Swimming Up Stream

Posted on June 1, 2011 by Tim Freund

Two men and a woman have to cross a raging river.  If they try to cross, they will surely perish.  Suddenly a voice from heaven says “I will grant you each one wish”.  The first guy says, “Give me the strongest muscles so that I may swim across this river”.  Immediately he turns into a hulking figure, jumps in the water, is almost swept away by the current, but makes to the opposite shore on his last breath.  The 2nd man says, “Make me an Olympic swimmer so that I may swim across this river”.  Like the other he is immediately transformed, this time into a sleek and powerful swimmer.  He dives in and after a fierce struggle; he too barely survives after nearly being swept away by the powerful current, but makes it on his last breath.  At last it is the woman’s turn to make a wish.  Quietly she gazes at the torrent of a river.  Finally the she speaks, “Build me a bridge so that I may cross this raging river”.  Moments later there appears a bridge and she easily walks across.

So what has this story to do with real estate?  Yesterday’s Case-Shiller report highlighted several dismal facts about the current status of the real estate market.  Prices are down almost everywhere from a year ago.  Now that the tax credits are a distant memory, we are seeing a double dip in pricing, almost as if the credits never happened. In fact if you look at a graph you can imagine that we are 2 years ago and the trend line is in the same place it would have been then had the government not instituted tax credits at all.  Yet, as David Blitzer, the S & P spokesman said on CNBC  yesterday, what we are seeing is that location maters.  California, he said unlike the Sun-Belt states, had broken out of the cycle proving once again the three most important words in real estate are not “Price Per Foot”, but rather “Location, Location, Location”.  I like what my manager Chuck Lech said, “The 3 most important words are California, California, California”.

I have been saying that inventory is too low in our market to make this a buyer’s market.  Prices in the LA area are at 2003 levels which, admittedly, is not a great thing, but when seen as remaining 5.4% above the low of Spring 2009, not all that bad either.  In his article in today’s Los Angeles Times, Alejandro Lazo quotes Beacon Economics chief economist Christopher Thornberg as saying, “With a recovering economy, incomes on the move, interest rates low, the fact that affordability is so good relative to the last decade is more or less supporting the market right now.”  I couldn’t agree more.  Lazo also quotes Richard Green of USC’s Lusk Center for Real Estate as saying “California (coastal) cities had begun recovering faster than other cities…because California didn’t overbuild to the same degree as those places.”

Supply matters.

I have been talking about supply for months.  Some of my Realtor friends called me yesterday to challenge me about the lousy numbers in Case-Shiller’s report, and I just said, “So? Just try and find a nice house for your buyers…”  Sure the national numbers are bad, and I don’t want to act like they aren’t, but bouncing along a bottom is a natural and necessary part of any housing recovery, one which should be embraced rather than vilified.  In fact anything else would increase the possibility of another bubble.  Slow and sustained improvement is just what the doctor ordered in my opinion.

So while we may feel like one of the swimmers in the story, fighting the current with all our might and struggling to survive, I believe if we don’t panic and remain patient, we will find our way to the other side.

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Buy Now or Wait?

Posted on May 28, 2011 by Tim Freund

Yesterday’s pending home numbers were pretty dismal.  They indicate that buyers are not rushing into the market and that confidence is still lacking in a housing recovery.  Admittedly, I am disappointed by the over 11% drop nationally and nearly 10% drop in the West.  Sure I can justify the decline as natural because of the floods and tornadoes across the Midwest and South, and heavy rains in the north; that in the West the markets of Las Vegas, Phoenix and Inland California are warping the statistics, where by all measures the market remains over run with distressed properties.  I could still argue that the Coastal and metropolitan areas within California are short on supply, and that my calling of a bottom last week not premature in the least.  I can even point to the obvious year over year decline as simply a statistical inevitability because last year’s numbers were tainted by the Federal Housing tax Credit, were artificially high, and that the year over year spread should start to decline steadily following the normalization of non-subsidized home purchases.  I could argue all of that, because it’s all true – to a point – but what is equally true is that consumers are still fearful of housing and that lack of confidence is holding back our recovery.

While supply is still story I pay the most attention to, I cannot dismiss the fact that buyers do not have to buy.  Without confidence or inspiration, the consumer will consume out of need, not out of desire.  When nervous, buyers will wait, keep their pocket book closed and that can push a market lower.  Yes it’s a bit of a herd mentality but so what?  Who can blame folks for being nervous and cautious?  At the same time however, I still see opportunity for buyers, if, and it’s a big if, they can find the right home.

Fortune favors the brave.

I love that phrase.  And I believe it is true and that timing really is everything.  Despite the pending sales decline, I believe the time to buy truly is now.  Can you lose equity immediately?  Sure.  But if you find the right home and pass, will you find a home just like it another day?  Probably not.  The right home is unique, because it’s right for you; right for its location, characteristics and right at the price.  Affordability has never been better.  Rates are low, crazy low, and for a few more months loan limits are high (the $729,750 high balance conforming loan limit will drop in October to $630,000 making everything above $630,000 a “jumbo” loan and that means a jumbo interest rate).  Amazing rates, prices back to 2003 levels and an improving economy?  I am not sure there will ever be a time like this again.

FDR said it best when he said, “We have nothing to fear but fear itself”.  If you are confident about your job, housing is not something to fear right now, rather something to embrace and take advantage of.  We’ve all heard stories about a “Once in a lifetime opportunity”, I think this is it and that there may never be a better time to buy a home than right now.

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More Evidence Of Housing’s Recovery

Posted on May 25, 2011 by Tim Freund

New home sales data from the Commerce Department out yesterday signaled more evidence the housing market is on the mend.  While the numbers are far from overwhelming, they none the less portend to better times ahead.  In fact it’s the inventory story that is leading the market’s move towards stability.

I know I keep sounding the recovery drum here, but the recent revelations about continued declines in new home construction permits and reports of tight inventories across a broad swath of markets, leave little doubt that something positive is a foot.  How positive? I’m not yet sure, but good news is welcome news I say.  Admittedly, I remain an island in a sea of disbelievers and naysayers.

Yet, consider this: I listed a home yesterday at a very competitive price and I’ve already been told after just one showing, to expect an offer immediately.  The price the seller is asking is 5-7% above recent comps, but there are similar homes on the market asking 5-10% more than us.  So are we low, or are they high?  Obviously I believe, and have counseled my clients, that we are correct and the others are too high.  Our strategy of aggressive pricing will help us to sell quickly which is one of the seller’s stated goals.  It also supports the point I have been making, that inventory is very low and buyers a plenty — provided the home is priced correctly.  But there’s more: this family is moving across the country to Cincinnati, OH, and when I asked about the market in the suburb they are looking at, they informed me, there aren’t many homes on the market.  Let me pause to make this point: supply matters.

The threat of a flood of distressed properties has convinced would be buyers and the media that the housing market is nowhere near a bottom.  That 2012 is going to be ugly and a double dip in housing not only likely but inevitable.  While my crystal ball is no better than anyone else’s, I just don’t see it.  Maybe I’m wrong or maybe I just enjoy being contrarian, but last time I checked, all goods and services exchange hands at a rate and price relative to the available supply when weighed against consumer demand.

In economics and specifically in our housing market today, we have the perception of an excess supply, but a reality that is really quite different.   So while external forces like tough lending practices and constant negative media, focus buyer attention on reasons not to buy, their personal observations as they attempt to purchase, are in conflict because their perception is not in sync with the reality they are finding.  Buyers are experiencing supply constraint not supply excess.  The constraint on supply has been caused by an extended period of reduced new construction and by a lack of home sellers with homes priced to sell.  The Commerce Department data yesterday, suggests to me that buyers are turning to new homes because there is insufficient supply in used homes.  Conventional thinking is that competition to new homes from distressed properties in the same neighborhoods, makes selling new homes too challenging: builders can not compete with foreclosures, which is true.  This is why the number of new homes under construction is down and newly issued permits down even further. Yet the data also puts the current supply at about 6 months, down from 13% months in April 2009.  As demand continues to strengthen with an improving economy, tight supplies of quality homes, will at some point, manifest in pricing pressure.

So although distressed properties will keep pricing pressure at bay for the foreseeable future, it is only a matter of time before the basic economic tenet of supply and demand takes this market into familiar territory where home prices are stable, demand steady and the sound of hammers and saws from the construction industry once again are the engine that drives our economy.

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Real Estate Good News Just Keeps Coming!

Posted on May 20, 2011 by Tim Freund

For those waiting for someone to say the worst is over, let me be the first to say it: “The worst is over!”.  Bold statement?  Perhaps.  Inaccurate?  Not so much.

For those of you who know me or follow TheRealEstateConverstation.com, you know I have been a glass half full guy for a long time.  It’s not that I am perpetually optimistic, it’s just that I believe the housing market is bouncing along the bottom and this week’s data and editorial commentary by a well known real estate maven, is further evidence of that.  Still don’t believe me?  Consider the following…

The first public acknowledgment that the housing market might possibly be on the mend came Tuesday, from none other than Miss Gloomy herself, CNBC’s Diana Olick, when she reported that low housing inventories and an improving job picture might be a signal that the end was near.  I have been saying for months that the inventory numbers were not consistent with a buyer’s market and in fact, if the media ever made a proclamation as I have just made, buyers would start scrambling to lock in historically low interest rates and take advantage of 4 years of record declines in prices.  To play off the oil company mantra, we’d be hearing “Buy, baby, buy”!

On my website, http://www.1000OaksRealEstate.com,  I have a widget, or website tool, provided by Irvine based RealtyTrac, that allows visitors to search foreclosures nationwide.  And when I look at any given area, the number of “flags” indicating homes in some stage of repossession or distress is pretty frightening.  Yet the data out of the Mortgage Bankers Association yesterday showed that while the number of homes delinquent rose slightly over the previous quarter, the year over year numbers were down.  The MBA interpreted this not as a “significant change” but rather as a “leveling off”.

“But the National Association of Realtors reported that home sales were down in April based on the Pending sales or homes under contract, following a nice rise in march… what gives”? says you…  To understand both sets of data which suggests more of the same for housing, let’s go back to what Diana said on May 17: “REO (bank owned) and short-sale inventory is high and will likely get higher in the coming months as banks process more foreclosures and push through short sales more efficiently. But organic, non-distressed sellers are holding off, and that is actually creating a phenomenon we haven’t seen since the housing boom…. Could this inventory issue be the catalyst to home price stability? I’m not talking about the big bad foreclosure markets, but the rest of the country, where demand is rising and the number of listings are falling. I hate to go back to that boring old theory of supply and demand, but might it actually prevail?”  Supply and demand…hmmm, now that’s a concept.

Another interpretation worth noting is that part of the delinquencies are tied to strategic negotiations between borrower and lender, either due to the borrower’s attempt to seek a loan modification or a short sale.  Why? Because troubled homeowners can’t get the bank to talk with them if they are current on their payments.  Quite simply, there are just too many households already behind for the personnel strapped banks to negotiate with those borrowers still current on their payments – the banks have to start with those folks closest to having their home repossessed, it’s just logical.  This fact, which is seldom acknowledged in the media, explains some of the homes that are called the “shadow inventory”.  They are in default, yet not bank owned.

Dave Walter, a top local Realtor and friend of mine told me yesterday that 50% of his listing calls are short sales.  To him, this is an indication of a troubled market, not one on the mend.  On this we don’t agree.  There is no question that short sales are not going to go away anytime soon and by their very nature put pressure on prices, since short sales typically sell for less than market value.  Yet when I look at the pending homes sales in my market in Southern California and specifically the Conejo Valley, it is clear that a large percentage of the homes in escrow are short sales (in some price ranges as much as 50%).  This is because A) buyers want to buy distressed property for their perceived better value and B) unlike regular sales which clear from pending to closed in 30-45 days, short sales take months to complete.  What’s significant here to me is that this warps the distressed or pre-foreclosure numbers because while these homes are in default, they are also under contract and will likely never end up in a bank’s inventory.

So why are sales down?  Much has been made recently on those declining sales numbers.  However I believe those numbers are declining not due to lack of demand, but lack of quality inventory.  To Diana’s point, equity sellers don’t like the prices they can get.  Further they may not have enough equity to make the move up.  In fact if there is any short coming to this market, it has to be the dearth of move up buyers.  You have to have enough equity to buy the next price up and many don’t given the stringent underwriting guidelines the banks are using to lend today.   Moreover, even those with sufficient equity, look at the inventory landscape and don’t see a suitable replacement property to go after.  They can’t buy a short sale or REO, because they have a home they have to sell, and banks won’t accept contingencies on sale, and they don’t want to sell until they find a home to replace their current one.  So they wait.  This in turn keeps a lid on inventory.  Multiple offers are commonplace and well priced homes in good neighborhoods and locations are selling quickly.  To my thinking, even though confidence in real estate remains shaky, lack of inventory is the real explanation for declining sales numbers, not declining demand.

Does this mean prices are poised to rise?  Probably not soon, but it does mean that most of our markets are stabilizing, the economy is improving and that is welcome news indeed

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Buying Distressed Property

Posted on May 12, 2011 by Tim Freund

Data out yesterday from RealtyTrac, an online foreclosure tracking service, shows that foreclosures are on the decline rather dramatically.  They caution however that the cause is not an improving housing market but rather a slowdown do to a more cautious paperwork process by the lending industry.  In fact, they reported 1 in 240 California households received some form of foreclosure notice last month which would suggest the market is still soft.  But if foreclosures are on the decline, is it really a good time to buy and can you still buy a distressed property, and how do you go about it?  What about short sales?  Have I missed out and are distressed properties always the “best” deal?

There are several ways a buyer can acquire a distressed property. One way is at the Trust Deed auction on the courtroom steps.  In California we are a non-judicial state so foreclosure does not require a trip before a judge, but rather takes place as an auction at the courtroom steps.  The TD sale is really designed for investors however, since it’s an all cash purchase (no financing) and involves extensive research and time, and far more buyer risk.  This is due to the lack of warrant-able clear title and that the auction is very often postponed over and over again, costing lots of time.  But time aside, the title research should be reason enough to dissuade most would be buyers.  Why?  Imagine buying a home at auction and thinking you got a great deal, only to find out that there were other loans or liens on the property that you were unaware of.  Maybe you bought from 2nd lien holder and come to find out that there is still a first trust deed on the property.  Yikes!  Or maybe a Federal tax lien.  Uncle Sam always gets his.  At a trust deed auction, there are no warranties of any kind, so you better have done a lot of research before bidding.

The more common way to buy a foreclosure is through your Realtor and the Multiple Listing Service (MLS).  This property is known as an REO – Real Estate Owned (by the bank).  Under this type of sale, the bank does offer clear title and all encumbrances are paid off.  In this way it’s just like a regular sale but the home is sold “as is, where is”. This means that while you do get the warranty of clear title unlike the trust deed sale, you don’t get repairs.  The bank will not fix anything, do any termite work or offer you a home warranty.  Thus there are almost always additional costs that must be taken into account when buying an REO.  Further REO’s are seldom in excellent condition and in fact very often the trend has been that they are in some degree of disrepair and also in lousy locations.  Bad decisions by homeowners, beget bad decisions.  In other words, the guy that bought and subsequently lost his home, often  bought a poor location too, then maybe even tried to be Handy-Andy and fix the place up himself – without permits and the ability to do quality work… you get the picture, the house is a wreck.

Lastly there are short sales.  Short sales are a place that an average Joe can potentially get a really good deal by purchasing directly from a homeowner, but at an amount lower than the debt on the property.  To accomplish this, the homeowner has to get the lender or lenders approval to sell for less than owed.  I have described short sale process here in The Real Estate Conversation before, but suffice to say, there’s nothing short about a short sale.  A short sale can take many, many months and because the transaction requires all of the lenders approval, success is not guaranteed.  So short sales generally sell for a discount because of the time factor.   Time is money after all and short sales take a long time to complete.  Also like a foreclosure there are no repairs or home warranties, so the property condition on short sale homes tends to be inferior to regular equity sales, though usually better than REO’s.  As a result, there is still often some upside to the buyer in the form of sweat equity – you buy for less and fix it yourself.

Should everyone be looking for a distressed sale then?  Not necessarily.  In fact if you are on a schedule to move or have to sell a home and it’s under contract, but not yet closed, neither an REO nor a short sale are options because lenders will not allow any contingency on a successful closing of another home when selling or negotiating a distressed property.  So put simply, if you need to sell your current home to buy, you are not eligible to buy a distressed property.  If you are on a time sensitive schedule, short sales are out too.  Does the fact that you can’t buy a distressed property mean you shouldn’t buy at all?  Of course not.  You can still make an excellent purchase if the regular sale is priced correctly and in fact more often than not, the regular sale will be in far better condition than a distressed home and very often in a better location too.  You can also close when you want, a real advantage if you need to move quickly to get in before school starts etc.  So whether you are buying a regular sale, an REO or a short sale, as long as you’ve clearly identified your goals, wish list and priorities, you would be hard pressed to find a better time to buy than right now.

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Making Sense of Negative Equity

Posted on May 10, 2011 by Tim Freund

This week we received great news in the employment numbers but also discouraging numbers on the housing front.  Prices were down and negative equity up.  Zillow, the online real estate valuation website, came out with numbers that had gloom and doom written all over them.  28% of homeowners with mortgages owe more than their home is worth.  This reality naturally varies from market to market because in some cities that number approaches 75%.  This is called negative equity – the opposite of having equity in your home.  The problem with a negative position is that a borrower is paying towards a mortgage, but not building equity.  Think of it like buying a car.  The moment you drive the car off the lot, it drops in value and you owe more than the car is worth.  Eventually you’ll pay off the car, but for the first several years, you can’t sell it unless you put some additional money in to pay off the loan.  What’s interesting to me is that people seldom walk away from their car or have it repossessed. Yet, there has been a lot of talk about “strategic defaults”, where homeowners throw their hands up in the face of declining property values, and simply walk away from the home, its debt and then begin the arduous task of starting over.  So why is this happening with homes and not cars?

To begin, most of us need a car.  But don’t we also need a roof over our heads too?  Because of this, strategic defaults are not nearly as common as the media would have you believe.  Furthermore, homeowners have an option to sell the home short of what is owed (with lender approval) called a “short sale”.  But what about our national psyche and the effect of negative equity on our confidence? Without question we are suffering from lack of confidence in buying a home.  Why else would people not be buying like crazy right now with low interest rates, home values down to 2003 levels and lower, if not for lack of confidence?  So here is the discussion I believe we need to be having: how much does it save to walk away and rent rather than to pay towards an underwater mortgage?

Consider that with renting there is no deduction for property taxes and interest.  So for argument sake, let’s assume a property owner’s total cost of ownership (not including maintenance and utilities) is $4,000 a month, and that to rent a comparable home is $2,500.  After the write off of the taxes and interest at a .28% tax rate, the homeowner writes off $1,120 (.28 x $4,000).  But that might include principle and insurance, so let’s round that figure down to $800 in income tax savings.  If we use these numbers, the total cost is $3,200 a month to own vs. $2,500 to rent.  This means for the owner to save their credit and keep their family home, they have to pay $700 more every month ($8,400 per year), than renting.  Of course there’s the  additional cost of ownership in gardening, and repair too, but the actual cost of paying an “under water” mortgage isn’t nearly as high as you might expect.  Then there is the whole social cost to a society where personal responsibility the cast aside in favor of financial gain, (we can talk about this behavior in Corporate America and Wall Street another time).

In the end, each borrower must assess their situation and answer to their own conscience, but while it’s depressing for sure, when you look at the numbers, negative equity is not as big a deal as you might think, and the lack of confidence in real estate not justified.

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There’s Never A Bad Time For Negative Headline

Posted on April 28, 2011 by Tim Freund

“A SPATE OF POSITIVE DATA NEWS PUTS REAL ESTATE BLOGGERS ON SUICIDE WATCH”…  That should be the headline you read today.  The pending homes sales data came out today and it was positive.  I can see the talking heads like Diana Olick now, “Ack!  What should we do now; whatever will we talk about”?  We all know bad news sells and newspapers and magazines really need headlines that sell, but I’m ready for some positive headlines.  To quote George Harrison, “Little darling, it’s been a long cold lonely winter
Little darling, it feels like years since it’s been here,
Here comes the sun… and I say, it’s alright!”

As for Diana Olick, I actually really enjoy Diana, in fact, I wish I was Diana Olick; she’s smart, has a killer job, is well respected, gets into any restaurant she wants in NYC and DC, and she’s not bad looking either, but would it kill her to put a positive spin on something just once?

On Tuesday, Diana and CNBC reported that rents are rising and consuming more and more of our household incomes, but no one wants to buy because they don’t see the investment value.  Huh?  Let me think out loud for a second… “rents are rising, but I won’t buy because value could go down, so I’m better off paying the landlord’s mortgage, cuz gosh, I wouldn’t want the investment to go down.  Maybe I should keep it in dollars hidden in my mattress?  Yes, that and give it to my landlord…”  Come on people, that just makes zero sense.  But does Diana articulate that?  No, rather she then raises the specter of the US Government going into the landlord business as a way to absorb the Fannie/Freddie REO and “Shadow Inventory”.  Blah, Blah, Blah.  Raise your hand if you’re tired of hearing about “Shadow Inventory”.

OK, let’s talk about the nation’s housing inventory for a second.  Guess what areas are hardest hit and have the largest glut of unoccupied and distressed properties in America?  Las Vegas?  You’re right.  Phoenix?  Right again.  South Florida?  Wow you are amazing. Palmdale, Modesto, Sacramento Ca, Detroit, MI… Seeing a trend here?  What we have is an oversupply in areas that are either in the midst of a long economic decline, or in areas where builders built on endless land, which in turn created a gajillion construction related jobs.  And don’t give me a construction job building a house of cards is still a construction job, ’cause I don’t buy it.

When I was growing up in Northern California, people moved to Las Vegas for one of two reasons: they we’re either working for the casinos and tourist industry or they were retiring and wanted cheap housing and senior discounts on endless buffets.  What Vegas became was a Ponzi Scheme.  Housing created jobs, which created demand for housing, which created jobs, which created demand for housing etc.  One paid for the other until it couldn’t anymore and then the whole thing fell down, worthless, broke and broken.  Vegas, Phoenix, Miami Beach was a Madoff-esque creation.

So why not have the Feds be landlords and just rent these places out?  The problem with this conceptually is that a lot of the inventory is in areas where there isn’t any need.  Remember sand doesn’t have the same value in the desert as it does in a glass factory.  However, if the homes were cheap enough for rent, then people might opt for them over apartments and help minimize the need for apartment housing (of which little has been built in the past few decades, at least in California).   Or we could just let the free market dictate the absorption until the entire inventory is gone.  There is precedent where the government owns and rents housing on the cheap to qualified low income residents, and this wouldn’t be a bad thing; heaven knows the homeless situation in America is appalling (is homelessness in America and a glut of housing inventory an oxymoron?).  However, rather than put the government in charge, why not incentivize investors and let them do it?  This is a concept even Larry Kudlow would embrace.  In California we call it Section 8 housing, and there are tax incentives for property owners to comply with the government mandated requirements, and everyone wins.  Government and the private sector working together, what a concept!  Anyway, my point is, the news is getting better; the patient is on the mend and like a kid asking a stranger to toss an errantly thrown baseball back into play, I say to CNBC and the like, “A little help here”?

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Case-Shiller’s Latest

Posted on April 26, 2011 by Tim Freund

As is the case on the last Tuesday of every month, the Case-Shiller Index is published with commentary by Standard and Poor’s.  For the 8th consecutive month, the index posted a decline.  “‘There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing,” David Blitzer, chairman of the Index Committee at S&P Indices, said in a statement. “Recent data on existing-home sales, housing starts, foreclosure activity and employment confirm that we are still in a slow recovery.'”   And as is always the case, the headline says it all right?  Well not always.

As I have often noted here in The Real Estate Conversation, real estate is local.  If we look at Detroit for example, it hardly paints the same picture as D.C., which actually posted a gain.  And while SF and LA remain down as a whole, if a stat was kept on the coastal areas of California, which there is not, I presume the numbers would fare much better. So while Mr. Blitzer is partially correct in saying “there is very little, if any good news about housing” he is incorrect when he states, “if any”.  Why?  Because there is some good news, or at least it isn’t all bad news.  California for example boasts retention of a 68% increase in value since 2000.  That’s good news… Los Angeles and San Francisco MSA’s (Metropolitan Statistical Area) show seasonally adjusted declines of a modest .1% and that is not bad news either.

Additionally, the idea as Mr. Blitzer suggests in his statement, that the fact that we are in a “slow Recovery” is somehow a bad thing, I say, “How’s that”?  Can you think of any real, substantive recovery that isn’t or shouldn’t be slow?  The media and financial market’s obsession with a quick fix, an overnight rally, a “boom” return to the “way it was”, shows an incredible lack of foresight and the fundamental problem with Wall Street.  I’d like to find this statement shocking from S & P, but I don’t because after all, S & P is the same organization that valued those crummy derivative MBS’s (Mortgage Backed Securities) investments, as of the same caliber as those of high quality; a point almost completely overlooked in the blame game for the whole mortgage meltdown by the way.

OK, granted, a small improvement would be welcome news indeed, however a slow recovery based on fundamentals and not artificial government stimuli (think Housing Tax Credit 2009-10) is not bad really.  Moreover had the Housing Tax Credit never been enacted, prices would have likely declined further in 2009-10 and had that been the case, the year over year numbers would look very much different indeed.  In fact this is a very important fact worth re-stating another way: Last year’s values were artificially elevated due to the Federal Tax Credit, so the year over year numbers, should look worse if we are to expect natural market forces to take over.  If you like me, are on a low sodium diet, consider the whole of Case-Shiller’s statement on the last Tuesday of every month, not just the sound bites, and I think you’ll agree that,  that’s a grain of salt worth taking.

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California’s Future

Posted on April 23, 2011 by Tim Freund

A couple of days ago, a client sent me an article with 5 opinions suggesting the housing market was poised to continue its downward slide.  I responded by saying the future is unclear but that locally at least, the numbers remain consistent with an improving market.  Inventory numbers were only 5% changed to the upside, which by all historical measures, save for the market’s heyday from 2003-2005, indicated a lower level than spring usually affords.  Moreover, pending homes sales data suggests that the market is vibrant across many price points with over 39% of all homes, currently under contract and more than 31% if you exclude short sales.  (Short sales typically take a longer time to close so those pending numbers get thrown off by the clogging of long drawn out bank negotiated deals).

For so long, we have been hearing about the demise of the Golden State; budget worries and stalemate in Sacramento; the third largest number of foreclosure actions in the nation as measured by state; and on and on.  If you were to accept those notions as true and indicative of the future, you could not help but conclude that the luster was off California.  Yet, like a championship fighter, you can’t count out the nation’s most populous state, because it’s been knocked down before, can take a punch, and when really backed into a corner, always has the hope of a last minute knockout punch.

When President Obama began his reelection bid this past week, he started his fund raising in sunny Southern California.  California, home to the largest port in the US, the movie industry, Disneyland, the birthplace of aerospace… He ended by visiting Silicon Valley, home to the iPhone, cloud computing, the world’s largest search engine, social networking and birthplace of the mouse and microchip.  Furthermore, Dow Jones Venture Source reported yesterday that 40% of the nation’s venture capital in the first quart of 2011 went to firms within California – the next closest state, Massachusetts, received just 12%.  If California is on life support, then perhaps think of it rather than like the old “Iron Lung”, stationary and immobile, but as Darth Vader, agile, powerful and not to be messed with.

Throughout her 160 year history, California has always been the land where dreamers of big dreams go to make their dreams come true.  All those dreamers have to live somewhere, and one thing is for sure, it won’t be under a rock.  Rather it will be under a red tiled roof maybe just east of the big city; it will be not far from the coast, yet close to the mountains; probably near a BART station or the 101 freeway…  It’s usually about this time that fans of real estate like to paraphrase early 20th century political satirist Will Rogers who said, “Buy land, ’cause God ain’t makin’ anymore”, and to this, I proudly admit, I am no exception.

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Why Sell Now?

Posted on April 14, 2011 by Tim Freund

If the economy is finally showing improvement, why would you ever want to sell now?  Why not wait a bit until things really pick up and property values start to rise?  Valid questions indeed, but before we can answer those we need to answer this: why are you selling at all?

Let’s set a stage and presume to begin with that you have enough equity to sell, pay closing costs and commissions and have enough money to put a down payment on a replacement property.  So back the original question, why sell at all?  First the obvious: You’re getting divorced, have a job transfer, lost a spouse, or lost a job; all reasons largely or completely beyond your control, necessitating a move.  So really there’s no question here, you’re selling now rather than wait for an upswing in prices because you have to.

The less obvious: Growing family, better job/higher income, you got married, you want to.  You’re selling now because you need to and want to and you recognize the opportunity to benefit.  In other words, your situation has changed for the better and you realize prices are down as are interest rates.  Therefore, if you sell now, while your place is down, so too is the place you’ll be buying.  Thus the “delta”, or difference, between the existing property and the replacement property is such that any increase in your existing property would also mean a greater increase in the replacement property.  Example:  If you were to wait for your $500,000 home to appreciate 10%, it would rise to $550,000.  However, it is likely that the replacement property would mirror that appreciation and if that property had a current value of $800,000, and went up the same 10%, it would rise $80,000, essentially costing you $30,000 more.  Further that would mean higher property taxes, and we don’t know where rates would be at that time?  Plus, very often better properties appreciate faster and more than inferior properties, so it’s conceivable that the replacement property could go up faster and higher than your property costing you even more by waiting.

But what if prices deteriorate further?  True, this is a possibility but consider what you would have accomplished: we’ve established that your situation has changed for the better and you really wanted to buy “up”, which you’ve now done.  So you’re living in a nicer place, maybe larger, maybe with a bigger yard, maybe with the view you always wanted, maybe with the pool for the kids, maybe in the school district that’s better for your special needs child or with the better music program or sports team, maybe it’s got the extra room for the baby or for mom; maybe it’s got the big closet for your wife or the 3 car garage you always wanted… catch the drift here?  You’ve upgraded!  Since you just upgraded and your situation is improved, you’ve got no intention of selling so who cares what happens in the immediate-near term with values?  Ahhh, real estate is a long term investment isn’t it?  Yes it is and to repeat, you just upgraded your situation for the long term, and that sounds pretty darn good doesn’t it?

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