Becoming a Homeowner

PODCAST: This Hot Housing Market with Daniel Bortz

Home sales and prices have been on a tear and are forecast to continue to rise in 2021. Whether you're hoping to sell, buy or refi, contributing writer Daniel Bortz has insights for you. Also: What to make of SPACs?

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Transcript

David Muhlbaum: It’s time we checked in on that crazy housing market going on out there. What does the run-up in home values and prices mean for people looking to buy or sell, and also people with no intention of moving? Contributing writer Daniel Bortz gives us a fix on real estate today. Speaking of rising asset values, what’s up with SPACs? That’s all coming up on this episode of Your Money’s Worth, stick around.

David Muhlbaum: Welcome to Your Money’s Worth, I’m senior online editor David Muhlbaum joined by my cohost senior editor Sandy Block. How are you doing today, Sandy?

Sandy Block: I’m doing great.

David Muhlbaum: Well, good. And how are your brackets faring?

Sandy Block: All messed up, but I’m still having fun watching the games. And yours? Oh no, no wait, sports aren’t your thing. That was my old cohost, Ryan.

David Muhlbaum: Yeah, you’re right about me and sports. I was just being polite and trying to set up our closer today where we are going to talk about sports gambling and taxes. But first I want to talk about another sort of gambling, stock market gambling. Okay, maybe that’s a bit harsh, stock market speculation? Specifically these things called SPACs, special purpose acquisition companies. It seems like every day a new celebrity puts their name on one like, Jay Z, Shaquille O’Neal, Colin Kaepernick .... Sammy Hagar. Because next week in our main segment, we’re going to have a guest on to talk about bitcoin. And I want the practice of discussing something I don’t totally understand, and tell a cautionary tale.

Sandy Block: Okay. Well, we talked about SPACs actually at this week’s editors’ meeting and yes, risky is a word that came up a lot and there was a lot of head-shaking too, but we should start with what the darn things are. Most people are familiar with an initial public offering or IPO. Special purpose acquisition company or SPAC, is another way of bringing a company public. But while they have some similarities, they also have key differences from IPOs.

David Muhlbaum: Okay. I just love these acronyms. We’ve got SPACs, not PACS, which are for politics and not Spanx, which are for bellies. They’re not an acronym either, but okay.

Sandy Block: Yeah, don’t go there. Right, SPACs. So a SPAC is a publicly traded company that lists on a public stock exchange, but unlike an IPO, which is usually for a company that builds, makes or sell something and wants to cash out and get bigger, a SPAC’s purpose is to buy something else. It’s just a pool of money with managers, a board, and of course, shareholders, including some small retail shareholders.

David Muhlbaum: Who are getting a chance to play in the private equity world. They’re going to be like the next Bill Ackman, except just one little chunk of him.

Sandy Block: Right. That’s their hope, big paydays, the kind formerly reserved for early investors in public offerings. So the A is for acquisition; they’ve been buying lots of tech startups and of course electric vehicle companies because everybody wants to own the next Tesla. Plenty of startups like the idea of SPACs competing for them too. It raises valuations and is a whole lot easier and less public than going through the IPO process.

David Muhlbaum: Oh yeah. And sports gambling too. One of the biggies that went through the SPAC process was DraftKings. That was a year ago or so and they now trade on the Nasdaq, DKNG.

Sandy Block: Exactly. You can gamble with DraftKings or on DraftKings. And also yes, that one was a year ago and yes, we’re aware that SPACs are not anything all that new in the market, but they have been on an absolute tear lately. There’s substantially more money being raised this way than through traditional initial public offerings. And that’s one of those phenomena that is raising the “uh, oh, irrational exuberance” warning flags in the markets.

David Muhlbaum: So even if you as an individual investor who shakes their head and goes, “Thanks, but no thanks” about investing your own money in a SPAC, there’s still some exposure in a way.

Sandy Block: Markets go up, markets go down and sure, you can mitigate risk by being diversified in big index funds, but to an extent, we’re all in the same boat. I’m not saying SPACs are what’s going to turn around this bull market, but you can’t rule that out either. The SEC is making some noises about that.

David Muhlbaum: SEC, another acronym. This one’s familiar, for Securities and Exchange Commission, the feds, the government, the regulators. Okay. I got a headline, “SEC Spanks SPACs.” 

Sandy Block: Okay. That hasn’t happened yet, but they have warned people about not being too wowed by the celebrity veneer being applied to these things. I’ll quote, “It is never a good time to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.” Basically, just because Shaq thinks it’s a good investment, doesn’t mean it’s for you. 

David Muhlbaum: Or Sammy Hagar.

Sandy Block: Or Sammy Hagar. I’m dating myself here.

David Muhlbaum: Yeah. I was wondering what the Red Rocker had been up to.

Sandy Block: Well now you know, he’s raising money. Sammy’s is a businessman. Caveat emptor.

David Muhlbaum: When we return, we’ll look at the ups and bigger ups of today’s real estate market. Want to buy a house? Better be ready to move fast and write a nice note.

Welcome back to Your Money’s Worth. Joining us for our main segment today is Daniel Bortz, a contributing writer for Kiplinger’s Personal Finance. One of his latest pieces for us is a wide-ranging look at the real estate market, which is a particularly good topic for him because he’s also, get this, a licensed real estate agent. Welcome Daniel.

Daniel Bortz: Hey, thanks for having me, David.

David Muhlbaum: Daniel, you had your work cut out for you because you have to cover not only the significant demographic disruption that the COVID-19 pandemic had on real estate last year, but the ongoing flurry of activity. In 2020 sales of previously owned U.S. -homes hit their highest level in 14 years, and a lot of economists say this year is going to top that, and prices of course are continuing to rise.

David Muhlbaum: Since we’d like to be forward-looking here, we’re probably going to spend more time asking you to speculate about what’s to come. But to start, can you give us a quick recap on 2020? We had a couple of months of freak out and lock down and then, well, people figured out pretty quickly how to trade houses in the middle of a pandemic. What were they looking for?

Daniel Bortz: Sure. So, they were looking for two main things and they’ve been pretty well reported, so I won’t belabor them too much, but they’re quite real. At the top of the market, you have wealthy urbanites who didn’t have a second house in a more rural location. So they went out and bought one. And this happened in your traditional summer destinations, but also places like Bozeman, Montana and southern Vermont. So if you’re buying a home, that’s in a more rural location without too many people around, those were getting really snatched up by people that were living in cities.

Sandy Block: Yeah, I see that. As David and listeners know, I spend part of my time in West Virginia and I’ve certainly seen that happening. There were people from the DC area snapping up properties in the Eastern panhandle. So, the rich take care of themselves and I guess developers or anyone else with building lots, like the people on my street, are making out well too. But what about people in the less exalted areas of the market?

Daniel Bortz: Well, that’s the second thing that we’re seeing. So the motivations were similar, and so was the behavior. People were moving from densely populated locations. You’ve got the big cities and tightly packed suburbs and they were moving to the exurbs where they could have a bigger, more affordable house and be farther away from other people.

So the dollar values there were lower and so sometimes were the distances that they moved. The main difference was the really rich could always move, and what let these people move now, in these circumstances, was that they have the freedom to telecommute.

You have big companies like Twitter and REI and Square, they’ve announced plans to let their employees work remotely indefinitely. And there’s one recent survey that found a third of workers that they would quit their jobs if they couldn’t continue working remotely after the pandemic. Now, I don’t really think a lot of people would follow through on that, but it does show that a lot of Americans, they do really want to continue teleworking after the pandemic.

Sandy Block: Right. And I read recently that Ford is telling people they can work from home indefinitely if they have, obviously they’re not building cars, because I don’t think you can do that from home. So this is what’s driving the market a year in, even as maybe just maybe the end of the pandemic is in sight.

Daniel Bortz: That’s a great question. So here’s the general forecast for what we’re looking at for the rest of this year in terms of prices and inventory and mortgage rates. So for the economists that I interviewed for the article, the economists at redfin and zillow and realtor.com, they’re all forecasting modest home price gains this year, and that’s largely because mortgage rates are still historically low. They’re not as low as they were at the beginning of this year, but they’re expected to stay low.

The last time I checked in with the Mortgage Bankers Association, they told me that they were predicting rates will rise to just 3.4% for a 30-year fixed-rate mortgage by the end of the year. So relatively speaking rates are still going to be pretty great. Also, certain properties at the same time are not selling as well as other properties. You’ve got these condos and townhomes that are located in big cities and downtown areas.

Those are a little bit harder for sellers to move and mainly because people right now, with what’s going on with the pandemic, they want access to outdoor space. So if you are trying to sell a small townhouse or condo in, say, the middle of Washington D.C., And you’ve got no outdoor space, you have no backyard, you’re going to have a harder time selling that.

David Muhlbaum: So we have a seller’s market for the foreseeable future. What’s a buyer to do?

Daniel Bortz: The most important thing that they can do is to make what we call a clean offer. With so much competition among home-buyers right now, you want to be submitting an offer with as few contingencies as possible. That’s what’s going to really strengthen your bid.

David Muhlbaum: Cash is king!

Daniel Bortz: Cash is always king. Now it’s interesting, there’s a new, I think it was just released actually last week or maybe even this week. Redfin’s been tracking how many of their winning offers have gone up against other offers, and this time they found that six out of 10 offers that were written by their agents actually faced bidding wars last month in February. And that’s the 10th straight month where more than half of Redfin offers encountered competition.

Daniel Bortz: So in situations where you’re going up against a ton of other bids, you might want to consider waiving some contingencies. For example, you might forgo your right to home inspection. Now that is a risk that you take, especially when you’re buying an older home. So one strategy that we have, if you know you’re going up against other offers, is to perform what’s called a pre-offer inspection before you submit your offer.

So that’s where you’re going to come in, where you look at the house during a showing or an open house, decide you like it, and before you write an offer and give it to the seller, you’re going to hire your own inspector to sort of kick the tires on the house, take a look, see what’s working, see what’s not and decide for yourself if the house is in good enough condition that you’re willing to buy the property as is and then you can waive that home inspection contingency.

David Muhlbaum: I love the kick the tires analogy because it reminds me of checking out a car before you buy it. Yeah, but this has all got to happen pretty fast, right? I’m thinking anecdotally about literally the house next door to me here. The sign went up, coming soon, they had a few previews before the weekend open house and there was a contract on it by the end of the weekend, like boom, four, five days. So if you want to do one of these pre-offer inspections, you probably better have that person sort-of on contract with you, ready to go.

Daniel Bortz: Yeah, you need to have all your ducks in a row in that sense. Your agent is where you can really lean on for this. Your agent can connect you with a really quick, responsive home inspector. And since homes are selling so quickly, you want an agent who’s really tapped into your market. For example, two friends of mine, they recently purchased a house and they did a pre-offer inspection, but they were able to do that, like I think within the first hour that the property went on the market, because the seller knew when it was being listed. So they were the first people to get in there and they did their inspection right away, and they submitted an offer within hours. And even though they went up against, I think more than 10 other bids, having that home inspection contingency waive was what really gave them the edge. And so they won that house.

Sandy Block: Yeah. Dan, not to promote your license too much, but it sounds like in this kind of market, having a good real estate agent is... they earn their pay because you do need kind of an inside track on some of these deals.

Daniel Bortz: Yep. Absolutely. And something buyers should consider if they’re thinking about not working with an agent, they should remember that the buyer’s agents commission is paid for out of the seller’s proceeds when they actually go to closing and they sell their house. The buyer doesn’t actually, nothing comes out of their pocket in addition to what they’re paying for the house to pay their agents. So essentially, a buyer’s agent for a home buyer is free.

Sandy Block: So Daniel, what are some of the nonfinancial things that you can do? I’ve heard stories about people actually writing letters to sellers to try and get in it. Does that work?

Daniel Bortz: It does. So even with homes selling above list price right now, you really want to be tugging on the sellers’ heartstrings. And you could do that by writing a personal letter to the seller. This is a really old-school tactic that performs well in today’s market. Actually one of the sellers I interviewed for the story was a couple selling their home in Carmel, Indiana. It was about 30 minutes outside Indianapolis. They got five offers when they sold their house last December, and the winning offer was from a buyer who wrote them this really heartfelt letter that outlined their struggles of finding a home in the area. And it’s what really resonated with the sellers.

What we recommend is you can have your agent help you write a letter and the letter should be pretty short, no longer than a page, but just really speaking to what’s going to resonate with the seller and having that personal touch with your offer is what can potentially give you an edge over other buyers.

David Muhlbaum: Yeah. It might not hurt to do a little Google stalking on the owners too. So you can align your story with theirs. English majors, this is your chance! So, what guidance do you have for sellers, I mean, besides judging these essay contests?

Daniel Bortz: If you’re planning to sell your house, you want to do it in the first half of the year. Mainly because that’s going to help you beat an expected increase in supply. We’re going to see more homes coming on the market this year, later this year, as we go through the pandemic, as we continue to see vaccines being rolled out. You’re going to have more homes being listed and buyers are going to have a larger selection of houses to choose from. So you want to list your home kind of as soon as possible when supply is lower.

And another thing that you can do to really make your house, your listing shine and get top dollar for it is you’ve got to hire a professional real estate photographer to take photos for your listing. But what’s interesting is in addition to doing those photos, virtual tours, it’s also called 3D tours where buyers can basically walk through your home online. That’s really standard operating procedure right now.

Also, staging is crucial. If there’s no furniture for buyers to focus on when they walk inside your house, they’re going to see every little flaw. They’re going to see the scratches on the floor, they’re going to see the paint smudge on the wall. They’re small flaws, but they can really stick in a buyer’s minds later on.

Staging also, it costs money, but it usually offers pretty good return on investment. So professional staging costs on average $500 to $600 per room per month, but it really pays off. Staged homes, they sell faster and for more money than unstaged homes, that’s according to research by the National Association of Realtors. And some listing agents will even include staging services as part of their listing service.

David Muhlbaum: Yeah, that’s interesting because I think in a seller’s market like this, there can be a temptation for sellers to get complacent, to just be like, I’ll get lots of money, and not even sweep the garage out. But there’s a danger, I think of frankly, insulting your buyers if you don’t make an effort.

Daniel Bortz: I think that’s right. I think buyers, even though they know that sellers are in the driver’s seat right now, they still want to be working with a home seller that cares about their house, that kept their home in good condition and that wants to sell to a buyer who’s going to come in and treat their home as well as they did.

Sandy Block: So Dan, you talked earlier about mortgage rates and we saw this yesterday with Freddie Mac’s report, creeping higher. Let’s talk about that for a minute. Are we going to see them going up enough to sort of dampen the roaring housing market that we’re seeing?

Daniel Bortz: So if things continue on the path that they are right now, they’re going to increase this year, certainly, but they’re not going to price home buyers out of the market. Essentially, you’d have to see significant interest rate hikes for that to happen. We’re talking mortgage rates for 30 or fixed mortgages going well over 4%, which is not likely to happen by the end of this year even.

Sandy Block: Well, as an old person, 4% to me still seems really cheap. It was 5% for years and I’m old enough to remember when it was over 10. So yeah. I think you make a good point, it’s still a pretty good deal.

Daniel Bortz: Yeah. I mean, historically it’s interesting, like you said, mortgage rates 20 years ago were sky high compared to today’s rates. But for instance, my wife and I, we just closed on a beach house that we bought, not to brag, but we were able to get a 30 year fixed rate mortgage at 2.625%, which is just crazy.

Sandy Block: That is crazy. Awesome, congrats.

David Muhlbaum: We’ll be over. Now, one thing I wanted to touch on also is: All of this activity is really one thing to pay attention to if you have the intention of buying or selling a house, but it could also have an effect if you’re sitting in one without intending to move, and you’re seeing your home equity going up and up and up. What are people doing to tap into that?

Daniel Bortz: So like you said, you have homeowners who are staying put. They’re sitting on a lot of home equity right now and what a lot of people are doing is they’re taking that money and they might be getting a cash-out refinance and then using that cash to make renovations to their house. And some of them are doing this just to kind of improve their own enjoyment of their property. They might be adding on screened-in porch so that they can spend time outside in the summer without having bugs get at them while they’re eating dinner. But you also have people that are still always sort of laser-focused on their return on investment and people who are making improvements that are going to actually have their home sell for a significantly higher amount of money in a few years.

Sandy Block: And actually, that’s a good promo because we are working on a story for an upcoming issue on the types of home improvements that add the most to the value of your home. And some of them are kind of surprising. Like I think number one was like a new garage door or something like that. But, the lowest cost with the biggest value. But I know that’s going on, guys, because as we are recording this, if you hear any ambient noise, it’s a house two doors down from me is just putting on a great big addition and replacing their siding with brick or something like that. It looks very expensive and it’s been going on and it’s really loud.

David Muhlbaum: Oh yeah. Just before we started out, I heard beep, beep, beep. I thought, Oh my God, here we go. I looked out the window and sure enough, someone’s rolling a dumpster into the driveway. I’m like, okay, going to have to find out what’s going on down there. There is a lot of rebuilding happening and yeah, I presume that’s a lot of that’s happening with HELOC money, home equity line of credit.

Daniel Bortz: Yeah. Sandy, I hope the construction crew doesn’t get started too early in the morning.

Sandy Block: It’s early enough.

David Muhlbaum: There are a lot of local laws about that sort of thing.

Sandy Block: Yeah, well, I don’t see any cops on the street. I just see a lot of saws and construction trucks.

David Muhlbaum: Yeah, well, it’s them versus the leaf blowers. All right, Dan. So what could stop this juggernaut? We think mortgage rates are going to stay okay, but anytime the real estate market is doing gangbusters, a lot of us think back to the mid 2000s and we get a little edgy. This time is different?

Daniel Bortz: So, unlike during the last recession when we had the housing crisis, today’s buyers are extremely well qualified for mortgages. They are vetted top to bottom, they have to provide a ton of paperwork just to get pre-approval. Buyers can’t really make offers on homes until they have a pre-approval letter from a mortgage lender in their hands.

David Muhlbaum: So everyone’s getting sniffed over so well that we’re not really headed for the credit quality crisis that we had back then?

Daniel Bortz: No, definitely not.

Sandy Block: But still to David’s question, what would slow things down? If it’s not a credit quality issue, what do you think could, not necessarily put on the brakes, but make this not so crazy?

Daniel Bortz: I think as we see rates continue to tick up, we’re going to have some buyers who might put themselves on the sidelines again, especially younger home buyers. There is that frenzy right now that they want to lock in a rate around the magic 3% number. And in fact, if the mortgage rate for 30 year mortgages goes significantly higher than that, I think you might see some buyers pull out of the market.

David Muhlbaum: Well, there’s nothing wrong with a nice calm ending to a run-up. It sure beats the alternative. Thanks very much for joining us today, Dan, we appreciate your insights into this market and I hope you enjoy the new house.

Daniel Bortz: Thank you.

David Muhlbaum: We started out today talking about investment options that are speculative, and we’re going to close by talking about gambling straight up, being in the middle of March Madness and all. Now, I must confess that while I don’t pay much attention to spectator sports, I pay even less to gambling. I just missed those genes or something. But what I have noticed is that plenty of people who don’t necessarily know much about NCAA basketball are perfectly happy to fill out a bracket and throw $10 or whatever into the pool.

Sandy Block: Oh yeah, for sure. I mean 11 months a year, I don’t do any sports gambling and my mom used to say about basketball that you could get it all by watching the last two minutes. But come March, I am all in. And this year I really miss the whole thing where someone comes around and picks up my sheet and my money and then we have whole weeks of gloating or moaning in the office kitchen about how our brackets are doing and how there were these big upsets. And since I always put West Virginia in the final four, which hasn’t happened in a long time, I never have to worry about winning or paying taxes on my winnings. It’s just a social thing.

David Muhlbaum: Right, social. I get it, even if I don’t do it. You mentioned taxes though, and that’s the personal finance angle here. In theory at least, if you won your pool, you don’t owe taxes on that.

Sandy Block: You’re right. In theory, gambling winnings are taxable income.

David Muhlbaum: But in practice?

Sandy Block: Not so much. Now, I’m not here to say you shouldn’t report it if you won big in your bracket pool, and God knows we’re not in the business of telling people to cheat on their taxes. But as far as I can tell, there aren’t a lot of people putting their bracket winnings on their 1040s. And I haven’t heard anything about the IRS pursuing people for under-reporting their brackets. The agents might be too busy worrying about their own brackets.

David Muhlbaum: Well, okay. There’s a national mania for you I guess. So fine, a little fun money with friends, whatever, but the legal sports gambling industry is very much on the rise these days. I hear radio ads and such all the time and they too, they’re looking to cash in on basketball betting. People who are experienced sports betters, they presumably know the drill when it comes to gambling, winning, losing, and the taxes on that. But I’m just wondering about people whose office pool got canceled this year, maybe because they’re literally not in an office anymore and who are neophytes to online gaming, if they’re going to be in for a surprise if they play — and win — and then next January get a form from whatever site they used, which is basically the gaming site telling them and the IRS exactly how much they won.

Sandy Block: Well, yeah. You can do all sorts of March Madness stuff online at the gaming sites. And I’ve seen those commercials too; they’re ubiquitous. You can try to do the traditional brackets and the payouts, they could be huge. Or you can get in during the tournament, busted brackets, round by round, all sorts of stuff. But here’s the deal. If you win more than $600, generally you will get a W-2G form, which is what you mentioned earlier, David, maybe now, maybe later. And yes, you’d be an idiot as well as a cheat if you don’t report that income and pay taxes on it because the IRS gets it too.

Sandy Block: But also if you win really big, generally, if you win more than $5,000 on a wager and the payout is at least 300 times the amount of your bet, the IRS requires the payer to withhold 24% of your winnings for income taxes, just like a paycheck.

David Muhlbaum: And the actual rate will be whatever your income turns out to be once you’ve considered all the other lah-di-dah and income.

Sandy Block: You could owe more than that.

David Muhlbaum: More or less. Yeah, and maybe the state too?

Sandy Block: Well, that depends on the state.

David Muhlbaum: I thought you didn’t gamble on sports, or at least you didn’t win at it.

Sandy Block: I don’t, but I know taxes!

David Muhlbaum: Okay, fair enough.

And that will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. If you’ve already subscribed, thanks. Please go back and add a rating or review if you haven’t already, it matters.

To see the links we’ve mentioned in our show, along with the other great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes, transcripts and links are all in there by date, and if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at podcast@kiplinger.com. Thanks for listening.

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