building -Buying/selling -Moving -Living

More common characteritics

-Public sewer -Gas (as main heating fuel source) -Regular and/ or home equity mortgage

Events indirectly impacting real property occur at a regional, national, or international level:

-Regional/ national/ international economic events -National environmental regulations -Regional/ national/ international political events

Recession

-Unemployment increases -Foreclosures increase -Supply trumps demand; more properties sit vacant -Public confidence falls -Home prices fall

Recovery

-Unemployment stabilizes but remains high -Foreclosures remain high -High supply of homes on the market, few buyers -General public unease -Home prices are under-valued

Less common characteristics

-Well water -Electricity (as main heating fuel source) -No mortgage

So who really owns the property when it's used as collateral? This gets to the question of title to the property, and the answer is, it depends.

-When a mortgage is used to secure the property as collateral, the borrower holds both legal and equitable title to the property, but the mortgage document places a lien on the property. The lien gives the lender the right to seize and sell the house should the borrower default. This lien shows up on the property title, and the property can't be transferred without the debt to the mortgagee being satisfied. In other words, the borrower is the legal owner of the property. -When a deed of trust is used to secure the property as collateral, the borrower holds equitable title (meaning the borrower has consistent control over the property), and a trustee holds the legal title. Borrowers have the right to use and occupy the property until they've repaid the loan. Once the loan is repaid, the trustee transfers legal title to the borrower. Because the trustee already has title to the property, it's much easier for a lender to foreclose on a property.

Events directly impacting real property occur at a local level:

-Zoning ordinances -Lending activities -Political activities -Employment trends -Local environmental regulations -Building standards

You live and work in the north central U.S. Which of the following factors has a direct impact on property at the local level?

A change in zoning ordinances

Let's assume you have your real estate license and are working with a client, Joe Common, a 50-year-old male. He's your average Joe when it comes to the American Housing Survey (AHS) and represents all of the common characteristics the survey reports. Is Joe looking to buy or rent?

Buy

The supply of properties available in the market is greater than the number of buyers. What type of market does this describe?

Buyer's market

Althea is starting her own candle business. Her plan is to rent a space to sell her products for several years, with the hope of expanding. In this scenario, which facet represents supply?

Commercial space for lease

A multibillion dollar online retail distributor has decided to set up operations in Ashland. The population of Ashland is 22,000. What is the potential impact to the area?

Community is potentially put at risk.

Edward is an economic analyst. In his work, he keeps a particularly close eye on this industry, because action or inaction here is a leading indicator of the country's overall economy. Which industry is this?

Construction

Moving

Consumers make arrangements to occupy or leave the property.

Buying/selling

Consumers work with real estate professionals, lenders, home inspectors, etc., to purchase or sell a home.

Leverage

Controlling a large investment with a small amount of funds

Building

Engineers, contractors, and other workers build properties and infrastructure.

Taxpayer Relief Act of 1997

Exempted homeowners from paying taxes on capital gains up to $500,000 for married couples filing their income taxes jointly ($250,000 for individuals), provided the property was their primary residence and they lived there for two out of the previous five years. TRA '97 eliminated some previous requirements to obtain the exemption, making it easier for homeowners to claim the exemption. Essentially, the act relieved some of the tax burden homeowners may have been subject to when selling their home, potentially making homeowners more willing to sell their home and make a new home purchase. -exempted homeowners from paying taxes on capital gains up to a specified value.

Public confidence is increasing, and we're finally starting to see some properties moving. More buyers in the market mean a reduction in the high number of properties that have been sitting on the market.

Expansion

Which of the following best describes the state of the market during the expansion phase of the real estate cycle?

Increases in hiring, employment, and public confidence, and lots of buyers in the market

David purchased a house three years ago for $300,000. Considering historical property value fluctuations, what is the likely value of the property today?

It's impossible to tell. Historically, property values fluctuate up and down in the short term.

When consumers make a small down payment and borrow the remaining amount of the purchase price from a lender, they are demonstrating what concept?

Leveraging

Which of the following items directly influences real estate demand?

Loan availability

Which of the following is an example of leveraging in a real estate transaction?

Making a down payment

The right amount of growth is what many communities seek. What are some actions they may take to encourage growth?

Offer incentives that encourage industries or companies to do business in town.

As unemployment decreases, more and more buyers enter the market looking to purchase homes. The number of homes available decreases, so new home construction increases to boost the supply. Multiple buyers may be after the same property, causing bidding wars, which drive up prices.

Over supply

Oy! When are things in the real estate market going to pick up? There are so many houses on the market, with many sitting vacant because everyone is too scared to buy. This does nothing to help the increasing number of foreclosures. Deals can be had for those who are ready to buy, however. During this phase, prices tend to fall in order to encourage home shoppers to buy.

Recession

In which phase of the real estate market would you expect to see unemployment and foreclosures remain high but begin to stabilize?

Recovery

Things in the real estate market are starting to improve. Foreclosures are still high, but not increasing. The same is true with unemployment. The public is still generally uneasy about the economy, but we've made it through the worst.

Recovery

Living

Residents enjoy local amenities and services.

Equitable title

The borrower's interest in a mortgaged property

Historically, what do property values tend to do over long periods of time?

They increase only

Which of the following best describes collateral?

Using a house as security on a mortgage

Long term fluctuations

Value tends to fluctuate upward

Facts About the Primary and Secondary Markets

-Local lenders may sell loans they have issued to national institutions as a way to generate more money to make additional loans. -The secondary market may act as a balancing mechanism by making money available in hot local markets and providing a safe avenue for cold local markets to unload excess funds. -Secondary market players purchase loans from local lenders, package these together, and then sell them as mortgage-backed securities to investors. -Selling mortgage-backed securities provides national institutions in the secondary market with additional funds to continue purchasing loans from local lenders.

Many communities are searching to find the right growth balance:

-Too much or too fast growth could result in inadequate police and fire presence, schools, roads, transportation. -No growth or too-slow growth could negatively impact the local economy. -Dependency on one market driver (e.g., Mega Corp) could put the community at risk.

As interest rates rise, the number of buyers in the market is likely to ______.

Decrease

Which of the following best describes a seller's market?

Demand is greater than supply

Pledge

Different from hypothecation in that the owner actually surrenders possession of the property to a lender to hold as security for a debt repayment. Stock certificates are commonly used as pledges for a loan. Once the borrower repays the loan, the pledge is returned. But if the borrower defaults, the lender can sell the pledged item(s) to regain the principal and interest amount.

Real estate professionals keep a multitude of other professionals busy during the buying and selling process. Which of these professionals or entities are most active outside of the buying and selling process?

General contractors

Which act temporarily removed the requirement that taxpayers whose homes were sold as a result of a foreclosure had to include the loan write-off amount as taxable income?

Mortgage Forgiveness Debt Relief Act of 2007

Hypothecation

The pledge of property as collateral for a loan