Real Estate Pulse

A look at recent trends affecting real estate and the law

Mortgages for ‘do-it-yourselfers’ are spiking

There’s been a big increase recently in a special type of mortgage for people who are buying land and then building their own home on it.

These “hybrid” loans function as construction financing during the building phase. Essentially, they act as a line of credit, which borrowers can tap each time they need to make a construction payment. During this phase, borrowers must pay interest on the loan, but they don’t have to make any payments toward the principal.

Once the house is finished, the loan converts into a traditional mortgage secured by the home.

The loans can be very useful if a buyer is working with a smaller or specialty contractor who isn’t able to arrange its own financing for the project. And they enable the buyer to undertake just one loan, rather than having to navigate a standard construction loan while also trying to arrange a conventional mortgage on a house that’s still on the drawing board.

One bank that offers these loans, TD Bank, says its originations are up 110% so far this year.


Rents are continuing to climb

Apartment rents rose 3.2% in the first quarter of 2014 compared to the same period of last year, according to a study by research firm Reis Inc.

Rents are up 13% across the country on average since 2009.

And there’s reason to think that rents will continue to increase. For one thing, both home prices and interest rates have risen recently, pricing many would-be homeowners out of the market for now. And there’s not a lot of surplus apartment space – the vacancy rate was only 4% in the first quarter, down from 4.2% in the previous quarter and 8% back in 2009.

Retail rents are also increasing. Average rent for space in a strip mall hit $19.42 per square foot in the first quarter, and average rent in a large regional mall hit $40.15. Average rents have increased for 12 consecutive quarters and are now at the highest level since 2008.

A lack of new construction of retail space appears to be responsible for pushing up the rent levels for existing space.

Average urban office rent was $29.28 per square foot, a small increase over previous quarters. The amount of occupied office space has been growing, but not as quickly as it did before the recession a few years ago.


Baby boomers are flocking to urban areas

A growing number of “empty nester” baby boomers are selling their suburban houses and moving to downtown condos.

The reason? With their children grown, they no longer need a big house, they don’t have to worry about being in a good school district, and they like being able to walk to work and to restaurants and cultural events.

This trend started in the 1990s, and lost steam during the recession, but it is picking up again significantly, according to recent data showing a large net migration of fifty- and sixty-somethings into center-city areas.

One result is that many urban condos are becoming more expensive than suburban homes. In fact, the nationwide median price for a condo rose 11% in the past year.

Although it varies depending on the city, most downtown condos are now selling for 40% to 200% more on average than a house with a comparable square footage in a drivable suburb, according to a recent study at George Washington University.

That’s a dramatic reversal. Only 20 years ago, suburban properties typically commanded a significant price premium.


Want to build a second home next to your current one?

Many cities have liberalized their zoning laws in recent years to allow people who live in single-family homes to add a second home on their property. They can do this by creating a basement apartment, building an “add-on” apartment to the house, or even constructing a separate cottage in the backyard.

Cities are responding to requests from homeowners, many of whom are middle-aged couples whose children can’t afford to find their own apartment and want to live with them. Other owners want a nearby space to take care of aging parents who can no longer live on their own, or simply want to rent space to bring in extra income.

Laws have changed recently in Seattle; Vancouver; Salt Lake City; Silicon Valley; Missoula, Montana; and many other places.

Of course, these changes can be controversial, since nearby homeowners may worry that their neighborhoods will become more crowded and experience problems with noise and traffic.


‘No down payment’ mortgages are back

Remember “no down payment” mortgages? These were the kinds of loans that often led to foreclosures during the real estate bust a few years ago. They’re making a comeback – but in a different form.

In their new incarnation, home buyers put up their home and a portion of their investments as collateral. The amount of a portfolio that must be pledged depends in part on the nature of the investments – a larger amount must be pledged if they consist of stocks rather than bonds, for instance. The homeowner keeps ownership of the investments, although there are some restrictions imposed by the lender, and typically the investment account must be held at the lender’s institution.

The advantages for buyers are that they (1) don’t have to sell appreciated stocks and pay capital gains taxes to fund a down payment, (2) may get a larger mortgage interest deduction, and (3) may come out ahead if their investments return more than the mortgage interest rate.

Of course, there are dangers, too, since homeowners will have put their personal assets as well as their home at risk if anything goes wrong.


Tenants with children can’t be limited to lower floors

Managers of apartment buildings sometimes want to require tenants who have small children to live on a lower floor, in order to prevent complaints from other tenants about noise in the apartment above them.

But the U.S. Department of Justice says this is illegal. The government announced that such a rule would violate the federal Fair Housing Act, which prohibits discrimination against tenants based on “family status.”

The Department recently filed a lawsuit against the owner of an apartment complex in Massillon, Ohio, claiming that the owner illegally refused to rent apartments on upper floors to families with children.


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