Allow Me to Think Out Loud…

Thinking The San Francisco Chronicle just splashed more bad news about the housing industry all over the front page of the Friday (March 14th) issue. Sales are down-way down. Part of the explanation seems to be that tightening lending standards have made it hard to afford a home since qualifying at artificially low teaser rates is no longer acceptable. Stated income loans are only available for self-employed individuals and Wall Street stopped buying mortgage backed securities so rates are up too.

Of course buyers who have been priced out of the market are now waiting to jump in at the bottom, which only adds to the rapid decrease in sales activity.

Timing couldn’t have been worse for Congress to approve raising the ceiling on federally backed mortgages from $417,000 to $729,950 in the Bay Area. Many buyers considering purchasing a home are enticed to wait out the market a little more to see if rates will drop further.

So if we had a crystal ball, we’d say that when the new higher conforming loan cap goes into effect, it’s just possible that many buyers will get off of the fence. And if they all do that at the same time, there just possibly could be competition once again for housing.  The biggest fear if you’re a buyer is you get in the market too early and your home’s value could go down before it goes back up; that’s a horrible position to be in if you have to sell while it’s down. The alternative is to get lucky and time it perfectly, or wait to see values going up and be assured you didn’t get the best deal. I don’t know for sure, but history tends to repeat itself and I’ll bet home values go up again sometime in our future. While everyone’s trying to guess when the bottom is not everyone will get it right.

Maybe buying before that happens would be a good idea. If rates do go down further, one could always refinance…

Redwood Shores Market Update for March 2008

Notice how the reported median price in 2007 was up 3% over 2006. We adjusted for the fact the median size home which sold in 2007 was 100 square feet larger. Accounting for larger homes selling, Redwood Shores actually experienced a median price drop of 2.27% in 2007, or perhaps better stated swing of 5.27%. In our estimation this is critical information buyers and sellers should know. Yet it is unavailable to the general public due to the enormous time spent performing manual calculations.

(Click on the picture for a full size illustration)

Go to our web page at MorganHomes.com and click on "How’s The Market" to read more interesting stats on Redwood Shores.

Rws_median

Belmont’s Market Report-February 2008

February sales data for Belmont is available but there’s not much to talk about. There were only five sales (homes that closed escrow) in the month of February. That means only five sales were consummated in January. That’s down more than 50% over last year. While that may sound like a huge percent decrease, it’s important to remember in terms of actual units, it means eight fewer homes sold.Graphtrends

The median price decrease could make headlines though. It dropped from $900,000 a year ago to $750,000 for the same February period. Of course with only five sales these numbers are easily skewed. In fact, the median size home which sold in February 2007 was 1,680 square feet in size compared to this year’s five sales where the median size home was only 1,010. That’s more than enough to explain the difference in the median year-over-year price change. If one was to account for this differential at the going cost per square foot the adjusted median price would be $ 1,122,000 for 2008.

In February, the average home took over 40 days to sell and the seller received only 96% of their asking price.

In every category we measure—the time it takes to sell a home (DOM), the number of new listings vs. sales, the percentage the seller received of asking—the performance was markedly down over last year. Yes the real estate market has slowed and if we were to measure it as we do the economy, you could say it’s in a recession.

Bel_208_postcard

Ready, Set, GO!

We’ve been hesitant to comment on the economic stimulus plan until all of the cards fell into place.

Now that the stimulus package has been signed by President Bush, the lending industry will get a much needed infusion of cash.

For the Peninsula, by far the most stimuli will come from the provision which raises the conforming loan cap. Fannie Mae and Freddie Mac are government sponsored companies which back home mortgages. Until now, the largest loan they would dish out was $417,000. That did little good on the Peninsula where the median price is closer to $900,000. Being able to sell these new larger loans to Wall Street as government backed securities means rates will be lower.

It’s a bit tricky as to what the new cap will be, since it will be indexed to your local median home price, but the conforming cap should be raised to $729,750 on the Peninsula.

WHEN WILL THESE NEW UPPER LIMITS BE AVAILABLE?

Optimists say in about a month from now (April 2008) but don’t hold your breath.

PLAY YOUR CARDS RIGHT AND ACT FAST.

If your current loan is less than $729,750 and more than $417,000 you could directly benefit from the new conforming cap but you only have until December 31st of this year to refinance your home. That means there will be about an eight month window of opportunity.

WATCH THE LENDING INDUSTRY SCRAMBLE.

Since the program is supposed to end in December, it’ll be a mad dash to get all of those loans refinanced. Lenders will have to staff up, Title companies will have to re-hire many of those recently let go due to waning home sales and appraisers will begin raising their fees again.

Fence-sitting first time home buyers will no doubt see the window of opportunity to purchase since the same home will now carry a lower monthly payment and home values have softened for the first time in years.

There will be a whirlwind of activity until the end of the year—it should be quite, shall we say, "stimulating"…

How Low Will it Go?

Our best guess is that this housing retraction will be more similar to 2001 than in 1990 which is to say it should be relatively short lived so long as jobs remain plentiful. This means the housing market should level off this year as far as declining sales go. Our feeling is it will be later in the year rather than sooner. We don’t anticipate a "light switch" suddenly going on and people flocking back in droves to the market. The market will probably remain flat through 2009 with sales picking up later that year. That’s the national picture.

On the San Francisco Peninsula, real estate is not suffering from the same issues as many other parts of the state and country. Regionally, the main reason for a slowdown in sales has been tighter lending practices (causing Jumbo loans to be more expensive), low homeowner affordability (due to high prices), and buyer skepticism brought about by the housing issues which dog the industry and has many buyers taking a wait and see approach.

The San Francisco Peninsula market continues to outperform the country as a whole and even fairs better than San Francisco. Stand & Poor’s released their November data suggesting the largest decline "in history"—their history dates back only to 1991.

The decline, measured as a percentage, they estimate at -8.1% for the year in San Francisco (metropolitan area).

San Mateo County posted a -4.3% decline in appreciation in 2007 the first drop since 2001 when appreciation levels declined -8.4%. Notice in the graph below how in later years as prices rise even a small percentage in appreciation can mean a large increase in real dollars; conversely a small dip in the percent of appreciation can mean a lot in terms of real equity evaporating (if there is such as thing as real equity). Smc_appreciation_19982007_550_2 

How low it will go is anyone’s guess, but experts seem to think the turnaround could be in mid to late 2008.

  • Don’t Expect a Housing Turnaround Anytime Soon

The Mortgage Bankers Association Says Housing Problems Will Linger Until Mid-’08-ABC News, October 2007

  • Forecast 2008: Economy Slows, Housing Woes The decline in the turnover of existing homes is expected to bottom out by early 2008. But the related home construction activity that is so important to the economy is not expected to turn around until well into the year. As for the troubling housing price slide, that’s not expected to hit bottom until the end of 2008. By Phillip M. Perry (Dec/Jan 08)-Area Development

Adjusted Belmont Real Estate Median Price

Belmont

It’s interesting to note that in the last two years, for the first six months virtually the same number of homes sold—94 in 2006 and 92 in 2007.

After the July news of the mortgage industry financial issues, the overall uncertainty of the market, and undoubtedly with anticipation that homes values may drop, 2007 saw only 127 sales as compared to 167 in 2006 for the second half of the year.

Can one believe the reported median price for Belmont?

The MLS system reported the aggregate Belmont real estate median home price in 2006 to be $925,000. That rose to $945,000 in 2007 or a little over 4%. Further analysis reveals that the median size home which sold in 2007 was 95 square feet larger.

Understanding the median home sold in Belmont during 2007 sold for $548 per square foot and the median size home sold in 2007 was 95 square feet larger, this could account for as much as $52,000 in the reported median sale price for 2007. Which means the actual median price in Belmont was closer to $892,000 or a decrease of 3.4%.

But it matter less what happened for the entire year if the market incurred a sudden and radial change later in the year. In other words, even if the market went up 10% for the first six months if it dropped 15% in the second six months the current value as of December is more important.

Looking at Belmont’s median home price at the end of December in 2007 as compared to December of 2006, we see that in 2006 the median home price was only $850,000 and at the end of 2007 a whopping $1,025,000. Applying the same logic and adjusting for whether larger or smaller homes sold during the two periods, we see that in fact the median size home sold in 2007 was 370 square feet larger. Using our above price per square foot number of $548/sq. ft that eliminated $202,750 of apparent appreciation and means the true median price would be closer to $822,000 in 2007 as compared to $850,000 in 2006 or a 3.2% decrease year over year.

·         This report has been revised with the release of additional data. Sources used in data analysis included Multiple Listing Service searches and REILPro Statistics.

Sales That Drive Our Economy…

There are great deals to be had on appliances right now. Sales

Everyone knows that the U.S. economy is driven to a large degree by consumer spending. Tighter post-Christmas spending patterns create a need for stores to offer up sales and financing deals to lure consumers back to the stores. Check out Best Buy and Circuit City to see the amazing deals one can get right now!

This year with consumer confidence low, the average consumer will pull back even more. That translates into great deals for the savvy (or fortuitous) consumer who’s waited to buy. On big ticket items such as plasma TV’s and refrigerators it’s not unusual to see low or no interest rate financing options today—even free delivery.

Tv When will these offers end? They’ll end when consumers return to more bullish spending patterns. When will that happen—of course no one knows. The only indication will be when you are no longer offered deferred or low interest finance rates and deep discounts—watch the ads.

How does that translate into real estate? Actually, perfectly. The same forces are at work and the same indicators available. You’ll know when was the best time to buy just after it passed.

                                    Live your life.

*The information contained is educational and intended for informational purposes only. It does not constitute legal advice, nor does it substitute for professional advice.

Butter or Bacon–How Do You Know What’s Good For You?

Let’s point fingers. It’s the American way—when things go awry, we want to know who’s to Uncle_sam blame. There’s got to be somebody out there whose hands are dirty? And if we can’t find them we’ll pick an easy target.

So who’s is to blame for the mortgage fiasco? Might there be enough blame to go around for everyone?

The banks and lenders who made the loans certainly had to know the risks involved—they designed the loans in the first place. They are the ones that lowered the qualifying standards so that a buyer could get approved for a loan at a minimum negatively amortized payment option.  One might even argue this is what the banks wanted. Countrywide, the nation’s largest lender may have specifically designed these loans to bring themselves to the brink of bankruptcy. Why? We’ll leave that one to the conspiracy theorists.

Cf_graph_2

The brokers who made the loans must have also been aware of the pros and cons; how else could they sell the products? Why didn’t they just tell people that these were risky loans, I’m sure no one would have opted in had they been aware of a potential down side…

Real estate agents must bear some culpability too. After all, they sold these people homes they knew they could never afford for the short-sided interest of getting a commission check. Let’s just hope they all go down with the sinking ship—that’ll teach them. Many of these buyers could never have dreamed of owning a home and real estate agents should have told them to forget about homeownership and stay renters.

And all will be well in American if we can just find someone to blame.

The fact is other than some unscrupulous lenders, bankers, mortgage brokers and agents who participated in these loan schemes without disclosing the downside, one really cannot blame the average industry professional for doing their job—selling a product—anymore than one could blame your local supermarket for selling tobacco, alcohol, butter and bacon. Those products might not be the best for you but they’re available— it’s up to the buyer to be aware of the health issues and indulge in moderation.

If you think the buyer suing her agent in California over the value of her home is a case to watch, wait until homeowners start suing the banks for offering them loans the banks should have known they could not afford.

The reality is this is probably the best argument against privatizing Social Security. Most people do not possess the business acumen to handle their own finances. I can just imagine the uproar over that bailout now…

Median Price Methodology Examined

Median Price Methodology:

The methodology of reporting median home prices varies depending on the source. The MLS uses the aggregate method of calculating the median based on the preceding twelve month sales. We discuss why in a changing market this system is flawed at best.

Standard & Poor’s methodology is perhaps the most accurate, but it relies heavily on past sales and is therefore better suited for looking at historical trends than illuminating current market conditions. Bel_median_12

We employ another approach which is to examine the most recent month’s sales, and adjust for larger or smaller homes selling to help mitigate wild fluctuations in median price results.

For example, the MLS reported Belmont’s median value for 2007 to be $945,000; yet looking at the median price reported at the end of December it stood at $1,035,000; a significant difference and an overall upward trend from the previous three years.

Median Bay Area Home Price Near Worthless

What You Hear About Median Home Values May Be Completely Wrong

The Multiple Listing Service for the Bay Area peninsula has launched the December sales stats and there is some compelling evidence that Bay Area homes values dropped slightly over 2006.

The median home price is the midpoint at which half of the homes sold for more, and half sold for less. Of course if smaller or larger homes are selling then these numbers are easily skewed—especially with a small market sample.

SMC 2007San Mateo County posted a reduction in the median home price to $885,000–a $40,000 (4.3%) decline over $925,000 in 2006.

This statistic could be wildly inaccurate though. Simply put, there’s no easy way to determine if the size homes which sold in a given year were larger or smaller than a previous year’s. Intuitively, given a large sample–totaling all sales for San Mateo County for example, one would expect the median size home to remain relatively constant and thus portray an accurate picture of the median home values. But unique market forces such as the ones we are currently experiencing are just the sort of thing that could skew those numbers. If for example, more first-time buyers purchased homes, the median size home included in the sales calculations would undoubtedly be smaller and thus skew the median price lower.

The Multiple Listing Service (or MLS system) which essentially retains all agent related transactions has its own inherent flaws. They derive the median home value by taking the median price for every home sold in a given year. If the housing market has a dramatic shift during the course of the year, it’s entirely possible that the median home price reported has nothing to do with the home values at the end of the year on December 31st.  In other words, it matters not whether home values climb for the first quarter of 2007, if in December they’ve dropped dramatically. The MLS median price is more a measurement of the average median value rather than the true median price at the end of the year.

Last year was a prime example of why reporting the median home price in this fashion is erroneous at best. In Belmont for example, there were 94 sales in the first six months of 2006 and 92 in 2007–virtually unchanged. However, the next six months after the July mortgage issues came to light, there were only 127 sales in 2007 compared to 167 in 2006. It’s a strong indication that the market changed in the second part of the year and why measuring the median values at the end of the year, rather than reporting the aggregate is a methodology more suited to a changing market.

In a small market sample such as the town we live in, Belmont, Ca, it’s even more imperative that one adjust for the median size of homes which sold. We incorporate this onto our calculations and low and behold an entirely different picture emerges.