Helpful Real Estate Blog

Lately more and more homebuyers and individual builders (those who have bought a lot and want to construct a house on it for personal use) show preference to small houses or so called micro-houses. They don’t want to buy (build) a large, traditional house like mane of those today are on sale. They consider such houses too sprawling and putting needless strain on the environment. So the consumers turn their choice to “weeHouses,” equipped with multipurpose units that can be used as anything from second homes to yoga studios.
 

According to the words of Geoff Warner, principal architect at Alchemy Architects, a St. Paul firm, the first such home he built drew such a positive response that he decided to build more of the tiny houses and since 2003 he has sold 14 additional units.
 

Besides of Mr. Warner there are many other architects in the USA who designs micro-homes. Micro-home is usually a house measuring from a few hundred to a little more than a thousand square feet, versus 2,400 square-foot home built in the USA last year. Micro-homes contain most of the amenities of larger dwellings, including kitchens and bathrooms. Many of them have just two rooms and sometimes with a living area in addition.
 

Today’s designers offer micro-homes as multipurpose units. For instance, such builders of tiny homes as V2World, a Phoenix, Ariz. present their units as “hotel, guesthouse, yoga room, urban dwelling, vacation pad, personal sanctuary, live-work space” - whatever the homebuyer wants them to use for.
 

I think it is not an easy task for designers and architects who have gotten accustomed to work with large-scale houses to switch over micro-homes. Such reorientation requires good skills and sharpness because designing a tiny home offer the challenge of figuring out how to use every nook and cranny in the best way. In such home designers should make every space purposeful.  But they contrive to compensate small dimensions of dwellings by using artful space-enhancing designs and a wide range of devices. Among them I’d like to emphasize such as custom-designed cabinets and furniture, sleeping lofts built in raising ceilings, closets, bed closets, flat-roof space used as a deck or patio area. To make a little house seem less boxy architects apply to large windows. For instance, Rocio Romero, who heads an architectural firm in Perryville, Missouri, used a loft sleeping area and built-in bed while designing for a 625-square-foot guest house. She also decided to make windows in the loft and alcoves at the head of each bed that contains recessed lighting fixtures to enable the guests to read in bed.
Buyers of “weeHouses” may be classified into two main groups:
1) Most of them want to acquire a secondary space, either a vacation home or a building near or attached to a primary residence.
2) The others buys (or build) micro-houses for constant living driven by a wish to simplify their lifestyles, to free themselves from all the old useless things (like old furniture, books, etc.) or other motivation.
 

Although the market of mini-houses is quite small, the number of buyers interested in such dwellings bounced up considerably for the last five years.  A group for championing of extra-small homes called the Small House Society was founded in 2002 by an information-technology consultant in Iowa City Greg Johnson. Today it includes approximately 260 individuals and architectural firms. Mentioned above architect Rocio Romero has sold 45 micro-homes since 2003. One of such houses cost about $100,000 including mounting. It is 1,250-square-foot home, which contains the art studio space and a bathroom.
 

And what is the most interesting and unusual thing, in my opinion, is striving of well provided people for moving into small houses. Thus Libby Crawley, the associate director of the doctoral program in business at Georgia State University, decided to change her five-bedroom, three-and-a-half-bath home in the suburbs of Atlanta  for a one-bedroom house just under 700 square feet, in Atlanta’s East Lake neighborhood.
 

As for me I don’t share the views of those who give their predilections to micro-houses. I’d like to live in a large comfortable mansion with large light rooms and a lot of space in it. And the only reason that can make me to choose a small house is the luck of money for the building of big cottage. I assure that tiny houses are suitable just for spending your vacations but not for full-time living.
 

Meanwhile, although I have always been in love with large spacious houses I admit the advantages of micro-homes. The main of them are:
 

1) Building and designing of such homes require less money and building materials, versus big homes, and thus such homes offer a good solution of dwelling problem for those who are bed provided for.
 

2) Micro-homes enable to save some space on a lot which can be used for other purposes besides living, such as gardening, truck farming, or even active rest outside breathing in the fresh air.
 

3) Owners of mini dwellings try to use the space they possess in the most functional way and thus they get rid of the habit to accumulate and keep lumber and needless belongings.
 

4) Small houses require less fuel for heating and cooling and are much easier to clean.
 

5) Short terms of fitting micro-homes, as most of them are designed to be easy-to-assemble. Such homes are delivered in parts, as nearly finished units, and called prefabricated homes.
 

It is interesting to know that previously prefabricated homes had one very significant shortcoming: their similarity made them difficult to market because most of buyers wanted to have a house unlike their neighbors possessed. According to the Witold Rybczynski, a professor of urbanism at the University of Pennsylvania’s School of Design, and an author of 11 books on architecture and planning, “people wanted something more idiosyncratic.”
 

But to date designers and architects partly eliminated that drawback of compact micro-homes. Since today’s homebuyers, especially those who live most of the time in standard-size houses, want to possess a more unusual property for their vacation home designers due to resort to different devices like A-frames, log cabins, geodesic domes, cathedral ceilings etc.
 

Many homeowners want to build a scaled-down, fully equipped tiny house next to a larger home. These tiny houses are measured between a mere 64 square feet to just over 1,200. Tom Stevens, a builder for Consortium Design Group in Canton, Mich., sells such extra-small houses and calls them “personal spaces.” One of such homes Mr. Stevens has been working on for the past two years “will look like a chip off the old block,” as he said. This home will be a smaller 288-square-foot flat-roof unit beside a house on Batteese Lake, Mich. The smaller unit will be constructed from the same materials as the house, and will have heating and a bathroom.
 

Micro-houses in general (not only prefabricated ones) have two main challenges architects and homebuyers have to solve: creating enough storage space and finding sufficiently small furniture to put in compact rooms. Sleeping lofts, raised beds and under-bed storage help to cope with mentioned tasks. Small European appliances, like a Miele 24-inch convection oven and combination washer-dryer units are also used by many designers.
 

And in conclusion I’d like to say that at the national level micro-homes is an excellent idea under the existing circumstances of demographic pressures and land exhaustion.

This article I’d like to devote to the description of the basic elements and members of the real-estate market.
 

The main elements of any market are demand, supply and price. At the housing market demand is presented by homebuyers, and homeowners (private holders and construction firms and organizations) present supply. Their reciprocity is provided by intermediaries – special real-estate firms, organizations and licensees – who give all the necessary information, make consultations and assist in arranging a bargain. Real-estate agents charge a fee for their assistance called commission, which amounts in percentage from the value of a home and is added to price. 
 

Price depends not only on the interaction of owners and buyers of realty or the activity of real-estate mediators but on the decisions took by public and local bodies of government as well. They work up monetary policy, credit policy, approve regulations, set up mortgage interest rates, etc.
 

For more effective functioning of the market and championing interests of its participants, special organizations and associations are created (like National Association of Realtors in the USA).
 

So I’d like to distinguish the chief members of the real-estate market:
1) homebuyers – those who wants to buy a house for the personal use;
2) homeowners – those who  wants to sell homes (private holders and construction firms);
3) intermediaries – those who provide links between homeowners and homebuyer and render assistance in carrying out deals with immovable property;
4) government and local authorities – those who regulate the real-estate market by implementing credit policy and determining  value of interest rates.
5) special organizations and associations – those who battle for the interests of the real-estate agents.
 

I remember from the economic theory that demand and supply interact in the establishing of equilibrium price. But equilibrium price is a very uncommon occurrence and as it was somewhat mentioned above there are a lot of factors that determine price besides of demand and supply (activity of intermediaries, credit policy, public and local regulations, etc.).
 

As regards the real-estate market, price changes in it sometimes defy explanation. According to economist Robert Shiller, the author of “Irrational Exhuberance” and co-producer of the Case-Shiller real estate indexes, increases of home prices have far outran rises in construction costs, rents and income. So existing prices are way overblown. “Home prices lately have done something really remarkable. This is the biggest boom the United States has ever seen,” he said. This housing boom may be compared only with that one happened after World War II when veterans returned home, got married and bought homes. But that boom was supported with strong demand while the current one may be characterized as speculative. “It’s an uncertain situation,” he says. “It looks like a down cycle that might continue down or it may bounce around. I will not make a forecast but this pattern suggests risk.”
 

I agree with his view that high home prices and big lag in the pace of growth of prices and building costs explain record residential construction. Outstripping rise of price in comparison with the surge of the costs of construction has stimulated construction firms and organizations, which accelerated their activity until new home inventory has nearly doubled in the past few years. Developers kept building because the profits were very high with home prices so much higher than building costs.  The indispensable condition for the discontinuance of the construction which is not supported with strong demand is reduction of prices.
 

But in the past few months builders slightly slackened their activity, foreseeing the whiff of the end of the housing boom.
 

All this visually illustrates the model of typical market interaction: price gain results in supply rise, and on the contrary price diminution leads to the falling of supply.
 

Meanwhile, I want to emphasize that the latest situation on the American real-estate market proves the unpredictability of home prices and its riskiness.

In this article I try to describe how credit policy carried out by the Federal Reserve affect the state of the real-estate market, how manipulations with interest rates influence the behavior of real-estate members and thus change tendency in home sales and prices.
 

Sales of homes had increased to record levels for five consecutive years because of the lowest mortgage interest rates in four decades. And now housing boom is slowing and the main reasons for the ending of boom and decline of home sales is the uptrend in mortgage interest rate this year. So, in accordance with the National Association of Realtors sales of homes in the USA decreased to a 6,67 million annual rate, a 1,2% decline from April. But sales changes differ in different regions. While demand decreased 3.8% in the Midwest and 4.2% in the Northeast, it increased 0.7% in the West and 0.4% in the South.
 

I agree with those economists-analysts who say that this is a typical feature of a cooling real-estate market when sales start to fall under the impact of increasing mortgage rate. The surge of mortgage interest rate was caused by the tightening of credit policy by the Federal Reserve. Mortgage rate is determined by the Federal Reserve which meets on Wednesday and Thursday to deliberate on interest-rate policy. The Federal Reserve applies to the tightening credit policy and raises rates in order to curb inflation and keep price pressures in check. Thus the Fed increased interest rates by a quarter percentage point to 5.25% from 5%. The economists of the Federal Open Market Committee and some Wall Street organizations expect further increase and suppose that interest rate can mount to 5.5% in August, and perhaps toward 6% by the end of the year.
 

I support those who believe that the rate hike could continue this year. Especially as policy makers didn’t rule out the possibility of further rate increases. The Federal Open Market Committee stands out that “the extent and timing of any additional firming will depend on the evolution of the outlook for both inflation and economic growth”. So it is quite possible that some further interest-rate policy firming may be needed.
But I think that further rising of interest rates may proved to be rather risky because such step may eventually put the economy into a recession. According to the mind of the majority of economists monetary policy works with long and variable lags. This circumstance explains the conduct of the previous chairman of Federal Reserve, Alan Greenspan, who stopped raising rates in 1995 and 2000 even though both times inflation climbed higher for months afterward.
So I think that it is not an easy thing for policy makers to make a decision on what course to choose and the final conclusion require careful deliberation and prevision of all the consequences.
The Federal Reserve held the interest rate at the point 1% without any concern that a tepid recovery could turn low inflation into deflation (or falling prices) and lead the USA economy to slump. Since then, it has steadily raised interest rate, to 5.25% now.
As a result of two years of growing borrowing costs in the USA the housing market has begun to cool as home sales fell, which lead to the slowing of construction and more slowly rise of home prices.
On the basis of all the foregoing I’d like to conclude that the impact of credit policy on the state of real-estate market is evident:  with the tightening of credit policy mortgage interest rate goes up that lead to the stifling of homebuyers’ activity and lowering of sales. Generally the moderation in housing activity leads to the slowing of economy.
On the contrary, softening of credit policy results in decrease of mortgage rate and rise of sales.
 

In my opinion credit tightening has double disposition. While boost of mortgage interest rate is a necessary instrument of anti-inflation policy that helps to stop the moving up of prices and prevent flaring up of economic crisis, real-estate agents and homebuyers lose enough by this measure. The former incur losses because of the lowing number of transactions. Homebuyers lose because of the increase in the cost of shelter, mainly tenants’ rent and “owners’ equivalent rent” which indicates the cost of owning a home in comparison it with what that home would rent for. As homes became less affordable thanks to growing prices and mortgage rates, many prospective buyers have chosen to rent, and thus put upward pressure on rents, and therefore owners’ equivalent rent.

As any other market real-estate market has cyclical development with its slumps and booms. So last years the market was characterized with housing boom, which was shown in the skyrocketing price tags and saturated activity of real-estate speculators (who bought homes and resold them shortly thereafter for a sizeable profit - this activity is called house flipping). So during that time real-estate industry was a very attractive sphere for investing money and obtaining enormous profits.
 

And now housing boom appears to be over in many parts of the USA. The current situation is characterized by the slackening in the increase of prices. For example, in May the average home price in Southern California ($485,000) had its smallest annual price growth, 6.4%, since July 2000. San Diego County’s average home price raised a mere 0.4% to $490,000 from $488,000, and Ventura County’s average price had a rise 3% to $586,000. Those Counties that had the largest price appreciation during the heyday of the housing boom saw the smallest price gain in May. And the reduction of prices is observed in some states. For instance, home prices declined 10.2% year-over-year in South Bend, Ind., to a median of $81,800 in the first quarter of this year. And the main reason for this is an outbreak of home foreclosures in the city. Local homeowners had to sell their houses since industrial jobs in the city dwindled and it has become harder to do monthly payments on adjustable-rate mortgages. So foreclosures bring profit to investors who restore homes and resell them thereafter.
 

Today it’s taking longer to sell a house and real-estate agents need much more time to complete negotiations since buyers became choosier and homeowners don’t want to receive less money then their neighbors did last year. And some real-estate professionals are being forced to offer rebates and closing costs to their clients.
 

So real-estate speculators have lessened their activity everywhere with the exception of hurricane-ravaged New-Orleans, where house flipping is still a growing business. Last year’s storms damaged about 100’000 single-family homes, and approximately 34’000 houses are now under restoration. So, as one local real-estate broker says, by making a living reestablishing and reselling New Orleans-area homes, it is possible to make a gain of 80% for three or four months of work on each residence. It is evident that not only real-estate industry gained from this natural calamity, but building industry as well. Home Depot Inc. has opened some stores putting up for sale construction materials and home-builder KB Home is constructing houses in the region.
 

But all this tendencies bear no relations to Austin, where the average home prices raised 8% in May to $174,000, and houses are selling in less than two months. The Austin real-estate market is characterized with boosting sales and buyers who see it as a relative bargain. Buyers now increase their interest to such outlying areas as Round Rock and Hill since home prices within the city go up.
 

After passing in review of the tendencies that are taking place in the American real-estate market I’d like to make some inferences:
 

1) The real-estate market develops cyclically and those cycles and general tendencies differ from state to state, and even from city to city statewide. While one area sees the growth of business activity with soaring of prices and number of deals, in other area we can observe reduction of prices, sales and damping of real-estate broker’s activity.
 

2) The state of the real-estate market depends on different factors, among which are such as policy of local government, mortgage rates, foreclosures, behavior of homeowners and homebuyers, activity of real-estate agents, natural calamities (hurricanes, inundations, etc.) and many others.
 

3) There are some areas which can be characterized by stable situation with steady growth of prices, firm interest of buyers in the realty situated in that areas, and growing activity of real-estate industry members.
All the above-stated brings to the conclusion that investing in the immovable property is quite risky and require a consultation from a good specialist before making up your mind.