Home prices have posted double-digit annual gains and homeowners are feeling richer. Those higher prices are also driving an uptick in cash-out refinancing, in which owners are taking out some of the home equity by refinancing.

In 2020, about $185 billion of equity was taken out through cash-out refinances—the highest amount since 2007, according to Fannie Mae and Freddie Mac.

But Fannie Mae’s board of directors chair Sheila Bair warns in a new column at Yahoo! Money that homeowners need to be careful about using cash-out refinances and taking out too much of their home’s equity.

“In many cases, a cash-out refinance makes sense, allowing a family to cover a medical emergency or a longer-term investment such as college tuition or a home renovation,” Bair writes. “But cash-out refinances can also carry risks that every homeowner—and every lender—should consider, especially during times of rapid home price increases such as now.”

After all, home prices can’t rise indefinitely and there’s always a risk with cash-out refinances that home values could fall below the loan’s value.

Stricter lending standards today than preceding the Great Recession are making it more difficult for some homeowners to transact a cash-out refinance. For example, Fannie Mae now requires that cash-out refinance loans be no greater than 80% of the home’s value and at least six months of verified reserves for homeowners whose monthly debt payments are 45% or more of their monthly incomes.

Lenders and homeowners are being more cautious: 36% of 2020 cash-out refinances resulted in a mortgage balance at least 5% greater than the previous balance. From 2005 to 2008, that comprised 78% of refinances.

“The overall picture of today’s cash-out refinance market is one calling for caution, but not alarm,” Bair notes.

Bair urges any homeowners considering a cash-out refinance to recognize the importance of not missing any payments—a missed monthly payment on a cash-out refinance loan could cost them their home—and to be aware that refinancing still costs money. Closing costs could make up 2% to 5% of the loan amount. Also, Fannie Mae and Freddie Mac will not back a cash-out refinance loan with less than 20% equity.

“Homeownership can be one of the most effective ways of building wealth,” Bair writes for Yahoo! Money. “However, entering into a long-term mortgage and building equity requires care and diligence.”

The pandemic fueled a remodeling boom as more homeowners sheltered in and looked to redo their home as a new hobby. But the costs of remodeling projects have soared over the past year.

Some house projects have seen prices jump by more than 50% in 2020 compared to 2019. Also, the average spending on a remodel increased from about $9,000 in 2019 to more than $13,000 in 2020, according to a new report from Angi and HomeAdvisor.

“It was a pretty significant pivot,” said Mischa Fisher, chief economist at Angi and HomeAdvisor. “Costs went up, project sizes got larger, people chose to spend more.”

The most popular pandemic house projects were repainting, bathroom remodels, flooring, landscaping, and kitchen remodels, according to the report.

But projects are costing more to do. For example, new cabinet installation saw the largest increase in costs over the last year, jumping 56% higher than in 2019, according to the report.

Surging demand and strained supply chains are causing remodeling costs to increase. Material costs—notably lumber—have seen an uptick in prices as well.

Homeowners looking to spruce up their homes should plan ahead, Paul Emrath, vice president of survey and housing policy research at the National Association of Home Builders, told Bankrate.com. “Be prepared for possible sticker shock and the process taking a little longer than usual,” Emrath says. “Be aware of the rising trends in all the costs of the remodelers for contractors. It’s not just them being greedy and trying to drive up their profit rate, their costs are all going up as well.”

For the first time in 10 weeks, mortgage rates inched above 3%—and the era of 2% rates may be over. “As the economy progresses and inflation remains elevated, we expect that rates will continue to gradually rise in the second half of the year,” said Sam Khater, Freddie Mac’s chief economist. “For those homeowners who have not yet refinanced—and there remain many borrowers who could benefit from doing so—now is the time.”

The National Association of REALTORS® has predicted that mortgage rates will average 3.2% by the end of the year.

Freddie Mac reports the following national averages with mortgage rates for the week ending June 24:

• 30-year fixed-rate mortgages: averaged 3.02%, with an average 0.7 point, rising from last week’s 2.93% average. A year ago, 30-year rates averaged 3.13%.
• 15-year fixed-rate mortgages: averaged 2.34%, with an average 0.7 point, increasing from last week’s 2.24% average. A year ago, 15-year rates averaged 2.59%.
• 5-year hybrid adjustable-rate mortgages: averaged 2.53%, with an average 0.3 point, up slightly from last week’s 2.52% average. Last year at this time, 5-year ARMs averaged 3.08%.

Freddie Mac reports average commitment rates along with points to better reflect the total upfront cost of obtaining a mortgage.

To win a bidding war, more buyers are waiving appraisal and inspection contingencies, according to the latest REALTORS® Confidence Index survey. Home buyers most commonly are waiving the appraisal contingency (28%) and the inspection contingency (25%), shows the survey of more than 3,300 REALTORS®.

The buyers waiving contract contingencies are those who are either paying cash or using conventional financing.

Buyers using FHA or VA loans can’t waive the appraisal or inspection contingencies due to financing guidelines, Gay Cororaton, research economist for the National Association of REALTORS®, writes on NAR’s Economists’ Outlook blog. Therefore, those buyers may be at a competitive disadvantage compared to other buyers who don’t have to follow certain financing rules. For example, FHA inspection standards require that components of a home are in good working condition, such as the heating unit, water heater, and smoke detectors. FHA buyers are unable to waive the inspection to compete and still get their loan.

“In a housing market where sales are moving swiftly, the time to undertake the inspection and appraisal is creating a hurdle for buyers obtaining FHA-insured loans, who are typically first-time buyers, and buyers obtaining VA-guaranteed loans,” Cororaton writes.

Buyers also must compete against those who are bringing more money to close. The share of mortgages with at least a 20% down payment increased to 52% in May, up from about 40% in 2011, the NAR survey shows. Nearly one in three first-time buyers made a down payment of at least 20%, up from about 25% in 2011.

Home buyers with conventional financing are edging out those with FHA and VA loans, which offer low down payment financing. Conventional conforming mortgages, which conform to guidelines set by Fannie Mae and Freddie Mac, accounted for 74% of mortgages issued in May, an increase from 65% in 2018. On the other hand, the share of FHA-insured mortgages comprised 14% of mortgages in May. In past years, that percentage was around 20%. Also, the share of VA-guaranteed loans fell to 7% in May, down from its 10% average in recent years.

Real estate pros report that VA loans, for example, have a reputation for receiving low appraisals that can make it difficult for buyers to compete in an environment where home prices are escalating quickly. VA appraisals often can average five to 15 days to complete—a lengthier timeline than many other loans. “It is extremely difficult for FHA/VA buyers to get accepted in a multiple-offer situation,” writes one real estate pro in the REALTOR® survey. “They are on the bottom of the hierarchy.”

Remote work and mobility are expected to have the most significant impact on real estate over the next year, according to The Counselors of Real Estate’s list. The group identified current and emerging issues expected to have an influence over real estate in the 2021-2022 cycle. Remote work and mobility and its influence over commercial buildings globally was named as the top issue, followed by technology and ESG (Environment, Social, and Governance).

“The pandemic was a stress test, revealing vulnerabilities, appetites, and new and increased risks,” says Michel Couillard, global chair of The Counselors of Real Estate. “These themes present themselves in the 2021-2022 Top Ten Issues, which are highly interconnected and indicative of a newly changed and further evolving real estate environment. We have been awakened to some familiar but nascent areas of importance, namely cybersecurity, supply chain, and price instability. None of these are new concepts, but in a span of months or even just weeks, we saw high profile hacks, shortages of resources like microchips, lumber and labor, and rising prices across the board.”

Here’s a closer look at the top 10 issues on CRE’s list for 2021-2022:

1. Remote work and mobility

The pandemic greatly disrupted the workplace as many employees began to work remotely—and still are more than a year later. Commercial properties may need to be repositioned as the workplace adapts to more flexible and even shareable spaces.

“As we emerge from COVID-19 into a new world replete with local and global disruptions alike, our industry has been forced to recognize that adaptability and resiliency are paramount in real estate markets,” says Couillard. “It is undeniable that the pandemic’s disruption significantly impacted human behavior in how and where people have chosen to work. Now, with an escalating return to ‘business as usual,’ and workers beginning to return to offices, landlords, and companies nevertheless are facing repositioning of the workspace and the benefit of easily adaptable and shareable spaces. …. Property owners and managers should be flexible in order to accommodate these demand-driven changes in the desired use and location of space.”

2. Technology acceleration and innovation

The Counselors of Real Estate also ranked the acceleration and adoption of technology as having the second greatest impact on the real estate industry. “The stressors were not about new tech, but about the acceptance of it,” Coulliard says. “Lockdown-driven changes in our work, the economy, in social structures, and in our personal behavior forced the industry to put any earlier reluctance aside.” Growing technology themes include artificial intelligence, machine learning, the Internet of Things, and cybersecurity, the report notes.

3. ESG at a tipping point

Environmental, social, and governance (ESG) initiatives are growing. In 2020, ESG funds more than doubled net new money intakes. “The growth in recent years is fueled by multiple drivers, including consumer shifts, regulatory requirements, trillions of dollars of wealth transferring to generation Z and millennials committed to philanthropic living, a blurring of work and societal expectations, and a full sprint to attract and retain top talent,” the report notes.

4. Logistics

“Whether it’s a port, rail line, pipeline … manufacturing facility, warehouse, farm, ranch, or grocery store, all these real estate assets are a critical segment in the supply-chain funnel that is logistics,” the report notes. “How logistics is functioning impacts the utilization of commercial real estate. Redundancy and the ability to process disruption are two key elements required to support the fast-moving, high-volume requirements of modern-day logistics in the ‘shop-online-and-deliver-to-me’ era in which we find ourselves.”

5. Infrastructure

The Civil Engineers estimates the U.S. infrastructure funding gap in 2021 to be $2.6 trillion, a 24% increase compared to 2017. “The COVID-19 pandemic, climate change, and heightened societal interest in social and economic equity have redefined infrastructure imperatives beyond the significant ongoing necessity for improved roads, bridges, airports, ports, mass transit, and other traditional infrastructure needs,” the report notes. A proposal on Capitol Hill sets out to allocate $110 billion in new spending to bridges and roads, $65 billion to expanding access to broadband, and $48.5 billion to public transit, and more. Stay updated here: NAR resource page on transportation and infrastructure in real estate

6. Housing supply and affordability

The National Association of REALTORS® and the Rosen Consulting Group released a report last week calling for a “once-in-a-generation” response to address decades of underinvestment and underbuilding in the housing market. The nation has faced a shortfall of 5.5 million to 6.8 million housing units since 2001, according to the report. Housing groups are calling on lawmakers to expand access to resources, remove barriers to incentivize new development, and more. Read more from NAR’s report on this: ‘The State of America’s Housing Stock Is Dire’

7. Political polarization

“Political friction is holding back America’s economic productivity,” the report notes. “We are squandering resources as we try to address problems that arise from the partisan divide rather than problems confronting us as common issues …. And the real estate industry’s well-being is a function of our economic growth.”

8. Economic structural change

Economic growth is mostly an unknown. As the report notes, how do we assess the real potential of the economy for sustainable growth? What numbers indicate a true trend and which are merely adjustments from the low bottom of the second quarter of 2020? Which behavioral changes made by U.S. households in the pandemic will persist? The ability for businesses to anticipate what’s next is met with challenges. For example, “even though real estate investors may reasonably expect an uptick in demand in the coming year, the ability to anticipate when occupancy and rent will rise frustrates underwriting,” the report notes. “We are observing many investors increasing their focus on property management aimed at retaining tenants and defending cash flow, while selectively seeking ‘value-add’ properties amenable to active asset management. The thinking is ‘focus on what you can control’ during this period where macro-level uncertainty is the governing headwind at the policy level in terms of the structural problems in this economy.”

9. Adaptive Reuse 2.0

The term is not new but the focus is getting bigger. CRE refers to Adaptive Reuse 2.0 as “The Neighborhood Approach.” It aims to address the challenges of what to do with defunct suburban malls and thousands of empty big-box retail stores that are surrounded by desirable and affordable neighborhoods. It requires a re-examination of suburban communities in repositioning and transforming areas that could be at risk for blight. A number of projects have been completed or are underway to help reconnect communities, prevent blight, and restore green space.

10. Bifurcation of capital markets

Debt capital markets have been volatile since the pandemic, namely public markets like commercial mortgage-backed securities, mortgage REITs, and agencies such as Freddie Mac and Fannie Mae. “Mortgage REITs took a significant hit early in the pandemic, with some recent recovery driven by restructuring credit lines and paying down credit facilities that experienced margin calls,” the report notes. Still, the “market continues to be flush with debt capital liquidity, despite property type and market uncertainty. Looking out to the remainder of 2021 and into 2022, performance will dictate the amount of distress and losses, and risk management should dictate markets, property types, leverage, loan structure, and pricing for mortgage debt. The next year should also tell us if commercial real estate debt was too rich and whether perceived risk underestimated where pricing should have been.”

Learn more about each of these issues: Cre.org/topten

©National Association of REALTORS®
Reprinted with permission

Virtual land in the online world of Decentraland grabbed international headlines after recently selling for more than $900,000, a record purchase on the platform, the Decentraland Foundation announced.

Ownership of some virtual land is bought and sold with nonfungible tokens, a type of cryptocurrency that records the ownership status of digital items on a blockchain, a form of digital ledger, Reuters reports.

Blockchain-based real estate in virtual worlds has surged in price as part of an NFT market frenzy that began earlier this year, Reuters reports.

The virtual land in Decentraland was the most expensive purchase of land using NFTs as currency, Reuters reports citing DappRadar, a website that tracks NFT sales data. Decentraland transactions are based on the Ethereum blockchain, according to the site’s frequently asked questions page.

Republic Realm, a digital real estate investment fund owned by U.S. investors, purchased the virtual land in Decentraland. The virtual land is comprised of 259 units or panels of land. It represents 66,304 virtual square meters, or 16 virtual acres. It’s the largest Decentraland purchase in virtual size.

In virtual worlds, users purchase land to show off their NFT art collections, walk around with friends, visit buildings, or attend events.

Earlier this month, a unit of virtual real estate sold for about $650,000 in the blockchain-based virtual world called The Sandbox.