February 2006      

In this issue of Home Base:

1. Forces Combining to Reclaim Consumer Real Estate Choice

2. Remodeling: The Next Big Thing

3. How Would You Like to Save $600 a Year?

4. President Offers Support for Energy Independence

5. AHGA Calls for End of New Homes Tax

6. Home Values Softening

7. States Going After Foreclosure Scamsters

8. Homeowner Tips and Tools

 

Remodeling: The Next Big Thing

The red hot real estate market has been the object of most peoples attention in recent years, but as home resales start to cool off remodeling will likely become the next real estate big thing.

Remodeling has continued to grow throughout the real estate boom. Home improvement spending by homeowners grew by 4.5 percent last year, with owner-occupants investing $149.5 billion in their homes, according to Harvard's Joint Center for Housing Studies. The Center predicts a 4% growth in 2006, but AHGA believes a number of factors may push that figure considerably higher, perhaps to 8% this year:

● There’s a lot of home equity out there. Thanks to home appreciation in recent years many move up buyers are sitting on cash they took out when they sold their last house.
● With mortgage rates inching up, remodeling is becoming more attractive than moving up. If you were lucky enough to buy or refinance your home in the last few years you probably have the best mortgage rate you’re likely to see for a long time. Why move and give up that sweet mortgage rate if you have cash from your last home or can affordably finance the much smaller cost of a remodeling job with a home equity loan?
● Members of the huge Baby Boom generation have been spending twice as much on remodeling as the World War II generation that preceded them, according to the Harvard study. With medical advances enabling more seniors to live in their homes longer, a growing focus of remodeling will be on senior mobility issues.
● For more homeowners, “moving up” is more a matter of livability than square footage. Baby boomers and older Gen Xers are becoming empty nesters, many more interested in a top of the line kitchen or master bath upgrade than they are in a bigger home with more bedrooms.
● Federal tax incentives for home remodeling projects to enhance energy efficiency kicked in on January 1 of this year, and will be in effect until the end of 2007. With the costs of home heating and cooling skyrocketing, AHGA predicts that many homeowners will want to take advantage of those tax incentives, and many of those remodeling projects will no doubt incorporate quality of life improvements.

All in all, the outlook is bright for home remodeling, but homeowners need to approach the home remodeling process carefully and thoughtfully. Consumer complaints about remodeling contractors are the perennial most frequent complaint received by the American Homeowners Foundation, and are always in the Better Business Bureau’s top 3 list- often second or first. The Foundation has free home tips and the National Association of Home Builders (NAHB) has just published a free guide called "How to Find a Professional Remodeler." While there are no guarantees, a remodeler who belongs to NAHB’s Remodelers Council, the National Association of the Remodeling Industry, or any of the other remodeling sector trade associations, is more likely to have benefited from continuing education and have a commitment to his trade, than someone who does not belong to an industry trade group.

The single most important thing a homeowner should do in any remodeling project is to insist on a comprehensive written contract describing all the terms, the work to be done, payment schedules, dispute resolution methodology, etc. A one page bid sheet is not comprehensive enough, and you should never base a remodeling agreement on a handshake. A comprehensive written contract will not only offer protection against dishonest contractors, it will also help prevent the miscommunication that leads to many disputes between honest parties. There are several sample remodeling contracts available, including AHF’s comprehensive plain English Home Remodeling contract.

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How Would You Like to Save $600 a Year?

We are on the cusp of a national price war in TV services competition that can save consumers billions of dollars. If legislators, federal regulators, and municipal officials will modernize the outdated TV franchise process, consumers will save as much as $600 annually as new competitors to cable TV company monopolies drive down the price of TV services.

Past Federal Communications Commission (FCC) studies revealed that the price of TV services dropped an average of 15% when new competitors entered the market. More recent data however, suggests that consumer savings may be far greater. A 2006 Bank of America study found that in three different markets there was an immediate average annual TV services subscription rate price cut of $242.23, or 36%, when a new competitor was allowed to compete with the local cable TV monopoly. In one Texas market the incumbent cable provider dropped their premium service package rates by 50% when a competitor announced plans to enter their market late last year, a price cut of $50 a month or $600 a year. “This is a substantial share of a typical homeowner’s remaining disposable annual income after they pay their mortgage and other necessary living costs.” observed AHGA President Bruce Hahn in the Alliance’s February 13 FCC submission. “There are few if any other areas where a federal agency could save consumers this much money by simply streamlining a few rules.”

In its FCC comments, AHGA noted that encouraging more TV services competition will also benefit homeowners and other consumers in other ways as well. TV services are only one of several types of broadband services. Any regulatory initiative that fosters deployment of more broadband alternatives in TV services also encourages more competition in other areas of broadband as well.

All of these services are saving overburdened, dual income homeowners a tremendous amount of time, and reducing traffic and pollution from trips to libraries, government offices, malls, and video rental stores. As more powerful broadband alternatives proliferate the number and technological sophistication of home-based businesses will grow even more dramatically.

Last year, 82.5 million workers world-wide worked at home at least one day a month, more than double the figure from 2000, according to Gartner Inc., a technology research firm. Teleworking and home-based businesses both contribute to the quality of homeowner’s lives and reduce pollution.

Wider use of integrated home based monitoring and intervention systems for patients with chronic illnesses will allow many senior and other homeowners to remain in their own homes, instead of being forced into nursing homes. Telemedicine (two-way video communication between patients and health care providers) will also help in that regard. These technologies will also eliminate the need for many in-person visits to health care providers and save homeowners and the federal government billions of dollars in health care costs.

The consumer benefits of more competition in TV services and other areas of broadband overwhelm arguments for continued excessive regulation of TV services. It is clear that the issue of TV services competition has extremely broad implications. AHGA believes that the franchise negotiation process could be shortened to a few days by adopting standard terms with regards to Public, Education, and Government (PEG) channels, franchise fees, and anti-redlining. The commission should also develop standard franchise terms, and should determine that any franchise which attempts to go beyond those terms or takes more than 15 days to negotiate is unreasonable. This would not interfere with local government’s control over the rights-of-way or with ensuring that cable television remains a vehicle for local programming. In taking this action, the commission can save consumers billions of dollars on their TV service bills, and speed the rollout of advanced broadband services.

Some municipal governments have welcomed new competitors to cable TV monopolies and others are proceeding down that path, albeit slowly. However still others are balking and some may never agree to allow new competitors to the local cable monopoly. To try to expedite consumer savings and choice, Texas has moved forward with statewide video franchising laws and others are considering them as well. Statewide laws will greatly expedite the rollout of competition to the cable TV monopolies and get savings into American homeowner’s pockets even sooner.

Federal legislators are also considering national legislation to expedite competition in TV services. Sen. John Ensign (R-NV) hopes his legislation to let telephone companies and other video providers obtain nationwide franchises will be woven into broader legislation. A House companion measure would exempt video providers from obtaining local franchises while still requiring franchise fees. Senate Commerce Committee Chairman Ted Stevens (R-AK) is developing a plan under which a federal-state panel would propose changes to franchising laws in an effort to bring about uniformity in the process.

All of this is extremely good news for American homeowners and other consumers. We can only win in what we hope will become a race between federal, state, and local officials to see which can do the most to encourage TV services competition the soonest.

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President Offers Support for Energy Independence
 

In this year's State of the Union President Bush strongly endorsed needed steps towards U.S. energy independence. "America is addicted to oil, which is often imported from unstable parts of the world," said the President in an understatement. President Bush called for a national oil savings target and said that "The best way to break this addiction is through technology."

OPEC officials noted after the President's address that efforts to reduce dependence on Middle Eastern oil would discourage increased investment in Persian Gulf production. This only reinforces the need to use technology and alternative fuels to increase fuel choice and reduce demand for oil.

Congress last year extended tax incentives for alternative fuel vehicles and passed a bevy of other modest energy incentives that will reduce our dependence on foreign oil. Among them are tax incentives for homeowners who add additional insulation or energy efficiency technologies to their homes, and similar incentives to home builders to build super energy efficient new homes. “These incentives need to be expanded and extended” says AHGA President Bruce Hahn. Two thirds of our oil consumption is in the transportation sector, mostly by cars and trucks. The President’s focus on all types of hybrid vehicles is therefore entirely appropriate. “However, home heating and cooling also account for a large share of direct and indirect oil consumption, and the incredible increases in home heating costs are hurting many homeowners this winter,” Hahn added. “We need to give temporary financial assistance for those cost increases this winter to homeowners who need it, but the long term solution must include reducing the energy consumption of American homes and shifting our energy dependence away from oil and more towards passive and active solar and nuclear technologies.”

"Energy independence is a matter of national security and its urgency demands that we take action now," Senator Lieberman (D-CT) said recently. "Last fall a large bipartisan -- and bicameral -- coalition of Senators and Representatives came together to offer a comprehensive bill that would turn the rhetoric of energy security into reality by saving millions of barrels of oil in just a few years, and bringing new fuels and technologies to market within five years. The best way to reach the goals President Bush talked about in his State of the Union is for Congress to enact this legislation and for the President to support it and sign it into law."

There are a number of interesting home-related energy projects underway. A new "GridWise" energy project involving IBM, Whirlpool and the Department of Energy (DoE) will use the latest technology to tell homeowners how much money they are spending on electricity. A project being tested in Washington state and Oregon will send e-mail alerts to homes when their monthly power bills exceed their household budgets. The "intelligent" power-grid technology then will turn down their thermostats automatically. While they can override those settings, the project should make participating homeowners very aware of how much they might save if they dress a little more warmly inside their home. DoE plans to give money to those among the 300 participating households who decrease energy use.

In a second study, participants will receive a high-tech Sears Whirlpool dryer that can sense instability in the power grid and shut off its heating element for a few minutes to conserve energy, while it continues in tumble mode. The appliances could drastically reduce power demand, and the power grid instability that occurs about once a day in that area. Washington was selected because the Northwest region of our National Grid is under the most serious strain due to large population and industrial growth.

Broader adoption of these technologies could eventually save consumers as much as $80 billion in 20 years by precluding the necessity for constructing new power distribution equipment or substations.

In the meantime homeowners should take steps to cut down home energy costs on their own, The American Homeowners Foundation has developed a free ten minute home energy audit that enables homeowners to identify simple steps they can take to improve home energy efficiency using a few simple tools while taking a self guided walk-through of the rooms in their home. At the Department of Energy's Web site (www.energy.gov), can also find ways to find air leaks in their home and learn how to stop them.

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AHGA Calls for End of New Homes Tax

In February 14 testimony submitted to the Senate Commerce Committee, the American Homeowners Grassroots Alliance (AHGA), asked Congress to take action to relieve homeowners from the “New Homes Tax”, which adds an estimated $1,000 to the price of new U.S. homes and raises the cost of many remodeling projects.

These tariffs make homes less affordable, especially to the most vulnerable first time buyers who account for a substantial portion of the nation’s annual new home sales. The tax prices almost 300,000 families out of the market and would make home additions and other remodeling projects unaffordable for many more homeowners. It will add substantially to taxpayer contributions to the cost of rebuilding homes destroyed by Hurricane Katrina.

These tariffs amount to 10% of the lumber price. They were imposed at the behest of large U.S. lumber producers on softwood imported from Canada for use in homebuilding. “We believe these tariffs are nothing but protectionism for the major U.S. tree farmers” said AHGA President Bruce Hahn. “They are paid for by every homeowner who buys a new home and the builder just passes the tax up the line.” he added.

AHGA believes that a free trade policy is in the best long-term interest of the US and other countries, and results in the greatest benefit to homeowners and other consumers in all countries. The fast changing world economy and expanding trade between nations will continue to shift competitive advantages from industry sectors in one country to those in another.

AHGA does not believe that removing the tariff would threaten the jobs of U.S. timber workers. If it did, the appropriate solution to the challenges of worker displacement is the extension of unemployment benefits and an expansion of trade adjustment assistance. AHGA supports strengthening trade adjustment assistance programs; in particular by expanding funding for worker retraining so displaced workers can qualify for employment in growing industries.

AHGA is disappointed by the support of the U.S. Commerce Department for these tariffs on softwood lumber from Canada. “This Administration has been supportive of homeowners in many ways, most notably in the Justice Department’s worthy antitrust efforts to prevent the National Association of Realtors and state real estate associations from denying home buyers and home sellers choice in real estate services”, observed Hahn. “We wish they would be more supportive on this issue as well.”

Those most affected will be first time new home homebuyers and those who would otherwise barely qualify for home ownership. Their purchases will be delayed until their earnings increase. In the meantime they will lose the opportunity to build equity in a home they could have owned. A recent trend toward increases in mortgage interest rates will also keep home ownership out of reach for many of them. While others will still be able to buy a home, many of them will be paying interest for 30 years on the $1,000 home price increase resulting from the tariff. The increase in cost for lumber in home additions and other remodeling projects would also increase substantially, and many of the nation’s 75 million homeowners would pay the price.

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Home Values Softening

Data shows that home values are softening in many markets. Inventories are up in most areas, and a number of factors suggest that the era of double digit home appreciation is over. This is not as bad as it might sound. It will have little practical impact on many homeowners, just as the price appreciation of homes over recent years has had less effect than many imagine.

Rising tides lift all ships, and when American homeowners have gone to buy a bigger boat (i.e. house) in recent years they simply found the difference in price between theirs and that bigger boat hadn’t changed much. They still needed to come up with as much cash or finance that much larger a mortgage. Happily, thanks to low mortgage rates and easy mortgage credit, home financing was not a problem until recently.

Some homeowners have made out well. Those selling their homes and moving to less expensive housing markets over the last couple years (especially retirees) have done quite well. The huge rates of appreciation also brought smiles to home investors who have cashed in or are getting ready to. And local governments have benefited greatly from the surge in real estate tax revenues resulting from home appreciation. Many local governments have even loudly touted recent slight reductions in real estate tax rates, conveniently overlooking the fact that the net real estate tax paid by the average homeowner is still rising substantially.

The group that may have done most poorly are recent first time buyers in weakening markets. Those who paid top dollar may find that any equity they had may have vanished, and some may be “upside down”, owing more than the home is worth. Perhaps even worse, some of them will soon face significant mortgage rate increases if they have adjustable loans with very brief initial fixed rates. Their predecessors who have been in their home three years or more are much better off, even if they also have adjustable rate loans that will soon move into adjustment mode. Those buyers now have enough of a pad through home appreciation, that they will still have substantial equity even if the market softens. Those with adjustable rate mortgages who may in the future have to sell because of unaffordable rate increases will end up with thousands of dollars in net profit for their efforts.

We believe the biggest losers in the coming year may be future first time buyers, who may now have to sit on the sidelines several years longer than previously. Mortgage rates will creep up in 2006, offsetting much if not all of any softening of home prices. Mortgage lenders are also tightening lending standards, both because the Comptroller of the Currency has been pressuring them to do so and because changing real estate economy dictates more conservative lending practices.

As appreciation slows or stops it becomes far more risky for lenders to make no down payment or low down payment loans, or offer marginally qualified borrowers extremely low interest rate adjustable rate loans with very short terms before the rates are adjusted (probably upward). “If lenders make those kinds of loans today many will end up owning homes that are worth less than the foreclosed loan balance” said American Homeowners Foundation President Bruce Hahn. Fortunately for lenders and first time buyers who have been in their homes a few years there’s enough home equity to payoff the lender and leave extra cash for most owners, should the homeowner be forced to sell their home because of upward rate adjustments or other factors.

The down side to first time buyers slowing their entry into the market will be its ripple effect. Homeowners who want to move up from their first and current starter home, will need a first time buyer to buy their home if they are to move up to a bigger home. With fewer first time buyers there will be fewer move up buyers. The same applies at the next level. The decline in the number of future first time buyers will therefore probably add downward pressure on home values at every level (except for the millionaire mansions) and increase the time it takes to sell a home in 2006.

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States Going After Foreclosure Scamsters

One of the worst forms of mortgage fraud are con artists who assume the appearance of legitimate financial counselors. Many charitable organizations, who try to help poor and often unsophisticated homeowners, will provide financial counseling, often free, and can often prevent families from falling into foreclosure.

Some private businesses provide the same kinds of services, and some of them do a good job. Unfortunately not all of the mortgage rescuers have the homeowner’s best interests in mind. Some charge thousands of dollars for negotiating with the homeowner's creditors, but they do little or no work and leave the homeowner in worse economic condition than before they started. The worst of them will try to convince homeowners to deed their homes to investors for a year, ostensibly to provide homeowners time to clear up their credit and refinance and reassume ownership of the property. While such arrangements may be legal, many times the counselors use this approach to acquire homes at below market value and the homeowners wind up becoming tenants and then being evicted because there was virtually no chance they could keep up with payments.

Legislation was introduced in Illinois aimed at stopping con artists who promise to bail out cash-strapped families but often end up taking their homes instead, according to the Chicago Tribune. Illinois’s Mortgage Rescue Fraud Prevention Act requires consultants to provide homeowners with a written contract disclosing the services that will be provided. Homeowners could cancel the contract any time before the services were performed, and violators would be subject to criminal penalties for violations of the law.

Similar legislation has been introduced in Colorado and New York. They follow Maryland and Minnesota which passed laws protecting consumers from these scams in 2004 and 2005 and California has had a similar law for a number of years.

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Homeowner Tips and Tools

Here’s ways to:
1. Help you sell your home.
2. Help you plan for retirement.
3. Help you avoid spyware and other malicious computer programs.

1. There’s a new website that can help homeowners sell their home. Started by the founder of Expedia, Zillow.com has launched a beta real estate site, offering free, unbiased valuations on more than 40 million homes across the United States, with data on an additional 20 million homes.  This includes most homes in the country, not just those for sale.  All consumers need to do is enter an address.

In addition to finding a valuation, value for homes, consumers can access and view – for free – an enormous amount of information on individual homes, including:

● Historical value changes for each home, charted over the past year, five years or ten years. 

● Historical value changes for each home as compared to its surrounding zip code, city, state or the entire U.S.

● All comparable home sales in an area.

● Satellite, aerial and parcel views of many homes.

Individual home data, such as number of bedrooms/bathrooms, square footage, lot size, stories and year built.

Finding this information on Zillow.com is free, and does not require anyone to enter any personal information.

Additionally, Zillow’s My ZestimatorTM tool allows users to refine the value of a home for their own use, based on changes or additions to that home.  For example, a seller with a recently remodeled kitchen can refine her value based on this change.  Zillow calculates the remodel value for her area based on local remodel data and depreciation. 

These home valuation estimates can help home sellers in several ways. Inexperienced real estate agents may not be good at determining fair market values and Zillow provides a yardstick for comparison. In addition, some real estate agents may give home sellers a lowball home valuation if they don’t think they have competition for the listing. This helps them get a quick sale, but the home seller may be forgoing profits. There is substantial evidence that this may not be uncommon. In his recent book Freakonomics, University of Chicago professor Dr. Steven D. Levitt determined that real estate agents on average got 4% more for their own home than they did for their clients owning similar homes).

Some real estate agents sometimes purposely inflate the value of a home as well. Some homeowners start out with unrealistically high expectations about the value of their homes. If an agent is competing with other agents for a listing with such a homeowner one of them might be tempted to deliberately overestimate the value of a home just to get the listing. After it languishes on the market for a while, the agent can come back with a suggested “price correction”, but in the meantime the homeowner may have wasted valuable time.

Zillow can also provide other tools and the confidence that home sellers may need to sell their home without a real estate agent or through the use of a discount agent. Keep in mind that Zillow is still a “beta” website, which is geek speak for a work in process. Those who have tried it say that in some areas it provides very accurate valuations while in others (particularly more rural) the formulas used to compute the valuations need more tweaking. Nevertheless it is built on 2 terabytes of data (geek speak for “lots”), has plenty of investment funding to keep working at it until it get those formulas right, is run by a successful Internet veteran, and the company has said upfront that it won’t stop until it gets its formulas right.

2. Torrid Technologies offers an inexpensive ($89 for the personal edition, $169 for the couples version), user friendly, reasonably accurate retirement planning software that we highly recommend to homeowners who are either beginning to think about financial/retirement planning or would like a tool to track the progress of their planning. The company reports that 94% of their users said in a poll that they would definitely recommend this program to their friends and colleagues. AHGA President Bruce Hahn first learned of it several years ago in a financial planning magazine where it was the top recommended software among “budget” financial planning software. He has been using it for 3 years and has found it to be a very useful benchmarking tool.

The main value of Torrid Technologies’ Retirement Savings Planner is to help consumers focus on the investments and returns necessary to achieve the desired level of retirement income. The user determines the desired age of retirement, the amount of desired retirement income in today’s dollars, and must also make assumptions about the return on investments and inflation. The former is a subjective estimate that relates to investment style (appropriately so, since this will vary and investment advisors generally recommend more risk taking earlier in a career and a more conservative approach in later years). There is plenty of historical data on inflation on which you can base an inflation factor. Plug in information about your estimated social security benefits and any estimated pension benefits, and the software will tell you how long your investments will last until you reach a shortfall between income and expenses.

A common temptation will be to assume an early retirement age and a conservative return on investment and see how long until you are in the red (not long, as it turned out when we tried that). All of the assumptions can be modified and the numbers can be rerun at any time. When we increased our projected savings and investment return rate (still keeping both within reason), and pushed the retirement age back a couple years, the results looked much better.

And changing the numbers in subsequent years, when our financial results exceeded our projections, produced even more pleasant results. In the latter regard it also serves as a tracking tool, because the software protocol continues to recompute how long your savings will last based on your ongoing updates. If things are going well the software will keep pushing back that date. When you get to the point that you will not run out of cash until age 99 based on reasonable assumptions, there’s a pretty good chance you’re in good financial shape. And that will give you a pretty good feeling.

This software does not provide investment advice, nor can it help you with specific investment plans. The couples edition may not be necessary if only one family member is working. There is also a $699 professional edition, which we have not tried. For specific investment advice you’ll need advice from experts. You can Google many excellent articles on how pick them. There are similar types of software that are more sophisticated, but they are substantially more expensive. However it is an excellent and very inexpensive way to track your progress on your voyage to financial freedom.


3. A group, including Harvard and Oxford universities and Google, has unveiled a campaign against spyware and other malicious computer programs that can steal personal information, snoop on your Web surfing and bombard you with pop-up ads.

The coalition, is also receiving input from Consumer Reports WebWatch. It has created a Web site - http://www.stopbadware.org - to list programs that infect unsuspecting users who can check the site to see whether something is dangerous before downloading it. The coalition intends to publicly expose firms that make the software in an effort to shame them, and will gather data that could lay the groundwork for class-action lawsuits against them. Some programs track every keystroke on your computer and steal credit card, bank account and Social Security numbers. Some are also coded to prevent detection by virus protection or other malware detection software.

"For too long, unscrupulous companies have made millions of dollars infecting our computers with malicious software," noted John Palfrey, executive director of Harvard Law School's Berkman Center for Internet and Society and co-director of the Stop Badware Coalition. "This is so dangerous because there are intruders in your house, but you don't know that they are in there or how they got there."

The coalition also intends to reduce the use of adware which launches pop-up ads and can track Web-surfing habits. Definitions of such software vary widely, and this coalition refers to as "badware," which it defines as malicious software that subverts a computer's operations to benefit a third party. Others use the term “malware” to define it.

"These people out there are very important to Google. They are our customer base," said Vinton G. Cerf, a Google vice president and an early leader in the Internet revolution. "So our interest is very strong in doing anything we can to help defend against this sort of abusive behavior."
Separately, Microsoft Corp. introduced a free test version of anti-spyware software last year, and has announced plans to integrate its new Windows Defender anti-spyware product in its new Vista operating system. Microsoft will also give it free to Windows XP users.

Congress has passed legislation to address spam and other specific components of “badware” or “malware”, and spyware legislation is currently pending. AHGA supports this legislation but is also urging a broader approach. “Who knows what the bad guys will think of next?” noted AHGA President Bruce Hahn. “We started with spam and viruses, and now we have spyware, worms and a host of other problems threatening our computers. Congress should pass a law criminalizing actions to put software code on computers without the owner’s knowledge and advance permission. If it did not come installed (and fully disclosed) from the computer manufacturer, and I did not put it on or give informed consent for a third party to put it on my computer, then it shouldn’t be in my computer”, Hahn concluded.

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Do you have a little spare time over the next month? Many state and federal legislators will be home during the President’s Day recess. It’s a great time to express your views to members of Congress and state legislatures on the issues contained in this month’s edition of Home Base, as well as other policy issues important to you.

Many legislators also reserve office hours when they are available in their home state or home district offices to meet with constituents to discuss policy issues. You may be able to arrange a personal meeting while they are home.

To find out federal legislator’s schedules you can call the Congressional switchboard at 202-225-3121 and ask to be connected to your Representative or either of your Senators.

To look up the phone number and send an email to your U.S. Representative or your U.S. Senators, click here. The site can look up their names for you if you don’t know them.