The Market is Looking Better than the Financing Process

The market IS showing signs of improvement, and the official data for July certainly reflected a dramatic change of events across all price points. August seems to have continued the trend as I suspect buyers have jumped in to capture greatly deflated home prices in combination with historically low interest rates. The combination places the affordability index for home purchases at the lowest point we’ve seen in many, many years. Has the market turned up from it’s bottom? Perhaps… perhaps not. Are we close? I believe so, especially when viewed within the context of home affordability — evaluating home price with the cost of funds to make the purchase.

This leads me to the over-arching topic of this post — The Financing Roadblock. We all know that loose money is what got us into this mess. Lenders gave out money to whoever could find someone to fill out their loan application, and everyone in the finance chain made money… except for those left holding the bag of you-know-what at the end. Fine. That’s behind us now.

Today, the pendulum has swung in such an absurd direction that even the most qualified applicants are finding it hard to obtain financing. Let’s take a look at one or two of my most recent examples…

Case 1: I have clients who finally closed escrow on a sub-$2M home after almost 90 days of escrow time, fraught with lender-imposed delays. The clients are both physicians… one a private practice doc in a high-demand specialty, and the other a specialist employed by the country’s largest medical group. Their combined income is in the $500K+ range. With 25% down, mid-700 credit scores, and both in professions that are buffered from the economy more than most, you’d think they’d be an excellent credit risk. Unfortunately, the major bank processing their loan treated them in a fashion that should have been reserved for the people who got us into the present financial mess.

6+ weeks into the escrow, the bank reviewed their loan file again, ran their credit scores for the second or third time, and found that their score had dropped 4 points since the first time that they had checked it. That equates to roughly a one-quarter percent variance from the original score… insignificant by all objective measures. The 4 point drop was likely due to this bank’s multiple credit inquiries into my clients’ credit file. Regardless, the bank decided that the 4 point drop was reason enough for them to deny the loan UNLESS my clients came up with an additional 5% down payment… in this case, almost $100,000 more cash!!! Rather than lose the house, they sold stock to get the loan approval. Unfortunately, the story is not over.

Then, the bank subjected the appraisal to their mandatory review process. So, some bureaucrat in an office somewhere in California did a “desk review” of the appraisal and decided that the appraisal should be rejected. Wonderful! So, now we have a system where an out-of-the-area appraiser, selected by the lender based upon their low-bid bulk appraisal contract with the lending institution, who has little or no knowledge of the area’s real estate, just got his/her appraisal rejected by someone sitting at a desk who has never seen the property. You’ve got to love the logic in the system! So… guess what? Now, we have to challenge the process and get the bank’s approval for a second “field appraisal” at my clients’ expense. And, by the way, it will take another 2+ weeks for the lender to process and review it! Fortunately, the second field appraisal came in at the contract value and we ultimately closed the escrow after the lender caused yet another delay… this time in funding the loan. Total process… about 3 mos, start to finish!!!

Case 2: This time the client is also a physician with impeccable credit scores in the 800+ range! He is in a specialty that is totally buffered from the economy and, in fact, the revenues for his practice group are up on a year-over-year basis. He also was going to be putting 25% down on a home in the approximately $1.5M range. Lenders should have been lining up to make this loan, but once again, they found a reason to block the purchase.

The loan package was submitted by the mortgage broker to two lenders… one, the major bank fondly referred to in Case 1 above, and then to a smaller commercial bank who makes jumbo loans in California. So… the second lender decided to reject the loan package in its entirety because my client had been with his present private practice group for less than 2 years and they considered him an “independent contractor”. By the way, most private practice physicians are “independent contractors” since they are not technically “employees” under a salary-based contract. Additionally, my client has been a practicing physician in his specialty for many years since finishing his medical school training, so he wasn’t new to his profession.

The major bank lender decided that they would grant the loan ONLY IF my client’s medical group would turn over their partnership K-1 to the lender… not just the K-1 my client receives at tax time, but the full K-1 that the partnership files for the entire physician group. In this case, the partnership has over 900 physician partners, and they are one of the largest physician staffing groups for their specialty in the US. The partnership could NOT turn over the K-1 because it contains confidential information on ALL of the physicians in the group! So… guess what? The bank turned the loan down, even after the medical group’s financial staff wrote a letter on the group’s letterhead stating that the group had been profitable for over 30 years and had zero debt!!!

Hmmm… and some still wonder why the upper end of the US housing market has been hit so hard!!! Keep in mind that MOST purchases in our general market area require loans larger than “conventional” limits of $729K, so they all are subject to the type of insane process described above.

The State of the Market

The spring of 2009 has been profound for the dramatic change we’ve witnessed in the real estate market. Before diving in and taking a detailed look at the local market, let’s explore some of the broader based dynamics that are influencing it.

The recession that started around the 3rd quarter of 2007 will most likely run well through 2010, with more favorable economic performance anticipated as we get into the latter part of this year. Our Gross Domestic Product (GDP) is running around -2% and the California unemployment numbers were just announced at around 11.5%. The official numbers don’t reflect the very significant number of people who have lost their businesses, aren’t drawing unemployment, job-seekers who have just graduated college, or those who have earned money in the “shadow” economy… gardeners, housekeepers, nannies, etc. The “real” unemployment number is thought to be more in the 16-17% range.

Although the media would like us to believe otherwise, there is NO national real estate market. Statistics about the “US housing market” are meaningless and have often been used to sensationalize the news. Unfortunately, the California market really doesn’t need any sensationalizing. Prices in San Francisco’s residential market are down approximately 45% since May of 2005; Los Angeles is down about 40%; while cities that never experienced the big real estate run-up, like Charlotte, NC, are only down a few percentage points. We’ll get into the reasons for this in just a bit.

If one keeps in mind the simple “law” of supply and demand, it’s much easier to understand the present market. With the end to the moratorium on March 31st that allowed banks to hold back their inventories of foreclosures, we’re expecting a glut of them to roll into the marketplace this summer. Most are found in the east county areas, but there are a significant number expected to find their way into the local “Lamorinda” market.

While in 2008, it seemed like most people “hated “real estate, 2009 has provided opportunities for investors and long-term holders of real estate to get into the market with very favorable terms and expected asset performance. Foreclosed homes are now finding their way back into the rental pool as they get scooped up by anxious investors who are seeing them produce positive cash flow with low down payments. Those who were sitting on the sidelines, or who never thought they could afford our local markets, are now finding them affordable with the combination of dramatically reduced prices and historically low interest rates. Those interest rates will not stay low forever, and are already headed up in concert with the 10-year Treasury rates.

The high-end markets have been particularly stressed this year; not just locally, but on a worldwide basis. From Sydney to New York to San Francisco, the formerly “protected” markets have been severely impacted… quite frankly, in ways that many thought they’d never see. Regardless of how one defines our local “upper end” market, the picture will be unsettling for sellers. Based upon closed sales through the end of May, homes in Lafayette and Orinda priced at $1.5M and above had an inventory with 40 months of supply… measured by dividing available inventory by the number of homes that have actually closed escrow in a given month! If we define the “upper end” market as being comprised of homes $2M and above, we’re looking at about 28 months of inventory based upon the expected closings by the time you read this market letter!!

In fact, as of this writing, there are 56 homes on the market in Lafayette and Orinda at $2M+, and only 4 homes pending in escrow. Only 2 homes have closed escrow in this price range all year. The most recent of those homes entered escrow in early February. One of the four homes pending in escrow was purchased for $3.85M two years ago, and it sat on the market for months before the price was lowered to $2.995M where it finally garnered an acceptable offer.

So, why are we having problems in the upper end? Well, there are numerous factors that are far beyond the scope of this publication. However, we no longer live in a world where “the rich always have money.” In fact, we really need to look at where the money came from to buy all of these $2M+ homes over the last 5-7 years. Based upon anecdotal information from lender sources, much of it came from large performance bonuses, including from the now heavily impacted financial services industry. Those dollars are now gone, as are many of the jobs held by some of the present homeowners in this market segment. Replacement jobs are few and far between, and most aren’t at their prior compensation levels. Another large source of capital for these home purchase dollars came from stock option cash-outs. Those dollars are substantially gone now, too.

We should also add that the availability of loans for luxury homes has been extremely challenging. Whereas lenders were once giving loans to anyone who could fog a mirror, they now are making it extraordinarily difficult for some of our most financially qualified buyers. For the most part, the federal conforming loan programs don’t help the majority of buyers in our market, due to their upper limit of $729K. As a result, local buyers are largely dependent upon the handful of lenders who have extremely conservative “jumbo” loan programs available. This further constrains the supply of buyers and exacerbates upper end market woes. Recent upticks in mortgage rates, keyed off of increasing 10-year Treasury rates, could put further pressure on prices.

Some who have found themselves owning a luxury home, but without a job or with a lower paying one, have cut their superfluous expenses back and are doing everything they can to hold onto their homes. Many have already put their homes on the market, contributing to the build-up in inventory and it is expected that we’ll see others do so this summer and fall. For what it’s worth, the real estate economists who have studied our local markets don’t see improvement in this “upper end” segment until about 2011, when they forecast that it will stabilize and then return to “normal” real estate appreciation rates of 3-5% per year. In the meantime, they are forecasting further downside risk in the range of 5-15% over the next 18 months.

As further evidence of this, the banks are building this downside risk into their automated appraisal review process, and in some portions of Contra Costa County they are discounting “comparable sales” by 2% per month. We have heard of several recent sales where the banks have cut the appraisal by 10% upon review, even though the two parties to the transaction were contractually bound at a higher price. This leaves three alternatives… the buyer comes up with more cash to make-up the difference, the parties agree to a lower price, or the buyer backs out of the purchase.

The overwhelming majority of current activity is occurring in what has historically been considered the “lower end” of the local market. The average price of a home pending in escrow within Lafayette is around $1,070,000. On the positive side, this average “pending sale” price has increased over $100K above where it was about 3 months ago. In fact, the average price of sold homes in our area is up 3 months in a row, as astute buyers have jumped in to capture some of the outstanding purchase opportunities!

If you are a buyer in today’s market, you hold all of the power in the real estate transaction. Although there are plenty of homes that are still over-priced to today’s market, there are also many that represent excellent long-term values. Move-up buyers benefit in today’s market, whereas those who seek to downsize should consider waiting awhile, depending upon the type of market you would be moving into or what investment alternatives might be had with the sold home’s equity.

What do you do if you must sell? As painful as it might be, it’s best to be realistic about your market price. Only the homes that are compelling values are selling, and that’s across the board. In the upper end, being a compelling value in an “A+” location seem to be the key ingredients based upon homes that are presently pending in escrow. Don’t “test” the market at a high price, and then step your price down. “Testing” accomplishes nothing and only adds “Days on Market” to your listing in a soft market. If you insist upon “testing” at a high price, then be prepared to make a significant adjustment to market after no more than 30 days, otherwise you risk becoming a “stale” listing at an over-market price, and buyers will start to think that something is “wrong” with your home.

Unlike the latter half of 2008, we are seeing homes sell in 2009. All is not doom and gloom. As of this writing, there are 278 unsold homes on the market in Lafayette and Orinda, yet 69 of them are “pending sales” in escrow – almost 1 in 4 homes. The relative abundance of buyers in the lower end of the market, coupled with availability of lender capital in this price range, has caused the pending sales to be weighted at the lower end of the market. Therefore, if you have a home priced appropriately within this range, there is a strong chance that it will sell. Proper pricing is the key, since again, only compelling values are capturing buyer attention.

Remember that markets always cycle. This particular cycle is more unusual than most because it was coupled to and greatly exacerbated by the tremendous level of turmoil in the US economy, an unprecedented run-up in real estate prices fueled by lax lending practices, and finally the collapse of the lender’s “house of cards”. Nevertheless, it’s a cycle that will bottom out and turn back up. Specifically, we’ll most likely see the market cycle up in more affordable housing, followed by the upper end properties where the supply/demand relationship is most out of balance and where very constrained institutional financing has had the greatest impact.

We have always prided ourselves in conveying honest, fact-based information to our clients. We can’t change markets; we can only seek to understand them and to provide informed counsel to our clients – critically important in today’s complex, rapidly changing real estate market. We would be happy to help you navigate the current complexities of today’s real estate market in order to help you make the best decisions to achieve your personal financial objectives.

April Showers…

We’ve just concluded what could be termed a “dead week” in local real estate, with Spring Breaks in the local schools and many away traveling.  Inventories rose a bit with yesterday’s influx of new listings, but not as much as some had expected.  Undoubtedly, the rainy weather and upcoming Easter holiday may have influenced the on-market date for many.  We are, however, moving into what is historically the peak of the market.  Inventory levels will inevitably rise, and hopefully, so will buyer demand.  

Although the official market stats have not yet been released for the month of March, a little work in Excel provides a pretty good view of where the market is.  At present, there are 183 active listings in the Lafayette & Orinda combined markets, with an average list price of $1,434,000.  There are 39 “pending” sales in the same market area, with an average list price of $964,000. On a forward looking basis, we have almost 5 mos of inventory in the market, and certainly more once the official stats come out showing the number of closed sales in the month of March.  The most important piece of data here is the gap of almost $500,000 between what is actually selling and what is listed.  Also of note is the fact that there are only 2 pending sales in all of Lafayette and Orinda that were listed for over $1.5M and NONE over $2M !!

This is great news if you are a buyer, and not so good news if you need to sell.  Hopefully, we’ll see market improvement as interest rates are driven down further and better loan programs are made available that reach beyond the conforming limits of $729,000, which have effectively “capped” our sales at the under $1M level.  

To steal a term from Randy on “American Idol”, being “real” is pretty darn important in this market.  Being among the most active agents in the Lafayette/Orinda markets, we get calls from prospective sellers on a weekly basis.  Absent a present need to sell and a recognition of the critical imperative of pricing to the market, we have suggested to many that they wait out 2009 and see if we’re in a better market for sellers in 2110.  It’s simply not fair to paint a picture that is better than the reality of the market, although some agents do this routinely to secure the listing.  Homes won’t sell at over market levels in 2009, however agents can benefit by finding buyers at Open Houses — thus the motivation for “buying” the listing at an inflated price.  In the end, it’s a lose-lose for the client since expectations are set unrealistically and the home ends up not selling.  

So, what’s it take in this market to sell…  Frankly, it takes doing everything right, from proper marketing and pricing… to impeccable management of the contractual obligations and escrow.  As a seller, it takes commitment to the process and a real recognition of the market.  It’s not a market for “testing” to see if the house will sell for some arbitrary price that isn’t in tune with the market.  Unfortunately, the market is stronger than all of us, and one has to understand how to meet it, not hope that it will make an exception for those who just want to “test” it.  I wish it wasn’t so, but it is.

Since most sellers ultimately become buyers on the other end as they purchase a replacement home, it’s not all bad.  In the end analysis, you have to look at the differential between a realistic sale price of the “old” residence, and the purchase price of the replacement.  For many, the numbers work well in this market… particularly if you are able to take advantage of the market to “up-size”.   Depending upon the market one is moving to, even downsizing can be at relative parity to “better” markets.  Some of our clients have moved out-of-state where the local markets are much more severely impacted than here in the Bay Area.  Some have moved to “retirement” communities in the east bay and Sacramento areas where they are able to negotiate amazing buys right now.  They are finding that selling at market prices here works well for them.  

These are challenging times.  Our commitment is to provide our clients with honest, factually-based information and the highest calibre, professional real estate services.  We can control what we deliver to our clients, but unfortunatley, not what the market delivers.  We can, however, try to steer them through any “storms” that may lie ahead based upon our real estate and finance experience, coupled with factually based counsel.

The Water Level is Rising, but Could the Tide be Turning?

We’ve had a rather big week in the Lamorinda real estate market with total inventory for the 3 community area rising by about 10% over the last 7 days to a total inventory of 227 available homes!  About 40% of that inventory is priced in the sub-million dollar range, making taking these communities to their most affordable levels in many years, especially when considering the current cost of capital. For those seeking to move up from lower priced communities, or perhaps buying their first home, it is doubtful we’ve seen more attractive economic circumstances in the last 10 years or so.  For those who have substantial investments in the area’s real estate, the market and overall economy’s softness has certainly been disconcerting — and for some, very painful.  

The “tide” may be turning a bit.  Always one to try and draw upon objective indicators of financial and market performance, I am often reticent to latch onto innuendo, subjective comments, or simply holding my finger to the wind.  Nevertheless, sometimes intuition and simple, subjective indicators do provide valuable insight to the market.  For what it’s worth, we are definitely feeling more interest in the market from our clients and from the clients of agents who we have recently talked to as part of our follow-up on the showings of our listings, as well as during the normal course of business.  As I write this entry, I am anxiously awaiting a response on an offer written by a client on a Lafayette home in the $1M+ range.  Earlier today, I also showed another client a home in the $2M range that I feel is a strong value proposition relative to competing properties.  Regardless of whether the client ultimately feels the home is “perfect” for their needs, the fact remains that they are prepared to buy in the present market and now feel that they will be served well over the longterm.  Yet another client called us yesterday seeking to buy another property for a massive remodel.

True… this is our little microcosm of the market, but we’ve also recently heard some positive indicators from other agents who we know and who are active in this community’s market.  Time will tell, but perhaps the tide is now beginning to turn.

The Financial Clamp on the Market

For those who have followed the traditional Lafayette/Orinda markets over the years, one would think that we’ve now found ourselves in a time capsule, circa 1999, or perhaps a bit earlier.  Looking at the present list of 33 properties “pending” in escrow, two-thirds of them were priced less than $1M and there is only one priced at over $1.5M.  In fact the present average price of homes in escrow is just $956,000… a price point that formerly was thought to barely get you four walls, a roof, public utilities… and that’s about it in the former community of sub-one million dollar “tear downs”.    Not so any more.  The most expensive home currently in escrow was priced at $1.995M for over 5000 sq. ft. of brand new, high quality construction… bargain-priced to move by a well-respected builder who unfortunately did not react to the need for price adjustments in last year’s market.  Rather than continue to fight the market, he priced it to attract attention, and that it did… 3 offers, but none over list price. 

One of the greatest challenges that we’re all having… inclusive of active real estate professionals and sellers… is the recalibration process that is going on with regard to pricing properties.  We still find ourselves driving up to a home, and mentally telling ourselves that it’s got to be worth at least $X, only to recalibrate against a modest number of sales data points, and then realize that the “new market” price is really $Y.  As a seller, it’s MUCH more challenging to bring oneself to the “new market” reality because of the rapid and precipitous path the market has taken over the last year, and the strong emotional attachment most have to their homes.  “Surely our home can’t be worth $Y… we’ll just wait for the ‘right buyer’.”  It’s a logical reaction, but one that will eventually work its way out of the market as time and the new reality sets in. 

So, back to the $956,000 average pending sales price for the Lafayette/Orinda market.  What’s up with that?!  Well, it’s the “Financial Clamp” that’s been imposed by our friendly financial institutions who have yet to really, truly commit to make ready availability of loans for homes costing over $1M.  With the soon-to-be new max conforming loan rate moving to a whopping $729,000, we may see the clamp raised a little higher on the market ladder, but not enough to really help out those who are trying to sell their $1.5M+ home in this market.  With few exceptions, most buyers in that price range require loans of $1M+.  They ARE available today, but with very stringent restrictions that make it very challenging for most. 

One of my clients was recently pre-approved for one of these new “super-jumbo” loans.  The lender wanted 30% down and the loan would have a 25 year amortization schedule, all due and payable in 15 years… the interest rate was in the low 6% range, however the lender also wanted one year’s worth of principle, interest, taxes, & insurance as reserves — all documented before close of escrow!  Not too many buyers have those resources, thus the “financial clamp” on our current market. 

I hope that this issue is on the radar of those who are trying to free up the housing money supply.  Our market, and many within California, do not fit the profile found in “middle America’ where a $1M+ residence is considered an estate property.  My sources within the financial industry tell me that things will get better — that more super-jumbo loans are headed our way.  If so, our market will get better, too!

The Market Update You Won’t Find in the Local Media…

The question of the week has been, “What should we do…?”  We’ve responded to this question from clients whose homes we currently have listed, from those who are thinking of putting their homes on the market, and from buyers sitting on the sideline.  I’ve received emails through our website this week from at least two families relocating into the area, and of course, they have been reading the national media and are hesitant to move into the marketplace.  Obviously, I don’t know the precise answer to this question with absolute certainty, however, I always believe in drawing upon objective data to help make important financial decisions in my personal and business life.  To the extent possible, augmenting the data with a sprinkling of qualitative information and intuition always helps!

So, let’s look at the very latest market data made available by the MLS this week… starting with a broad view of Contra Costa County.  On a year-over-year basis for the month of February, the latest data available shows the following:

– Inventories are DOWN 33% over last year;

– Sales… actual closed escrows are UP 73.5% over Feb 2008;

– And, Pending sales… those presently in escrow( the leading edge of the mkt.) … are UP 84% over Feb 2008!

For those who rely upon the national, or even the local print media for their real estate news, this has got to be rather startling information!  What’s going on here!?  Well, what we’re observing  is the very important absorption of the REO/foreclosure homes, primarily in the east county of Contra Costa, but certainly extending into Concord, Pleasant Hill, Walnut Creek… and even to a much lesser extent, the Lamorinda area.  This process is critically important to the stabilization of the entire market.  The good news here is that the process is well underway.  Yes, there are option ARM loan holders whose interest rates will get ratcheted up in 2009, and they may need to sell, however the numbers show there are plenty of buyers ready to absorb that inventory.

As a side note, I’m also observing excellent investment opportunities for our clients with these homes… the ability to buy at huge discounts from the market values of just two years ago, put 20% or so down, and have a neutal to positive cash flow immediately.  Looking at other alternative asset classes, real estate is starting to look pretty good!  These opportunities will continue to fuel the absorption of inventory and the firming up of the market.  When evaluating a purchase decision, whether as a primary residence or as an investor, one has to look at the total cost of ownership… including the cost of capital.  Today’s low rates, in combination with dramatically lower prices, make a very appealing case for real estate ownership.

OK… back to the market.  Let’s look at the “Lamorinda” market’s latest performance.  Here, we see a different story, but one that would logically be expected.  Afterall, on a macro basis, we’re looking at an evolutionary process.  The “low end” inventory will get absorbed before we see the more “upper end” markets of Lamorinda recover.  So, let’s look at exactly the same span of time as above… Feb 2009 over Feb 2008:

– Lamorinda inventories are UP 35%;

– Sales… actual closed escrows are DOWN 27%;

– And, Pending sales… those presently in escrow, are DOWN 42%.

From my perspective, there are no surprises here.  Within Lamorinda, we’re dealing with a market where there are few investor sales, therefore transactions are really between people who actually live in their home, and those who seek to live there!  As a result, factors like a month’s worth of heavy rain keeps them out of the marketplace, as does a month’s worth of bad news on the broader economy. 

If historic trending repeats itself in 2009, we’re poised to enter the peak of the buying/selling season.  There are also other data points that suggest that consumer interest in Lamorinda homes is substantially on the rise.  I can’t give away all of my secrets here in this blog, but those data points are factually based, and captured in a scientific manner.  OK… I admit to be a “techie”, but it does allow me to market our properties more effectively online, and to quantitatively measure effectiveness.  So, given this “secret” information, there are strong indications that we’re poised for buyers to actually move into our marketplace in the next 2-4 weeks and make purchase decisions… all based upon consumer behavioral trends, scientifically measured in markets prior to 2009.  The unknown element is whether those behavioral trends will repeat this year.

So, back to the “What do I do?” question.  As a buyer, there will be superb buys in our market this spring and summer.  There have already been some, including a recent $2M Lafayette home that was VERY attractively priced and received 3 offers.  There have been other compelling values, as well.  I personally believe this is a very good time to be a buyer.

We will continue to see downward pressure applied to the upper end of our market.  This is fueled by the problems of the overall economy, as well as by the fact that the upper end market has been fairly “protected” vs. the mid and lower end segments.  Now, it appears its time has arrived for a correction.  Additionally, the upper end market of Lafayette & Orinda was artificially driven up in 2007 by a significant influx of Wachovia executives moving in to run their acquisition of World Savings.  Their most senior executive purchased a $4.6M property that we happened to have listed, and then invested several hundred thousand into landscaping, a pool, and interior appointments.  That property went on the market in Lafayette about 3 weeks ago for $4.4M, and then was promptly lowered to $3.9M last week.  Another senior exec purchased a home for $3.85M in Orinda in early 2007, and rumor has it that it will be on the market within a week or two for just under $3M.  There are more of these situations out there, and they will place downward pressure on our market in 2009.  As they sell and close escrow, they will become the “comparable sales” that the appraisers will use to determine relative home values.  It’s the honest market reality, and its something that none of us can change.

So, as a Seller, what do you do?  Unless you are in a position to wait out the market for what might be several years at approximately the present price levels, you need to be realistic about the market.  If you are planning on moving up in price, you’ll find that you’ll benefit immensely from the present circumstances.  If you are moving down, you’ll get a strong value on your replacement property, but you’ll see a greater discount taken on the sale of your more expensive property.  Again, that’s the present market!  The best advice I can give is to not deceive yourself about the market, face it squarely, and price your home so that there is strong perceived value to prospective buyers.  The worst thing you can do is to chase the market.  In the long run, the financial toll will be much greater.

As always, feel free to email or call me with your questions and/or comments.  We’d be delighted to assist you in any manner possible with your real estate needs.

Is there change in the wind?

Just a short note here to try and bring some optimism to the never-ending stream of media negativity.  So, it’s a well-known fact within the world of internet marketing that an increase in consumer “views” of a product normally precede an increase in consumer purchases.  

As a matter of course, I normally monitor activity levels in our internet marketing to make sure it is effectively placed and receiving the expected traffic levels.  One of the beauties of the “new media” is that its possible to actually measure the success of one’s marketing, as opposed to simply putting ads in glossy magazines that people in supermarkets and car washes read.  The reality of today’s world is that people DON’T buy homes by looking in printed media… “car wash” and “supermarket rack”  magazines or the newspaper.  :)  Enough about that!  

Anyway, while monitoring the past week’s traffic levels on various online media that I use for our client’s home marketing, I noticed an interesting change.  Traffic levels increased 6 to 8 times the previous week’s levels!!!  This occurred for each of the properties we currently have listed, so it wasn’t limited to just one.  So… we’re cautiously optimistic that we’re about to see a change in buyer behavior, with more people jumping in and actually taking advantage of some of the excellent buys available in today’s real estate market.  Stay tuned for more!!!

The Rain Has Departed… Will the Buyers Come Forth?

With a week’s worth of sunshine in the forecast ahead, and as we head into what should be the prime Spring real estate market, it’ll be interesting to see whether we see buyers stepping forward into the market place.  Oh, we’ve seen some, particularly in the lower to mid area of our market, but not the quantity that we’re used to seeing as we approach mid-March.  Interestingly, conversations that I’ve had with several colleagues today seems to suggest that we’re about to see at least some new buyers jump in and buy now!  One of the colleagues that I spoke with came by to talk to me about a new $2.695M listing that Susan and I just put on the market in Orinda.  She’s got qualified buyers coming out to look at homes next weekend!  We’re also seeing several of our buyer clients poised to enter the market, too… all in price ranges that are above the mean for the “Lamorinda” market.  

Although it’s hard to find positive news anywhere in the media, we’re optimistic that many buyers are going to see the long-term opportunities in the present market and jump in.  I know we’re in a drought, but hopefully we’ll get enough of a break in the weather to see whether our optimism is well-founded.  :)

In the meantime… several people have asked recently about the new California tax credit available for buying a home.  Rather than try to summarize all of the program’s provisions, it’s better to take you right to the source.  The following is taken directly from the California Franchise Tax Board site:

This tax credit is available for qualified buyers who on or after March 1, 2009, and before March 1, 2010, purchase a qualified principal residence that has never been occupied. The buyer must reside in the new home for a minimum of two years immediately following the purchase date.

We will accept applications for allocation of credit by fax only (916.845.9754), starting March 1, 2009; however, we will not send notifications of credit allocation until we have developed procedures. Once we begin processing allocation applications, credits will be allocated on a first-come, first-served basis. We will update this page as soon as we begin mailing credit allocation letters. We plan to begin mailing credit allocation letters no later than May 1, 2009. This delay is necessary to allow us time to develop a system to capture and verify the application information, allocate the credits, and send the credit allocation letters. Please be patient with us and do not send applications more than one time. (Updated)

Tax credit amounts

California allocated $100,000,000 for this tax credit. Buyers must apply for credit allocation from us. Applications will be reviewed and credit allocations will be made on a first-come, first-served basis. Once $100,000,000 has been allocated, the tax credit will no longer be available. Please check this page for updates on the allocated and remaining credits available.

• Requirements of the credit

• The home must be a “qualified principal residence” as defined under California Revenue and Taxation Code Section 17059(b)(1). The home must:
  • Be a single-family residence, whether detached or attached.
  • Never have been previously occupied.
  • Be occupied by the taxpayer for a minimum of two years.
  • Be eligible for the property tax homeowner’s exemption under California Revenue and Taxation Code Section 218.
• For over three successive taxable years, the total credit allocated among owners that occupy the home must not exceed $10,000. (Multiple qualified buyers that occupy the home will be allocated credit based on the amount paid and their percentage of ownership.)
• Any credit that reduced tax on a tax return must be repaid if the buyer does not occupy the home for at least two years immediately following the purchase date.
• FTB may request documentation to ensure buyers have complied with the requirements of the credit.

Qualified buyer:
A taxpayer who purchases a single-family residence, whether detached or attached, that has never been occupied, that is purchased to be the principal residence of the taxpayer for a minimum of two years, and that is eligible for the homeowner’s exemption under California Revenue and Taxation Code Section 218.

Qualified Principal Residence/New Home: (Updated)
A qualified principal residence means a single-family residence, whether detached or attached, that has never been occupied and is purchased to be the principal residence of the taxpayer for a minimum of two years and is eligible for the property tax homeowner’s exemption.

• Types of residence: Any of the following can qualify if it is your principal residence and is subject to property tax, whether real or personal property: a single family residence, a condominium, a unit in a cooperative project, a houseboat, a manufactured home, or a mobile home.
• Owner-built property: A home constructed by an owner -taxpayer is not eligible for the New Home Credit because the home has not been “purchased.”

Contact Franchise Tax Board:

Phone:

• 888.792.4900 (press 5)
• 916.845.4900 (not toll-free)

Email: wscs.gen@ftb.ca.gov

Welcome to our Blog… A Refreshingly Informed View of the Market

The big news has been the dramatic fall of an ailing economy that is still confounding the economists and seems to have caught most people off guard.   Qualitatively different than past recessions, it took a number of years for us to dig ourselves into the present quandary, and it will take a number of years to get out of it.  The present problems are rooted in complexities that are much broader and deeper than past recessions – with many of the major issues emanating from foundational elements of the US economy – the housing market, mortgage lending criteria, and banking/securities industry practices.   Unfortunately, we managed to export the problem to the rest of the world through the issuance of mortgage-backed securities, so it’s going to take a collective effort to correct the course of our mother ship Earth. 

Since we won’t be able to solve the overriding economic issues through anything said in this blog, nor can we add to the constant stream of “news” about the economy or the national real estate market.  We can try, however, to provide some insight to our local market and the opportunities, as well as pitfalls that may lie ahead.  Let’s begin by looking at the current available data on the Lafayette and Orinda marketplace, which are considered so similar that they really should be analyzed as one.

We observe a market that is neither as good as we’d like, nor as bad as we’ve heard via the media.  Current inventories are up about 25 percent over the same period last year, but sales volumes are not significantly dissimilar from a year ago.  The qualitative difference resides in the homes that are presently selling.  With prices showing a drop of close to 20 percent over the last 12 months, the homes that have sold recently are the ones that buyers perceive to be a strong value.  As a result, we saw a rather substantial decrease in price-per-square-foot averages for January 2009 over January 2008 as the strong value buys from December closed escrow and became a matter of record.  Looking at just the January year-over-year numbers, there was a 28 percent decrease in average prices.  Keep in mind that a month’s worth of sales data for this period is a very small sample of the annual market, and that there are a number of factors that can influence price averages.  Therefore, one cannot yet reach the conclusion that the entire market is down 28 percent from a year ago. 

Although the February 2009 market statistics aren’t normally released until close to mid-March, our interpretation of the market data suggests that inventories climbed to a level about 40% greater than February 2008, however the number of “pending” sales was almost identical to the previous period in 2008.  Since there is normally a dip in prices during the softer winter months, it will be important to watch the upcoming market and look for trends.  Anecdotally, a brand new home that we listed and sold for $4.6M just 2 short years ago with 3 offers on it, was just listed by another agent and reduced after 2 weeks of market time to $3.9M!!  This is after the present sellers invested an incremental several hundred thousand dollars into a new pool, landscaping and interior decorating!  Clearly, the upper end of our market is experiencing considerable softness.

The lack of liquidity in the credit markets contributes to our real estate woes.  Yes, there are many loan programs available, especially in the range up to about $729,000 in credit under the government’s conforming loan limits.  However, as we head upstream to the jumbo and super-jumbo loans that are typically required to buy homes in our community, the challenge becomes much greater.  As an example, a client of ours made an offer on a home in Lafayette valued at close to $2M.  The very best loan program that could be obtained required 30 percent down, a credit score of over 740, and one year’s additional cash reserves to cover the loan payments, plus taxes and insurance.  Fortunately, our client qualified for the loan, but most people don’t have those sorts of financial resources.  As many of us have heard, the liquidity of our banking system needs to improve so that funds are available to fund consumer home purchases.  This is a critical condition precedent to seeing the economy and our housing market improve.  With spring fast upon us, improving weather, and hopefully greater availability of credit, we could see an upward spike in the market that is typical of “normal” seasonality.

This is a challenging market for buyers, sellers, and their agents.  Buyers seeking to trade up will see the greatest financial benefit, given the larger price corrections seen in the upper end of the market.  Those telling us that they are waiting for the market to bottom must have far greater predictive powers than most, because even the most astute economists don’t know that a market has bottomed until it’s been missed and is on its way back up.  If you are in the market for the long-term, it’s hard to imagine a better time to be a buyer than right now.

Those seeking to sell will find this market the most challenging because it is so different from where it was just 6-8 months ago.  Effective marketing and exposure of a property is so critically important today, yet we so often see properties marketed on major real estate websites with poor quality photography and poorly written descriptive text.  Just this past week, we saw a $2M+ home online listed by a well-known agent, and the main photo for the listing was the home’s front door!  It’s no wonder the home still hasn’t sold after 6+ months of market time.  The sellers will never know how many potential buyers dismissed the property after previewing it online. 

All of our marketing collateral is professionally produced, and we invest the time and money into our internet marketing so that it is broadly viewed and presented in a manner that will attract buyers to our clients’ listings, not send them away.  There are some marketing fundamentals that never change… a quality presentation of a product reflects favorably on its perceived value, and a poor presentation diminishes its value.  We think our clients need and deserve every advantage they can have working for them. 

Getting a home into escrow today and seeing it successfully close is far more complicated than ever before.  Understanding the complexity of current lending practices is important, as well as possessing the analytical and financial skills to anticipate and neutralize potential problems, rather than react to them once it’s too late.  A thorough understanding of the market is of paramount importance to help preempt the low appraisals we’re seeing in the market, as the lenders seek to further diminish their risk in making loans.  Unfortunately, an under-appraisal forces the buyer to come up with more cash down payment, and often causes the sale to fall apart.  Anticipating this issue and having the skills to diminish its likelihood of occurrence is of paramount importance when we represent a client selling their home. 

In this market, “the devil is in the details”!  We pride ourselves in effectively anticipating and addressing the “small” details that can make a huge difference in the success of our clients’ real estate transactions.  And, when asked for our counsel, we respond honestly with facts, not conjecture.  Please let us know how we can assist you, your friends, or associates with matters relating to real estate.  We’d be honored to help in any manner possible.

Stay tuned for more market info on a regular basis!!!