What Should I Expect From A Listing Agent And How Do I Choose?

Posted on February 16, 2013 by Tim Freund

There’s an old adage when it comes to sales, under promise and over deliver.  I guess this approach originated at some sales training course back when master salesman Zig Ziglar was still selling pots and pans.  While probably the safer method, I don’t believe it to be the correct one.  I believe in making big promises and then keeping them.  I like to set the bar high and then do the job.  I do try to measure the expectations of my clients because they may not fully understand the job of listing a home for sale but rather only what’s at stake: the successful sale of their home.  So when hiring a listing agent to sell your home, what is the job and what should you expect?

It is often said that a home seller should interview 3 agents.  This allows them to get several approaches to marketing as well as a cross section of pricing opinions.  This is not necessarily a bad way to go about choosing an agent, but it’s not necessarily the best way either.  What I mean is, if you don’t know a real estate agent and are starting out cold, then yes, interview a few.  However, if you know someone you trust, and they refer you to a Realtor that they had a good experience with, you may not need to look any further.  Provided that is, they show you what they do and have done in the recent past.  How did they articulate the listing? How did they market the home and how did they manage the selling process?  You must also develop a rapport with them and some level of trust.

Let’s start with by looking at their recent success.  Why recent success?  According to the National Association of Realtors, the average age of a Realtor in 2012 was 56.  That suggests that there are a lot more agents above 56 than below.  Think about it, if you had 200 agents and 100 agents were 30, the other 100 would have to be 82 to average 56.  Age in and of itself is not necessarily a good thing nor bad.  Age suggests experience, but is no guarantee of such.  In fact age does not reflect at all upon experience since many Realtors find real estate as a second career.  Looking at years in the business however, and reviewing recent sales activity, will give you an indication of their level of success in today’s market place.  I would guess that the average good Realtor in my market probably does 5-8 transactions a year.  Our very top producer might approach 100, but most top tier agents fall in the 15-30 category yet only represent 10% of all licensees.  But there’s more to it than just numbers.  An agent selling REO’s (foreclosures) for the banks for example, means higher sales numbers by volume, while an agent selling high end estates equates to higher gross sales dollars.  Since you are not a bank, and may or may not be selling an estate property, the type of property you want to sell makes a big difference in agent you’ll want to select.

When examining recent sales activity, ask to look at their most recent few listings.  First and foremost, review their pictures.  Not all agents are blessed with the ability or have purchased the necessary equipment to give your home the photographic representation it deserves.  That’s OK however, so long as they hire a photographer.  If, and I see this a lot, they can’t take a straight picture and they do the photos themselves, you are cheating yourself out of the single most important marketing element of selling a home.  If a picture paints a thousand words, you better have good photos.  This is an absolute necessity and especially true in this day and age where 90%+ of all buyers begin their search on the internet where quality pictures are a must.  You’ll also want to read the descriptions of their listings.   This reflects the attention they have spent on looking at the homes they are listing and also gives you an idea a to their creativity in marketing.  In doing this, you’ll see what you can expect when they market your home.

Speaking of marketing, you’ll want to know just exactly how they intend on exposing  your home to the masses.  Do they pay for extra display photos on Realtor.com, Trulia and Zillow, or are they relying solely on their company website and the Multiple Listing Service?  Will they still utilize print media?  If you have a single story home that might be marketed to a senior for example, print media has more value than if you are a move up, family home and your buyer demographic is a 30-something with two kids and iPad in their hand.  This is part of the analysis required to be a successful Realtor, and one of the things you are hiring your agent to do.  Understanding market dynamics and marketing are not the same thing, but both are equally important.   And remember, homes don’t sell themselves, you are also hiring your agent to be a sales person.  Just because an agent  was formally a CFO of a fortune 500 company or has an MBA, doesn’t mean they can sell themselves out of a wet paper bag, let alone, your most valuable asset.

To recap, we’ve said your agent has to have recent success; possess an understanding of market conditions; have a sense for the dramatic when it comes to describing your property in both word and photograph, and have the ability to sell.  As you can see, there’s a lot more than meets the eye when hiring an agent to list your home.  It’s not just the old days of putting a sign in the yard and a post on the MLS.

Perhaps more than anything else you’ll ever do, selling a home is high stakes and stressful.  It’s confusing and it’s downright scary.  Most of us just don’t do it very often.  Having an agent that you trust to help navigate the crazy amount of paperwork, the selling process and most importantly to represent your best interest, is absolutely essential.   That’s why if you are referred to an agent by someone you trust; have a good feeling after sitting down with them and reviewing their qualifications as I’ve described, interviewing 3 agents really isn’t all that important.

When I’m meeting a prospective seller for the first time, I like to tell this joke: “What’s the difference between  California driver’s license and a California real estate license?  Not everyone in California has a drivers license.”  It’s funny because it’s true.   So when you start the process of selecting a Realtor to list and sell your home, remember the words at the end of Indiana Jones and the Last Crusade, when the bad guy-industrialist wants to drink from the chalice that is the Holy Grail, the Knight of the Templar says to him, “Choose wisely.”  You owe it to yourself to do the same.

Posted in Economics, Real Estate | Tagged , , , , , , , , , , | 1 Comment

Real Estate 2013: What Happened To The Bottom?

Posted on February 10, 2013 by Tim Freund

Many real estate agents, analysts and buyers are asking the same question: What the heck happened to the bottom?  Weren’t we supposed level off before surging up again?  Doesn’t this portend to another bubble that is destined to burst all over us?  To this I say, we had a bottom; a two year bounce along the bottom, you just didn’t notice it.  Huh, you say?

Let me explain…

Regardless of where you get your numbers, Zillow, RealtyTrac, Core Logic, Trulia, Redfin or Case-Shiller, all numbers point to the same thing: the bottom began in spring of 2009.  The stock market had just gone into freefall, landing around 6500 on march 9, 2009.  Real estate was doing the same.  According to Case-Shiller’s March 2009 reading, San Francisco was down 30% since the peak and Phoenix nearly 54%.  However, those bottoms were not called bottom… but why?

It’s the old “forest for the trees thing” actually.  We were so crushed by month after month after month of bad housing data, that we couldn’t see the bottom right before us.  If you recall, in the midst of the property value freefall, 2009 also brought us the First Time Buyer’s Tax Credit.  Up to $10,000 of tax credit to be precise.  Because the housing tax credit started in 2009 and ended in April of 2010, with closings extended to October 2010, we missed the bottom because the tax credit caused prices to actually go up for a few months in 2010.  In other words, had we not had the tax credit, prices would have either continued to drop further (the Dem’s belief) or would have leveled due to natural economic forces (the GOP’s belief) but eventually we would have seen what a bottom looks like: a valley, that is, the drop, a flat bit, (the bottom) and then the other side of the valley, (the rise.)  But because the tax credit artificially boosted market activity in 2010, it didn’t look like a valley or a bottom at all, rather it looked a valley, a hill and another valley.  And since it appeared as if we had improved only to precipitously drop again, most concluded that it was one large, continuous freefall, when in fact it was actually a bottom.  Shave off the artificial reading of 2010 and you get a solid 2 year bottoming from spring 2009 to spring 2011.  That’s right, a nice, normal  valley.

I didn’t realize this myself until this yesterday while showing an investor property. He asked me, “What happened to the bottom?  We never had a bottom, just a ‘V'”  I guess I never really thought too much about the bottom, I only focused on the rise, but when he asked, I responded with, “Well the tax credit of 2010 hid the bottom, but if you just slice the brief bump from the credit, you get a stable, two year bottom.”  And with that, I said, saw it plain as day and had to come home and write about it.  Can’t see the forest for the trees… I’m not sure who said that first, but I guess some things never change.

Posted in Economics, Real Estate, The Real Estate Bottom | Tagged , , , , , , , , | 2 Comments

Should I Sell My Home Now Or Wait?

Posted on January 25, 2013 by Tim Freund

A lot has been made of late about the rebound in housing.  Foreclosure notices are at a many years low; prices both year over year and month over month, seem to be on a solid upwards trajectory and inventory is so low that multiple offers are common place all across California and in many other parts of the nation as well.  So if prices are rising, wouldn’t it make sense to hold out and wait before selling?

This is the $64,000 question, so let me tell you what I would do: sell now and do it quickly.

I know what you’re thinking, of course the Realtor says sell now, that’s how Tim makes his money.  While true, I have every reason to tell you to sell now, let me explain the reasoning and then you can decide for yourself.

I wrote recently that all around me Realtors are very concerned that this year is going to be more of the same, that is, the same as 2012.  Low inventory, lots of buyers and no sellers; multiple offers; cash rich investors looking for a place to put their money etc., etc.  Realtors and buyers alike are lamenting the days when a prospective buyer could look at several properties and calmly, methodically, make a decision to invest in the single largest purchase of their lifetime.  But today buyers are struggling just to find homes to look at, let alone buy.  So for a seller, this is the ideal situation.  The imbalance in supply against demand can only mean one thing, and that is that prices are going to rise.  So make them rise!

If I’m a prospective seller, I am preparing my home for sale as quickly as possible.  This means I already have my Realtor selected and he or she is helping to advise me on paint and carpet and other improvements that add value.  I am decluttering like a mad person and I’m paying the gardener extra to clean up the yard.  We’ve all heard that we only have one chance to make a first impression and since I am singlehandedly going to make prices rise, my home has to be at its best.  And yes, you are hiring a Realtor and paying them a full commission because they are going to earn it after you tell them what you want for your home.

When preparing to list your property for sale, the Realtor is going to show you all the comparative sales in your area.  They will provide analysis and tell you about where you need to price your home to sell.  But in an environment where you have no or little competition, you should look at those numbers, those backwards looking numbers and then ask your agent about pushing the envelope.  Since you are convinced prices are going to rise, you are going to project that future rise and price your home accordingly.   That number may be 5%, it may be 10% above the comps and this in addition to the counsel of how best to prepare your home for sale, is what you need your Realtor for: to determine just how much you can push the asking price.

Some months back I told the story of Nate Shapell, the large Southern California home builder, who saw people camping out for homes on a new phase he was offering.  With a stroke of his pen, he immediately raised the price, significantly realizing a far greater profit.  You are going to do the same thing.  Granted, you don’t have the benefit of having people camping out on your curb, waiting to buy your home, but there is no reason you should not be the one to raise the price.  All it takes is a handful of higher sales to trigger everyone to do the same.  When the market was slow, being aggressive was critical to successfully selling.  You had to have a beautiful presentation and a low price to circumvent your competition.  You wanted to be the first one to leave the party not the last because in a declining market, waiting meant a lower sales price.  Conversely, when you find yourself in an appreciating market, you also want to have an aggressive price, but this time aggressive means going higher not lower.  But beware: the time to do this is probably limited.  Once everyone figures out that they can command a much higher price for their home, they too are going to put their homes on the market and all of a sudden, the low competition, low inventory scenario becomes more one of greater competition, a more balanced market and that makes extracting a premium much more difficult.

I should warn you that this strategy does carry certain risks, namely, I could be wrong and you could end up over pricing your home and it doesn’t sell.  But when there is risk, there is also the potential for reward and I consider this strategy a fairly low risk, high reward approach.  All I know is this, if there are no homes like yours on the market, what is a buyer going to do if you are asking more for your home than the last sales suggest you should?  Obviously every neighborhood is different; every home unique, appraisals are a problem and this strategy may not work across all price ranges.  But I predict that someone will pay the extra money for your home, because you can’t keep a good market down and ladies and gentlemen, we are in a good market.

Posted in Economics, Real Estate | Tagged , , , , , , , , , , , | Leave a comment

Real Estate: What To Expect In 2013 And Beyond

Posted on January 18, 2013 by Tim Freund

After nearly 23 years of selling real estate, you might expect that I’ve seen it all.  I’ve sold through 2 earthquakes; 2 real estate bubbles and their subsequent bursting; 3 recessions from mild to severe like the one we’ve just come out of.  I’ve sold through 5 presidencies, military conflicts , the birth of the internet, the smart phone and yet through it all, people have bought and sold homes.  With that experience as a backdrop, I thought it a good time to give my estimation of what to expect in the coming years for real estate.

Currently there are two schools of thoughts among Realtors for 2013.  One group says it’s going to be a tough year for real estate professionals because the competition for listings is going to be intense.  The second camp believes that 2013 is going to be a banner year.  If you’ve been reading my blogs over the past few years, you can probably guess that as a “glass half full” kinda guy, I’m in the second group.  It’s not that I am a perpetual optimist, it’s just that I see some movement in home ownership that we haven’t seen before and lets face it, the economy is getting better.

Much has been written of late that as home values rise and fewer people find themselves underwater on their mortgages, mobility will become a greater reality than it has been since the financial meltdown that started in 2008.  Let me repeat that as a point of emphasis: Mobility.  In my mind, there are always going to be people buying and selling real estate.  Job changes, life cycle events, and retirement can necessitate the need to move and now with values rising, more people can sell and many will.  Think of it like we’ve been in a holding pattern and now it’s time to move on.   People will move because they can.

So yes, the ever improving economy is going to buoy housing because as values rise people will finally be able to sell and move.  But I believe it’s the demographic changes taking place that are going to play the biggest role in the housing market starting in 2013 and for that matter, years to come.  Consider this: the Baby Boomers, who in 2012 began hitting 65 years of age are still working.  This means they have an income at a later stage in life than every preceding generation.  Baby Boomers also represent the largest holders of our nation’s wealth.  So unlike previous generations who were staying put at 65 having long since retired, Baby Boomers have the unique flexibility to move.  Many will move out of their two story homes, into one story homes.  The shift towards a one story market will necessitate changes in new home construction.  Additionally, since one stories are less common as they were 40 years ago, baby boomers will be buying in communities where one stories exist and are being fixed up.  I also believe that the Boomers extensive wealth will  begin a slow flow toward helping out the grand kids or as demographers like to refer to them,  “Generation Y” or the “Millenniums.”  With their improving employment prospects, the Millenniums are going to be moving out of their parent’s home, buying a first home, starting their families but doing so with the aid of their Baby Boomer grandparents.  So while the Boomers may be spending less on themselves, they will be spending more on their kids.

Many economists believe that the U.S. is positioned to mimic the last 20 years of Japan; that is, to become an aging population that is going to tighten the purse strings because “that’s what older folks do.”  And that despite low interest rates and an improving employment picture, our economy will become stagnant; in a state of slow growth for the foreseeable future.  While it is true that our nation’s demographics sit on the precipice of dramatic shift, I do not concur with this assessment that our economy will stagnate.  Rather, I see the Baby Boomers as being different from past generations where the tendency to slow spending has been the natural progression.  Baby Boomers are not of the depression era mindset like their parents were.  The thinking “they have to make it on their own,” is just not the attitude of the Boomer generation.  Remember, we are speaking of the people responsible for the 1960’s and their attitudes are not that of their parents.  Because of the Great Recession, Boomers have had to help their children (often referred to as Generation X); letting them move back home when the recession left them jobless and unable to maintain their household.  The Boomers have also done the same for their aging parents which has led to their additional moniker the “Sandwich Generation.”  Interestingly, this too is leading to a change in new home construction from single family to multi generational.  This all adds up to more construction jobs and continuing economic recovery.

That said, while Generation X is relatively small, the Millenniums are not.  There are as many Millenniums as there are Baby Boomers, which means there’s a very large, upcoming generation only now moving into the home buying age group.  And while all this demographic movement portends to increased mobility and thus home sales across all age groups, there is also the additional impact of immigrants and their pursuit of the American Dream.  All this adds up to lots of home sales.

Is this going to lead to a boom in housing?  I believe it will.  We are already seeing the effects of tight inventory on home values.  We can’t help but see the signs that after 5 years of anemic home building, we simply don’t have enough homes to accommodate a rising population, so builders are building again.  This is great news for our economy since construction is the engine of every economic recovery.  But beyond that, the tea leaves I’m reading all point to a period in real estate characterized as a demographic explosion leading to increased mobility, more home ownership and more homes sales.  And more home sales means prosperity for all.

Posted in Economics, Real Estate | Tagged , , , , , , , , | Leave a comment

What The Heck Do I Need A Realtor For?

Posted on December 20, 2012 by Tim Freund

You might be surprised that I would engage in this discussion about whether a home buyer or seller would really need the assistance of a Realtor in buying or selling a home, seeing that I’m a Realtor and all.  I mean to me it’s obvious, you hire a hairdresser to cut your hair and would never even consider doing it yourself, why then would you not apply the same reasoning to the selling of your most important asset?  But for the sake of argument and fairness, let’s take a look at what I do for my clients and then you judge for yourself, sound reasonable?

The bread and butter of any real estate agent’s business is listings.  And since the largest investment most of us ever endeavor, is home ownership, home selling seems an obvious place to start.  When a homeowner decides to sell their home several discussions ensue.  First and foremost is how?  Of course the obvious to most of us is to hire a professional Realtor like me to handle the marketing and transaction details, however since we are discussing the need for a real estate professional at all, let’s just start with the “stick a sign in the yard, hope someone comes by, knocks on the door and says, Can I come in and see your home?”  OK, that sounds pretty stupid, but it is really one option.  But let’s assume you are a bit more savvy and know that that approach is not likely to be successful, since you can list your home with an online service that will at least market your property in the Multiple Listing Service (MLS) for limited expense.  Since every Realtor is going to look to the MLS for properties listed for sale, you now at least have some exposure for your home.  So what now?  Well what did you price it at?  That’s right, you need to determine what you are willing to sell for even before you put the sign out and hire an online service to place your home in the MLS.  Well, there are those sites like Zillow and Trulia that have value estimates, so you could base your price on them, but are they really accurate?  Just what do those services base value on anyway?  Frankly their algorithm is a bit of a mystery and as a Realtor the value Zillow posts is something practically every seller brings to my attention, and I must say, they are rarely even close.  These services have no way of actually “knowing” or even estimating accurately the value of your home since the only thing they can look at is previously sold comparable properties.  They have no way of knowing about your remodel, or your view, upgrades, placement on the street, schools or for that matter any of the comps they are using to base your value upon.  It’s lot size and room count and square footage.  Did I happen to mention location, location, location in that description, no and that should raise a red flag and tell you something right away about accuracy of online valuation services.

This is not sour milk from someone whose job is being threatened by an online service, on the contrary, I love it when sellers tell me about the “Zestimate” on their home because it gives me the opportunity to show my value as a real estate professional.  So reason number one for hiring a Realtor is their knowledge.  In fact it’s reason number 1-100.

Knowledge is power, knowledge is key, knowledge is everything.  Knowledge of the current market; knowledge of the value of certain amenities; knowledge of the competition, community, school district, availability of financing and of presentation.  If you want to know what a real estate professional thinks your property is worth, you have to hire one.  Pretty straight forward.  Can you figure it out on your own?  Maybe, but are you really willing to take on that responsibility and risk?  And what if you’re wrong?  You price it too low and your buyer takes advantage; you price it too high and nothing happens.  Given that your goal is to sell, “”nothing happens” is a disaster.  So let’s agree that hiring an expert is one big reason you hire a Realtor.

However, you’re still not convinced so let’s step back and assume you, being pretty analytical, have decided on a selling price and you’ve contracted, yes signed a legally binding contract, with an online listing broker.  Uh, “Signed a legally binding contract?”  That’s right, you’ll have to sign a listing agreement  with an online broker just as you would a traditional full service broker.  “Can it be cancelled if I’m dissatisfied?”  I don’t know, you tell me.  Hmmm, that makes me a bit nervous, how about you?  Alright let’s say for argument sake it can be cancelled, you still will have to pay them something; a fee or a fraction of a commission, something, because even online services are not free.

Finally you are on the market.  Your home is listed on the MLS and you think you’ve priced it about right, so now all the regular real estate agents are going to line up to show your home, right?  Well… are you paying them a commission?  “Sure I am, what’s normal?”  Though every commission is negotiable, let’s say for discussion sake you offer the “traditional” 3% of the selling price as commission to the agent representing the buyer.  “Well, wait a minute”, you say, “can’t I offer less, perhaps 1 or 2% to the agent representing the buyer and save a little more.”  Sure, so now you are paying a reduced fee to the listing broker and a reduced commission to the selling broker, more money for you.   But then no one shows up to show your home.  Selling agents have to make a living and while they will do what is ethical and best for their client, the more you pay them, the more likely they will show your home over another, and there’s always another.

So you conclude, “Alright, I’m willing to pay an agent to show and sell my home.”  Then let’s review, how much are you actually saving? Just the listing commission minus the fee to the online brokerage for listing your property in the MLS.  OK, that’s still something, but let’s revisit something else I just touched on and that is, the showing of your home.  By not using a full service broker to list and market your home, you become the agent in-fact.  You will be showing your home, scheduling appointments since you have to be present which means either you have to adjust your schedule for every appointment or you restrict when your home can be seen to “fit into” you schedule.  Restricting the showing of  your home, hmmm that doesn’t sound optimal.  Ever heard the phrase a Realtor works 24-7?  There’s a reason, and while perhaps not literally true, Realtors do work weekends, mornings and evenings as the job demands and since you are now the agent, guess what you are doing?  Uh huh, working a lot of hours just to show your home.  Oh, and who you is going to “pitch” your house, you know, “sell” it to the other Realtor and their client?  You that’s who.  “Geez, really?”  Yes, really.

Let’s take this a step further and assume through the grace of God, someone actually had their Realtor write an offer and that agent brings the offer to you.  Again, you’re pretty savvy, maybe you deal with contracts in your job, maybe even far larger government contracts or something, so you’re no stranger to them, but this one has things like contingency periods, cost breakdowns that you the seller have to absorb; reference to wood destroying pests, liquidated damages, mediation, arbitration… are you ready for that?  A typical purchase contract can have more than 50 pages.  yikes!!  What about the requirements to disclose?  Can you be sued for failure to disclose something?  You bet.  But you’re paying the other agent a commission sell your home, clearly this is their responsibility isn’t it?  Well actually no, they represent your buyer or thought of another way, your opponent in the chess game of negotiation.  They do no “have your back,” rather they are watching out for their client and since you have only limited input from your online discount broker, you are effectively on your own.  I don’t know about you but when we are talking about a transaction that involves something that costs “six figures” or more, that would make anyone just a little nervous, no matter how confident you are.  By the way, I haven’t even brought up things like inspection, requests for repairs, escrow, title, natural hazards reports… mold.

At this point you should be asking yourself, how much am I actually saving vs. what can I potentially lose?  It’s a risk/reward proposition and I firmly believe the risk far out ways any reward or savings by not using a Realtor to sell your home.  Additionally you may not be saving anything because after all, I am a professional negotiator, this is what I do, day in and day out so I’ll get the better price over someone with less experience every time, more than offsetting my commission.  I liken myself to a scene from the movie The Terminator when Reese says to Sarah Conner, “He’s a Terminator, that’s what he does, that’s all he does, and he won’t stop.”  And if you noticed I said Realtor not real estate agent earlier, it’s because a Realtor is an agent who must belong to the National Association of Realtors and is therefore held to a very specific set of ethical standards.  Only Realtors are required to follow these strict standards which are almost universally more stringent than that of any state governing organization like the Department of Real Estate.  Of course there are bad eggs as in any industry, so choose your Realtor wisely, but know this: by choosing a member of your local Board of Realtors as your representative, you have taken every precaution and in doing so given yourself the very best opportunity to sell your home for the most money, with the least amount of hassle and in the shortest possible time… and what is that worth to you?

For more information on what I can do to sell your home or to refer you to someone capable in your area, please contact me and I would be happy to help you.

Next up, “Why do I need a buyer’s agent?”

Posted in Economics, Real Estate | Tagged , , , , , , , | Leave a comment

California Home Prices: A Speculative Rise Or A Natural Correction?

Posted on December 14, 2012 by Tim Freund

The rise in pricing of California real estate has caught many observers off guard and has caused many to wonder aloud if the high numbers are sustainable or just another speculative bubble waiting to burst.  If you have been following the numbers this week, you know that it’s been reported that sales are up 15% year over year and prices are up 19% during the same period.  Sounds pretty unbelievable right?  There are several explanations so let me try to address them.

First, sales are up for a variety of reasons and it is not investors as many pundits have suggested.  Investors were the driving force of sales activity when no one else was buying.  Distressed properties made up more than 35% of all sales and deals could be had.  Cash buyers scooped up homes at the foreclosure auction at the courthouse steps; they bought door to door from people who were underwater and the bought short sales.  Most sophisticated investors do not buy homes at market value, there’s just not enough profit given the risk (risk-reward).  If they are “flippers” they have to buy at .80 cents on the dollar or better, to have enough margin to account for rehabbing and selling costs.  What about rentals?  In California the average rate of return for a property purchased and held as a rental, is about 5%.  Not bad when compared to the rates of return from your local bank, but not exactly a number that is going to drive every mom and pop with a few hundred thousand in disposable cash, into real estate.  Sure there are folks buying for the 5% return, but don’t believe for a minute that these investors are driving the market up 19%.

Second, to analyze the numbers, one first must understand what the 19% rise in value represents.  This is a median number.  A median number is the line at which half the homes sold sell for more and half for less; that is the median.  This is different from the average which combines the total gross dollar sales numbers and divides by the number of sales.  The thing about a median number is that it can be moved with the simple increase in sales of one price range or another.  In other words, if more low end homes are selling which was the case with all the distressed properties, the sheer volume of lower end homes “pulls” the median down.  Conversely, if suddenly there are fewer distressed properties selling and in addition a greater number of higher priced properties selling, the median gets “pushed” upwards.  This has been the case over the past several months and explains why the year over year number is so large at 19%.

Third, that’s not the whole story, for in fact homes are also appreciating and they are doing so at an incredible clip.  Why?  Demand is exceeding the supply of available homes and that fundamental  market force is driving up the price.  How much?  Try 2% over the past month.  The affect on the median of fewer distressed properties explains the year over year price change as I’ve explained, but a 2% month over month is pure market dynamics at work.  Some are suspecting it’s speculation; it may be a frenzy, but it is not people “speculating” that prices are going to rise so they will buy now for a quick profit later.

Forth, why is demand exceeding supply to the point that we are appreciating at 2% a month?  This is a more complicated answer because there are several forces at work.  First, interest rates are at an all time low.  In conjunction with a nearly 30% decline in value since the bubble’s peak, home affordability has never been greater.  Second, there has been a dearth of home building over the past 5 years in areas and cities that have seen a rise in population rather than a decline; fewer homes manufactured to met a rising demand.  Third, many people  either owe more on their home than it’s worth, thus making selling not an option or they simply don’t have enough equity (yet) to sell and have a down payment on a replacement property.  This is partly due to the decline in equity positions paralleling the drop in overall value but also is a reflection on the tight lending standards we have today which largely require 20% down.  Remember, since the mid 1990’s, many folks bought with 5 or 10% down and even if they had put aside an equivalent down payment through personal savings or by paying down their existing mortgage, in most cases today, they need 20% to purchase because the rules the lenders are using have changed.  This in turn makes those folks stay put, not list their home for sale and further constrain supply.  Forth, because there are fewer homes for sale, finding a replacement property, even if you have the required down payment, is exceedingly difficult.  Thus, would be sellers, looking at available inventory conclude, now may not be the best time to sell since they really don’t  want to be homeless because there’s nothing for them to buy.  So they too, don’t put their home for sale, constraining supply even further.

In looking at the numbers here along the Los Angeles/Ventura County line, our inventory is below levels of 2003-4 for this time of year, when like today, homes were appreciating at a 1-2% a month clip.  So are we in a bubble?  No.  Consider the stock market in spring 2009, the DOW hit 6500.  Today it’s over 13,000.  Have businesses improved their bottom line by 100%?  Is the economy 100% stronger?  Of course not, but the market over reacted during the sell off and has bounced back to find its equilibrium.  Housing is no different and will do the same.   The 30% drop in California property values, particularly in the population centers, was an overreaction and now the market is doing what any market does, finding it’s point of balance.  Are we there yet?  No, and likely not even close.  When will we know we are close?  When people can sell their home and freely buy a replacement property with relative ease.  Until then, expect continued month over month appreciation, because the pendulum always swings too far one way – and we swung pretty far to the negative, and right now things are swinging back.

Posted in Economics, Real Estate | Tagged , , , , , , , , , , , , , , | 2 Comments

How Do You Know If You’re Overpaying for A Home?

Posted on December 9, 2012 by Tim Freund

I get asked this question more and more by my clients as the market is rebounding and prices are rising.  Tough question, no easy answer.  So exactly what is “Market Value?”  The academic answer for real estate is, “Market value is the price a willing buyer and willing seller agree to without the presence of duress.”

This is an interesting word, duress.  Duress in this definition refers to stress that might pressure a buyer or seller to make a decision they might not normally make.  The reason I find this so curious is that we have been in a period of economic duress since the demise of Lehman in fall of 2008, wouldn’t you agree?  And for many areas it’s been even longer.  After all, losing one’s job would constitute the presence of duress.  Facing a foreclosure would too.  How about a job transfer that requires selling in an unforgiving market, where prices are generally off by as much as 25-30%?  That would be pretty stressful.  So if all that is true, couldn’t we argue that none of the sales over the past 6 years were reflective of market value since we have been under a period of perpetual duress?  It’s an interesting argument because we have been forced over these past few years to deal with the “new normal,” as the pundits like to say.   Yet that flies in the face of the definition of market value.  How about when prices were rising from 2004-2007?   Wasn’t that a period of duress for all the buyers?   Were they not forced to pay for more than comparable sales suggested was a fair price for a particular property?  You bet they were.  I suppose one could argue that the only time there isn’t the presence of duress is when the market is in balance.

Bummer, we haven’t had a balanced market in nearly a decade.

The National Association of Realtors defines a balanced market as 6 months of available inventory.  That may be so in many parts of the country, I can’ say really, but in California I believe that magic number to be 3 months of available inventory.  The reason is simple, if we weren’t in a perpetual state of shortage, why would a home in Malibu sell for any more than a home in Houston?  Why would suburban Westlake Village cost any more than suburban Cincinnati?  The answer is they wouldn’t sell for more, therefore, we must have less than 6 months available inventory and 3 months seems to me to be about right; it only makes sense.

So back to the question at hand, how do you know if you are paying too much?  An appraiser would tell you to look at the comparable sales over the past 6 months and look for homes of similar, size and location; usually within a mile or so of the property you are considering.  You make adjustments based on condition, lot size, small square footage variations and features.  Amenities like a view could trigger an adjustment of 5%, though to me I would pay 10% more for a view because it’s the most rare of all amenities in my opinion, and it’s important to me.

I just said something there that is of paramount importance so it bears repeating, “It’s important to me.”

When comparing properties to determine market value, an appraiser will consider the a fore mentioned adjustments, but that’s not to say you’ll value all variables equally.  For examples consider things like schools; is the better elementary important to you?  If you have small kids absolutely, but not necessarily so to a senior, though any astute real estate person will tell you schools are never unimportant, because someone is always looking for better schools, thus it’s significant for future resale.  Another example would be one story vs. two.  If you are a young couple, maybe a ranch home isn’t so important but if you are a senior or physically challenged, it could be paramount.  One time I had a single story listed for sale and an offer came in but it was low.  I asked the agent who brought me the offer, why and he referred to comps (comparable sales) of similarly sized two stories.  I told him that those weren’t comparable because they were two stories.  He said he didn’t understand.  I explained the rarity in our area of one story homes and thus supply and demand dictated it was more valuable.  He didn’t get it, so I concluded by saying, “Then maybe your buyer should buy one of those cheaper two stories.”  He replied, ” No she has to have a one story.”  The agent not only didn’t understand, but did his client a terrible disservice; the buyer ended up not buying the home she could have had and really wanted, because the agent failed to apply his client’s value system to the home, rather than his own.  So what was market value in that example?  Clearly it was not strictly an unbiased assessment of similar sized homes that closed in the previous 6 months.

OK, so  we all can agree that value is very much a case of the “eye of the beholder,” but I still haven’t addressed the original question of “how do I know if I’m paying too much?”  The reason is there are too may relative factors in the decision itself, so there is no set answer.

However, I’m not going to leave  you with that.  As a practical measure, let me tell you what I’m doing now.  First I do look at the comps.  That will give me a basis for analysis.  Then I make my adjustments and come up with a general sense of where it should be if we were in a balanced market. Then I consider the market we are in.  In my local market prices are rising, having gone up 5-7% since last spring.  Then I apply what I consider the 30% rule.  Presuming prices were off 30% from the peak (your area might vary), I’ll go back and look at the peak price for similar homes in the neighborhood, I’ll multiple in by .70 and see how close that price is to the asking price.   Some neighborhoods I might use the 25% rule.  By and large this is as good an indicator as any, as to the fair market value for the home in question.  Given the rise in price I described earlier of 5-7%, I’ll then apply that adjustment and viola!

If that doesn’t sound scientific enough, I understand, but real estate is not scientific, rather it’s largely emotional and therefore the laws of science don’t firmly apply.  The application of logic does best.  And if that too falls short for you, then there’s the old standby: Do you like it?  Can you afford it?  Are you planning on staying a long time?  If the answer is yes to those three questions then buy the darn thing for whatever the price it will take to get it.  In the end, a home is a long term investment and ten, twenty even fifty thousand dollars won’t make a big difference to the payment, after all, what is the fair market value for happiness?

Posted in Economics, Real Estate | Tagged , , , , , , , , , , , , , , | Leave a comment

Like A Phoenix Rising From The Ashes: Earthquakes And Hurricanes

Posted on November 3, 2012 by Tim Freund

It’s a funny thing, memory.  The passage of time takes the edge off the raw emotion of important events in our lives, leaving an impression, almost like a photograph, a snapshot if you will, of the moment.  The images of Hurricane Sandy have brought to mind just such a snapshot of my personal experience with natural disaster, earthquakes.

Ironically I’ve lived through two massive earthquakes: San Francisco in 1989, when like 2012, the Giants were in the World Series and the Northridge Earthquake in 1994.  I was working and living in San Francisco in 1989 when the earthquake struck.  My wife Tama and I had to walk home from downtown because the electricity was out and public transportation was not functioning.  In a tale of good and evil, I remember hearing about a good Samaritan who was gunned down for directing traffic in the Lower Haight while the street lights were out.  Back at our apartment that night, we sat alongside our neighbors in our apartment’s courtyard huddled around my 2″ battery powered black and white TV.  We may have had the only working TV in the City a far as I know.  We drank like sailors on leave, sharing tales and fears, not knowing what was to happen next.  The death toll and  damage were largely contained to the downed Nimitz freeway in Oakland and the Marina district, where nearly century old landfill turned to sandy-slush and some housing slid off their foundations.  We had friends live with us for several months because their apartment building was one of those that was demolished.  The recovery however seemed pretty quick.   At the time, the economy was booming so for most, the damage became a commuter’s nightmare but by and large, life returned to semi-normal relatively quickly.

A year later, we moved to Southern California.  By 1994 I had welcomed two kids, Hannah and Adam, the newest only 4 months old when the Northridge quake rattled my home.  It was only through the Grace of God and good fortune that my wife was nursing my son at that exact moment, because she jumped up only seconds before bookshelves I’d mounted in my baby son’s room came tumbling down on the crib and rocking chair.  Memo to all, don’t mount bookcases over a bed…

The Northridge shaker was far more damaging of individual property than that of Loma Prieta.  Many, many houses came down or were damaged.  Words like “Red Tagged” and “Yellow Tagged” were bandied about to indicate the degree of personal property loss.  Yellow meant repairable but unlivable, Red a total loss.  Strikingly different from 1989, was the economy at the time.  We were in the throes of an awful recession.  The housing bubble had burst and values had plummeted.  Construction was anemic and for one selling new homes I can attest, it was a very tough time.  The economy was not dissimilar to the economy we have today.

From the chaos and despair however, came the dawn of a new day, it was called disaster relief.  FEMA stepped in, albeit slowly and so did the Small Business Administration by helping those homeowners without insurance to rebuild their homes.  The insurance companies set up virtual triage camps to assess and assist their members and although it took more than several months, the money did eventually start to pour in.  As the money arrived, so did the jobs.  Construction workers suddenly found their services in demand again.  Lumber, steel, flooring, cabinets, concrete – it was all needed for the recovery.  For an ailing economy, the Northridge disaster was like a shot of vitamin B, so much so that by 1995 the real estate market had bottomed and began what was to be a rapid ascent.

It is with this backdrop, that I hold out hope and optimism for the victims of Hurricane Sandy.  It will take many, many months before life returns to normal for a large swath of the Eastern Seaboard.  It will take the generosity and compassion of those not affected to help relieve the suffering in the near term and it will be the large sums of money of the insurance companies and the Federal government that will likely kick start those ailing economies as they did in Northridge nearly 20 years ago.  Coupled with what appears to be a national economy on the mend, we have to believe things are going to get better for those affected most by Sandy.

*A quick aside: If you’d like to help those affected by Sandy, donations to the American Red Cross can be made online, RedCross.org/hurricane_aid, but I used Apple’s iTunes link to donate directly to the Red Cross “Super Storm Sandy Relief” because they have my card information and it was fast and easy, just 4 clicks.

Posted in Economics, Real Estate | Tagged , , , , , , , , , , , | Leave a comment

Similarities Of 1954 vs. 2012, More Than Just A Giants’ World Series Sweep

Posted on October 29, 2012 by Tim Freund

It’s not hard to describe the feeling of waking up this morning to the reality that my Giants had just won the World Series by sweeping the Detroit Tigers; I’m elated.  Their enthusiasm, business-like approach and utter disregard of the self in favor of the team was a pleasure to watch and a lesson for us all.  Because the Giants last swept a foe in the World Series back in 1954, I thought it might be interesting to research the real estate market conditions of that year, and compare it to 2012.  Imagine my surprise when I found the similarities extend beyond a Giants sweep.

1954 saw the beginning of a construction boom that would create the image of “Any Town Prosperity” that we’ve come to associate with the 1950’s.  In 1953, the country was experiencing a recession.  Incomes were down and the nation was mired in an unpopular war overseas, the Korean conflict… sound a little familiar?  However in fall of 1954 a funny thing happened, the government instituted a strategy of monetary easing.  Interest rates came down and government requirements for down payments on FHA and FNMA loans were eased.  At the same time, soldiers began returning from the Korean Peninsula, starting families and builders began a construction boom that lasted more than half a decade.

Demographers find it curious that it was neither an increase in familial size, nor an increase in personal income that fueled the explosion in housing.  Rather they conclude, a “Basic demand” shift coupled with easing lending standards was responsible.  Similarly, consider our situation today.  Construction and home builder optimism is at the highest level in more than half a decade, in response to 6 years of anemic home building.  We are seeing a shift of desired location, back to the cities rather than further into the suburbs, kind of an “anti-‘1950’s” shift.  We alternatively have a home buying population that is both aging and young.  The aging Baby Boomers want one story homes of which a dearth has been built over the past 30 years, while the grand children of the Baby Boomers are finally moving out of their parent’s homes in ever increasing numbers.  Like 1954, we are mired in an unpopular war overseas, coming out of a recession and witnessing unprecedented monetary easing.  The one significant difference I can see is the difficulty of obtaining a mortgage today.  In a continued response to the easy lending of the last market boom, the government still maintains a near choke hold on bank reserve requirements, which in turn is constricting home lending.  This, given the ever strengthening housing market, is the missing key that could propel us  into a full blown economic expansion in 2013.

So perhaps it’s just Baseball euphoria.  Maybe it’s the longing of a bygone era that baseball brings to mind.  Regardless, 2012 may yet draw comparisons to 1954 in more ways than a Giants’ sweep in the World Series, and that would be something to celebrate indeed.

Posted in Economics, Real Estate | Tagged , , , , , , , | 1 Comment

Legend Of The Fall, Or How Nate Shapell Made A Million Bucks In A Morning

Posted on October 24, 2012 by Tim Freund

Before I was a Realtor selling resale homes, I was a builder’s representative; I sat at a model home complex and sold tract homes.  I was fortunate to have married into a family that worked for a large home builder in Southern California called S & S Construction, so I had an “In”.   I began my career as a new homes salesman in 1990 in Danville, Ca.  Danville is an upscale community in San Francisco’s east bay.  I got my license about the same time as the 1988 housing bubble crashed.  Interest rates had just dropped to below 11% because the Federal Reserve felt it necessary to add stimulus to the economy by bringing down rates.  The economy was stumbling following a period of unprecedented home appreciation.  The 1988 boom actually started somewhere in late 1987, not long after what was has become known as Black Monday, the day the stock market crashed.  Leary of the volatile stock market, people looked to housing as a safe place to put their money.  Also in 1987 the Fed was bringing down rates after having raised them over a period of a years in response to spiraling inflation.   For those too young to remember, in 1981 the Prime Rate actually neared 21%.  I remember upon learning that I could get a student loan at 7%, my father said, “Take the money.”

Inflation is when the costs of all goods and services are increasing and is usually tied to the declining value of a currency; ever heard that a dollar doesn’t buy what a dollar used to?  This is inflation.  Cars, clothes, fuel and homes were rapidly going up in price.  Yes, contrary to common thinking, home pricing is affected by inflation and rising rates don’t necessarily halt rising home values.  This is the back drop for my story…

Whether this is a true story or urban legend, I cannot say; I wasn’t there, but this was how it was told to me.  The year was 1977 and Nathan Shapell was President and CEO of S & S Construction, one of Southern California’s most prominent home builders.  Shapell built homes all across So Cal but nowhere like they did in Long Beach.  Imagine back to when Long Beach was a bedroom community, not far from the aerospace capital of the world and home to one of America’s busiest ports.  Shapell built thousands of homes in Long Beach in communities called Eldorado Park and Bixby Village.  It was prime land whose ownership was traced back to the Spanish Land Grants.

It was a crisp fall morning, much like today, and Shapell and Company had been readying for a grand opening of new model homes.  This was back in the day when old man Shapell still drove himself out to grand openings.  Shapell ruled with an iron fist.  As a Holocaust Survivor, Nathan Shapell was one tough son of a gun and if he wanted to do something, he did it and no one argued.  Back in the sales office everyone is excited.  They’d arrived early.  The homes were cutting edge designs, yet still made with lathe and plaster, the only homes around being made that way.  The office was to open at 10 am.  At about 9:30, Mr. Shapell arrives and he can’t believe his eyes.  Walking from his car to the sales office, he sees a line of people waiting to buy his new homes.  He actually has to step over people camped out in sleeping bags.  Inside, the staff is ready.  The smell of coffee is the air; the topo (topographical) table shows where the first phase will be built; the brochures were out and so was the price sheet.  A new young vendor named Bill had been in charge of all the displays and the renderings, it was his first grand opening and it was Bill, some 25 years later, who relayed to me this story.  At this time the  homes were set to be sold in the high $100,000’s up to $199,900.  The market research had been done and the buyers had been told of the upcoming pricing.  But no one had been prepared for a line of camped out buyers, least of all Nathan Shapell.  As Mr. Shapell entered the sales office he smiled and then said, in his thick Polish accent, “Vatch Dis.”  He took out a red marker, grabbed the price sheet, drew a line through the prices and then wrote new prices… $50,000 higher!  With a stroke of his pen, Mr. Shapell raised the price of his homes by 25%.  They sold out the 20 homes they released that morning and Shapell made an extra Million bucks.

You might be asking yourself about now, how is it that was possible?  This is why I tell you this story.  Shapell recognized that morning that there were more buyers than there were houses available.  The demand exceeded the supply and if people wanted to buy a home from him that morning, they were going to have to pay more money.  Now fast forward to this crisp fall morning 2012.  As we look at the available inventory, there simply are not enough homes to meet the demand of today’s home buyers.  Whether this is because banks aren’t releasing their foreclosed homes or people are under water and can’t sell, or are under equitized if that’s a word, or maybe because they just think by waiting prices will go up, is unclear.  What is clear to me is that prices are going to rise because the demand exceeds the supply and this is the most basic tenet of economics.  I do not anticipate a 25% rise overnight.  I do however believe that the time to buy is now, and so is the time to sell.  Why?  I think we can all agree that it is better to sell low and buy low than it is to sell high and buy high.  So as we look back this week and recall the 25th anniversary of Black Monday, let us also reflect on the history of housing.  Because for right or for wrong, history is prone to repeat itself and I don’t see any reason that this shall not continue.

Posted in Economics, Real Estate | Tagged , , , , , , , , , , , , , , , , , | Leave a comment