October 2021 – Page 5

Strong Equity Stakes Alone May Not Be Enough to Stave Off Foreclosure Starts

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But Will Reduce Inflow of Distressed Properties Into Housing Market — Though Black Knight research shows just 7% of homeowners in forbearance have less than 10% equity after including 18 months of deferred payments, the potential for foreclosure activity persists regardless — While homeowners with limited equity were much more likely to be referred to foreclosure during the early stages of the Great Recession, foreclosure start rates on 120+ day delinquencies have been relatively similar regardless of equity position from 2010 on — However, high-equity borrowers are more than 40% less likely to face the involuntary liquidation of their home (via short sale, foreclosure sale, deed-in-lieu, etc.) than borrowers with weaker equity positions — Even among borrowers with less than a 60% combined loan-to-value ratio, 30% of those referred to foreclosure ultimately faced involuntary liquidation, suggesting that many who could sell to avoid losing their home to foreclosure are not always doing so — Complicating matters further, the white-hot housing market that has been driving increased equity stakes through rising home values has begun to show signs of cooling, albeit slightly — Annual home price growth slowed from an all-time-high of 19.4% in July to 19% in August, marking the first decline in the rate of annual appreciation in 15 months, with daily tracking data for September suggesting further cooling is on the way — This may prove to be welcome news for potential homebuyers, as the monthly payment required to buy the average priced home with a 20% down, 30-year fixed rate loan is the highest it’s been since late 2007, despite still historically low interest rates The Data & Analytics division of Black Knight, Inc. (NYSE:BKI) released its latest Mortgage Monitor Report, based upon the company’s industry-leading mortgage, real estate and public records datasets. Given Black Knight’s recent analysis of the strong equity positions of borrowers in forbearance, even when adding 18 months of deferred payments to their debt loads, this month’s report explores the relationship between such equity positions and downstream foreclosure start rates and – ultimately – distressed liquidations. According to Black Knight Data & Analytics President Ben Graboske, the data suggests that the healthy stores of equity in the hands of homeowners currently in forbearance may not be sufficient on its own to ward off foreclosure activity. “An analysis of our McDash loan-level mortgage performance dataset back to 2007 shows that holding equity in one’s home might not be a blanket backstop to foreclosure activity,” said Graboske. “Borrowers with limited equity were much more likely to be referred to foreclosure during the early stages of the Great Recession than those with strong equity positions. But foreclosure start rates on homeowners who were 120 or more days past due have been relatively similar regardless of equity stakes from 2010 on, with borrowers in the strongest positions only slightly less likely to be referred to foreclosure. So, while we may see some variation in foreclosure activity based on the equity levels of borrowers who are unable to return to making payments post-forbearance, those with strong equity won’t necessarily be immune to foreclosure referral.” “The same data also shows that borrowers with strong equity stakes are more than 40% less likely to face the involuntary liquidation of their homes than borrowers with weaker equity positions, limiting both potential losses on such mortgages and distressed inflow into the housing market. Still, even among borrowers with 40% equity stakes who are referred to foreclosure, some 30% in recent years have lost their home to foreclosure sale, short sale, deed in lieu, etc. What the data doesn’t tell us is why so many people who could avoid involuntary liquidation by selling through traditional channels simply do not end up doing so. Whether that’s due to lack of understanding of their equity positions or the foreclosure process in general is unclear. But given the large number of high equity homeowners currently struggling to make their payments, this represents a significant challenge for the industry: how to educate struggling homeowners on the post-forbearance, foreclosure and – if needed – home sale processes, to limit unneeded stress on homeowners and the market alike.” However, the report also finds that the white-hot housing market, which has driven homeowner equity to record-breaking heights, is starting to show signs of cooling. According to the Black Knight HPI, annual home price growth slowed from an all-time-high of 19.4% in July to 19% in August, marking the first decline seen in the rate of annual appreciation in 15 months. Daily tracking data from the company’s Collateral Analytics group suggests further cooling in September as well. Any slowdown in appreciation will likely be welcomed by potential homebuyers, who have seen the monthly payment required to purchase the average priced home with a 20% down 30-year fixed rate mortgage increase by nearly 20% (+$210) over the first nine months of 2021.That brings the average monthly mortgage payment to its highest level since late 2007. It now requires 21.6% of the median household income to make the monthly mortgage payment on the average home purchase, making housing the least affordable it’s been since 30-year rates rose to nearly 5% back in late 2018. Since the Great Recession, home price growth has begun to slow when such payment-to-income ratios hit approximately 20.5% or higher, but low inventory levels in recent months have led to record home price growth even with tightening affordability. Any further rate increases – such as those seen in the week following the Federal Reserve’s announcement on tapering – will only exacerbate the affordability side of the equation. For example, should home prices and incomes hold steady, but interest rates rise to 3.5%, the average monthly payment would rise by more than $100 and home affordability would hit a 12-year low. At 4%, the payment-to-income ratio would climb above its pre-Great Recession (1995-2003) average. If rates climb back to 5% as in late 2018, it would require $380 (+29%) more per month to buy the average-priced home than it does today, with affordability reaching the lowest levels on record outside

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Individual residential real estate investors are concerned over the impact that rising home prices and the lack of housing inventory are having on their real estate investments. Perceived risk of losing market share to iBuyers and other institutional investors is also on the rise. RealtyTrac® recently completed its second RealtyTrac Investor Sentiment Survey surveying over 300 individual real estate investors across the country to find out how they viewed the market, what problems and opportunities they faced, and what their impression was of today’s environment for real estate investing. ● 48% of investors believed that the investment market is worse or much worse than it was a year ago ● Almost 63% of survey respondents listed the rising cost of homes as a major challenge for residential real estate investing ● The lack of available inventory was identified as the second-biggest challenge (57%) by the investors “Real estate investors continue to face the dual challenges of low inventory and rising home prices,” said Rick Sharga, executive vice president at RealtyTrac, an ATTOM company. “Coupled with strong competition from traditional homebuyers and rising material and labor costs, it’s no wonder that individual investors believe that the market is less favorable today than it was a year ago.” About 48% of investors believed that the investment market is worse or much worse than it was a year ago, and 36% believe that conditions will remain the same over the next six months. Rising home prices (63%) have replaced lack of inventory (57%) as the #1 challenge cited by investors, although they trade places in the investor six-month outlook. Competition from traditional homebuyers (28%) fell out of the top three problems for investors and was replaced by increased material costs (36%). Still, many investors believe that ongoing competition from homebuyers will continue to be a challenge, and 27% said it will likely remain a top concern six months from now. The unprecedented demand from homebuyers has created an unusual market dynamic for individual investors: instead of competing with larger institutional investors, mom-and-pop investors find themselves competing with more traditional consumer homebuyers. The investors who participated in the survey are representative of the majority of real estate investors—the typical mom-and-pop investors who purchase between 1-10 properties a year. It is these individual investors who exert the most influence on market conditions. Nearly 90% of the 19 million single-family rental properties in the country are owned by mom-and-pop investors, while the largest institutions—collectively— own less than 2%. The fix-and-flip market similarly is populated by thousands of small investors who average about one flip a month, but who now face growing competition from the so-called iBuyers like Opendoor, Offerpad and Zillow, which are essentially institutions that do flipping at scale. While respondents to the previous RealtyTrac survey were almost evenly split between fix-and- flip and buy-and-hold investors, the respondents to the Fall 2021 investor sentiment survey included more investors who purchased properties for the purpose of renting them out. This could be a reflection of current market conditions — ATTOM Data has reported that the number of flips in Q2 2021 was down year-over-year, as were flippers’ gross profits. “Investors are more optimistic about the future than they are about current market conditions,” Sharga noted. “But they do worry about inflation – about 81% of the investors surveyed were concerned about inflation causing material and labor costs to rise, making affordability an issue for prospective homebuyers and renters, and increasing the costs of financing.” The Foreclosure Factor Foreclosure activity today has virtually ceased due to the government’s foreclosure moratorium and the CARES Act mortgage forbearance program. While August foreclosure activity was up by 27% from July numbers, it was 70% lower than August of 2019, prior to the COVID-19 pandemic, and the implementation of the government foreclosure prevention programs. The inventory of homes in foreclosure is now at the lowest level ever recorded in the RealtyTrac database, contributing to the extreme shortage of homes available for sale. While it’s unrealistic to expect that default activity won’t rise somewhat after these government protections expire, the investors answering the survey aren’t expecting a flood of distressed properties. About 30% of the respondents believe that foreclosure activity will return to its normal, historical level (about 1% of mortgage loans in a given year), while 33% said that foreclosures will surpass normal levels, but remain well below the levels seen during the Great Recession. With a record $23 trillion in homeowner equity, it’s likely that most homeowners in default will be able to sell their properties prior to the foreclosure auction, and very few will ultimately be repossessed by the banks and subsequently listed for sale. About RealtyTrac Founded in 1996, RealtyTrac publishes the largest database of foreclosure property information in the U.S. along with other real estate and mortgage data used by real estate investors and professionals to find, analyze and purchase residential and commercial distressed properties. RealtyTrac is owned and operated by ATTOM Data Solutions, a leading provider of publicly recorded tax, deed, mortgage and foreclosure data as well as proprietary neighborhood and parcel-level risk data for more than 150 million U.S. properties. For more information, visit www.RealtyTrac.com.

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Manageable rent burdens mask affordability challenges for many workers who can afford only a small pool of available rentals – Rent burdens for many workers in fully in-person jobs, including teachers and nurses, have remained largely unchanged over the past five years, even as rent prices have grown significantly. – However, only a small share of rental homes in many large markets are priced low enough to allow teachers and nurses to keep rent burdens where they are now. – On average, these rental homes are smaller and older than typical rentals in each market. Older homes may increase the likelihood of living in unhealthy or unsafe conditions. The Great Reshuffling has the potential to improve housing affordability for millions of Americans able to work remotely from a less expensive market. But for occupations that require in-person work — teachers and nurses, for example — affordability is becoming more of a challenge as rent growth sets new records. Many renters in those in-person jobs are battling for a small slice of the rental market comprising smaller, older homes, a new Zillow® analysis shows. The analysis highlights the impact that more than a decade of underbuilding has had on renters as well as the need for communities to make it easier to build homes. New construction in the U.S. has fallen behind by millions of homes since the Great Recession, helping fuel record home value growth and increasing pressure on the rental market. “Many renters have been able to keep costs low even as prices have grown over the past several years, but merely affording rent does not mean they are thriving,” said Zillow economic data analyst Nicole Bachaud. “A deeper look shows a big slice of the market is out of reach for workers looking to maintain a comfortable rent burden. That often means renting an older home with less space but a smaller price tag, or doubling up with roommates or a partner.” While rent burdens — the share of income spent on rent — can appear low, especially when compared with recent growth in rent prices, renters often live with roommates or a partner, or target less desirable homes to keep housing costs manageable. The typical teacher spends about 22% of their income on rent, well below the widely accepted 30% rule for housing affordability. That’s up only slightly from roughly 20% of income spent on rent five years ago, despite rent prices growing almost 24% over that period. To keep their rent costs this low, only a fraction of the rental market is available to teachers. In Boston, for example, teachers on average only spend about 18.5% of their income on rent, down from about 20% in August 2016. But to do so, they must choose from only 6% of rentals in Boston that are priced low enough. Those homes are almost 300 square feet smaller and 33 years older than the typical Boston rental. While age does not always tell the whole story when it comes to quality, living in an older home increases the likelihood of living in unhealthy or unsafe conditions. Even in Tampa, where teachers spend almost 28% of their income on rent, just under the 30% affordability threshold and much higher than the 17.2% they spent five years ago, teachers are limited in their rental options. Only 2.2% of the Tampa rental market is available for teachers who don’t want to exceed that share of income spent on rent each month. One way for communities to ease price pressures on renters is to make it easier to create new inventory, including relaxing zoning restrictions. Basic supply and demand is the primary driver of growing housing costs, so increasing the supply of affordable housing types can help meet demand. Zillow research has shown that even modest densification could exceed what is likely needed to meaningfully slow housing price growth over the long term. “Boosting supply is the clearest path to improving affordability,” Bachaud said. “Allowing for even small amounts of new density could have a big impact on prices.” Nurses face similar hurdles in finding an affordable rental. While nurses who rent live affordably in all large metros according to the 30% rule, they are renting homes at least 100 square feet smaller than the typical rental in each market. In San Diego, where nurses spend about 24.5% of their income on rent, only 8% of rentals are affordable at that rent burden. Portland, Ore. is the most equitable rental market for nurses, with nearly two-thirds (63.4%) of the market available for nurses who spend 17.3% or less of their income on rent. The median rental available at that rent burden is 111 square feet smaller than the typical Portland rental, the second-smallest difference of any large market; affordable rentals for nurses in Washington, D.C., are 108 square feet smaller than a typical rental. About Zillow GroupZillow Group, Inc. (NASDAQ: Z and ZG) is reimagining real estate to make it easier to unlock life’s next chapter. As the most-visited real estate website in the United States, Zillow® and its affiliates offer customers an on-demand experience for selling, buying, renting or financing with transparency and nearly seamless end-to-end service. Zillow Offers® buys and sells homes directly in dozens of markets across the country, allowing sellers control over their timeline. Zillow Home Loans™, our affiliate lender, provides our customers with an easy option to get pre-approved and secure financing for their next home purchase. Zillow recently launched Zillow Homes, Inc., a licensed brokerage entity, to streamline Zillow Offers transactions. Zillow Group’s brands, affiliates and subsidiaries include Zillow®; Zillow Offers®; Zillow Premier Agent®; Zillow Home Loans™; Zillow Closing Services™; Zillow Homes, Inc.; Trulia®; Out East®; StreetEasy® and HotPads®. Zillow Home Loans, LLC is an Equal Housing Lender, NMLS #10287 (www.nmlsconsumeraccess.org). SOURCE Zillow

Aaron Katz and Jeremy Gavin

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Straight From College to Real Estate Aaron Katz and Jeremy Gavin were college roommates at the University of Massachusetts – Amherst when they first decided to get involved in real estate investing. After graduating in 2001, they began searching for their first investment property. With no money and no experience, they found a multi-family property, got a loan for the down payment and convinced the seller to fund the repairs. Their plan was to rent out three of the units and to live together in the fourth unit. However, things worked out so well, they decided to rent out the entire building. This was just the start. Within a year, while Katz still had a day-job with Marriot International and Gavin as an operations manager with a landscaping company, they bought another multi-family property in the same area, and then decided to try their hand in the big city – Boston. They bought their third multi-family property in Boston, which is where the business really took a turn…they learned about condo conversions. They converted the third property into condominiums and sold them all relatively quickly, realizing a nice profit. During this project, they were approached by a neighbor wanting to sell, so they bought his property and converted those to condos, as well. Fast Forward to 2006 In need of consistent leads and capital, Katz and Gavin attended a real estate trade show where they were introduced to HomeVestors® (HVA). They were immediately interested because of the HVA system and the resources they provided. However, during this time, HomeVestors was only accepting applications for “full-time” franchisees. So, they both quit their day jobs and went 100% into real estate as independently owned and operated HomeVestors business owners. Starting in 2007, they opened an office in Boston for WinWin Properties and hired their first two staff members. However, doubts lingered because Boston was a very high-priced market, and they were concerned about buying homes at reduced prices. Under a lot of various pressures to make deals, the first year was tough. They did realize that because the market was so high priced that they did not have to do a lot of transactions because they could make more money per house than they could in other lower priced markets. After weathering the “Great Recession” of 2007-2009, which required some imagination and creativity on their part, Katz and Gavin continued to grow the business. Today, they have nine full-time employees, own a real estate brokerage (Proactive Realty), and manage their rental properties thru a holding company (Townhouse Holdings). And they are active within the HomeVestors organization; Aaron is the Ad Council President for Boston, and both are Development Agents in New England responsible for training and mentoring sixty franchisees. To anyone looking to get involved in real estate, or especially becoming an independently owned and operated HomeVestors business owner, Katz and Gavin have some very simple advice. “We are successful because we focus on relationships. And, you must have ethical discussions with potential sellers. Honesty and ethics go a long way in this industry.” “Also, I think our biggest learning over our career is to ‘stay in your lane’ – and by that we mean that we see so many investors try doing too many different things and they don’t become experts at any of them. Just about all of them end up out of business at some point. We stick to providing a service to people that are in distressed situations involving a home and we help them deal with issues in that area. That’s all we do, and we try to be the very best at just that one thing.” Aaron continued, “We have been through it all! We started in 2001 (terrorist attack) with no money; we have gone thru the Recession of 2007-2009 (money dried up); and we survived the COVID-pandemic. Keep your heads down, focus, follow the system, and be ethical.” Homevestors What exactly does it mean to be a HomeVestors® business owner? Owning a real estate business is life changing and naturally comes with risks! When you become a HomeVestors business owner, you get immediate access to motivated seller leads, financing resources for qualifying purchases and repairs, one-on-one coaching with your local Development Agent, proprietary software for analyzing properties and deals, and access to a nationwide network of coaches and peers. Your house-buying business is yours and you run it as your own venture with a focus toward your individual business goals. If you are interested in a franchise, call 855-454-4578. Each franchise office is independently owned and operated.

Home Flipping Increases While Profit Margins Continue to Drop

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Typical Profit Margins Slump to 10-year Low ATTOM, curator of the nation’s premier property database, released its second-quarter 2021 U.S. Home Flipping Report showing that 79,733 single-family homes and condominiums in the United States were flipped in the second quarter. Those transactions represented 4.9 percent of all home sales in the second quarter of 2021, or one in 20 transactions – the first increase in more than a year. The second quarter home flipping rate was up from 3.5 percent, or one in every 29 home sales in the nation, during the first quarter of 2021. But it was still down from 6.8 percent, or one in 15 sales, in the second quarter of last year and remained below levels seen throughout most of the past decade. The report further shows that as the flipping rate rose, profit margins dipped to a 10-year low. The gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) rose in the second quarter of 2021 to $67,000. That figure was up 2.4 percent from $65,400 in the first quarter of 2021, and 3.1 percent from $65,000 in the second quarter of last year. But the more important measure of profit margins slid downward, with the typical gross-flipping profit of $67,000 in the second quarter of 2021 translating into just a 33.5 percent return on investment compared to the original acquisition price. The national gross-flipping ROI was down from 37.2 percent in the first quarter of 2021, and from 40.6 percent a year earlier, to its lowest point since the first quarter of 2011, when the housing market had yet to start recovering from a price slump brought on by the Great Recession in the late 2000s. The decrease of 7.1 percentage points in the typical profit margins from the second quarter of last year to the same period this year, marked the largest annual drop since mid-2014. Profit margins declined in the second quarter as prices on flipped homes rose more slowly than they did when investors originally bought their properties. Specifically, the median price of homes flipped in the second quarter of 2021 soared to an all-time high of $267,000. That was up 10.6 percent from $241,400 in the first quarter of 2021 and 18.7 percent from $225,000 a year earlier. The annual increase marked the biggest price spike for flipped properties since 2005, and the quarterly gain topped all improvements since at least 2000. But those price run-ups still failed to surpass increases that investors were absorbing – 13.6 percent quarterly and 25 percent annually – when they bought the homes that they sold in the second quarter of this year. That gap – prices rising more on purchase than resale – led to profit margins dropping. The price surges on both sides of flipping deals came amid an ongoing housing-market boom that continued during the second quarter of 2021 despite widespread financial damage done to the broader U.S. economy by the Coronavirus pandemic that hit early in 2020. Home prices continued surging amid a glut of buyers chasing an already-tight supply of homes stifled further by the pandemic. Those buyers were drawn into the market in large part by 30-year home-mortgage rates that dipped below 3 percent and a desire among many households to escape virus-prone areas and opt for space to accommodate work-at-home lifestyles. “Home flipping rebounded during the second quarter. But profits sure didn’t, as the typical home flip around the country netted the smallest return on investment in a decade,” said Todd Teta, chief product officer at ATTOM. “However, it’s not like home flipping has become a losing proposition. A 33 percent profit on a short-term investment remained decent, even after renovation and holding expenses. But with a few more periods like the second quarter of this year, investors may need to reframe how they look at these deals.”

A Guide to Property Insights

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Streamlining Your Operations to Make Your Portfolio More Profitable By Kori Covrigaru Does managing your real estate investment portfolio leave you feeling stressed? Single-family rental (SFR) investors have a host of logistical and operational tasks that can put pressure on their schedules and limit profitability. Vendor management issues, material ordering mistakes, long-distance SFR management headaches — problems always seem to arise when investors least expect them. Property Insights provides full-service support for SFR investors, from pre-purchase to post-rental of properties. We support your short or long-distance investment no matter where you are in the U.S., removing those pain points from your life. Our nationwide network of PlanOtechs uses high-tech Ricoh Theta Z1 cameras to create virtual-reality-like tours of properties, including accurate dimensions (so accurate, you can take materials measurements from the 3D tour!), dollhouse views, and floor plans. We provide access to an updated 3D tour during any renovations or repairs, so you can check on contractors and the status of a project. Our 3D tour can serve double-duty as an add-on to your rental listing as well, making it easy for potential renters to virtually tour the home. We can also provide a post-rental tour of a property, so you can inspect your investment’s condition from the comfort of your own home or office. Investment Property Condition Report When you’re making new acquisitions, you do not want to leave your investments to chance. Get insights on the home’s layout and condition before investing with the Property Condition Report. Virtual Layout and Condition Viewing: You don’t need to travel anywhere but to your desk to view the layout and condition of any property in the country. Our national network of PlanOtechs allows 3D walk-throughs of the properties you’re considering. By visualizing the layout and condition of the property ahead of time, you will have a better idea of the profit you can make from the investment. Remote Acquisition Decisions: Make your investing decisions remotely. With Property Insights, you can assess a property, determine the investment you would need to make to prepare it for rent, and easily calculate the projected profitability of the purchase — all remotely. Renovation Planning Reduce the headaches of renovation and repair projects. PlanOmatic builds a 3D virtual tour of your property, allowing you to digitally walk through your new investment and determine what projects need to be completed. Project Planning: Walk through your property virtually to determine what renovations and repairs are needed. Accurate Measurements: Use our 3D video tool to measure spaces like counters or bathrooms to estimate needed materials. Better Estimates: Estimate materials and labor needs from your computer more accurately. With the measurement tools and virtual walk-through, you have a better understanding of the property’s needs, resulting in less material waste and more accurate scoping. Reduce Change Orders: With better estimates of your project’s needs, you can also reduce the number of change orders you have to make. Renovation Oversight: Schedule virtual walkthroughs during the renovation process to manage your projects from anywhere. Property Life Cycle Management With rental properties, the property’s condition post-turnover is always a concern. Our 3D tours track the appliances, utilities, and overall condition of the property. Single-family rental investors can reduce their operating costs with Property Insights by PlanOmatic. All those little things that take up time and space in your head are — poof! — gone. We streamline your investing processes, leading to a more profitable and less time-consuming business.