There's been a flurry of numbers out this week on the real estate market. Some were up, some were down and some were in conflict with others! Yesterday's WSJ had two housing articles on page 2 quoting two different sources for May home sales. The numbers were dramatically different! I've said it before: don't believe everything you read. Check it out or have someone you trust check it for you.
Here's another interesting concept that you should consider in evaluating future trends in the real estate market. Nationwide, foreclosures have accounted for as much as 50% of all recent home sales. When you add "short sales' to the mix the number goes up to 85% to 90%, especially in the lower price tiers and in our area. (Silicon Valley is a little less). But here's the rub.
When these distressed home sales are factored into the data in coming months, we're going to see some huge distortions.
Today, when we compare sales numbers (year-to-year), that data shows median home prices are still declining. But the large volume of distressed sales have dramatically lowered the recent median home selling prices. Price declines in the segments that are comprised of distressed sales are reflecting the foreclosure prices and the sheer number of these sales has year-to-year comparisons depicting almost the full brunt of that decline. In areas like ours where the inventory of lower priced homes has significantly declined of late and selling prices are reflecting multiple offers, etc., median prices are stabilizing or even rising. Future year-to-year price comparisons will reflect this rise in price in the base month.
Consider what happens when a home that sold at $1M in 2005 now comes to market and sells for $650,000. This could be a foreclosure caused by unemployment, a bad mortgage or just a seller caught needing to sell at the worst time. This 35% drop in price will get buried under the volume of other sales (today most all at entry-level price points) and will hardly affect the median price number. What we could witness is a rising median selling price while we are simultaneously experiencing significant price erosion at the middle and upper ends. These declines could be completely hidden if all one does is look at median prices.
Friday, June 26, 2009
Thursday, June 18, 2009
Skin in the Game!
I was listening to a long-time Wall Street trader and the CEO of Cougar Investments discuss the Obama administration's new financial regulations yesterday and he touched on a subject near and dear to my heart. He was saying that the top executives at the banks and investment houses that "invented" the highly-leveraged financial packages, at the mortgage lenders who sold some of the undocumented loans and the boards of directors at publicly traded companies should all have signifcant personal skin in the game.
It is so easy for someone working with another client's money to take a few "extra" risks because the pain incurred for failure doesn't hurt the trader or director personally. Even if they hold stock in a company, if they didn't pay their own hard-earned money for it, they don't have skin in the game.
This is exactly the problem we have today with most foreclosures and with some home-owners who are considering walking away from their mortgage and handing the lender the keys to the home. So when someone tells me that there is this "new loan program" that allows buyers to get in for zero down or almost zero down, I shudder! Deja vue! Didn't we learn anything? Hard-earned money that is at risk is a key element to minimizing financial over-reaching.
The speaker also commented on the argument by some investment houses that tough regulations would stifle creativity in the financial markets. He astutely and politely avoided saying that some of the financial creativity that were demonstrated in the past should have been stifled! He did, however, say that a study of times when new regulations were enacted showed that they were followed typically by periods of greater financial growth for clients as well as greater financial stability in the markets. It's a lot easier, safer and faster to go down a road when you know where the edges of the pavement are located and where the out-of-bonds are.
Inventory remains tight at the entry price levels. Mortgage rates are down slightly from the highs of two weeks ago. More foreclosures are coming. There are 4 Million homes behind on their mortgages in the USA. Only 400,000 mortgages have been re-negotiated so far by the banks and government. We have buyers ready to buy these foreclosures and short-sales.
At the upper tiers of the market, it remains a slow and tough sell. Jumbo loan rates remain high compared to conforming rates and downpayment requirements are stringent. The recent testimony from several real estate industry leaders to the US Congress recommended that interest rates need to be maintained / instituted at low levels across all price ranges and that the tax credits for first-time buyers should be extended to all buyers as well as extended in time beyond Dec 31, 2009. All the stuff you have been reading here!
It is so easy for someone working with another client's money to take a few "extra" risks because the pain incurred for failure doesn't hurt the trader or director personally. Even if they hold stock in a company, if they didn't pay their own hard-earned money for it, they don't have skin in the game.
This is exactly the problem we have today with most foreclosures and with some home-owners who are considering walking away from their mortgage and handing the lender the keys to the home. So when someone tells me that there is this "new loan program" that allows buyers to get in for zero down or almost zero down, I shudder! Deja vue! Didn't we learn anything? Hard-earned money that is at risk is a key element to minimizing financial over-reaching.
The speaker also commented on the argument by some investment houses that tough regulations would stifle creativity in the financial markets. He astutely and politely avoided saying that some of the financial creativity that were demonstrated in the past should have been stifled! He did, however, say that a study of times when new regulations were enacted showed that they were followed typically by periods of greater financial growth for clients as well as greater financial stability in the markets. It's a lot easier, safer and faster to go down a road when you know where the edges of the pavement are located and where the out-of-bonds are.
Inventory remains tight at the entry price levels. Mortgage rates are down slightly from the highs of two weeks ago. More foreclosures are coming. There are 4 Million homes behind on their mortgages in the USA. Only 400,000 mortgages have been re-negotiated so far by the banks and government. We have buyers ready to buy these foreclosures and short-sales.
At the upper tiers of the market, it remains a slow and tough sell. Jumbo loan rates remain high compared to conforming rates and downpayment requirements are stringent. The recent testimony from several real estate industry leaders to the US Congress recommended that interest rates need to be maintained / instituted at low levels across all price ranges and that the tax credits for first-time buyers should be extended to all buyers as well as extended in time beyond Dec 31, 2009. All the stuff you have been reading here!
Monday, June 8, 2009
Competition for Homes To Increase!
Since last November I have been discussing the increased demand for entry level and firt-time-buyer homes on our area. At present we have a severe shortage of homes in the entire county below $500K and especially below $400K. In Gilroy and Morgan Hill we continue to have fewer than 40 homes available for purchase below $400,000. In Hollister we have fewer than 50 homes available below $300,000. WHen nice homes in these price ranges do come to market, they are receiving multiple offers and selling for $20,000 to $50,000 over list price! Not all of the homes are foreclosures. Some are short-sales, and a few are straight sales.
The rumors are that the banks have another wave of foreclosures coming but what I am seeing is that they are releasing these homes VERY slowly and in bits and batches to minimize any drop in prices due to over supply. So while there may be mnay more homes available over the next six months, they will likely come to market in a slow steady strem, rather than a torrent.
On the buyer side we continue to see many first-time buyers entering the market. I have really been surpised at how many first-time buyers there are who have basically been shut out of the market for so long. Investors are also snapping up good rental properties. And lastly, we are seeing the first signs of a relatively new class of buyer: those who were forced to sell their previous homes via a short-sale in 2007. These sellers may have sold homes that they originally pirchased for $500K or more but were forced to sell at $300K or even less. Now that their two year forced hiatus from the market is expiring, they can re-enter the market at prices even less that they might have sold their previous home. Talk about re-negotiating your mortgage!! Mabe this is the way the government should have their plan operate!
Lastly, while bank-owned sales can close within 40 days of going into contract (up from 20 to 30 due to the new laws governing selection of appraisors that lenders can utilize), short-sales which are dominating the market can take as long as 3 to 4 months to close. Given that the first-time home buyer federal tax credit expires at the end of the year, I would expect a crush of buyers hoping to qualify for this credit as we get closer to fall and especially before the holiday season.
You might think that the recent rise and possible continued rise in interest rates would reduce the buyer pool somewhat. That is a good assumption. The question is more how much will Mr. Bernanke and the Fed allow the Treasury and the Congress to borrow and spend before they really protest (Bernanke last week complained that the government spending if not curtailed soon will cause the economy to slow down). Bernanle faces quite a conundrum in trying to maintain interest rates at levels where they will stimulate home sales while also trying to keep the recovery going.
Bottom line: I don't see the competition for entry-levbel homes easing up even if interest rates do climb abit. I expect interest rates to start a slow, inconcistent but relentless climb as government spending and borrowing drive Treasury bonds yields higher and mortgage rates along with them. I do not expect mortgage rates to exceed 6% in 2009 for a 30 year, fixed, conforming loan but I think they will approach that level- still historically low. Irrespective of what mortgage rates do, the supply of buyers is set to remain constant, if not increase, in the lower tiers of the market. Competition won't lessen which should maintain or even increase selling prices in spite of any increase in foreclosures. Once the next (and last?) wave of foreclosures have been exhausted, unless we have a significant change in the economy, look for entry-level prices to really start to rise- somewhere around late 2010.
The rumors are that the banks have another wave of foreclosures coming but what I am seeing is that they are releasing these homes VERY slowly and in bits and batches to minimize any drop in prices due to over supply. So while there may be mnay more homes available over the next six months, they will likely come to market in a slow steady strem, rather than a torrent.
On the buyer side we continue to see many first-time buyers entering the market. I have really been surpised at how many first-time buyers there are who have basically been shut out of the market for so long. Investors are also snapping up good rental properties. And lastly, we are seeing the first signs of a relatively new class of buyer: those who were forced to sell their previous homes via a short-sale in 2007. These sellers may have sold homes that they originally pirchased for $500K or more but were forced to sell at $300K or even less. Now that their two year forced hiatus from the market is expiring, they can re-enter the market at prices even less that they might have sold their previous home. Talk about re-negotiating your mortgage!! Mabe this is the way the government should have their plan operate!
Lastly, while bank-owned sales can close within 40 days of going into contract (up from 20 to 30 due to the new laws governing selection of appraisors that lenders can utilize), short-sales which are dominating the market can take as long as 3 to 4 months to close. Given that the first-time home buyer federal tax credit expires at the end of the year, I would expect a crush of buyers hoping to qualify for this credit as we get closer to fall and especially before the holiday season.
You might think that the recent rise and possible continued rise in interest rates would reduce the buyer pool somewhat. That is a good assumption. The question is more how much will Mr. Bernanke and the Fed allow the Treasury and the Congress to borrow and spend before they really protest (Bernanke last week complained that the government spending if not curtailed soon will cause the economy to slow down). Bernanle faces quite a conundrum in trying to maintain interest rates at levels where they will stimulate home sales while also trying to keep the recovery going.
Bottom line: I don't see the competition for entry-levbel homes easing up even if interest rates do climb abit. I expect interest rates to start a slow, inconcistent but relentless climb as government spending and borrowing drive Treasury bonds yields higher and mortgage rates along with them. I do not expect mortgage rates to exceed 6% in 2009 for a 30 year, fixed, conforming loan but I think they will approach that level- still historically low. Irrespective of what mortgage rates do, the supply of buyers is set to remain constant, if not increase, in the lower tiers of the market. Competition won't lessen which should maintain or even increase selling prices in spite of any increase in foreclosures. Once the next (and last?) wave of foreclosures have been exhausted, unless we have a significant change in the economy, look for entry-level prices to really start to rise- somewhere around late 2010.
Monday, June 1, 2009
GM and Real Estate Agents
Yesterday the unthinkable (at least to some mids) happened with the bankruptcy of General Motors. Frankly, my personal opinion is that this is what should have been allowed to happen months ago. But it's here now for the good or the bad, and we will just have to watch and see how it unfolds.
I was somewhat amused when Fritz Hendersen, the "new" GM CEO, told the news conference that the "New GM" (they used that term so often to maximize the distance between the old GM of yesterday (literally) and the new company they hope will rise from the ashes of bankruptcy court) would not be the same company that disappointed customers in the past. The company that sometimes would have 15 new-car introductions a year and hoped five would be hits, the rest they would be satisfied if they turned out "okay". The company that disappointed (and broke) shareholders. (Shares of GM were still traded today on the NYSE as collectors wanted the certificates to hang on their walls!) The company whose quality drove buyers out of showrooms in years past.
Gee, what did the workers of the old (or the new) GM think when they heard those words? Thanks so much for the vote of confidence in their efforts and performance. Just what will the management of the new GM do that will be so significantly different that financial success will occur?
And that's the same question that you as a real estate buyer, seller or investor should be asking your agent. What will your agent do that will be so significantly different that you will reach your real estate investment goals? Which leads me to a series of thoughts I bring to all my open houses.
There are many keys to finding the right real estate agent but here are four important ones that your agent MUST possess:
1) In-Depth Knowledge of the Area. A good agent has broad knowledge of area issues, future development plans, schools, community resources and neighborhoods. Agents who live, work and participate in their community possess the necessary up-to-date information you need to locate the neighborhood that best matches your needs and avoid situations that could cost you thousands of dollars at re-sale. When selling, good agents know how to best promote local attributes to maximize the price you receive for your property.
2) Real Estate Experience and Savvy. Your agent should have extensive, detailed knowledge of, and experience in, real estate practice. In particular, your agent's knowledge of the purchase contract that you will sign when buying or selling is critical to protecting your financial interests. He or she should also possess strong negotiating skills that maximize your bargaining position. Not all agents are REALTORS. REALTORS adhere to a code of ethics and usually possess additional training and course-work in real estate practice.
3) Wide Network of Lenders and Vendors. Your agent should be able to connect you with key people in many important areas including property inspection, title insurance, city and county regulations and processes, repairs, building contractors and mortgage financing. A good agent should personally know and have experience dealing with these vendors and should be able to recommend several qualified professionals in each category for your consideration.
4) The Real Estate Company. Good intentions are not always sufficient to keep a potential transaction from falling apart. Sometimes there are legal as well as financial ramifications that must be addressed. Te real estate company that employs your agent may be able to advise or mitigate some of these issues saving you frustration and money. Your agent's skills and professionalism partially reflect the emphasis the brokerage places on continuing education, legal updates, professional certifications and ethics.
Whether you are buying or selling, you and your property deserve the best agent you can find. Check agents out, ask for references and past successes with your type of property. It's nice that your third cousin's sister's boyfriend is a real estate agent. But let's face facts. Your real estate transaction is a business transaction. Your money and your happiness depend on how successful your agent meets your needs. Why settle for anything but the best?
I was somewhat amused when Fritz Hendersen, the "new" GM CEO, told the news conference that the "New GM" (they used that term so often to maximize the distance between the old GM of yesterday (literally) and the new company they hope will rise from the ashes of bankruptcy court) would not be the same company that disappointed customers in the past. The company that sometimes would have 15 new-car introductions a year and hoped five would be hits, the rest they would be satisfied if they turned out "okay". The company that disappointed (and broke) shareholders. (Shares of GM were still traded today on the NYSE as collectors wanted the certificates to hang on their walls!) The company whose quality drove buyers out of showrooms in years past.
Gee, what did the workers of the old (or the new) GM think when they heard those words? Thanks so much for the vote of confidence in their efforts and performance. Just what will the management of the new GM do that will be so significantly different that financial success will occur?
And that's the same question that you as a real estate buyer, seller or investor should be asking your agent. What will your agent do that will be so significantly different that you will reach your real estate investment goals? Which leads me to a series of thoughts I bring to all my open houses.
There are many keys to finding the right real estate agent but here are four important ones that your agent MUST possess:
1) In-Depth Knowledge of the Area. A good agent has broad knowledge of area issues, future development plans, schools, community resources and neighborhoods. Agents who live, work and participate in their community possess the necessary up-to-date information you need to locate the neighborhood that best matches your needs and avoid situations that could cost you thousands of dollars at re-sale. When selling, good agents know how to best promote local attributes to maximize the price you receive for your property.
2) Real Estate Experience and Savvy. Your agent should have extensive, detailed knowledge of, and experience in, real estate practice. In particular, your agent's knowledge of the purchase contract that you will sign when buying or selling is critical to protecting your financial interests. He or she should also possess strong negotiating skills that maximize your bargaining position. Not all agents are REALTORS. REALTORS adhere to a code of ethics and usually possess additional training and course-work in real estate practice.
3) Wide Network of Lenders and Vendors. Your agent should be able to connect you with key people in many important areas including property inspection, title insurance, city and county regulations and processes, repairs, building contractors and mortgage financing. A good agent should personally know and have experience dealing with these vendors and should be able to recommend several qualified professionals in each category for your consideration.
4) The Real Estate Company. Good intentions are not always sufficient to keep a potential transaction from falling apart. Sometimes there are legal as well as financial ramifications that must be addressed. Te real estate company that employs your agent may be able to advise or mitigate some of these issues saving you frustration and money. Your agent's skills and professionalism partially reflect the emphasis the brokerage places on continuing education, legal updates, professional certifications and ethics.
Whether you are buying or selling, you and your property deserve the best agent you can find. Check agents out, ask for references and past successes with your type of property. It's nice that your third cousin's sister's boyfriend is a real estate agent. But let's face facts. Your real estate transaction is a business transaction. Your money and your happiness depend on how successful your agent meets your needs. Why settle for anything but the best?
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