As we enter the new year, I'm taking a break from questions I receive from readers and instead will make some predictions for Washington area real estate.
Last year was a fabulous one for real estate. Interest rates were low, sales were high. All over Washington, construction cranes loomed high above new buildings. Mortgage interest rates were at comfortable levels, and in the District, the congressionally enacted first-time home-buyers' tax exemption added to the impetus to buy residential real estate.
Will 2000 bring the same enthusiasm? Let's gaze into the crystal ball.
Toward the end of 1999 we began to see a gradual increase in rates, and I predict that interest rates will slowly start to creep up to around 8.5 percent by midyear. The Federal Reserve Board is widely expected to raise overnight interest rates at its February meeting, and that will translate into higher mortgage rates.
The Internet will play a significant role in real estate activity. Consumers may not obtain their mortgage loans online, but they certainly will use mortgage Web sites for comparison shopping. Competition will keep mortgage rates competitive.
Will the consumer buy houses through the Internet? I seriously doubt it. Most potential home buyers are sophisticated: they want to inspect the house, explore the neighborhood, touch and feel what they are purchasing. They may, though, find their dream house online.
I do see a dangerous, anti-competitive trend on the Internet, toward "one-stop shopping." A potential home buyer can get a mortgage loan, have the house physically inspected, get hazard insurance and go to settlement--all with the same company.
In my opinion, this is not in the best interests of the consumer. Consumers should comparison-shop for everything in real estate--from mortgage loans and hazard insurance to settlement services.
Clearly, consumers should use the Internet to shop around. But be warned: Advice and information given by someone who has a financial interest in your decision is not objective--and may not be in your best interest.
There remains a lot of concern about community association life. Although sales of condominium and houses in homeowner associations were strong last year, many people are unhappy about the quality of life within such associations. I receive numerous letters each month from disgruntled owners, and we have all seen stories about the excesses by boards of directors in such areas as covenant enforcement, rules and regulations and assessment collections.
Community association leaders, such as the Community Association Institute, are working to correct this misapprehension of community association life. Additionally, more and more community associations are starting to recognize the impact of their activities, and to mandate better procedures, such as due process hearings, mandatory dispute resolution and open meetings and open elections.
Community associations also recognize that unless they address the serious problem of the number of investor-owners within their communities, buyers may be unable to obtain mortgage loans and owners will be unable to refinance. The secondary mortgage market, notably Fannie Mae and Freddie Mac, has imposed restrictions on the number of investor units that will be permitted to exist within an association; if the association exceeds those guidelines, mortgage financing will be difficult to obtain.
This is an area that will be addressed this year from a number of sources. Predatory lending can best be defined as "loan sharking."
In mortgage lending, there is a concept known as "sub-prime" lending. These are loans made to consumers who do not have the best credit. For years, sub-prime lending was carried on primarily by predatory lenders--lenders whose primary objective was to force the homeowner into foreclosure, so that the lender would be able to take back the house and re-sell it at a profit (and incidentally also make a new loan to the new buyer, at which point the process would start all over again).
In the past few years legitimate lenders, encouraged by the secondary mortgage market, have been working to legitimatize sub-prime lending. Lenders are beginning to recognize that consumers' past economic problems do not automatically mean these consumers cannot now be good customers. It is hoped that by the end of this year, competition by legitimate lenders will drive out the predatory lenders.
In addition, many government agencies are taking active steps to curtail these predatory lending problems. Lawsuits both criminal and civil have been filed against these lenders, with the goal of requiring them to stop their practices and return their ill-gotten gains to their consumer victims.
One issue remains on my "wishful thinking" list. When I first started in the real estate business many years ago, the borrower signed only two or three legal documents. Now, in addition to the mortgage documents (deed of trust and note), lenders require such documents as: name affidavit, clerical error affidavit, affidavit of debts and liens, disclosure statements, flood hazard insurance statement, etc. While relief in this area is desperately needed, unfortunately I do not believe that the mortgage industry will rise to the call this year.
I am cautiously optimistic about 2000. Happy New Year.
Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.