The Writing was on the Wall

Addendum to Part 1 of a 2 part series–"Which End is Up" or Understanding Our Housing Market"

Historically low interest rates, low cost housing availability across the country, investors hungry to reap a return after the dot com crash all set the stage for an overactive interest in housing as an investment.

There are really three distinct factors which played into the current market conditions across the county. The first is the sub-prime market. Essentially, these are loans which are made to folks who otherwise could not qualify for an "A" paper loan-usually that means low credit scores. Anyone with even the foggiest crystal ball could foresee that giving loans to people with bad credit is risky. The second major players were investors. Aggressively seeking any new vehicle to safely invest thousands turned to real estate. The availability of innovative interest only and negatively amortizing loans fueled the investment fire. Investors were able to put little or no money down on a new housing development in Las Vegas and before the project was completed for occupancy could re-sell at a huge profit.

As with any scheme is better to get in early rather than later. Not only did the country as a whole have more sub-prime loans it had more investors with less emotional ties to their homes. Both of these relied on one thing-low interest rates. As the "fixed for five year adjustable loans" came due, for many investors it no longer made sense to hold onto their investment as rents could no longer cover the payments. This created a flood of inventory as investors-all with the same issues (rising interest rates) flooded the market. Since these were investment vehicles which had for the most part already established considerable equity-selling and selling fast was the exit strategy. Of course this meant selling lower than your competition. The third factor was Wall Street’s hunger for new high yield investment securities which neglected to understand the risk these investment vehicles carried.

On the homeowner side, many of the sub-prime loans also began to adjust with the difference being many of these folks could not afford the new higher payment. The few that had neg-am loans had no equity to fall back on since housing prices were falling due to the sell-off of investment properties. This forced those who could to try and sell, further increasing inventories and lowering values; while others simply had no choice but to fall into default–eventually losing their home to the banks.

Now the banks are on no place to hold onto all of those loans they made so they sold them as securities on Wall Street-another set of hungry investors who jumped on the bandwagon and bought up all the sub-prime loans they could get their hand on. With thousand of loans in default, mortgage companies and Wall Street was stung by portfolios which were now worth nothing and did what Wall Street always does-overreact. With the sub-prime rate of default was reaching 15%, the default on Jumbo loans was only leas than 1/2/ of one percent. Throwing the proverbial baby out with bath water, they hastily decided that all mortgage backed securities were bad and no longer bought any Jumbo loans either (those over $417,000 not backed by Fanny Mae or Freddie Mac). With no one to buy these loans this raised the cost of Jumbo rates since mortgage companies were now forced to carry the loans "in-house", or add it to their portfolio–substantially increasing their exposure and risk therefore charging more. In July the overnight rate for Jumbo loans increase over 1% in one day.

Since most of the loans in the Bay Area are Jumbo loans this effectively made the cost of homeownership increase substantially overnight-hence with homes less affordable and at already historically high prices, a pull back began.

Part II of a Two Part series

Part 1 "Which End Is Up" or "Understanding Our Housing Market"

Opportunities in an Emerging Market

There are always opportunities in any market. As in the stock market where you can profit on a given stock whether it is going up or down depending on the position you hold, real estate also has it’s opportunities in a changing market as well.

It has been a seller’s market for years. So where are all the buyers now? Clearly the interest rates have increased making homeownership more expensive, but that can’t account for the current market pull back we’re experiencing. Certainly some buyers are playing a game of wait-and-see with the home values and others the same game with interest rates.

Smart investors usually buy and sell when no one else is. We’ve devoted a lot of time to discussing "When is the Best Time to Sell a Home" for seller’s wishing to try and time the cycles within a given year. For buyers, we feel an opportunity exists for the next year to acquire sound real estate investments. Housing price stabilization in the Bay Area and foreseeable job and economic growth all spell an environment rich for investment. If you are a buyer who never made it into the housing market now’s an opportune time to take advantage of less competition and softer pricing. If you are waiting for interest rates to go down further, that’s a fool’s bet since you can always refinance if they do and you can do nothing about it if they don’t. If you are waiting for home prices to plunge the same trap awaits-when will you know if you are at the bottom of a market?  When you see prices start to go back up.

For sellers wishing to sell and buy a more expensive home, now’s your opportunity too. In the superheated market we endured the past 10 years, purchasing a replacement home contingent upon the sale of your home-even when your knew your home would sell-was almost impossible due to the overwhelming competition of offers with no contingencies. With the current high inventories and less competition many sellers are now forced to entertain offers with contingencies which were unheard of just a year ago.

Was your home worth more earlier in the year? Perhaps, and it will certainly be worth more again in the future; but so will the replacement home you area purchasing. Remember. If home values dip 10% and you’re buying a more expensive home in real dollars you are coming out ahead.

If you are waiting to sell when you think the market is at its peak you already missed it. Do you wait for another appreciation cycle or move on with your life?

As we’ve always said, predicting the market is impossible to do with precision. Use real estate to enhance your life-not dictate it.

Drew & Christine Morgan-MorganHomes.com Belmont Real Estate

Visit our Blog at Beautiful Mountain Blog.org

Which end is up? or Understanding Our Housing Market

Part 1 of a 2 part series

"Reports of my death are greatly exaggerated"– Mark Twain quotation after hearing that his obituary had been published in the

New York

Journal.

The same might be true for the real estate market in the Bay Area. While everyday there’s some piece of news about the Bay Area’s real Estate market, many of it is focused to capture your attention in a sensational way and does little to offer insight and discussion.

Since no two markets are identical it’s difficult to say where this one will end up. But the relentless news stories about the mortgage industry melt-down and sub-prime loan mess has got even the most bullish investors nervous.

Clearly there will be a shake out (which is already occurring). Many areas of the country experienced a run-up in home values which was unsustainable and are now feeling the pull back which invariably happens after a bull market run-it should come as no surprise (read The Writing Was on the Wall for an explanation of what set the stage for the current crises).

The last large down-turn in Bay Area housing prices was in 1989-1994 when Bay Area communities saw huge paper gains in real estate evaporate-fine if you didn’t have to sell, but there was also a recession and many people were forced to sell their homes due to a company relocation or the loss of a job altogether; which is precisely the main difference in this market cycle compared to 1989-we’re not in a recession-in fact more jobs are being created in the Bay Area than are not.

As in the last housing market adjustment, some states faired better than others and some cities faired better as well. One thing we currently know is inventory levels are up and sales down. These two opposing effects will eventually result in a decrease in home values; when inventory levels rise and sales don’t, inventory grows and homes generally sell for less. There are of course radical pundits on both sides of the debate-one side stating emphatically that values will drop 50% and the other side in denial that anything could affect our precious market. As in most cases, the truth will lie somewhere in between.

How will this affect the Bay Area? For the immediate future it boils down to confidence. If homeowners believe that the market may be headed for a protracted decline they will be inclined to sit back and wait out the market. This of course will have a self-fulfilling prophecy effect since more homes will sit on the market longer and sell for less. If however, interest rates go lower, many homeowners-previously pushed out of the market-may return and seek opportunities.

Part II

Opportunities in An Emerging Market

Drew & Christine Morgan MorganHomes.com Belmont Real Estate

Visit our Blog BeautifulMountainblog.org

We’re always looking for a way to improve the services we offer to our clients and the advent of YouTube just made video affordable for us to include in all of our listings at no additional charge. It’s a great way to get more attention for a listing and it appeals to tech savvy audiences as well as anyone surfing the net. Check out the one we did for a listing we have on the market in Belmont.

Video Link here

More about us at MorganHomes.com

Introduction:

Welcome to the introduction of our five part series on when is the best time to sell a home. We’ll examine issues that affect home values and selling opportunties on a macro level, and then provide detailed information for our market sector. We hope you enjoy the series.

When’s The Best Time to Sell a Home? That simple question is one of the most frequently asked when we meet a seller. Unfortunately, the answer is not as easy.

There are many factors which may influence your local market and having the data certainly helps one examine when may be the best time to sell a home

Everyone knows real estate highs and lows-like in business-are cyclical. The recent 10 year run up in home values nationwide appears at its end (for now); though some parts of the country remain more effected than others.

In this five part series we’ll examine some of the indicators you can watch when trying to determine where your local market may be headed.

On a macro scale, the overall housing outlook can be affected by a multitude of factors and indicators can be seen along the way. In this five part series we’ll look at the following:

• Interest rates and the availability of mortgage money
• Consumer confidence
• Job creation and stability
• New home starts

And on a more local level:

• Inventory
• Sales
• New listings
• Days on market
• Percent of asking received by the seller
• Median prices

We are entering uncharted waters with the recent defaults of high risk loans, Wall Street’s pull back on mortgage investments and the demise of several prominent lending institutions. Money will be harder to get and more expensive. Those who were counting on refinancing their variable rate mortgage at the end of its fixed period, have no equity left and cannot afford their current payment will be forced back into the rental market. This will cause home inventory levels to increase and home values to decrease. Fewer buyers with more choices will equate to lower selling prices. To the extent that jobs remain steady (or increase) interest rates level off, fallout from the mortgage industry dust settles and buyers perceive new opportunities to purchase their first home, this storm too shall pass. How much and how quickly it will be mitigated by these factors is anyone’s guess.

Thanks for reading this introduction and check back for the continuation of this five part series.

You can see detailed San Mateo County market reports on our web page at MorganHomes.com

Real estate is best examined on a local scale since a rapid sell-off in south Florida, or falling values in San Diego can have little bearing on what a home is worth at any given point in your neighborhood.

Although it is best to focus on your local area, keeping an eye on the big picture is prudent.

In part two of our five part series on "When is the Best Time to Sell A Home" we examine some of the broader national issues which affect the overall atmosphere of home buying and selling.

Interest Rates and the Availability of Mortgage Money

To begin to address these issues is rather redundant since the current issues facing the mortgage industry are changing everyday and are covered well enough by experts-for many-the writing was on the wall. Suffice to say though that when money is more expensive and harder to obtain, fewer people can afford or qualify for a home. This and the high median price of homes can be illustrated by what is referred to as the Affordability Index; when the affordability index is low, fewer buyers are able to purchase a home and less demand can mean more supply and falling home values.

In June of 2007 we saw interest rates rising and although they were still near historically low levels, the perception that they were high may have changed the minds of prospective buyers. Whether uneasy about if they should wait for lower rates and purchase more home, or higher rates made home ownership simply unaffordable, fewer sale transacted.

Watch for Part III-How Consumer Confidence affects buyers and seller…

Consumer Confidence

In part three of our five part series on "When is the Best Time to Sell A Home" we examine some of the broader national issues which affect the overall atmosphere of home buying and selling.

The confidence of consumers is critical to trade. The "Consumer Confidence" report is a measurement taken by the Conference Board, an independent not-for-profit organization who polls 5,000 representative U.S. households; it’s bit like taking the pulse of the average consumer. Of course when consumer confidence is high-or rising-buyers tend to be more bullish. The effect that the release of these numbers has is a bit like the tail wagging the dog. In fact, it is a measurement of what a predetermined group of consumers think about the future, and when the numbers are released they can have either a positive or detrimental effect on the average consumer mindset; just watch what happens on Wall Street after the numbers are released.

Consumer confidence is directly affected by a multitude of issues facing our country (global and national) and can vary widely yet not have a dramatic affect on housing. This is particularly true when the reason in the confidence drop was not caused by jobs or housing. Our involvement in Iraq was an excellent example when consumer confidence dropped precipitously and home values remained relatively high.

The Consumer Confidence model was indexed relative to 1985 when a baseline value of 100% was attributed. The latest report in July-right before the widespread news of the sub-prime mortgage news hit the airwaves. It had rebounded from 105 in June to 112 in July and we expect it to drop considerably at the end of August. Low consumer confidence can be found during the trough of most real estate cycles.

Watch for Part IV-How new job creation affects buyers and seller…

More about us at Morganhomes.com

In part four of our five part series on "When is the Best Time to Sell A Home" we examine some of the broader national issues which affect the overall atmosphere of home buying and selling.

Jobs

When people feel secure about their jobs they are willing to take on more debt. But that’s not the whole story. When more jobs are being created (and filled) in an area than are exiting, and the supply of available homes can no longer keep up with demand, there’s competition for housing. A good indicator of where your local housing market may be headed is watching the number of net jobs increase or decrease; not just employment data. In other words, after all is said and done are there more jobs entering your area than leaving? And what kinds of jobs are being created? Those of high salaried professionals or perhaps less skilled labor and manufacturing jobs. Job and employment indicators can go far to help in evaluating the national housing market; and perhaps more precisely, have a direct impact on where you live.

New Home Starts

This is a great indicator of where large corporations believe the market will be months down the road. In the Bay Area the new home starts statistic has very little impact since most of the peninsula is already developed and resale activity is the predominant indicator. This is still an interesting statistic to watch especially when recovering from a housing downturn or recession. Here’s why; clearly an argument can be made that these large corporate developers are no indicator at all as to where the market is headed especially after the surplus of homes overdeveloped in 2006. However, the new home housing industry used the only real tool they have to control pricing and that is to cut inventory-by selling the homes they have and halting future development until which time they feel the market will pick up and sustain their sales. New homes start increases are a good indicator of a future bull real estate market

Remember that though a recession will be on a national scope, it will clearly impact some areas more than others. Know how these factors are affecting the market where you live.

The availability and affordability of money and the average consumers’ outlook on their job security and confidence ion the markets play a large roll in determining how buyers will perceive whether or not it’s a good time to buy a home.

Watch for Part V-How to interpret all of this and what can I do about it?

More about us at Morganhomes.com

When is the Best Time To Sell A Home (Part Five of Five)

When is the Best time to sell a home? (Part five of five).

If you’ve read parts one though four of our series, you undoubtedly know by now that there are many factors affecting the real estate market.

Understanding your particular area’s local market conditions and fluctuations will assist you in finding the best time for you to sell your home.

In our home town of Belmont for example, just before spring, the winter inventory of homes for sale is typically low; but crescendos through spring into summer. Getting a jump of your competition can be rewarding. This is illustrated in the graph which shows the inventory levels at various times of the year.

If conditions are right for buyers (i.e. job stability, favorable interest rates, etc.), then usually during this time of year demand for housing outstrips supply and there is upward pressure on pricing as buyers attempt to outbid one another for the available inventory.

As winter gives way to spring we begin to see more equilibrium and by June with more homes to choose from the percentage a seller receives for their home is usually less; though the median price remains at the new established highs.

In looking at the graph that represents the list price to sale price correlation, one can see the changes as inventory grows.

Different buyers at different times of the year.

An intangible appears to be the quality of buyers during different periods of the year. From a seller’s perspective, by quality we are referring to how aggressively these buyers bid. In late winter and early spring buyers seem to be more bullish and aggressive in their bidding. Perhaps this is because many of these buyers are ones who were out-bid the year prior and are now more determined to get the home they want. Once these folks have succeeded though, the market is left with the unsuccessful bidders and even the ones who refused to be in a "bidding war". These less aggressive buyers are in the market usually around late spring and early summer when the inventory grows-compounding the differential in this graph representing the percentage a seller receives from the sale of their home.

With Indian summers blessing the Bay Area and Belmont in particular, great weather embraces us late into the fall buoying the house hunting season beyond traditional markets. After Labor Day, once summer vacations are behind and children back in school, the market takes another "bounce" and sales increase as more inventory appears and buyers wishing to make a move before the end of the year are once again more focused. Notice in this graph for San Mateo County how there’s a post summer "bounce" as market activity typically increases at this time of year.

It becomes pretty clear that historically, listing your home in late winter, early spring or fall in the Bay Area will bring you the most market activity. Notice in this graph for the entire San Mateo County that the percentage a seller receives and the median home price is highest usually around June. Remember though-June sales were from homes listed in April and May.

Most sellers do not want to sell their home during the holiday season. The market slow down starts around Thanksgiving and activity wanes thorugh the end of December. This is usually the slowest time of year with few buyers focused on shopping for a home. The sellers who are listing are usually ones who must sell (due to a job transfer in many cases) making this a great time to buy and a poor time to sell.

Even your local weather can have an affect on when is the best time to sell. The Bay Area has rather mild weather but still the stormy month of February might keep buyers indoors. If you are located on the coast for example, you may want to avoid June when the marine layer develops and brings with it cool, cloudy days. In Belmont, view homes show very well at certain times of the year when they air is clear and summers winds are at a minimum. If you have a garden or extensive flowering landscaping that blooms at certain times of the year that too should be taken into consideration.Consulting a specialist will help you weigh all of these factors and determine when is the best time for you to sell.

After all that has been said, it’s important to remember that past performance does not guarantee future results. Meaning that although there is a compelling case to optimally sell your home in the early spring or fall in our area, changing global and national economic conditions could radically change that in any given year.

The best advice other than avoid selling your home if possible during the holidays, is to sell when you decide the time is right for a move. Timing the market perfectly is impossible but managing when to list your home is not. Keep in mind that these statistics and generalizations are not meant to be definitive rules on on market conditions.

For more information on the Bay Area, San Mateo County and the Belmont market contact us for further information specific to your situation.

Disclaimer: This information is for entertainment purposes only and includes no legal, accounting or real estate advice nor is this response in tended to be specific to your situation-consult a specialist for your specific situation.