Saturday, April 1, 2006

Greenwich Real Estate Market Explained

Some New Math on Homes

By DAMON DARLIN

Gary and Margaret Hwang Smith spend a lot of time musing about real estate.

It is not just that the couple, economics professors at Pomona College, have put so much of their money in the game, having bought a home in Claremont, a college town in Southern California, a real estate market that has been described as overpriced by most and a bubble by some

Rather, they said, applying economic tools to buy a five-bedroom 1922 Craftsman home sharpened their thinking and guided two years of research into whether there is a bubble. They concluded that not only was the Los Angeles region not in a bubble, but many markets that others were calling overpriced, like Chicago or Boston, were probably underpriced.

Their findings are at odds with other surveys that use the relationship of home prices to income to determine whether home buyers are overreaching. Homes in Orange County, Calif., were fairly priced, the Smiths found. Some cities like Dallas, Indianapolis and Atlanta were screaming bargains. Homes they surveyed in San Mateo County, south of San Francisco, were, however, overpriced by about 54 percent.

In a paper the two presented at the Brookings Institution this week, "Bubble, Bubble, Where's the Housing Bubble?" they said that even though prices had risen rapidly and some buyers unrealistically expected the trend to continue, "the bubble is not, in fact, a bubble in most of these areas."

They argued that the value of a home is determined by the rent it could fetch. Calculate the future rents, subtract mortgage payments, taxes and other costs, factor in a good annual rate of return of 6 percent or more, and one should be looking at the proper price of a house or condo.

Their bottom line was: "Buying a house at current market prices still appears to be an attractive long-term investment."

Speculating about bubbles their cause, their longevity, and indeed, their very existence occurs whenever there is a rapid rise in asset prices. When dot-com stocks pushed the stock market to record highs in the late 1990's, many people tried to explain or justify the high prices of the stocks by talking about how the Internet was creating a new economy, one that worked by different rules or needed valuations that did not depend on earnings but on eyeballs viewing Web sites or the "stickiness" of those eyeballs. Those justifications were proved false by the technology meltdown.

With real estate, there have been fewer attempts to justify the high prices and more of an effort to understand why it is happening and whether there is an asset bubble.

Robert J. Shiller, the Yale University professor who warned of the stock market bubble, has few doubts that a real estate bubble exists in many American cities. He said he did not buy the Smiths' point that certain markets were not overpriced.

The way the Pomona professors reached their conclusion, however, has generated a lot of interest among fellow economists. "I think the paper is a sign of the times," Mr. Shiller said, because it emphasizes the link between home prices and rent as the proper way to understand the value of real estate.

Richard Peach, a vice president at the Federal Reserve Bank in New York who studies home prices and their relation to income, echoed that view, saying, "This is an important paper."

The value of the Smiths' research may be its practicality. It concentrates on the how, more than the why, in laying out a method to determine the underlying value of a home. They offer a way for real estate agents, financial planners and prospective homeowners to understand how much is too much to pay for a house.

Karl E. Case, a Wellesley College economics professor who has been studying real estate prices for more than 25 years, calls the paper's method "absolutely the correct way to think about it."

The Smiths say a prospective homeowner needs to ask, Should I buy or should I rent? That the value of a house is tied to the rent it can command is not a new idea. Other economists have advanced the idea and some have advanced the notion that a bubble can be measured with price-to-rent ratios that correspond to price-to-earnings ratios for stock.

But a price-to-rent ratio does not go far enough, according to the Smiths. Investors like Warren E. Buffett value a stock by looking at its intrinsic value that is, how much return one would get on the stock over time. For stocks, that is the cash the company generates and, in some cases, gives back to shareholders in the form of dividends.

The intrinsic value of a house is the rent that it can generate. "It's not that houses are like stock," Mr. Smith said, "but if you think about them as you do stocks, you start thinking about it correctly."

The problem is that there has not been a good way to compare rents with homes. Indexes that try often end up comparing apartment rent with prices of a single-family home. A result, the Smiths said, is inflated price-to-rent ratios that are displayed as evidence of a bubble when one may not exist.

The Smiths solution was to look for "matched pairs" of similar houses, one rented, one owned, but both in the same neighborhood. They did this in 10 cities in which they could find enough real estate data and matched pairs. Once they had established what rent was for a certain house, they used software they created to compute the flow of rents over time, factoring in the outflow of mortgage payments, maintenance costs and taxes. Then they had to determine what those future payments would be worth today, which economists call the net present value. If the net present value is a positive number, the house is worth the price. If the result is a negative number, the buyer would be better off renting it. (For more, see Your Money, Page B4.)

Of course, few people do that math when they buy a house. They look at what other houses in the neighborhood are selling for and base their bid on some expectation of what the house may be worth in the future.

Those expectations are far too optimistic, numerous studies have shown, most notably a 2003 study by Mr. Case and Mr. Shiller that found, for instance, that homeowners in San Francisco expected annual price increases of 15.7 percent. "It's clear a lot of people are nuts," Mr. Case said.

The Smith formulas provide a way to determine if a buyer is overpaying. Making the calculations takes a fair amount of math skill, so Gary and Margaret Smith, who is also a certified financial planner, say they want to commercialize their program so that the average person can determine a house's value. She has helped several clients decide whether to buy or rent. "We may have some intellectual property that is valuable," Mr. Smith said.

Indeed, the Smiths used an early version of the formula before they moved from a tract home in Claremont to a home closer to the college. The two met and married while teaching at Pomona, about 35 miles east of Los Angeles. They have three children (a fourth is on the way), so they needed more room.

They found a four-bedroom house a short walk from the college that also had a separate guest house they could use as an office. But the owner was selling it without an agent and did not have an idea of what to sell it for. "He told us to figure out a price," Ms. Smith said. They determined what rents were for comparable homes and ran their cash-flow software to find a price. "We knew where we could go up to," Ms. Smith said. Their first offer was rejected, but he eventually accepted $950,000.

That was about 30 percent more than the price of the house they had been living in, but the net present value calculation told them that they would be generating an 8 percent after-tax return. "It seemed like a no-brainer," she said.

"Then it occurred to me that it was an appropriate method for looking at the question of the bubble," she said.

The Smith analysis does not escape criticism. Several economists, like Mr. Case and Mr. Shiller, quibble about the assumptions the Smiths make in doing their calculations for example, homeowners spending only about 2 percent of the house price a year on maintenance or that everyone can obtain a mortgage interest deduction. One-third of taxpayers do not itemize their deductions and many more are getting hit with the alternative minimum tax that removes some of the advantages of home ownership, said Christopher Mayer, a professor of real estate at the Columbia Business School. Still, he agrees with the Smiths that there is not a housing bubble and he was impressed by the effort they made in finding matched pairs of houses.

But he also said that they lacked an understanding of what drives the economies of cities. For instance, he says, Indianapolis looks undervalued because, unlike the Northeast and West Coast cities, land there is inexpensive. The supply side of the supply-demand relationship that determines prices seems to be overlooked. In some cities, zoning and other restrictions limit the building of homes. Elsewhere it is relatively easy to build houses when demand rises because most of the cost of a home is in construction. That is one reason there is a greater expectation of price appreciation in California than in a place like Indianapolis, he said.

The questions many people want to know about housing prices are not answered by the Smith research: when will they fall and by how much? "Some people think we are trying to predict prices and we are not," Mr. Smith said. "That's a point a lot of people get hung up on."

Sure, he said, if prices drop you would have been better off if you had waited. "But you can't time the market," he said. "If you are a house flipper, we aren't talking to you."

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Greenwich Real Estate - Buying A Home - Find Homes In Greenwich At InsideGreenwichRealEstate.com

BUYING A HOME:


1. Making the Decision to Buy:
The decision to purchase a home is often driven by the need for more space, the need to move to a new location or simply the desire to change one's life style. If you are unfamiliar with the area to which you are moving, the REALTOR you choose must make an effort to introduce you to the characteristics of the community and help you decide if this is a good match for your needs. Within any community there are variations by neighborhood, and these should become clear to you as you are shown properties in the community. By giving your REALTOR feedback, you can make the search process more efficient. If your REALTOR learns that you do not want to buy in a particular neighborhood, he or she will not show you properties there and will concentrate instead on those areas which interest you.


2. Selection of a REALTOR:
The selection of a REALTOR in a community such as Greenwich is made easier by the presence of the Greenwich Multiple Listing Service. Almost every real estate agent in the community is a member of the Greenwich MLS, which gives each REALTOR access to every property listed by every office in the membership. Therefore, it is not necessary to seek the services of more than one REALTOR.

In your selection of a REALTOR, you should look for someone with whom you are compatible. When you initially meet with a REALTOR, whether this is someone to whom you have been referred or someone you have randomly chosen, you will be asked to sign a buyer authorization form. Required by state law in order for the REALTOR to show you properties, provide you with information, and negotiate on your behalf, this agreement will state the time frame during which the agreement is in effect, the kind of property it covers, and the area of Connecticut in which it is effective. If you are uncomfortable making a commitment to a REALTOR, ask that the time frame be limited to a day, a week, a month or any time frame which you feel you need to determine whether you would like to work with this person. When you ascertain that the relationship is compatible, you can sign an extension of the time frame.

Since every REALTOR has access to the same properties through the Greenwich Multiple Listing Service, there is no need to use the services of more than one REALTOR concurrently. In fact, doing so can cause confusion to you and your REALTOR. Be sure that you have specifically described what you are looking for in a property and ask your REALTOR to introduce you to properties which most closely meet your criteria. Give feedback on properties that you are shown, so that your REALTOR can continue to refine the picture of what you need. If your criteria changes, communicate this to your REALTOR. For example, if you decide that a particular style of house does not fit your needs, let your REALTOR know so that houses of that style are no longer shown to you.

It is a REALTOR's responsibility to inform you of any material facts about a property which he or she knows. These facts would be things such a condition of roof, presence of wetlands on a property, a known change to a road which will impact the property, etc. It does not include information about the seller's reason for selling, who the neighbors are, etc. Your REALTOR may not know everything about the property's condition; that is why you will have a building inspection done before signing the contract to purchase.

When you have developed interest in a particular property, your REALTOR will be able to provide information about comparable sales in the area to help you determine value. Your REALTOR can arrange for you to visit the local schools, obtain information about programs available in the area and help you select the appropriate property.


3. Mortgage Pre-Approval:
You will contact a mortgage company or banking institution to understand what purchase price might be correct for you. Further understanding of your financial situation will allow the lender to issue you a "Pre-Approval" letter which stipulates that you have been approved for a mortgage up to a specific dollar value. This is a valuable asset for you during the negotiation process. If you are not familiar with the names of lenders in Greenwich, your REALTOR will be able to provide you with that information.


4. Finding the Right Property:
The search for your new home is truly a joint effort between you and your REALTOR. Be as open with your REALTOR as possible about your likes and dislikes. It is very important to tell your REALTOR what you like about each house you visit so he/she will begin to understand what you are looking for in the home you wish to buy. Between your input and your REALTOR's professional skills, the search will narrow until you ultimately find the "right" property for you.


5. Making an Offer to Purchase:
Once you have focused on one or two properties, your REALTOR will be able to provide you with market data on recently sold properties. This information will help both you and your REALTOR formulate your offer. Working with your REALTOR, you will be able to determine where you would initially like to start with your offer price. You should then develop a set of strategies, each dependent upon how the seller responds to your offer, so you do not end up "reacting" to any counter offer made by the seller.
The offer may include, but is not limited to the following:
  1. The Opening Offer Price that you are willing to pay.
  2. Financial Contingency requirements, amount of your mortgage and date by which you will receive a written commitment.
  3. The Closing Date upon which you will take ownership of the property.
  4. Inspection Contingencies (building, radon, lead paint, termite, well, septic, survey, etc.) usually termed "all physical inspections".
  5. Other Contingencies, if any, that are to be identified and included in a Contract of Sale along with dates if appropriate.
  6. Identification of the Inclusion and/or Exclusion of any "personal property" (washer/dryer, etc.).
  7. The date you will sign the contract and give 10% of the purchase price as earnest money.

This complete offer is then presented by your REALTOR to the Listing Agent for the property. The seller may respond in any one of the following manners:
  1. The seller may totally reject your offer without giving any counter offer.
  2. The seller may counter your offer with one of their own.
  3. The seller may accept your offer as it was presented.

Once a verbal agreement has been reached, a written "Offer to Purchase" is prepared by your REALTOR outlining the terms agreed to by you and the seller. This document is then transmitted to the Listing Broker and the attorneys of record.


6. Finalizing your Financing:
After an offer has been accepted by the seller the lending institution you have chosen will require an appraisal on the property to be mortgaged. The institution will send one or sometimes two appraisers to do a thorough inspection of the property to determine whether the property will qualify for the desired mortgage. Once the institution agrees to finance a particular property, they will issue a commitment letter whereby they agree to provide a certain dollar mortgage at a specific rate for a specific time and the buyer is assured the financing is in place.


7. Utilities and other details:
Your REALTOR will remind you about two weeks prior to closing that the appropriate utilities and services need to be notified in order to transfer the accounts to your name. These include, electric, gas, oil, propane, telephone and refuse. They may also include pool services, yard maintenance and more. During the same period the seller will be contacting the same providers to discontinue the same services. This transition needs to go smoothly to protect you from having to pay a "connection or hook up fee" because the service was completely terminated. Your REALTOR can help you with this, but the companies now require the new homeowner to initiate requests for service.


8. The Contract:
The seller will instruct their attorney to draw the Contract of Sale to include the terms agreed upon. Your agent will ensure that, at the same time, your attorney receives the necessary information so that he/she can begin their work and be prepared to receive and review the contract. Your attorney will review the contract from your perspective and insure that your interests are protected (such as including stipulations for delays, searching of Title, type of Title to be conveyed, cleanliness of the premises at the time of closing, etc.) The timing of this, dependent upon the complexity of the terms, should all take between five to ten days from accepted offer to signed contracts. You will normally be expected to submit an escrow check in the amount of 10% of the total purchase price (made out to the seller's attorney) with the signed contract.


9. Closing Day:
On the day of your closing, you and your REALTOR need to perform one last walk through of the premises. Together you will look to insure the property is in the condition is was when you signed the Contract of Sale. You will verify that the items to be included are present. You want to make sure the house and grounds are as specified within the contract and most important that there are no defects visible now which were previously hidden.

You (or in your absence, you power-of-attorney) will attend the closing - primarily to sign appropriate documents and deliver checks for appropriate amounts. If your situation dictates, you may actually meet with your lender immediately prior to the time of the closing to sign your mortgage papers. Between your REALTOR, your attorney and your lender you will be advised ahead of time of all the costs and fees associated with your closing.


10. Typical Home Purchase Costs:
  1. Points or loan origination fee.
  2. Adjustment of interest on loan from date of closing.
  3. Title Insurance (one-time fee required by banks).
  4. Credit check.
  5. Bank appraisal.
  6. Attorney's fee.
  7. Survey fee: If the property has not been surveyed, the lender to Title Insurance company may require a registered survey or plot plan showing the location of the dwelling(s) and the boundaries of the property, as well as easements and rights of way.
  8. Recording Fees: The buyer usually pays the fee for legally recording the new deed and mortgage.
  9. Homeowners Insurance: Proof of a current policy is necessary at closing. Adjustment costs paid to the seller at closing (where applicable)
    1. Buyer's share of pre-paid property taxes.
    2. Heating oil or gas remaining in tank(s).
    3. Association dues.
    4. Sewer service charge.
  10. Inspections made of the property (normally incurred prior to closing) which may have been performed at the request of the buyer, pest, structural, radon, lead based paint, well, septic, etc.
  11. Private Mortgage Insurance (PMI) if financing more than 80%. Tax escrow, if necessary.

Greenwich Real Estate - Selling A Home - Greenwich Homes For Sale At Inside GreenwichRealEstate.Com

SELLING A HOME:


1. Selecting a REALTOR:
Choosing a REALTOR is the first step in the home selling process. The selection of a REALTOR in a community like Greenwich is made easier by the presence of the Greenwich Multiple Listing Service. Almost every real estate agent in the community is a member of the Greenwich MLS, giving each REALTOR access to all properties listed in the MLS. You could start the search by asking your friends or your attorney to recommend a good candidate for you. Although a Real Estate company's reputation is important, your relationship will be with the Agent himself/herself. The REALTOR you choose should be a full time agent with broad experience and total knowledge of the market.



2. Preparing Your Home for Sale:
Everything in your home needs to be looked at through the "eyes" of the buyer. Your REALTOR should be able to help you with this. They will suggest things to be done to the property to ensure the highest price, such as painting (interior and exterior), removing valuable objects and "decluttering", having the windows washed, gutters cleaned and making other minor repairs that may be necessary. You should expect your Agent to be very frank with you about what your home may need to facilitate a timely sale.


3. Documents and Marketing Program:
Once you select a REALTOR you will be requested to sign a listing contract, a Greenwich MLS data input form, a State of Connecticut "Residential Property Condition Disclosure Form", and a U.S. Environmental Protection Agency Disclosure Form regarding lead based paint hazards (for properties built prior to 1978). Your Agent will review these documents with you, and if you care to seek legal advice, then do so before signing. Selling your house is disruptive and can be intrusive into your every day life, but your agent will work hard to minimize this.


4. Broker Open House:
The listing REALTOR of your property will schedule an Open House for the other REALTORS who are members of the Greenwich MLS so they may preview it. This helps REALTORS determine which of their customers might be interested in viewing your house. The Open House schedule in Greenwich is specific to certain times and sections of town allowing REALTORS to see as many Open Houses as possible in the given time frame. At the Open House the listing REALTOR will provide information, such as the listing itself and plot plans, and is available to answer questions about the properties.


5. Showing the Property:
The REALTOR will acquaint you with the various means by which a property can be shown. First, there is the installation of a keybox. This method allows the greatest access, because the only scheduling required is for the REALTOR showing the property to confirm with the homeowner that it is convenient to bring a prospective buyer over for a showing.

Somewhat more restrictive is the method by which the listing REALTOR alerts MLS members that a key to the property will be held at the listing office and a confirmed appointment would need to be made through the office.

The most restrictive method of showing is to require the listing REALTOR be present at the showing. This requires more scheduling between the homeowner, the listing REALTOR and the REALTOR who wishes to show the property to a client.


6. Considering an Offer:
When someone is interested in your property they will make an offer to purchase through their REALTOR. Your REALTOR will take you through this process. Some terms which may be included in the buyer's offer are:
  1. The offer price the buyer is willing to pay.
  2. The mortgage contingency requirements, amount of mortgage they are seeking and the date by which they will receive a written commitment removing the contingency.
  3. The closing date upon which Title and ownership of the property will be transferred to the buyer.
  4. A list of the inspection contingencies and when they will be lifted.
  5. Other contingencies (i.e. sale of home, etc.)
  6. Inclusions and/or exclusions of any "personal property" which may be a condition of the purchase.
  7. The date by which the contract will be signed and the buyer will provide 10% of the purchase price.
Once you and the buyer reach an agreement of the "terms and conditions" for the purchase, an "Offer to Purchase" is prepared by your REALTOR outlining the agreed upon terms. This document is then transmitted to the attorneys for buyer and seller.


7. The Contract Process:
The seller is responsible for having the attorney draw the Contract for Sale which will include the agreed terms and conditions. The buyer will normally be expected to submit an escrow check (made out to your attorney) with the signed contract, usually in the amount of ten percent of the total purchase price. The contract is typically a Greenwich Bar Association contract which will contain every detail and a schedule of inclusions and exclusions as agreed upon by both parties. The Seller Disclosure Form is also delivered as part of this package. After the buyers have signed the contract, it is returned to your attorney with the escrow check. Your attorney will then go over the contract with you and you will sign it.


8. Before Closing Day:
Near to the date of your closing the buyer's REALTOR and the buyer need to perform one last walk-through of the premises. Together they will ascertain that the property is in the condition it was when the Contract of Sale was signed. They will verify the items which were to be included are present. They will determine whether there are any defects visible now which were previously hidden. If any of these are found, you may need to be prepared to adjust for these costs at closing.


9. Closing Day:
You (or in your absence, your power-of-attorney) will attend the closing - primarily to sign appropriate documents and deliver checks for appropriate amounts. Between your REALTOR and your attorney you will be advised of all the costs and fees associated with your closing.


10. Costs Associated with Selling a Home:
Attorney's fee:
  1. Town of Greenwich Conveyance Tax ($2.50 per $1,000 of Sale Price). State of Connecticut Conveyance Tax ($5.00 per thousand up to $800,000 and $10.00 per thousand of $800,00).
  2. Survey Fee: If the property has not be surveyed, the Lender or Title Insurance Company may require a registered survey or plot plan showing the location of the dwelling(s) and the boundaries of the property, as well as easements and rights of way. This might fall on the seller's shoulders.
  3. Adjustment costs paid to the seller at closing (where applicable):
    1. Buyer's share of pre-paid property taxes.
    2. Heating Oil or Gas remaining in tank(s).
    3. Association Dues.
    4. Sewer Service Charge.