Confidence, Real Estate And Our Way Of Life

Posted on October 5, 2013 by Tim Freund

Positive Housing MarketThe real estate market is changing again.  Of course it’s never static.  Even when it was in free fall, it was moving, just in the wrong direction.  After what has been an unprecedented run since the first of the year in which prices have risen 15-25%, the market is perhaps giving just a little bit back.  Kind of like the forest reclaiming a fallen tree, that just sort of disappears amongst the leaves and branches of the forest floor. It is said, that water always finds its equilibrium.  That is, that you can fill a glass with water, tilt the glass and the water will right itself to level.  And so it is with home values.

We saw the crash following the collapse of Lehman and the financial markets, bust through value floor we thought was long ago set.  Establishing new lows as they like to say on Wall Street.  The pendulum swung; it swung wildly and it swung too far.  So when home values began their inevitable recovery, that recovery came on with a vengeance and that’s why we saw such dramatic price corrections this year to the upside.  Whether aided by a flood of hedge fund and investor cash, scooping up distressed properties for pennies on the dollar or because interest rates were being kept down to historic lows through Federal Reserve manipulation or because people just got tired of waiting to move, the market found a balancing point this past spring and summer.  But like the falling tree, those valuation changes have been absorbed and there is a new accepted, “floor in the forest.”  That is, until the next tree falls; the next fire rages through or the next torrential rain causes mud slides and changes things all over again.

watching numbersThe real estate market is constantly in motion, much like nature.  It is for this reason that guys like me watch the numbers so closely, to better educate our sellers and buyers.  Here’s what the numbers say:  Inventory is declining again and the market is slowing, not at all unusual for this time of year.  Not unusual that is, if you can remember back to what was the usual and normal seasonal behavior for the market?  A wily veteran in my office told me last week that we’ve been so abnormal for so many years, we’ve forgotten what normal is; that a natural slowing traditionally occurs in the fall.  Buyers looking to buy before school starts, have.  The holidays are not that far off and many sellers are looking towards selling but not until next spring.  I just got a call yesterday from someone wanting to talk values and marketing strategies for that very thing: selling in the spring.

We are also seeing a rise in cancellations; longer marketing times and a general seller nervousness.   Is this because the pendulum of the correction is preparing to swing back?  Remember I said it swung too far to the downside and that is why we rose so quickly.  And if you picture a pendulum, it does what?  It swings one way and then back the other and then back again, until like water, it finds its place of balance.  So is that what’s happening?  To some extent I would say yes, probably.  But don’t forget what the wily vet said, “We’ve forgotten what normal is.”  So is this normal?

I’m going to go out on a limb here (and if you follow my blog you know I tend to live out there on the limb…) and say no, this is not normal.  In June we had rates jump more than a percent essentially overnight; that is not normal.  Our nation is rolling out the largest entitlement program since Medicare; that is not normal.  I have a friend who is an independent insurance broker.  He hasn’t written new business for 3 months because he spends all his time explaining the Affordable Health Care Act to very angry and confused business owners and HR people.  His Anthem rep says his sales numbers are down two thirds.  That is not normal.  And we have an environment in Washington that is at best entirely dysfunctional and at worst a mad house being run by the inmates.  Our nation’s confidence is not normal.  I recently told a friend who was bemoaning any negotiation with Iran, that the greatest terrorist threat to our country is not Iran; it’s not Al-Qaeda, rather it’s the Income Gap.  The New York Times reported last month that the top 1% of income earners captured more than half the income growth since the end of the recession and they had previously reported in 2011, that corporations received 88% of the profits.  Now you don’t have to be Einstein to figure that if the wealth of the nation is being disproportionately distributed to the haves and not the have-nots, we have a serious problem.  Some might say it’s 30 years in the making so, “Tim, that is normal.”  I however would argue that although incomes of middle class workers have in fact been shrinking for 30 years, the advent of technology, accompanied by the elimination by technology of quality jobs plus the failure of corporate America and our politicians to recognize and address this changing landscape, means times are not normal.  At best we are on an undulating carnival floor, just trying to maintain our balance, and at worst on one of those elevator-dropping thrill rides like they have at California Adventure at Disneyland.

self-confidence3

So what has all this soapbox bantering have to do with real estate?  Simple: our entire economy, and most acutely real estate, is based on a level of trust and faith and confidence, that things will be OK; that the government will be open tomorrow; that there will be law and order and that making life decisions like buying or selling a home can be made with trust and a reasonable expectation of what will happen next.  Given what is going on in Washington, is it any wonder the real estate market is slowing down?  Is it any wonder that important decisions like buying a home or a car or hiring a new employee, are being set aside for the moment?  Is it any wonder that our enemies abroad are licking their chops, hopeful that we fall on our faces?  Confidence has everything to do with our way of life; it as everything to do with real estate and it has everything to do with our future, and right now, our confidence is not normal.

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The Good Old Days

Posted on September 28, 2013 by Tim Freund

Last night I put on the original Great Gatsby with Robert Redford.  It’s not a particularly good movie really.  I guess it’s just a story that doesn’t translate from the page to the screen.  What struck me however, was this idea of when “times were good” that is, as in better than they are today, you know, the “Good Old Days.”  While watching Gatsby, it is clear that in 1974 we romanticized the Roaring 20’s.  The economy was good, everyone was happy, there was no war and the crash of ’29 and upcoming depression, not yet a glimmer of a possibility.  Remember that in 1974 we were still ankles deep in Viet Nam and our President was under investigation for illegal activity associated with Watergate.  Yes, things were pretty bad when compared to the Roaring ‘20’s.  In fact they were pretty bad as compared to the 1950’s too, or so George Lucas would have us believe in his 1973 classic look back in American Graffiti.   So I guess 1974 was a pretty bleak year.

And yet… because of the Oil Crisis, gas prices were “raging high,” at $0.53 per gallon, the median income was somewhere around $11,000 per year and a new home cost about $39,000 (just over 3 times median income).

When I compare these figures to today, I’m not so sure the folks of 1974 had a clue what was a good time and what was a bad time.  Consider this, today the median income stands around $51,000 per annum about 4.5 times higher than 1974; median home price about $203,000, 4 times median income and about 5.5 times higher and gas about 9 times higher.  As you can see, today income is being out paced today by costs of goods and services.  What I find interesting here is that it would appear that times were better then, than they are now, much like they felt in 1974 when thinking about the 20’s or the 50’s.  However, there are a couple of things that stand out when comparing 1974 to today. While unemployment stood at 4.3% roughly 70% lower than today, inflation was at 13% and climbing which meant interest rates were going up and while incomes were higher relative to home prices, home affordability was much lower.  So exactly am I getting at?  I guess I’d liken these comparisons to a little like the Aesop fable of the dog and his bone:  A dog with a bone crosses a bridge.  Upon seeing his reflection in the stream below, the dog determines that the dog in the reflection has a better bone than he.  So he drops his bone and lunges for the other only to wind up with no bone and a mouthful of water.  As Aesop so wisely presents in his allegory, sometimes we are better off today than we might think we are and it isn’t until later that this becomes clear.  You see, while we have many problems as a nation, not the least of which is our current Congress, things could be a whole lot worse (as they just were during the Great Recession) and maybe, just maybe, we will look back at 2013 and call these times the “Good Old Days” when homes were appreciating, interest rates low, the economy improving and we have for the first time a nation where everyone will have health insurance.  I suppose only time will tell.

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The World Is Flat! Thank Goodness… Kinda

Posted on September 13, 2013 by Tim Freund

There were several interesting items of note it this morning’s paper some good, some not so good.  First and foremost is that it was reported that Southern California prices were flat for the second consecutive month.  Whew!  For a minute or two it was starting to look like a bubble was in the making.  If you’ve been following the Real Estate Conversation for any length of time, you know by now that my position was that the pendulum swung too far and that the rise over the past twelve months was simply a correction; that we bottomed between 2009-11 and that we should be entering a period of sustained stability with modest price appreciation going forward.  Thus the report of ‘contiguous flatness,’ is indeed welcome news.

Inventory in Southern California stands a little over 2 months.  The general consensus is that 6 months inventory is a balanced market, neither favoring buyer nor seller.  I maintain that California must always be in a perpetual state of shortage to justify our high prices.  At just over 2 months, we are nearing a more balanced market of 3 months inventory.  So in this case, flat is good.

The second bit of good news was that California is set to raise the minimum wage to $10 per hour.  While this will roil many small business owners, improving incomes is the only way an economy can grow and sustained property appreciation is possible.  If incomes don’t rise, neither can prices.  By and large, the recovery from the Great Recession has been void of real income growth, so any income growth, is good at this point, even if it comes at the hands of Big Government.

The last thing I found interesting was not so good and really points to one of the fundamental problems the United States faces and that is that Big Business is not spreading the massive wealth they are accumulating with their employees, in the form of higher wages, increased hiring and business expansion.  Rather they are rewarding a smaller group of investors.  What I am referring to here, is the trend of corporations buying back stock, in an effort to boost stock price,  rather than invest their profits in their people and their business.  To what am I referring you ask?   Disney announced that they are buying back $8B in stock.  $8 Billion, as in with a ‘B.’  So why does this trouble me?  Quite simply, instead of taking their enormous cash surplus (profits) and putting it to work by expanding, or through acquisition of other companies and/or equipment (computers, networks etc.) or for that matter, employee bonuses for a job well done, they are going to boost their stock price by becoming a big buyer and thus driving the price up.  Why you ask?  As the supply of Disney stock decreases, the demand for the remaining shares increases, and thus so does the price.  We are seeing this all over.  Amgen announced something similar last year as did Apple and in fact most of the major corporations have been making similar announcements as they get wealthier and wealthier.  The cash that Corporate America is sitting on today is in the Trillions, as in with a ‘T.’  So again, rather than use profits to expand business, expand hiring, increase wages thus creating a population more able to purchase the goods and services Corporate America makes, they are giving it back to the shareholders.  And sure, some of the employees own the company stock so they benefit by a rising stock and many others own some of these companies in their 401K so there is some benefit there as well, and yes some of those who have improved wealth via their rising portfolio will spend more on items they would have otherwise forgone.   Buying back stock however, does very little to increase employment and incomes.  It’s just a cheap way for stagnant thinking executives to raise their stock’s value as opposed to raising its value by increasing the size and scope and profitability of their business.

So the good news is that the real estate market is normalizing and the minimum wage is going to increase so we may actually experience a little much needed wage inflation.  The bad news is that Corporate America is still business as usual and that is not good news for anyone and certainly not real estate.

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Real Estate, Realtors And What I Learned From My Son’s Trip To The Hospital

Posted on September 2, 2013 by Tim Freund

For the past 5 days my 19 year old son has been a guest of Los Robles Regional Medical Center.  Since he’s being released today, I can finally relax and reflect.  Being that I am a Realtor, and a blogger, I like to look at things in terms of real estate, drawing parallels where they exist and this hospital experience is no different.  For example, there’s the customer service angle.  The nurses have been thorough and thoughtful, proactive and knowledgeable.  How grateful am I as a nervous parent, that the staff is this way?  Very.  My confidence in them only increased as day one became day three etc.  So too should your experience with your Realtor be.  Market knowledge and area expertise are critical to a successful Realtor and to every real estate transaction.  Contrast my experience with the doctors and nurses with that of the lady at the cafeteria.  The other day she closed up early and although we were there in time, she did not want to reopen to serve us.  Her focus was not on the customer at all but rather to her own wants and needs.  Her insensitivity to her customer; her failure to understand what was important to me and the stresses I was under made my experience less than satisfactory. This is not at all dissimilar to what many home buyers and sellers feel when they are going through the real estate transaction process.  A Realtor who fails to recognize where the stresses for a buyer or seller are, is not likely to win any customer satisfaction awards.  One of the reasons Realtors are held in such poor regard by the public is that they are often perceived as not doing enough.  Why is that?  Odds are it has to do with (and I quote the prison warden in the movie Hud), “A failure to communicate.”  My clients may not always like it when I tell the what’s happening (or not) during the process, but they consistently give me high marks on our customer satisfaction survey, because throughout the process, I keep them informed.  Nothing frustrates a home buyer or seller more than a Realtor who doesn’t communicate.

Knowledge.  How important do you think it was to me and my wife that the doctor, was able to figure out what was going on with my son, create an action plan to treat him and then implement it?  Pretty darn important.  How important is it for a homeowner to have a Realtor who is able to do the same when it comes to preparing a home for sale?  Being able to help a seller declutter, paint or carpet and stage the home for sale is something every Realtor should do, but most do not.  Regardless of the industry, we all want an expert giving us advice so that we can make the informed decisions.

In real estate we hear over and over again that the three most important words are location, location, location.  I can tell you that the fact that we live just 10 minutes from the emergency room was pretty important the other night.  I can also tell you that the new room in the new wing that my son was given, with the panoramic view of the nature preserve, didn’t suck either.  It made the experience of sitting day in and day out at the hospital, a whole lot more pleasant.  You see, location, location, location, really are the three most important words no matter the real estate in question.

As we leave the hospital today, it is obvious to me that communication, expertise, thoughtfulness and follow-through, are as important as ever.  Whether we’re talking about medicine or real estate, or for that matter, just about any business where professional services are offered, customer service and industry expertise matters.  However, unlike the hospital where you pretty much get what you get and can only hope the provider is capable, in real estate you have a choice.  So do your research and to quote the old knight of the Templar at the end of Indiana Jones and the Last Crusade, “Choose wisely,” or else hope you are as lucky as we were in getting the great staff of Los Robles Regional Medical Center.

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June 2013: Perception Is 9/10’s Of The Law

Posted on August 28, 2013 by Tim Freund

Great news for property owners: Case-Shiller, S & P’s housing index, shows home values are up across the nation.  Prices in some areas like Los Angeles Metro, are up for the 15th consecutive month and up over 20% from the lows in 2011.  They indicate that inventory is up and that the market and home value appreciation may be cooling slightly. They also estimate that the inventory nationally stands at about 5 month’s supply (a 6 month supply is generally considered a balanced market), so this means it is still a seller’s market, if only slightly.  All very interesting and not particularly surprising if you are a real estate professional.

As a Realtor, I’ve watched as prices have risen, sometimes in dramatic fashion when looked at year over year.  From a month over month perspective, it is a little harder to see; it’s kind of the forest for the trees thing: looking from up close you see the trees but not the forest.  To understand what’s going you have to consider a few things.  First is the fact that we dropped so much.  The pendulum always swings too far to one side or the other before finally finding a balancing point.  Prices went down way too far (for a growing population coupled with nonexistent new construction), which by the way is why Wall Street big money jumped in, they saw this before most of the little guys.  Then as prices rose, the new price was compared to a month and year prior, so when you compare anything to the bottom, naturally the size of the spread is exacerbated.  This is what has been happening.  And what happens when the public sees these huge spreads between what was the value and what is the value today?  They jump in for fear of missing the boat.  It is said that possession is 9/10’s of the law, but I’d like to suggest to you that perception is 9/10’s of the law.  Once the public perceived that home value price declines were over, many buyers jumped in; not because interest rates were so low but because they perceived a bottom and there’s safety in numbers.  Consider a swimming pool… When everyone jumps in the water at the same time, the level of the water rises perhaps to the point of spilling over.  To some extent, this is what has happened.  As a few people begin exiting the pool, the water level comes down.  This would be both normal and healthy.  Of course should everyone leave simultaneously, the water level would go down too far, but that is not what has happened, and I don’t expect it to either.

So what do I expect?  I expect that as the market cools, inventory will rise and the seller’s market will shift to that of a more balanced market.  This is happening nationally as we get to the 5 months to 6 months inventory level.  By the way, I have always maintained that California’s balanced market “tipping point” is 3 month’s inventory.   The reason is simple, California has to be in a perpetual state of shortage with regards to supply vs. demand.  If we had the same tipping point as Houston, we would have the same prices as Houston.  That said, inventory is rising in California and after an historic, meteoric rise in values since a year ago, we are starting to see a cooling trend.  Rising interest rates are clearly the catalyst for this, but the effect rising rates will have on home values long term is probably going to be pretty small.  It is true that rising rates affect affordability but we can’t underestimate stagnant income growth and the recent run up in values as key contributors.  It is this combination of rising rates and values that will slow appreciation, not any one element alone.  The Los Angeles Times reported that at the peak of 2006, affordability in California stood at 12%.   Interest rates stood around mid 6% in 2006.  Today we are in the mid 30%’s so we have a long way to go before we hit bubble-like levels.

Shiller also reports values stand at about 20% below the peak of 2006.  So while we have recouped a big chunk of our price decline, there is still a long way to go before everyone who bought high, is whole again.   Of course California only dropped 30-35% on average so we may be closer to 15% below the peaks; less along the coast and more inland, but you get the idea.  It is interesting to me that when I look at Case-Shiller’s graph over the past 25 years and specifically over the past decade, there are two points that today’s values cross the arc of rising and subsequently falling values.  The point Shiller likes to refer to, is the earlier spot on the graph where the line crosses.  That is, where today’s values are the same as spring 2004.  But because values went up and then went down, today’s prices also cross the graph as prices were declining in late 2007.  So prices are the same today as they were in spring 2004 and fall 2007 (just imagine cutting the top off a mountain and you get the picture).  I like to point this fact out because while the market was in decline in 2007 (who knew how far away the bottom was at the time), it was still a pretty good market, just one filled with more price reductions.

Getting back to my expectations, I would suggest that we will see the rise in values year over year begin to shrink as price appreciation slows, coupled with fact that those new prices will be compared against the prior year when prices were on the rise, thus the spread will get smaller and smaller.  Going forward we should not be surprised then, to see appreciation moderate and even become flat.  The significance to this eventuality is not that flat is bad, rather how the public will respond and how the message will be conveyed by the media.  If perception really is 9/10’s of the law, then how the public views these changes will have as much impact on home values as just about anything, and that will be interesting indeed.

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Choosing A Realtor: Should You Hire A Friend Or Family Member As Your Agent?

Posted on August 19, 2013 by Tim Freund

There’s an old adage in real estate: everyone knows a Realtor.  So if that’s the case, how do you choose an agent to represent you if you already have a personal relationship with some who sells real estate?

Choosing a Realtor is tough.  You have to find someone you trust; someone who will look out for your best interest; someone who is knowledgeable about the market and also has the experience to counsel you on what will be the largest personal financial decision of your life. It’s really a tall order, so what do you do when you’ve got a friend or family member in real estate that may not be all that you need?  Should you use them or not?

First and foremost, when choosing an agent to work with, you have to hire someone you trust, and your trust has to be well placed.  What I mean is, if you trust someone whose ethics you know are somewhat questionable, caveat emptor, buyer beware.  Consider their behavior over the years; do you believe them to be ethical and honest?  Trust and ethics are of paramount importance when choosing a Realtor.  And by the way, the fact that they might save you a few dollars is not reason enough to use them, there’s just too much at stake.  You really have to believe your agent is a person of character.  If you have any doubts you should probably reconsider your choosing them.  If someone isn’t trustworthy in daily life, their behavior is not likely to change when the chips are down in a real estate transaction.  If we’re talking about a friend or family member, be honest with yourself, but understand that if you don’t choose your friend or family to represent you, there are going to be repercussions.  But fear of repercussions is not reason enough to use someone you don’t want to.

What happens when you’ve got a personal friend or family member that is in the business and you really don’t want to use them?  Simple, don’t.  However, once you make this decision, you have to “cowboy up” and talk with them, preferably in person.  Maybe start by emphasizing how much their friendship means etc., and then tell them that you are going to be selling your home, but you’re using someone else.  Look, it’s never easy, but I can tell you from personal experience, if you tell your friend that your friendship is really important and explain why you’re using someone else and that you wanted to tell them in person, they will have a really hard time holding a grudge.  It’s no guarantee of course, they may really need the money and really be hurt, but you are much less likely to run afoul and permanently damage the relationship if you are forthright and tell them in person.  And please, don’t use the “I don’t want to do business with friends” line, that’s just a cop-out.  Tell them why you chose the person you did: They are the neighborhood expert; you don’t work my area; you’re too far away.  If it really is your position that friends and business don’t mix, then take the responsibility and tell them, “I have to be able to fire you and I couldn’t do that if we were working together, I care too much about you, but you know how tough I can be…”  If you know your personality or that of your spouse won’t mix with someone you know, then you should say that too; “I like/love you but I need someone I can push around and you’re not that person.  I just have too much respect for you, but I have to be honest with myself and fair to you.”  It’s not going to be easy no matter how you slice it but it’s better to face the music now then to live with it later.

If however, your family member, church friend, neighbor, softball buddy, really is a good agent, then use them because if you trust them, then trust them and listen to them.  A good agent is hard to find, so if you know one, you’ll thank yourself later for using them friend or not.

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A Case For Keeping Fannie And Freddie

Posted on August 9, 2013 by Tim Freund

The President came out two days ago in support of the conservative agenda to do away with Fannie Mae and Freddie Mac.  But there is something that I just don’t understand about the push by the President and Congressional conservatives, why?  I guess the concern is that the tax payer could get stuck with the bill again should there be another down turn.  After all, the government had to take over the public/private companies following the financial crisis and the tax payer had to “bail out them out.”  The cost to the tax payer of saving Fannie was $117B and $72B to save Freddie.  To date Fannie has repaid the taxpayer $105B after posting another quarter of record profits while Freddie $41B.  Huh, I think I like the government being in certain businesses.  In fact, at this rate by next quarter Fannie will be helping to pay down the Federal deficit or maybe since they’re in the lending business, help cover the skyrocketing costs of student loan debt by offering submarket interest rates to our youth. Does this make me a socialist?  I think not.  Rather, I think it just makes me logical.

You may recall that the reason the federal government had to step in and bail out General Motors, AIG and Freddie and Fannie, was that the financial meltdown threatened our economic foundation’s very existence.  Too big to fail, they said.  As a real estate professional I will never forget when the entire secondary loan market ceased to exist.  The secondary loan market is the place where mortgages are sold by banks so that they replenish their capital so that they can turn around and lend again.  It is the very foundation of our economic system.  The secondary mortgage market used to be insurance companies and hedge funds.  This is why AIG got into so much trouble; they bought bad bundles of high risk loans and when those loans were defaulted on, AIG had worthless paper.  Since AIG is primarily a life insurance company, it was reasoned that to let them fail would put countless retirees, future retirees and beneficiaries at risk of losing the insurance they’d been paying for and their survivors were depending on.  To save AIG, the taxpayer had to buy $182B in AIG stock.  Gradually the government sold its stake in AIG and eventually posted a $22B profit for the tax payer.  A 12% return on our investment.  Not bad if you ask me.

I suppose the argument against the US Government being in business is that they have an unfair advantage over the private sector.  To this I say, so?  In fact I would go a step further.  I would say that the government should be in a business partnership with the American people with regards to many businesses, not just the purchasing of home loans, as Freddie and Fannie do.  This idea that the government is not letting market forces free float and that that is somehow dysfunctional, fails to recognize in the case of home loans anyway, there is no secondary marketplace.  The insurance companies and hedge funds don’t want to buy home loans.  They could but they want higher rates of return.  Higher rates of return mean higher interest rates to the consumer.  This is not in the best interest of the American public, but is for Wall Street money managers and the wealthy who can afford to invest in these companies.  So the argument is that the consumer should pay more so that the free market can be free.  Hogwash.  I want my government to work for me, not the other way around.  I want the government to be profitable so I can pay lower taxes.  I want the government to make so much money, that my healthcare costs are lowered and our kid’s college education is made at least marginally affordable for the average family.  Taking this thought a step further, I advocate that the government should be in the energy business; in partnership with free enterprise.  For example, the government regularly grants leases to private companies to drill for gas and oil on public lands.  The leases we give pay us a fraction of the money and profit these companies earn. Because public lands are ours – we own them, they’re ours – I believe, we should be entitled to share in the profit.  A joint venture as it were.

When I worked for Shapell Industries, a Southern California home builder, they had joint ventures on land in Northridge, Long Beach and Laguna Niguel.  The JV partner didn’t earn as much as the home builder on every home sold,  but they did share in the profits.  With a public/private partnership on energy, we might for example, be able to restrict the sale of gas and oil extracted from our public lands to domestic refineries for domestic consumption, thus allowing Americans to buy fuel that is at prices that an owner would expect to pay – below market.  Why after all, should oil and gas extracted from public lands be allowed to be sold on the open market to China, forcing American citizens to have to compete and thus pay market prices when it came from our land to begin with?  Been to Saudi Arabia or Qatar?  Do you have any idea how cheap gas is there?  Try $0.48 per gallon.  What do you suppose the impact of that kind of cost for fuel would be on our domestic economy?  And I’m only talking about energy.  What about commodities like iron ore, copper, zinc etc., that are mined on public lands?  I think you see my point.

As it stands right now, Freddie and Fannie are turning a profit, helping to keep interest rates low for borrowers and there’s no one who wants compete with them anyway.  So there you have it, my case for keeping these lending giants firmly under government ownership for our benefit, we the people of the United States of America.  My name is Tim Freund and I approved this message.

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So You’re Thinking About Buying A Modest Fixer

Posted on August 2, 2013 by Tim Freund

You’ve been looking for a home and you’re on a pretty tight budget.  You’re well qualified and have the down payment in hand along with a strong preapproval letter.  There’s a home that just came up and you like the neighborhood and the specific location and the price is just about right.  Everything looks good but the home needs work, more work than you had hoped to have to do.  Should you pull the trigger?  This is a common scenario for many home buyers today, especially in Coastal California where the prices are high and new construction nonexistent.  It may come as a surprise to my out of state readers, but there are almost no new subdivisions in an around California’s best metropolitan areas.  This leaves home buyers with the choice of buying (and paying for) fixed up homes or buying homes in need of updating; sometimes considerable updating.

As our buyers considers whether they are up to the task of redoing this 1970’s all original gem, here are a couple of thoughts worth considering.  The first thing is to ensure that you have adequate money to complete the project, or whether you will only be able to go half way.  I recently sold a home that the sellers did an amazing job on a total fixer, that is, did an amazing job on the inside but were unable to finish the project because they underestimated the costs of doing the whole job.  Understanding costs are “job one” for any would-be home remodeler and/or buyer.  So how does one accurately assess costs and how should a buyer approach offering on a property that needs improvement?

Depending on the scope of the project, remodeling can be fun or a total nightmare.  When looking at the home you are considering purchasing, look at the expensive, not fun stuff first.  This would include plumbing (is it copper already or galvanized?); electrical (how large is the panel, 100 amp or 200 amp which we need today to handle all out electronics?); sewer line (is it clay or cast iron and is it filled with tree roots?); roof (has it ever been replaced or even serviced?); mechanicals like heat and air (does it even have air and how old are the systems?).  These items are not only costly, but let’s face it, they’re boring and while absolutely essential, they just don’t give any satisfaction to our creative juices.  For the purposes of our example, let’s just say that all these items are sufficiently working and won’t require imminent replacement.

So we are talking kitchen, baths, paint, floors…. and windows?  Windows can easily run $20-25,000 for a whole home, but add a lot of value in not only aesthetics but energy efficiency.  Kitchens; how much does it cost to redo a kitchen?  Of course it all depends on the materials (a theme you can count on throughout your project).  You can get a 10 x 10 IKEA kitchen cabinet set on sale today for $1,899.  It doesn’t include the labor to install so that’s a factor.  As an alternative, you could order from a custom cabinet maker and easily spend $30,000 or as little as $10,000.  This would include finish and installation.  I have personally found that Home Depot is not generally the best place to get cabinets.  There’s always a great local guy who will make and install custom for the same or better money.  As for counters, you can do tile for $1,000 or slab granite for anywhere from $4,500 on up.  Appliances are a biggie.  You can go Viking or Thermador and spend $20-25,000 or you can go GE Café and get in for $5-7000.  Naturally there are even less expensive.  See, this is the fun stuff right?  But watch out, I didn’t mention the sink, the faucets, the lighting and did you need to move outlets or possibly plumbing to accommodate the new fridge location and the ice maker line?  Ugh.  The accountants adding machine is making a lot of Chk-Chk, zzzphtit zing sounds…  Here’s one way to save a little and that’s Craigslist.  It’s amazing how you can find ovens and appliances on CL.  For example, I was recently shown a 48” DCS, high end oven and range, that new costs $10,000 for just $2,900 on Craigslist.  Also the big box stores are sometimes a great resource, but not always.  If you have access to a granite fabricator for example, they can often fabricate and install for less than Home Depot and you get a more unique piece of stone.

Venturing into the bathroom, you’ve got all the same things as a kitchen except instead of appliances you’ve got glass doors and shower heads.  Obviously a bathroom is a lot less expensive than a kitchen; that is as long as you are not putting in slab marble and gold plated fixtures.  Still a modest bath upgrade will cost $5,000 and an elaborate master suite can easily run $15-25,000.  Planning a “per room” budget is a good start to any project.  And after all this, you still need lighting (check your local lighting store rather than HD or Lowes because you might find a great returned item or floor model that really makes a room and at a fraction of retail) and paint, floors, doors and molding.

Because a project like this can be so overwhelming and so taxing on so many levels, I would recommend spending a little time at some of these stores just pricing things out, while you are home shopping.  Getting an idea of costs is really helpful as you assess the viability of a project and if the project makes sense.  I spoke with an agent this morning who told me his listing went multiple, a day after I said he was priced too high.  What do I know right?  Well, I like to think I know a lot and I said to him, “The home needs $75,000 and when finished, won’t be worth the money the buyer put into it.”  Naturally if money is no object, issues like these tend to go away, you’ll just buy already upgraded or you’re going to hire a professional to do all the remodeling and project management for you.  For most of us “Do- it-your-selfers” there are project planning sites online that can give you a helpful spreadsheet on what to expect.  Remodeling can be something to fear, but also something you can conquer.  Th key is to just be honest with yourself, know your limitations and do some homework.  What’s the old saying?   “An ounce of prevention, is worth a pound of cure.”

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Some Thoughts On Bernanke, Interest Rates And The State Of The Market

Posted on July 29, 2013 by Tim Freund

Today, the National Association of Realtors’ pending homes sales data, representing June’s homes entering contract, showed a decline of .04%.  Analysts expected a smaller decline of .01%.  The Decline is being blamed on a combination of low inventory (can’t go under contract if you’re not on the market) and the dramatic full 1% increase in interest rates since May.   And while the pending number still represents a near 11% increase from June of 2012, it is consistent with what every Realtor I know is saying about the market, and that is that it is slowing down.

Slowing down is an interesting term because it sounds negative, though it is not necessarily so.  What I mean is, yes the market is slowing some, but it couldn’t keep skyrocketing indefinitely without some kind of respite.  So a slowdown about now is actually welcome news.  A bubble we don’t want.  That said, here’s what I think is the reasoning for the decline in pending numbers.

First and foremost is the interest rate increase.  In our area of the Conejo Valley, along the Ventura/Los Angeles County line, the 1% increase in long term mortgage rates represents about a $500 a month increase in payment based on a conforming loan amount of $417,000.  That’s a lot of money to just about everyone and to my thinking, the clear catalyst for the slowdown in new contracts.  The current pool of buyers is pretty shell shocked by this rise from 3.5% to 4.5%.  That said, in a few months a new pool of buyers will exist and to them a 4.5% rate will sound good having never had a chance to buy at 3.5%.  It’s interesting when I talk to people in finance and investing, about the rise and the cause/reasoning behind it.  My personal belief is that Fed Chairman Bernanke blew it by making a statement about the eventuality of rising rates, without accompanying that statement with tangible action.  In other words, he came out and stated that if the unemployment should get down to 6.5% and the economy continued to show strength, then sometime in 2014 the Fed would begin ratcheting back their stimulus policy known as QE III, of buying $83B a month in mortgage backed securities (MBS).  Ratcheting back isn’t even raising the Fed Funds rate (the rate the Fed charges banks to borrow), it’s just scaling back the Fed’s printing of money and using that money to buy mortgages.  I argue that the failure to take action along with this statement means he shot a volley across the bow of bond traders and they then turned tail and ran but without hitting any target, Bernanke wasted a valuable bullet.  When bond traders run, they dump bonds and the rates rise as they did.  Yet the Fed did nothing.  So effectively Bernanke caused a rise in rates in anticipation of action, rather than because of action.  The obvious problem is that when he actually takes action, rates are going to go up even more.  I would argue that had he done something at the same time of his statement, the effect would have been the same.  After all, rates went up over 30%.  How much more would they have gone up had he done something?  Probably not at all would be my guess.

When I recently expressed this line of reasoning to someone, they said to me, “Maybe that’s what Bernanke wanted to have happen and you just don’t understand; he is the smartest guy in the room you know…”  While a possibility, I doubt it.  Especially given how much back peddling and damage control he and the other Fed presidents been doing ever since.   Frankly it’s his own fault because he has pledged a policy of transparency as a departure from the policies of his predecessor, Alan Greenspan.  You may recall that Greenspan used what Wall Street observers like to call, “Greenspeak” as a method to signal to the markets what the Fed was planning on doing without specifically declaring so.  The uncertainty and disagreement that ensued was something Bernanke has said he wants to avoid.  Here’s the problem with that: markets need a certain degree of uncertainty to function or else traders can’t make any money.  By giving the bond traders a warning about things to come, they reacted to the eventuality rather than the present day reality.

Regardless, on this we can agree: interest rates went up and that slowed things down.  But there’s more going on here than just an increase in rates, namely prices have gone up a lot in the past 6 months.  By most accounts, home prices have risen around 18% in the past 12 months and maybe by as much as 10-15% since the first of the year.  Clearly this appreciation is unsustainable and a slowdown inevitable.  In fact I am seeing that many sellers are pricing their homes too high which has the effect of keeping those homes on the market longer, increasing inventory and requiring more sellers to reduce price.  Moreover, historically summer inventory increases anyway, so that means there are a couple of forces at work here pushing our inventory higher.  Further, the rise in values has finally allowed many sellers to get out from under water, increasing mobility (the ability to sell) giving us some more homes for sale.   Thus we have more inventory due to more sellers, seasonal trends and longer marketing times as a result of overreaching sellers.

The Question is what does that portend for the near term?  If I were to guess I would say that prices are going to soften a little.  Moreover I would argue that the lions’ share of the appreciation (or recouping of losses from the dramatic crash we experienced) has already taken place.  That’s not to say the market is never going to rise again, nor that it is going to go back down, but it does mean that the market is flattening and its meteoric rise leveling.  Clearly this should be a healthy thing.  So whether this was Bernanke’s goal or not, his actions have caused the real estate market to pause and take a breath; appreciation to slow and the cost of buying when using financing to increase.  Only time will tell if this turns into a soft landing or a crash landing, either way, it’s going to be a little bit bumpy for a while.

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It’s Good To Be Right, But This Time Let’s Hope I’m Not

Posted on July 27, 2013 by Tim Freund

Yesterday I was asked by the real estate company I work for to participate in a panel and speak on a couple subjects.  The first topic was on how to successfully create a business based listings and the second, on blogging and writing about real estate.  Every Realtor knows, that a successful real estate practice requires an ability to get listings.  It truly is the bread and butter of the real estate trade.  Why you ask?  It’s really pretty simple.  Take any given weekend.  A Realtor who is working with buyers can show, what, maybe 3 buyers a few homes in one day?  So by really hustling, a good agent might be able to represent 6 clients in a weekend and that’s if all the stars align and you find each client a home in the first or second property you show.  Contrast that with listings.  In theory I could have an infinite number of listings, all being marketed simultaneously and being shown by anyone of the thousands of Realtors showing property over any normal weekend.  6 vs. infinity, hmmm… pretty easy to figure listings are the name of the real estate game.  Thus I spoke about how I market myself and what it is I do for my clients that gives them the confidence to hire me to list and sell their home.

After my panel participation, we moved to break out groups, where I was asked to speak about blogging and writing for real estate.  If you’ve read any of my posts in the past, you know that I am passionate about real estate and economics and like to share my views through my blog.  I was flattered to be asked and even more flattered by the number of people who came to my table to hear me speak about blogging.

I explained how you start a blog, where to get a domain name and how to use categories and tags to get noticed by the search engines.  But one of the questions really rang out and that was, how did I get my ideas for content.  I said many ideas just come from our day-to-day dealings with clients and transaction and other ideas simply come from the news.  For example, when I called the bottom of the real estate crash on May 28 2011, (https://therealestateconversation.com/2011/05/20/real-estate-good-news-just-keeps-coming/ ) it was based on my “boots on the ground” experiences and attention to the numbers that the market was producing.  When I wrote about, “How to successfully get a loan mod,” it was from my experience of helping some family members and clients to navigate through the morass that was the modification process.  The fun thing about putting thoughts and opinions on paper or in cyberspace, is that I can go back and look at things I’ve written.  By and large I’ve been pretty accurate and there’s no blog that stand out as, “oops, missed that one.”  In fact I’ve been right a lot.  Which brings me to today.

The first thing that happened today is that I read about a Palm Springs subdivision that is building tract homes based on the designs of the mid-century modern architecture of Ain, Eichler, May and Wright.  And that made me go back over my old blogs to find an article I’d written back when the housing market was in some of its darkest days and builders couldn’t give away homes.  In that, I put out a challenge to tract home builders to stop building ticky-tack houses and lean on these giants of modernism (https://therealestateconversation.com/2011/03/29/new-home-sales-a-creative-cure/).  Today’s L.A. Times article tells of this Palm Springs builder (Palm Springs, a city long known for its affection towards modernist and Googie architecture) doing just that and selling out every phase.  While not terribly surprising due to the hot market we are in, it none the less speaks to the new-old aesthetic that the young, Prius driving home buying population is seeking.

While going back over those articles I also found another assessment I made, that provides a gloomy and foreboding indication of what we as a nation should expect in the coming months.  As it turns out, according to the national media, the Republican led Congress is preparing for an all-out budget war and fight over the debt ceiling (again) with the President come this October.  And although both parties have pretty much stayed out of the way of our economic recovery, we better prepare ourselves that this behavior is going to change and it’s going to hurt us and hurt us bad.  Why, what’s supposed to happen you ask?  Put simply, the Congress is preparing to shut down the government if the president doesn’t either, put an end to ObamaCare or gut agencies like the EPA and National Endowment for the Arts in an effort to drastically cut government spending.  I’m not here to defend or critique ObamaCare, but it’s ironic that more economists than not want more government spending not less, yes more, because it will further stimulate what is largely accepted as a rather listless recovery and provide more good paying jobs.  Austerity does not a job create the reasoning goes, rather it puts more people out of work.  And while perhaps in the long term, smaller government is a vital step towards national economic health, the near term effect of austerity is not in the nation’s best interest in my opinion.  That said, we have weathered the “Sequester” and one can only hope I’m wrong, but I don’t think I am.  Consider my blog when the Congress last acted juvenile with our debt ceiling, (https://therealestateconversation.com/2011/08/02/glad-thats-over-with-now-lets-get-back-to-business/) and nearly allowed our nation to default on our creditors.  In that blog I wrote this about Congress’ action:  “By leading us down the debilitating path of uncertainty, Congress has single handily set back our hopes of economic recovery months and may have even pushed us back into recession.  If we are lucky, it will only mean greater pain and suffering for a short while, but if we don’t get back to business quickly, we may look back at July 2011 as the month Congress brought the world’s greatest economy to its knees.”  I was right then and the recovery ended up stalling that fall and didn’t start to pick up steam again until 9 months later in spring of 2012.  Now I may or may not be a soothsayer, but this much is clear, in looking back over nearly 4 years of The Real Estate Conversation, I can confidently state that my “boots on the ground” opinions have been far more right than wrong and I’m telling you here and now, if Congress goes forward with a government shutdown, we better be prepared to see our national debt explode with all the handouts we are going to have to give the unemployed. We should expect real estate to slow down, construction to slowdown and our fledgling recovery to maybe do a 180 and run right into another recession.  So there it is, I said it and I stand by it.  In a year we can look back at this blog and see if my sky is falling prediction was just Peter calling wolf or a call to action that should have been headed.  So write you Congressional leaders and beg for common sense because I wouldn’t bet against me.

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