The Housing Chronicles Blog: 2019

Tuesday, May 7, 2019

The Business World -- Especially Home Builders -- Actively Prepares for Climate Change

It seems that nearly every day now, we read another headline about new high temperature records being broken throughout the world. 

Fortunately, like much of the private sector, the building industry is not waiting for a national political consensus to seriously address climate change, and has stepped up with a combination of clever planning, innovative products, and whole-house systems which also help make the case why buying a newly constructed home is smarter than ever.

The challenge seems overwhelming: If the world hopes to keep temperatures rising well below 2.0 Celsius (3.6 Fahrenheit) by 2060 from pre-industrial times, CO2 emissions from buildings will need to drop by 85 percent. Between now and then – and as outlined in a new initiative for the City of Los Angeles -- that means new buildings must be zero-carbon by 2030, with both new and existing buildings becoming zero-carbon by 2050.

The buildings in which we live, work and play demand energy in two forms: The operating energy needed to fuel their daily operations, and embodied energy, which includes everything required to construct them. Globally, almost 40 percent of energy used is related to building construction and operation, and both steel and concrete require enormous sums of energy to produce.

According to the Department of Energy, U.S. buildings account for 39 percent of primary energy consumption and 72 percent of all electricity consumed domestically.  Including embodied energy, the United Nations calculates that our buildings contribute nearly half of total U.S. emissions.

However, since we’re not about to go back to living in caves and hunting for our next meal, what can we do?  Prepare.

Insurance companies, institutional investors and central banks around the world are actively planning for the consequences of more volatile weather across the world.  The EPA recently published a report advising communities on how to plan for the debris left behind by natural disasters, while CoreLogic’s RiskMeter service combines its vast databases with PhD-level scientists to model future risks to property including floods, storm surges, wildfires, earthquakes, wind, hail and more.

Last fall was also the launch of The Investor Agenda, with the motto “Accelerating Action for a Low-Carbon World.”  This group of over 400 institutional investors around the world, which together have $32 trillion under management, provides a framework for them to share actions and commitments for four key areas: Investment, Corporate Engagement, Investor Disclosure, and Policy Advocacy.

Here in the U.S., investing giants BlackRock, Vanguard, State Street Global Advisors and others are backing the Sustainability Accounting Standards Board, a nonprofit organization which seeks to standardize and increase corporate environmental disclosures.

Given that 85 percent of respondents to Harvard Law School’s 2019 Institutional Investor Survey viewed climate change as the most important sustainability topic, it’s likely that both multi-national construction giants and public home builders will eventually face increasing scrutiny.

Central banks around the world, including the European Central Bank and the Bank of England, are also getting involved, with the goal of maintaining financial stability with new standards for financial disclosures and classifications for green assets.

In California, the government is requiring all new homes in buildings of up to three stories to provide solar panels by the beginning of 2020, which is expected to add $8,000 to $12,000 to the sales price.  Based on a 30-year mortgage, the state’s Energy Commission projects that while these new standards will add about $40 to an average monthly payment, they’ll also save consumers about $80 on monthly bills for heating, cooling and lighting.

The building industry itself has already made huge strides tackling climate change, but there is clearly more to do.  Nationally, the percentage of commercial office space certified by LEED or Energy Star in 2017 was 38 percent, up from less than five percent in 2005.  Similarly, the share of green single-family homes rose from just two percent in 2005 to 33 percent by 2017.   The share is expected to increase to nearly 50 percent for both single- and multi-family homes by 2022.

Moreover, those builders which include smart home products which also conserve resources – such as TRI Pointe Homes’ HomeSmart™ and LivingSmart® systems – have found that sustainable homes generally find more demand from buyers, with one study from the Earth Advantage Institute finding a premium of up to eight percent over conventional homes.  This premium extends even more to the resale market, with green homes selling for up to 30 percent more than traditional existing homes, and often selling faster.

That’s a win-win solution for everyone.

Monday, March 18, 2019

The Basics of Opportunity Zones: 2017 Tax Reform Provides Development Incentives

You’ve probably heard something recently about Opportunity Zones (or o-zones), which were established by the Tax Cuts and Jobs Act of 2017 to employ tax incentives for long-term investments in rural and low-income, urban communities.  As the first national community investment program in over 15 years, it’s a natural fit for certain types of development projects, but since it’s written as part of the tax code, negotiating the specifics is critical.

There are currently 8,760 opportunity zones nationally, which comprise census tracts (or parts of them) nominated by various states, and certified by the Department of the Treasury.  The purpose of the legislation is to encourage private investment in these low-income tracts by allowing a temporary, 5- to 10-year deferral of tax on capital gains, a reduction in the amount of capital gains tax that must ultimately be paid, and potential tax-free appreciation in qualified opportunity zone funds.

All o-zone funds must hold at least 90 percent of their assets in a Qualified Opportunity Zone Property (QOZP), which is measured every six months in a given calendar or fiscal year.  Failure to meet this 90-percent rule can result in severe penalties.  While an o-zone fund can include both capital gains and other sources, only the capital gains are eligible for the o-zone tax benefits.

So let’s say you’re a developer proposing a new multi-family property in a certified o-zone, and looking for investors wanting to take advantage of this legislation.  To qualify as a QOZP, the property must be purchased after 2017, and the tax basis of the completed property must be at least double the original basis, plus one dollar.

For redevelopment projects in which the existing structure(s) are targeted to be razed or substantially rehabbed, this should be an easy milestone to hit.  However, there’s a strict timeline of 30 months to complete these improvements, which could prove more difficult for larger projects still early in the planning and approval process. There are also time pressures for investors, with capital gains required to be transferred to an o-zone fund within 180 days from the date they are realized.

But there is some help on the way:  HUD Secretary Ben Carson recently announced that his department will offer technical assistance, as well as providing preferential treatment for grant applicants with affordable housing projects in o-zones.  In addition, the Federal Housing Administration’s pilot program for financing low-income housing with tax credits was expanded to incorporate o-zone projects.

Even better, HUD is now working with other federal agencies and programs so that developers can combine o-zone tax benefits with other programs, such as the New Market Tax Credit.  Carson also confirmed HUD’s controversial initiative, announced last August, to encourage cities to change their zoning regulations in order to build more affordable housing.

For an investor, there are several options to save on capital gains.  If a taxpayer holds its ownership interest in the o-zone fund for at least five years, then 10 percent of the gain invested is excluded from the tax owed upon the sale of the taxpayer’s interest in the o-zone fund (or 2026, whichever is earlier). If the ownership interest is held for at least seven years, an additional five percent (for a total of 15 percent) of the invested gain is excluded, and if a taxpayer holds its ownership interest for at least 10 years, then all appreciation in the investment will also be tax-free when the taxpayer sells its interest.

To take full advantage of the statute’s current benefits – including a deferral of tax until 2026 and a 15 percent reduction in taxable gain -- investments must be made by the end of 2019. Still, taxpayers can make investments after 2019, and will also be able to benefit from the appreciation exclusion that many believe is the greatest advantage of the new law.

However, the rules that normally cap 50-percent ownership as the limit for determining if companies are related parties are further limited with o-zones.  In this case, cross-ownership is limited to 20 percent, and some builders will be unwilling to give up 80-percent equity to qualify for the tax advantages.  Still, for Low-Income Housing Tax Credit (LIHTC) project developers, their familiarity with giving investors majority ownership could help boost more affordable housing at a time of unyielding demand.

Finally, o-zone funds can also include investments in existing companies, not just properties.  But, as with all things related to our very complicated tax code, seeking advice from tax attorneys, CPAs and other experts is probably the first place to start.

Friday, February 15, 2019

Builders and Developers Adjust to a Softer Market

If there is one thing that building industry pros are good at, it is adjusting to the ebbs and flows of the cyclical nature of the housing market. Due to a combination of rising home prices, higher interest rates, and low inventory, the lengthy, post-recession housing rebound did soften considerably in the last part of 2018. 

However, it also remains to be seen if this softening is merely another pause in a longer story, or if the housing market is closer to the end of the current cycle. For now, most builders are not waiting for the answer, and are already using a combination of financial incentives, a more personal touch to guide homebuyers through the sales process, and tapping the wonders of Artificial Intelligence (AI) to clear existing inventory as soon as possible.

Long a standard tool in the builder’s marketing box, sales incentives can vary from covering more closing costs to free upgrades and even outright price cuts. According to recent national statistics, in the first month of 2019, 23 percent of builders lowered their prices – including incentives, but also outright price cuts – versus just four percent in the same month of 2018. While this nearly six-fold increase in net pricing cuts to buyers is certainly notable, it is still far less than the rate exceeding 40 percent back in 2010.

Buyers may also be choosing smaller units. According to preliminary data for November 2018 from the U.S. Census Bureau, the median price of a new home sold was $302,400, down seven percent from the previous month, and falling nearly 12 percent year-over-year. At the same time, seasonally adjusted sales were up nearly 17 percent from October, but fell nearly eight percent since November 2017. Meanwhile, the average months of supply for new homes edged down to 6.0 months versus 7.0 the month before, but up sharply from 4.9 year-over-year.

A separate report from the Mortgage Bankers Association (MBA) for January 2019 showed a strong, 29-percent sales rebound for seasonally adjusted sales of new, single-family homes after two disappointing months to the fastest pace since 2013. Although January applications for new home mortgages were flat year-over-year, they rebounded by a sharp 43 percent from December.

Certainly one major factor helping buyer demand has been a steady decline in lending rates, which, according to Freddie Mac, were currently trending around 4.4 percent in mid-February for a conventional, 30-year fixed-rate mortgage. While this average rate is still up sharply from just below four percent a year ago, the nearly 60-basis point drop from November 2018 can mean over $12,000 in extra purchasing power for that $300,000 home.

Today’s technology is also assisting builders to offer a more personal touch throughout the sales process. Considering that a single- family home start can take as long as 90 days from the date of deposit, anxious homebuyers may be looking for reasons to cancel if they are not seeing physical proof of their new home coming to fruition. That is where a “more communication is always better” mindset can help keep sales on track, using a variety of regular video-enabled emails on a regular basis. By educating the buyer from the builder’s point of view, sales managers can also better manage expectations through closing day.

While AI can certainly help with this ongoing communication, it is becoming even more important when personalizing online advertising and messages for new leads with services including Google, Facebook, Instagram, and others. For example, Google’s new ‘responsive search ads’ apply inputs from clients and then use machine learning to arrive at the most ‘perfect’ ad for an individual. According to the experience of online marketing consultant Do You Convert, this evolving technology can help lower costs-per- click by 18 percent, and improve click-through rates by of to 46 percent.

On the existing home side, brokerage giant Keller Williams recently launched its own proprietary AI system called Command. Intended to replace other, off-the-shelf CRM competitors, the company analyzed the pros and cons of other systems, and assembled a team of 27,000 people – many of them agents – to create a solution that could be customized to each user. Later this year, the brokerage plans to launch its own consumer-oriented app to compete with Zillow.

In both cases, the idea is to win the race for a one-stop shop where potential buyers can search for homes, mortgages, and other related services without leaving the company’s branded garden. Those builders who manage to harness today’s evolving technology without losing the personal touch of a talented sales person will likely outperform their competitors.

Tuesday, January 15, 2019

Technology Continues to Change Real Estate Sales

Lead, Follow, or Get out of the Way -- Author Unknown

Is it time to finally bid goodbye to the traditional method of selling homes along with its standard, six-percent commission?

After many years of impacting the fields of retail, travel, stock trading and others, technology is now increasingly poised to change how both new and existing homes are bought and sold. While there will probably always be a market for traditional agents, only those with area expertise and excellent customer service will survive in this new marketplace.

When Jack Ryan, a former Goldman Sachs partner and technology investor, went to sell his Southern California home to an interested party in 2015, he contacted his local real estate agent who would help him complete the paperwork – for six percent of the sales price. Frustrated with this response and hiring an attorney instead for a small fee, he soon co-founded Real Estate Exchange (REX), which uses artificial intelligence (AI), machine learning and big data to match buyers and sellers for just a two-percent commission.

Unlike competitors such as Redfin and PurpleBricks, which discount the listing fee but still require sellers to offer a buy-side commission, REX bypasses the MLS entirely, thus cutting out three percent of the equation. For those buyers who insist that their agent receive a cut, it can still be negotiated with the seller, or the buyer can roll the cost onto their own mortgage. Should anyone experience buyer’s remorse, REX even offers a 30-day, money-back guarantee.

For those sellers looking for a faster route, “iBuyers” such as Redfin Now, Zillow Offers, OpenDoor, OfferPad, and Perch provide what is often a below-market cash offer in exchange for an almost-immediate sale. While Zillow expressly encourages sellers to bring in their own professional agent, the others close the deal mostly in-house. For this convenience, they charge overall fees ranging from six to 13 percent, depending on the strength of the market and the condition of the property.

Coldwell Banker, in partnership with Home Partners of America, is leveraging the rent-to-own giant’s subsidiary, cataLIST, for cash offers to sellers in select markets. If the seller turns down the offer as too low, then the home is still marketed as a traditional listing.

For larger new home builders, NewHomeSourceProfessional, a unit of Builders Digital Experience (BDX), specifically partners with buyer’s agents to help its builder members move inventory to a digital audience. Billed as an “MLS for new homes” and free to agents, the system not only regularly scrapes builders’ websites for pricing and inventory changes, but can also pull specific information about floor plans, school districts and other community information.

Going one step further and leveraging the power of AI, last year BDX also unveiled HomLuv, which allows buyers to review and rank more than one million images from 100,000 different new homes. As buyers pin their favorites, the system learns their preferences and begins matching them with participating builders for their locations of interest.

For smaller and custom home builders, Edgewise Realty is another option which offers a closer, direct-to-buyer partnership similar to REX, which also allows clients to reserve units with just a $1,000 deposit, upload financial documents, and make choices about features and upgrades. Currently working with about 30 different builders across the country and charging a flat one-percent listing fee, Edgewise buyers can also get regular updates with photos and videos.

But what if a potential buyer first has a home to sell?

To address that situation, BDX has teamed up with Keller Williams International in multiple U.S. markets for its New Home Ambassador and National Builder Trade-in programs.  Although the ambassador program allows agents to create a separate and personally branded website to search new home listings, the trade-in program charges a discounted, three- to four-percent commission while still offering the expertise of professional stagers and agents, and even lease buy-out programs for renters.

Meanwhile, upstart Knock has another strategy appealing to builders, which is to purchase a seller’s chosen new home for cash -- often at a discount -- and then sell the old home the traditional way. Only when the old home escrow closes do the buyers receive title to the new one.

Similarly, Ribbon finds buyers first, and then offers sellers a competitive, all-cash bid for a commission of 1.95 percent. With Ribbon, buyers can even rent out their new homes at market rates until they’re able to obtain a suitable mortgage, whereas if a Knock listing is taking too long to sell, it can also be temporarily converted to an income property.

Indeed, the times, they are a-changin’.