Here is a breakdown of the pros and cons
If you own a small business, you will likely face this conundrum: Should I buy or should I lease my commercial property? Before deciding, it is important to figure out if it makes good financial sense for your company—as well as weigh the pros and cons of each. Here is what you need to know about buying (or leasing) commercial properties. What should be the reasons to consider buying a commercial property? There are multiple reasons that you should consider buying a commercial property. Buying could be a good fit for your business if you have complete control of the property, meaning you don’t have to answer to a landlord. It gives you the opportunity to build equity and long-term wealth, and you’ll also likely be able to buy a property with a 10% down payment using a loan from the Small Business Administration (if you run a small business). Buying a commercial property means you have the real estate to fall back on, or you can lease the property to tenants in the event your business fails, you close up, or simply want to sell. Finally, it can also help you benefit from certain tax advantages – although of course, it’s essential to consult with your accountant first. Pros and cons of buying On the plus side, you’ll have the potential to build equity in the property, since it will likely appreciate in value over the long term, making it a good investment vehicle for you. You could also benefit financially from renting your commercial property to a tenant, which would give you an extra income stream to pay for the mortgage and other expenses. Owning the property, meanwhile, means you’ll face fewer restrictions on remodeling, upgrading, and decorating the space. On the other hand, buying a commercial property also comes with some downsides. You’ll be responsible for property maintenance, requiring you to invest your own time and money into the building. You’ll also have to pay taxes on the property, and could face financial pitfalls such as losing money if the building declines in value, you need to sell, or you cannot find a buyer. Reasons to consider leasing a commercial property There are many reasons to consider leasing a commercial property and whether it makes sense for your business – for instance, whether your company is expanding and you’re unsure if you’ll outgrow the property. You should also consider whether market conditions are unstable, and if committing to shorter term leases – for instance, three to five years – makes you more comfortable than overcommitting. It can also make sense to lease if you don’t have the funds to make a down payment, for instance if you’re still in the early stages of building your company. In scenarios where you need a building immediately – for instance, in the next 30-60 days – leasing a property can be a great option, and it should also be favored at times when lease terms are more favorable than purchasing. Pros and cons of leasing One of the pros of leasing is that it offers you more flexibility, meaning you’re not tied to a specific location, a certain square footage, or monthly payment for longer than the duration of the lease. It means you only require minimum property maintenance and allows you to establish your company in a location you might otherwise be able to afford. Leasing can often allow you to share the cost of the building with other companies, if your business is part-time – and your proximity to other businesses could give you the opportunity to build invaluable relationships. Downsides to leasing a commercial property include the fact that you don’t build equity in the property if you’re a renter, rents are likely to increase over time, and you’ll also have to deal with a landlord. Is buying office space a good investment? Whether buying office space is a good investment will depend on what makes financial sense for your business. After all, commercial real estate is a long-term asset and will keep its value over time if it is maintained properly. For starters, if you pay all cash, you immediately own 100% of the property. Your down payment and monthly payments will build equity in the property, if you take out a loan. On the other hand, your equity will be the difference between the remaining loan balance and the property’s fair market value—and will aid in building the overall value of your company—if you sell or refinance the property. The fact that commercial real estate is an appreciating asset could also make buying office space a good investment, since it lets you benefit from capital appreciation, i.e., the increase in the value of the property in the longer term. The inflation rate, local supply and demand conditions, and interest rates, among other factors, impacts the rate of the appreciation. Rental income and potential tax breaks could also help making buying an office space a good investment for you.
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Some "applications are expected to remain depressed".
US mortgage applications dropped for the second consecutive week despite a sharp decline in mortgage rates, the Mortgage Bankers Association said Wednesday. Seasonally adjusted mortgage application volume dipped 1.7% for the week ending July 8, according to MBA’s weekly survey. Unadjusted, applications were down 13% from the previous week. Purchase loan applications posted a seasonally adjusted 4% decrease and 14%, when unadjusted, from the previous week. Joel Kan, MBA’s associate vice president of economic and industry forecasting, said applications for purchase loans continue to be weaker due to the combination of much higher mortgage rates and the worsening economic outlook. Kan also noted that purchase loan size shrank from its record high a few months ago. “After reaching a record $460,000 in March 2022, the average purchase loan size was $415,000 last week, pulled lower by the potential moderation of home-price growth and weaker purchase activity at the upper end of the market,” he said. On the other hand, refinance applications edged up 2% week over week. Consequently, the refi share of mortgage activity increased from 29.6% to 30.8% of total applications. By dollar volume, refinance applications were up 0.3%, according to Fannie Mae. “Refinance applications increased slightly last week, driven by an uptick in conventional and FHA refinances. The overall refinance index remained 5% below the average level reported in June,” Kan said. “With the 30-year fixed rate 265 basis points higher than a year ago, refinance applications are expected to remain depressed.” Home price appreciation to moderate, chief economist says.
The price of single-family homes surged at an annual rate of 19.4% in Q2 2022, marking the second highest level on record, according to Fannie Mae’s latest Home Price Index. By comparison, the index was only at 17.3% at the same time last year. Quarterly, home prices went up 4.3% in Q2 on a seasonally adjusted basis. Although home prices went down from 20.5% in the previous quarter, Doug Duncan, vice president and chief economist at Fannie Mae, noted that it still maintained “a near-historic pace of appreciation” since the index began in 1975. He also said the low inventory levels continue to drive price growth like never before, leading to more affordability concerns for homebuyers. Meanwhile, Freddie Mac reported that 30-year mortgage rates averaged 5.7% by the end of Q2. “At the end of 2021 and extending into 2022, we believe many homebuyers pulled forward their purchase plans to avoid expected increases in mortgage rates, contributing to demand for homes and strong price appreciation,” Duncan said. “Given the sharp rise in mortgage rates since that time, and the resulting negative impact on affordability to potential homebuyers, we expect purchase demand to cool in the quarters ahead, and for home price appreciation to moderate as a result.” Fannie Mae’s index is a national, repeat-transaction home price index measuring the average, quarterly price change for all single-family properties in the US – excluding condos. MBA expert explains ongoing trend in credit supply.
The Mortgage Credit Availability Index (MCAI) inched down 0.3% in June, indicating a tightening in lending standards due to elevated interest rates, the Mortgage Bankers Association said Tuesday. The index dropped for the fourth month in a row to 119.6. Joel Kan, AVP of economic and industry forecasting at the MBA, blames significantly higher mortgage rates for slowing refinance and purchase activity and impacting the overall mortgage credit landscape. Credit availability was mixed by loan type, Kan noted. The conventional index was up 1.2%, while the government index fell 1.7%. Broken down by the component indices of the Conventional MCAI, the Jumbo index climbed by 1.4%, and the Conforming MCAI rose by 0.6%. “The decline in the government index was driven by the reduction in offerings for streamline refinance products from FHA and VA, which is the continuation of an ongoing trend reported in prior months,” Kan said. “Although there was reduced supply of lower credit score, high LTV rate-term refinance programs, the decline was offset by increased offerings for conventional ARM and high balance loans,” he added. “With higher rates and elevated home prices, more prospective buyers are applying for ARMs, but activity remains below historical averages.” Case emerges amid crime spike as loan applications drop.
A New York man has pleaded guilty for his role in a mortgage fraud scheme involving multiple mortgage loans at a multifamily complex, US Justice Department officials said Tuesday. Jacob Deutsch, 57, of Brooklyn, NY, waived his right to be indicted and pleaded guilty before US District Judge Omar A. Williams, officials said. The guilty plea was to a charge stemming from what officials described as a wide-ranging mortgage fraud scheme involving 24 mortgage loans on numerous housing properties in Harford totaling nearly $50 million, officials said. According to court documents and statements in court proceedings, Deutsch and Aron Deutsch work at B H Property Management, LLC, a property management company that manages numerous multifamily housing properties in Hartford, according to an affidavit. From September 2016 through May 2021, Jacob Deutsch, who ran the day-to-day operations BHPM, and Aron Deutsch engaged in a scheme to defraud several financial institutions, government-sponsored enterprises Freddie Mac and Fannie Mae, and the US Department of Housing and Urban Development, by providing them with false information overstating the value of multifamily housing properties managed by BHPM in connection with loans secured by those properties, according to justice officials. As part of the scheme, Jacob Deutsch provided false rent rolls and falsified leases to the victim financial institutions and their appraisers, which either overstated the number of renters by listing fictitious renters or others not actually living there, or falsely inflated the amount of rent paid by occupants, officials described. “Jacob Deutsch deceived inspectors into believing that unoccupied apartments were occupied by staging the apartments with furniture and by requiring BHPM employees to falsely tell inspectors they lived there and to lie to inspectors if asked whether there were vacancies,” according to the statement. “For instance, a rent roll and income and expense summary submitted by Jacob Deutsch to CBRE Capital Markets, Inc. (“CBRE”) in June 2018 falsely represented that 16 Evergreen Avenue was 100% occupied when, in fact, not a single tenant resided there at the time. Later, Jacob Deutsch e-mailed CBRE pictures of money orders and checks purporting to reflect rent payments from fake tenants on the falsified rent rolls for 16 Evergreen Avenue to show proof of payment of rent when, in fact, the money orders and checks had been purchased by Aron Deutsch or BHPM employees at Aron Deutsch’s direction.” Jacob Deutsch also provided the victim financial institutions with false and inflated income statements and financials for the properties, doctored bank statements, doctored or false documents overstating the purchase price of various multifamily housing properties, and doctored checks and invoices showing false or overstated capital improvements made to those properties, the affidavit noted. “The false information provided by Jacob Deutsch induced the victim financial institutions to issue loans that they otherwise would not have issued on the requested terms, or for amounts larger than they would have authorized had they been provided with truthful information,” officials wrote. “In addition, the false information induced Freddie Mac and Fannie Mae to purchase the resulting loans from the victim financial institutions, and induced HUD to issue a mortgage insurance commitment to a victim financial institution.” Jacob Deutsch and Aron Deutsch were arrested on a criminal complaint on May 19, 2021, officials said. On Tuesday, Jacob Deutsch pleaded guilty to one count of conspiracy to commit mail fraud and wire fraud affecting a financial institution, an offense that carries a maximum term of imprisonment of 30 years. He is released on a $50,000 bond pending sentencing, which is not scheduled. Aron Deutsch, 61, of Monsey, New York, pleaded guilty to the same charge on June 1, 2022. He was released on a $100,000 bond pending sentencing, which is scheduled for Nov. 3, justice officials said. The news comes amid a spike in mortgage fraud. According to a CoreLogic report, mortgage fraud risk soared in the fourth quarter of 2021 due to a drop in overall loan application volume and the shift to a purchase market. CoreLogic’s 2021 Mortgage Fraud Report showed a 37.2% year-over-year increase in fraud risk at the end of the second quarter of 2021. The large increase followed a drop seen in 2020 – a decrease driven mainly by the surge in traditionally low-risk refinances during the pandemic. An estimated 0.83% of all mortgage applications contained fraud, about one in 120 applications, an increase over the second quarter of 2020, where the estimate was 0.61%, or about one in 164 applications. Risk in the purchase segment increased 6%, with investment properties driving the highest risk in both purchase and refinance populations, analysts noted. “Refinance opportunities that surged lending volumes during the pandemic may be winding down. The outlook is for fewer low-risk refinances compared to purchases and cash-out refinances, which translates to a higher-risk environment for fraud,” said Ann Regan, executive, product management at CoreLogic. Economists warn that recession is highly likely by the end of next year.
Recent economic activity has been pointing to a growing risk of recession, according to a Bloomberg report, with experts saying that a downturn is highly likely by the end of next year. And while this downturn isn’t likely to hit as hard as recessions of the past, economists predict that it could last a significant amount of time. “The good news is there’s a limit to how severe it’s going to be,” Robert Dent, senior US economist at Nomura Securities, told Bloomberg. “The bad news is it’s going to be prolonged.” According to Dent, the economy could experience a roughly 2% contraction at the beginning of the fourth quarter, lasting through the following year. Lindsey Piega, chief economist for Stifel Nicolaus & Co, came to a similar conclusion, telling Bloomberg that a recession is “all but inevitable” and that the real question lies in what the depth and length of this downturn is going to be. The answer to this is largely in the hands of the Federal Reserve, which has remained committed to driving inflation down by rising interest rates. “The Fed is not going to pause until they see that inflation has convincingly come down,” said Anna Wong, Bloomberg’s chief US economist. “That means that this Fed will be hiking well into economic weakness, likely prolonging the duration of the recession.” Fed chair Jerome Powell has said that the economy remains in “strong shape” to withstand interest rate hikes and avoid a recession, but these comments have done little to halt concerns of what’s to come. Luckily, experts believe that a recession in our current economic landscape won’t be as brutal as the downturns of the early 80s or the financial crisis of 2007-2009. According to noted academic economist Robert Gordon, the Fed’s current mission requires only “about half the amount of disinflation” that was needed in the 1980s. Additionally, consumers, banks, and the housing market are all in a better position today than they were in the period leading up to the 2007-2009 financial crisis. Even amid surging mortgage rates, today’s housing market is still in a better place than 2006-2007 when it was overflowing with supply. Doug Duncan, chief economist at Fannie Mae, told Bloomberg that housing inventory is currently about “two million housing units short of what our demographic profile would suggest at this point.” “That puts a floor to some degree under how big a recession could be,” he said, pointing to the likelihood of a sharp depreciation in home-price hikes, “but not an outright decline.” Rising prices and mortgage rates make homeownership unaffordable, report finds.
Median-priced single-family homes and condos are now less affordable than at any time this century in most of the US, according to a new report by real estate data provider, ATTOM. The second-quarter 2022 US Home Affordability Report found that the median price of a single-family home hit a new high of $349,000 in Q2, meaning these property types were less affordable in the second quarter compared to historical averages in 97% of the nation’s counties. It is the highest figure since 2007, shortly before the housing market crashed. ATTOM’s affordability index analyzed median home prices in 575 counties with a combined population of just over 254 million. Affordability was calculated by assuming an average wage earner could make a 20% down payment and that they would not be spending more than 28% of their income on mortgage payments, property taxes and insurance. The report said that nearly one-third of average wages were required for major homeownership expenses during the second quarter, adding that the portion of wages dedicated to homeownership had risen at the fastest pace this century to 31.5%. The figure was up by a staggering 26% compared to the first quarter of 2022 and by 23.9% year over year. Data also showed that affordability had slumped to a 15-year low, while 30-year mortgage rates jumped above 5% during the same period. Rick Sharga, executive vice president of market intelligence at the company, noted that homes had previously remained relatively affordable “due to historically low mortgage rates and rising wages”. However, with interest rates almost doubling, homebuyers were now faced with monthly mortgage payments that were between 40% and 50% higher than they were a year ago, which many prospective buyers “simply can’t afford”. He added that “extraordinarily” low levels of homes for sale combined with strong demand had caused home prices to soar over the last few years. The report revealed that borrowers now needed more than 28% of the average $67,587 wage in the US to meet the ownership costs on a median-priced, single-family home or condo – “a ceiling considered affordable by common lending standards”, the report said. The report noted that despite the housing market having “roared ahead” for the 11th consecutive year, affording a home “has gotten significantly tougher in recent months”. Home prices have continued to soar along with high demand, but higher interest rates, growing inflation, soaring fuel costs and a declining stock market “all threaten the housing market”, adding that it “could already be showing signs of strain”, citing May as the fifth consecutive month of lower existing home sales. Sharga added: “Worsening affordability appears to be having an impact on demand, which could lead to prices plateauing or even correcting modestly in some markets. “Many potential buyers may elect to continue renting until market conditions improve. Others might adjust their sights and look for smaller properties, or homes that are further away from major metro areas. And it’s possible that worsening affordability could accelerate the migratory trends that the COVID-19 pandemic started, as residents in high cost, high tax states who can now work from home look for less expensive places to live.” ATTOM’s findings mirror the conclusions of the recently released Real House Price Index by First American Financial Corporation, which show that housing affordability hit a record low in April, falling to the lowest level in more than a decade. According to Mark Fleming, the chief economist at First American, the rapid annual decline in affordability was driven by a 21.2% annual increase in nominal house prices and a 1.9 percentage point increase in the average 30-year, fixed mortgage rate compared with one year ago. Fleming suggested two options for homeowners to offset the decline in affordability – to increase income, or for borrowers to switch to an adjustable-rate mortgage, which would have a lower rate than the fixed-rate benchmark. He added that the share of adjustable-rate mortgages relative to fixed-rate mortgages had grown in step with the increases in mortgage rates over recent months. To understand how we got here, and where we're going, it's important to look back.
Is a housing crash in the US imminent? Mortgage experts say a slowdown than a crash is in the cards, which is partly due to the unsustainable home price growth of 2020 and 2021. To find out why the US’s housing market is cooling off, and what experts are saying about it, read on. Is the US housing market going to crash? To see why a potential housing crash is a part of the current conversation, it is important to look back to November 2021, when home prices rose by a jaw-dropping 18% on a year-over-year basis. At the beginning of the year, the market saw near-record-low levels of inventory on the market. Demand for housing surged through the roof thanks to rock-bottom interest rates. In other words, rising demand and declining supply helped drive housing prices into double digits for a number of months. Entering 2022, established homeowners took equity from homes for a variety of uses, further eroding affordability for first-time homebuyers. The impact of the market behavior at the end of 2021 and beginning of 2022 caused higher than normal upward value trends, which experts agreed led to a market slowdown rather than a market crash. “We’ve had, as you know, a very large increase in home prices—18% in one year,” said Frank Nothaft, the chief economist at CoreLogic, who was a voice of calm when the media got the jitters at the beginning of 2022. “It’s the largest 12-month increase in home prices in our national index that we have measured in the CoreLogic Home Price Index.” Nothaft added at the time: “We’re expressing a slowdown in home price growth.” And so far, he appears to be right. Why is America’s housing market cooling off? With the housing market in the United States cooling off considerably, homebuyers could be forgiven for fearing the worst—an impending market bubble or crash. What is more likely, however, is that the drop in home sales is due to homebuyers’ reluctance to engage with soaring housing prices. Another factor that is likely impacting demand for homes is that the home price growth of 2020 and 2021 is simply not sustainable. Because home prices are stabilizing to more normal levels historically, properties are likely to sit on the market a little longer than they have over the past two years. Pending and new home sales have been falling recently as the market adjusts to higher prices and inflation, as well as mortgage rates that continue to increase. In April, for instance, pending home sales dropped by 3.9%, according to numbers released by the National Association of Realtors (NAR). Sales of new single-family homes, meanwhile—which account for 9.5% of all home sales—fell to a two-year low in May. That 16.6% drop represents the fourth-straight monthly decline. Median home prices rose by 19.6% from this time last year to $450,600. And compared to this time last year, sales of new homes are down by nearly 27%. What are experts saying about the possibility of a housing crash? Economists agree that the US’s housing market is experience a slowdown rather than an impending crash. Jacob Channel, the senior economic analyst at Lending Tree, said it is important to distinguish between a cool-off and a crash. In other words: This is not a financial collapse like the 2008 meltdown. “Even if the market does cool and slow down a little bit, that doesn’t mean that we’re going to end up in the same situation that we were in 2008, when you had people defaulting on their loans left and right and the market was absolutely flooded with houses that were just dropping and dropping in value because nobody wanted to buy,” Channel told Mortgage Professional America earlier this month. Channel noted Lending Tree’s data reflected the affect rising rates were having on prospective homebuyers. “The average rate offered to somebody in Lending Tree has increased by more than 2%,” he explained. “It’s one thing to buy a $354,000 house when mortgage rates are at 2.5%, for example, whereas today they’re over 5%.” Lawrence Yun, an economist with the NAR, said figures for pending sales “better reflect the timelier impact from higher mortgage rates than do closings.” Yun also predicted home sales “to be off by 9% this year” and home appreciation to slow to 5% before year’s end, which would represent a drop from recent gains of nearly 20% annually. May marks largest slowdown in home price growth since 2006, says Black Knight.
The housing market has shown early signs of cooling in May, according to Black Knight’s latest Mortgage Monitor report, with home price appreciation falling for a second month in a row. The national annual rate for appreciation went down to 19.3% from a revised 20.4% in April, indicating the largest single-month deceleration since 2006. But even as price growth stalled in 97 of the 100 largest markets in the country, prices still rose 1.5% from the previous month – almost double the historical average for the month of May. “While any talk of home values and 2006 might set off alarm bells for some, the truth is that price gains would need to see deceleration at this rate for more than 12 months just to get us back to a ‘normal’ 3-5% annual growth rate,” said Ben Graboske, president of Black Knight Data & Analytics. Home prices have gone up 10.8% since the start of the year, and 44% since the COVID-19 pandemic began. In examining the price growth slowdown in May, the Black Knight report also determined trends in housing inventory and affordability, revealing that the markets experiencing the strongest cooling are those with “comparatively poor affordability levels and low inventory deficits.” In terms of inventory, Graboske explained that there was a slight increase of 107,000 in active listings for May. However, inventory remained 60% below the number of active listings normally seen during this particular time of the year. “All major markets are still facing inventory deficits, but some have seen their shortages shrink much faster than others,” said Graboske. Among these are some of the hottest housing markets in recent years: San Francisco, San Jose and Seattle. Unsurprisingly, these are also among the markets seeing the strongest levels of cooling so far this year, with annual home price growth rates in each down more than three percentage points in recent months.” Affordability, meanwhile, slumped down to a point that hasn’t been seen since the 1980s, when mortgage rates hit double digits. Payment-to-income ratio for May was at 36.2%, owing to both rising interest rates and historically high home values caused by low inventory levels. Activities remain hampered by high mortgage rates, says MBA.
Mortgage applications were down 5.4% from the previous week, according to data from the Mortgage Bankers Association’s (MBA) weekly mortgage applications for the week ending July 1, which was adjusted to account for early closings the Friday before Independence Day. Measuring mortgage loan application volume, the MBA’s market composite index decreased 5.4% on a seasonally adjusted basis compared to last week. Unadjusted, this was a 6% increase from a week ago. Refinancing and prepayment activity was down 8% from the previous week and 78% lower than what was reported in the same week last year, while purchases for single-family homes dropped 4% from a week ago. Joel Kan, MBA’s associate vice president of economic and industry forecasting, explained that these drops were due to mortgage rates remaining higher than they were a year ago, even with rate hikes stalling over the last two weeks. “Purchase activity is hamstrung by ongoing affordability challenges and low inventory, and homeowners still have reduced incentive to apply for a refinance,” said Kan. The refinance share of activity accounted for 29.6% of total applications, sliding down from the 30.3% reported last week. Similarly, the adjustable-rate mortgage (ARM) share of activity decreased to 9.5% of total applications. The week’s FHA share of total applications stayed at 12%, just as the USDA share remained at 0.6%. The VA share, meanwhile, dropped to 11.1% from 11.2% the week prior. Finally, the weekly average contract rates for different types of loans saw the following changes, with effective rates decreasing across the board:
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