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…

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.

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.

Seller’s Can’t Afford to Overprice Their Home

Days on Market and Price Received Correlation

Though the nation’s mortgage industry is tumultuous at best, the peninsula market in the Bay Area is faring much better.

Last month 17 homes sold as compared to 14 in 2006 and off the high of 25 in 2005.

Of those 17 sales eight sold over the seller’s asking price, two sold at asking and seven homes sold under asking. Dom_received                                                                                    

The average time it took to sell a home was 39 days. Of the homes which sold over asking however, they took only 18 days to sell and on average sold for 3.61% over what the seller was asking. Seller’s which received their asking price took on average 40 days to sell, and homes which sold under the asking price averaged 56 days on the market and sold for 5.26% less than their original asking price.

Clearly, pricing a home correctly remains a crucial factor in getting the most for a home. These numbers illustrates a swing of almost 9% in what a seller received between a home priced to sell quickly and one which lingered on the market.

Alternative Real Estate Models



Drew & Christine Morgan,MorganHomes.com


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The Dual Income Trap

Elizabeth Warren, A Harvard Financial Law Professor writes in a very revealing article titled “The Middle Class on the Precipice” wherein she examines the dilemma now facing dual income families as spouses no longer have the added ability to enter the work force if even to temporarily buoy a family’s income. Scales_copy

Ms. Warren’s assertions can be seen as they apply to this year’s increase in foreclosures. In the 1970’s many households were single breadwinner families who purchased their home based upon a single income. This of course meant that if the sole money earner lost their job the other could fill the income void with temporary employment. Now that families are reliant on dual incomes, and qualify for their home loan based on two incomes, a loss of either income can be catastrophic if sufficient reserves do not exists.

Where will the next infusion of income growth come from? It seems highly unlikely that another source of income as significant as when dual incomes materialized will could arise in the future; leading one to speculate that the rapid increase in home values as experienced in the last 30 years is unlikely to continue at the same pace.

  • Housing is a necessity yet also very much a part of one’s financial portfolio—especially in the Bay Area. Own a home and let your equity develop.
  • Over the long term home ownership continues to be a sound investment. Buyers who are looking to purchase their first home should consider their job security.
  • There are better opportunities than in recent years but the days of 7-15% appreciation are over for now and flipping a home in a year almost impossible.
  • Qualifying on a dual income bases means you’re also reliant on two incomes and should also be considered.
  • Having to move due to job relocation or layoffs could put a financial hardship on a new homeowner if values have declined or not risen enough to cover selling costs.

Buyers—Should I Stay or Let it Go?

Much of the current real estate media attention has been focused on foreclosures and sub-prime lending practices. The media’s relentless impending doom stories have certainly rattled the nerves of the many would-be buyers. The question is should a buyer stay in the housing market hunt or let it go?

Ruggia0014c_2

Buyers tend to fall into at least one of three groups; buyers who believe the market will go down and are waiting on the sidelines, ones who can no longer qualify for a loan due to tighter lending guidelines, and buyers who see the new opportunities to own a home.

The Buyers who can no longer qualify for a home loan are probably better off not trying to get in over their head anyway. Stretching the ability to repay a loan is a recipe for disaster and many of the people who find themselves in foreclosure are probably wishing they had never bought in the first place.

The buyers who are aggressively looking for a home and seeking the market’s opportunities will most likely fare the best in years to come; buyers who wait until the media gives them the “all-clear” sign, will find they waited too long. Warren Buffet of Berkshire Hathaway, arguably the best investor of all time, states very succinctly in his business model that investors “…will understand that volatility provides investment opportunities and will use market drops to make good purchases." Mr. Buffet has also been quoted as saying “A good investor learns to insulate himself from market emotions and to make a distinction between market price and intrinsic value.”

Therein lays the dilemma. Is there any intrinsic value in Bay Area homes or are the prices overinflated?

Much has been made of possible housing bubble and many would claim it has burst while others feel the air is slowly being let out. Looking at historic trends in real estate we see that indeed the California and the Bay Area in particular outperform the country as a whole in housing appreciation.

Uscabay_area_median

This graph illustrates the median home price in the United States since 1968 as compared to California’s—the Bay Area was included as of 1982.

As one can see California has outpaced the country and the Bay Area outpaced California. It’s interesting to note that California and the Bay Area are more-or-less in step with each other while both clearly have grown faster than the country as a whole. But is this value real? Why does the Bay Area command these high home costs and can it continue? This is the very sort of data which leads many to conclude that California as a whole, and particularly the Bay Area, cannot sustain the price discrepancies with the rest of the country.

The Dual Income Infusion:

Twenty years ago, more and more California families became dual income families which increased their incomes by 75% and the ability to pay more for a home; and since a larger percentage of California families earned two incomes at higher pay, California began to outpace the rest of the county. Additionally, the advent of technology rich companies in the Silicon Valley infused a great deal of wealth to the Bay Area perhaps forever altering the discrepancy in home values. This added ability to spend more on housing is easily seen in the above chart discrepancy between the cost of a home in California vs. the country as a whole.

Where will the next infusion of income growth come from? It seems highly unlikely that another source of income, as significant as when dual incomes materialized, will develop–leading one to speculate that the rapid increase in home values experienced in the last 30 years is unlikely to continue at the same pace.

Buyers who are looking to home ownership should consider their job security. There are better opportunities than in recent years but the days of 7-15% appreciation are over and flipping a home in a year is currently all but impossible. Qualifying on a dual income bases means you are also reliant on two incomes and should also be considered. Having to move due to job relocation or layoffs could put a financial hardship on a new homeowner if values have declined or not increased enough to cover selling costs.

Locally, there has already been a slight decline in home values but we feel if economic conditions remain the same—or improve—this will be a short-lived adjustment. The market rebound will likely be slow to moderate with less aggressive growth and a healthier more sustainable market.

Housing is clearly a necessity. If you feel your job is secure and you have the wherewithal to afford housing now is an excellent time to entertain the possibility.

Read tomorrow’s article on The Dual Income Dilemma

Did the DOJ Get It Right?

One DOJ web page provides this insightful comment in a subtitle:

"B. The Internet’s Effect on the Real Estate Industry"

"With individuals assuming more of the responsibility to gather and assess information, less time and effort is required by real estate agents in assessing market conditions (for sellers) and in identifying and showing houses [(for buyers)]. The cost of an agent’s service, therefore, should go down reflecting this shift in burden."124

First this implies that everyone is assuming more responsibility gathering their own information. Some are and some are not.

The second part of the sentence: "…less time and effort is required by real estate agents in assessing market conditions (for sellers)…"

Nothing has changed in regard to the amount of time we spend to understand our local market. We still tour all the homes for sale whether we have a specific buyer for a property or not-we need to know the inventory. Agents cannot accurately asses the value of a home if they have not personally seen the comparables prior to the close of escrow. Isn’t that why appraisers call agents for the details on homes after they have closed escrow?

Third part:

"…less time and effort is required…in identifying and showing houses [(for buyers)".

Buyers may see a home on the internet and may exclude it from the search which in theory should cut down on the amount of time an agent will spend showing homes. This is an oversimplified version of how agents really find their buyer a suitable property. As stated before, we still see all of the homes for sale in order to be a specialist in our area. Buyers often want to see a home in person despite their initial on-line impression and often choose homes which they never would have entertained if it were not for their agent insisting on them taking a personal look. In fact the buyer’s access to instantaneous information has meant that agents must react even faster to the market and in many cases less efficiently. Prior to the email alerts systems which buyers now often subscribe to, agents previewed new listings for their clients on a specified "tour day" often in a caravan style with one or more agents riding in one car. With the Internet being updated every 15 minutes, agents are relegated to seeing all of the homes which meet their buyers needs every day in anticipation of an inquiry from their client.

Next Sentence:

"The cost of an agent’s service, therefore, should go down reflecting this shift in burden."

Burden, what burden are they referring to? A buyer’s voluntary perusal of available homes for sale which is provided solely because agents now create virtual tours, videos and upload all of the information is not a burden, it’s a marketing tool; but it doesn’t take the place of seeing a home first hand. Who pays for all of this new technology? What about the extra time and money spent in production?-perhaps that is why fees haven’t gone down as they anticipated.

On another page they continue by saying;"As a result, [of commissions staying at the same rate] the actual median commission paid by consumers rose sharply along with the run-up in home prices."

On this page the DOJ offers up a seemingly perplexing chart illustrating an apparent incongruity and implying that real estate compensation should be going down despite rising home prices due to healthy competition. What they apparently failed to take into consideration is that markets do not react perfectly and instantaneously to the adoption of new technologies simply because they exist. The technology learning curve which consumers and agents are enduring creates a lag in the effect competition will have on fees. Additionally, the influx of new agents, though dramatic, could not keep pace with the run-up in the median home prices; Licensees could not get licensed and effectively start practicing real estate at the same pace of home appreciation to provide ample competition and offset the higher commissions (in real dollars not as a percentage).

Don’t get me wrong, we’re all for competitive practices, but if the Department of Justice is going to be analyzing this data they need some better advisors helping them understand the industry.

When’s The Best Time to Sell a Home? (Part one of a five part series)

Drew & Christine Morgan-Belmont Real Estate

"Helping People Make Good Decisions"sm

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:

And on a more local level:

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

Drew & Christine Morgan-Belmont Real Estate

"Helping People Make Good Decisions"sm