As large swathes of the U.S. economy shut down to battle the COVID-19 pandemic, the housing market faces its greatest challenge in over a decade. Freddie Mac Research
TOP STORY: Home Maintenance
Homeownership is an expensive proposition. Unfortunately, many homebuyers, especially first-timers, think once they have saved the downpayment and qualified for a mortgage they are “home free.” Not only is that a bad pun, it isn’t true.
While your loan officer, insurance agent, and the tax collector can walk you through many of the ongoing costs of homeownership—principle and interest payments, private mortgage insurance, property tax, homeowners’ insurance— there are a whole bunch of unknowns that can trip up the household budget. When it comes to homeownership, it’s not just the purchase price, it’s the upkeep.
Even being aware of the ongoing costs is a different issue than paying for them. While everyone knows that the roof isn’t immortal, there is always the hope it can be nursed (or more likely wished) through a few more years of service.
That is not a smart approach.
A major system failure is a huge expense and when it happens, it can constitute a real emergency. When water is pouring through the roof or the HVAC sputters to a standstill in the midst of a record heat wave, a homeowner can’t wait for the next paycheck or until there is some running room on the MasterCard. And then there is the old saying about bad news coming in threes. Pretty sure it was coined by a homeowner. Not many household could handle a burst pipe, leaky hot water heater, and a defunct dishwasher in the same three-month period.
Whether you are a brand new homeowner or one that has been relying on crossed fingers for a few years, it is time to take command. Here are the key moves. Be proactive about maintenance; know what to expect, then budget for both the routine and the worst case.
You’ve heard all the clichés about taking care of what you have – stitch in time, ounce of prevention, etc. – so we will only slightly belabor the point. It is cheap and easy to replace furnace filters, take care of slow moving drains, clean gutters, sweep or blow-off roofs, vacuum refrigerator coils – and doing so can add years to the life of an HVAC system or major appliance, prevent roof and facia board rot, or avoid an emergency visit from the plumber. But these are also the easiest tasks to put off when time is short or money is tight. Need a push? Try pricing out a new HVAC system or ask your plumber for his weekend hourly rate. Now compare those to the cost of a three-pack of furnace filters or a can of Drano.
Even a veteran homeowner might benefit from some additional research. Learn how to do the minor fixes that can prevent a small problem from blowing up into a large one. Check out the recommended frequency for professional servicing of the HVAC system or tankless hot water heater and then make a written schedule for both monthly and less frequently required work and use that calendar to construct the maintenance part of your budget. Finally, build the cost of routine maintenance into a budget.
That is where knowing what to expect comes in. For starters, you should probably…
Expect the Worse
Unless your bank account is routinely robust enough to handle a sudden and unexpected system failure, you need a budget to cover both maintenance and major problems.
You may have heard the two rules for such a budget; the 1% Rule and the Square Foot Rule. The first calls for an annual budget based on a percentage of the purchase price. Of course, no one can agree on the percentage; 1% or 4% or something in between? If you paid $400,000 for your house you would expect maintenance expenses of $4,000 per year in the most conservative case, $16,000 in the least. Quite a range. Then, you might ask, if you bought your home 10 years ago for $300,000 and it’s now worth $450,000, which number do you use? Is dishwasher durability a function of housing market health?
The second method budgets a dollar for each square foot (SF) in the home; so, $2,400 per year for 2,400 SF house. This seems to make sense on its face, but many repair and replacement costs are totally unrelated to size. Installing a new roof or carpeting or painting the house is absolutely house size-dependent, but houses, whether big or small, usually have only one dishwasher or hot water heater. This method also doesn’t take labor costs into account.
A third solution melds the rules. For example, if you paid $435,000 for your 1,800 SF house the 1% rule would indicate a $4,350 annual budget while square footage dictates $1,800 per year. The average would be $3,075 or a monthly budget of $256.
Modifying the Rules
None of the three methods is perfect, but they are simple and can be fine tuned with a few additional variables. Weather is one. A house takes far less of a beating in a temperate climate. Exterior materials last longer if not subjected to severe heat or cold, snow loads, heavy rainfall/hail, high winds, termites, or drought.
The condition of the house is another variable, but one that may be difficult to ascertain. A previous owner’s predilection for deferred maintenance often only becomes apparent when serious problems emerge.
CONSTRUCTION’S GENDER INTEREST GAP
The construction labor shortage is critical, and the industry has been targeting women for recruitment. The women aren’t having it.
Currently women make up about 9.1% of the U.S. construction workforce, but most are in administrative, executive, and office positions, and those numbers haven’t budged in more than two decades. Only 3.4% of the 8.3 million workers in the trades were female. Building inspectors (14%) and painters (5.9%) have the largest numbers, but more than half the 40 construction and mining categories have too few women working to muster up a percentage. The share of women classified as construction managers, however, has grown, albeit, slowly. Kim Slowey, Construction Dive
The most important variable is, of course, the age of the home. If it is new or dose to it, there shouldn’t be any major repair/replacement expenses for a while; if there are, many should be covered by a builder’s or manufacturer’s warranty. For a new home, a basis of 1% with or without the square foot modifier, could be over-cautious, but starting there allows a cushion should things go wrong.
After five years some appliances may give up the ghost, by ten years more will be failing, and some painting or landscaping upgrades will be needed. Over the next decade, expect major repairs or even replacement of the HVAC system, more appliance failures, and perhaps an upgrade to the electrical system to accommodate the new technology that is now essential.
Today’s roofs, depending on the quality of the materials, generally last 20 to 30 years, although metal, slate, and architectural shingles can endure much longer. After 20 years of opening and dosing, the garage door(s) could be getting cranky, and energy upgrades such as new windows or more efficient appliances are increasingly important.
While 1% may be overkill for a new home, you need to up your game with an older one. If you are using any of the three rules, raise the percentage or add a few nickels in for each square foot.
While both the 1% and the Square Foot Rule are serviceable options and probably fine for a newer home, there is a more holistic approach. It involves separating maintenance costs from those for major repairs and replacements and constructing a budget for each.
Maintenance is the easy part. Using your calendar of regular and occasional tasks, ballpark estimates for required supplies and look up professional service charges on-line. Tweak the estimates as you learn and after a year or operations. Hopefully they haven’t also forgotten their mistakes last time round, mistakes that ultimately cost them billions to settle malfeasance lawsuits.
BUILDING THE WAY TO RECOVERY
Home building might do more than end the housing shortage, it might lead the way to a post-pandemic recovery as well. Building an average single-family home creates 2.90 full-time equivalent (FTE) jobs, generates $189,000 in wages and salaries and $138,700 in profits, much going to small sub-contractors, and $110,957 in taxes.
While 1.71 of the FTE jobs are in construction, they also include jobs in industries that produce, transport, store, and sell equipment and materials to professionals in architecture, engineering, law, and real estate. Paul Emrath, National Association of Home Builders.
It’s Different This Time
This time lenders are acting fast. Even before the first unemployment numbers (and thus far they have been staggering) came out, Fannie, Freddie, and Ginnie Mae (it manages FHA/VA/USDA loans) ordered their servicers to offer “forbearance”—a suspension or reduction of monthly payments—to all those affected by the virus. (Forbearance is not forgiveness. Check with your lender, first, as it may have some negative consequences.) Borrowers are responding proactively, requesting help early, unlike in 2008 when they waited until their loans were badly in arrears.
Congress also responded with $2 billion in stimulus funds and expanded unemployment benefits which, Freddie Mac says, should insulate home prices against 2008 style declines. The Federal Reserve has been quick to shore up securities markets, including those for mortgages, stabilizing sales and keeping rates low.
Technology is playing a major role as well. Lenders have made it possible to apply, process, and all but close a loan digitally and are working out the details for e- closings. Real estate agents have performed similar magic with virtual tours.
We know how the housing crisis and Great Recession ended. Employment turned around after 25 straight months of losses, home sales and residential construction have never quite reached pre-crisis levels, but there are multiple structural reasons in each case. Home prices bottomed out in the winter of 2012 and were back above their previous peaks in most places five years later. Credit tightened and borrowers paid attention to their risk profiles. Consequentially, the quality of today’s loans is exponentially higher.
What will be the outcome this time? Within weeks of the beginning of the current crisis, there were a slew of forecasts from all of those who do such things. Most of the analysts admitted they were in uncharted territory but also stressed what we have said here; the economy going into the crises was strong, housing was even stronger, and while it pushed the U.S into the last recession, it might be just the ticket to pull it out. The National Association of Home Builders made an especially strong case for this with its statistics, featured elsewhere on these pages, on how home building creates jobs.
Freddie Mac is very upbeat, seeing most of the impact on sales coming in the second quarter of the year, with an annualized 45% decline. This hurts, hitting as it does in what is normally the “spring market,” but the company sees sales picking back up in Q3 while home prices decline only fractionally over four quarters, then get back on track.
DRIVE THRU CLOSING
Three components of real estate closings have always required person-to-person contact, appraisals, notarization, and recording. The pandemic has the potential to disrupt all three. Lenders quickly loosened requirements for using exterior only appraisals and data driven automatic valuations. Now title companies and escrow agents are being creative. One closing took place in a parking lot in Gahanna, Ohio; the buyers in one car, sellers in another, the real estate agent in a third in case her advice was needed. Escrow agents circulated among the cars to get the required IDs and signatures. With many county offices closed, recordation may still be an issue. The Columbus Dispatch and Black Knight
So, while things are scary and much about COVID-19 is still unknown, we know that the current crisis is coming at a time when both the housing sector and the entire economy were unusually well prepared. The economic response has been swift and based on hard-won experience.
If the virus itself can be managed and/ or appropriate adaptions made to our home and work lives, then Freddie Mac chief economist Sam Khater may be right. About one month into the crisis he said, “While new monthly economic data are driving markets lower this week, they are a lagging indicator and should be priced in already. Real time daily economic activity metrics suggest that the economy will likely not decline much further. Going forward, the key question is no longer the depth of the economic contraction, but the duration.”