Real Estate Market Conditions

April 2012 Long Beach Real Estate Market Conditions

May 1, 2012

I just re-read Barron's cover story from two weekends ago. Barron's is the only paid subscription newspaper I get and I like that they tend to be conservative or on the bearish side of the coin. While I thought the article was quite lacking in substance, their timing I believe is of worth. So here is my observation regarding their article.

Noting the Damage

At year end 2011, the S&P/Case-Shiller National U.S. Home Price Index fell to a record low, 33.8% below the boom peak level, recorded in 2006's second quarter. The descent has been all the more hideous in such once-manic markets as Las Vegas, Phoenix and Miami, which, according to the Case-Shiller 20-City Composite Index, have fallen 61%, 55% and 51%, respectively, from their high-water marks.

The Long Beach and surrounding Real Estate Markets are similar. The more stable areas of Long Beach have seen corrections of around 30%, while certain segments, like condo's or North Long Beach, have seen greater corrections of around 45%. It is the inland empire that has seen the 50%+ type of correction that the Barron's article is citing.

Affordability

This is probably the single more important feature of an overpriced or underpriced market. Affordability fell through towards the peak of the market in 2005/2006. It was even difficult years prior to the peak we saw back in 2005/2006 to buy a home, but creative financing kept the market moving higher for longer than should have been allowed.

The near-record low in mortgage rates and concomitant slide in home prices has made houses and condos stunningly affordable (although stiff underwriting standards have made getting home loans more difficult). This is captured in the National Association of Realtors Housing Affordability Index, which measures how much purchasing power a median-income family needs in order to buy a median-priced home, using conventional mortgage financing.

This measure stood at 206 in January, which meant that the typical family has more than double the income needed to purchase an average home. That reading is more than twice the 102.7 at the peak of the bubble in July 2006.

This is a huge, so let me just restate what we just read. The average (or median) family has more than double the income required to purchase the average home. This allows for a huge upside potential in home values, once the market does turn. Putting this in prospective with the last market peak and recovery: When the market is hot, buyers feel the pressure to get into the housing market at all costs. The typical rule of thumb is that banks allow buyers to borrow up to 40% of their income towards a home payment. During market peaks of 1989/90 and 2005/06, lenders found ways to give buyers more rope to drown themselves in debt. Loans called ez qualifiers or stated income loans, buyers could push debt ratio's to 50% or more. But at market bottoms, buyers tend to be very conservative. During the last bottom of the market in 1995 and it was typical for me to work with a buyer that were only purchasing 1/2 of what the bank would qualify them for. Much like today. Why are buyers so overly aggressive at just the wrong time and so timid when they should be doubling down? Well, there are two factors. First, buyers mistakenly do consider their home an investment, when a home is really a use asset. Unless you rent your home out, then it IS an investment, but that is another article. When home prices are at their peak, there is often a stiff premium to own vs. rent. But prospective buyers feel that they will make that up with appreciation. In 2005, I calculated that it was 40% more expensive to buy than rent. So what if it costs an extra $1,000 per month to buy, even taking into consideration tax breaks. If the home goes up $50,000 in a year. I am still ahead $38,000 was the logic. Now what happens if homes are going down in value, and generally considered a bad investment? Then buyers figure the cost of owning shouldn't be any more than the cost of renting (including the tax advantages). And maybe the cost of buying should actually be less. Which is the case today. The simple fact that a home goes up in value actually makes the home more desirable from an ownership standpoint, and if homes are going down in value, they value is less then as well. The second reason for buyers being overly confident at market peaks and timid at market bottoms, is simple consumer confidence that comes with a vibrant market versus a pessimistic outlook. It was not uncommon for me to speak with potential buyers during the 1995 bottom and when asked why they weren't going to purchase more home, the response was "I want to be able to afford the home on one income, just in case my spouse looses their job".

Tale of Two Cities

Absolutely, in the opinion of Karl Case, professor emeritus at Wellesley College and one of the progenitors of the Case-Shiller indexes, launched in 2002. "If you drill down in the numbers by zip code in the Boston area, as I have done, you find that more desirable, affluent neighborhoods like Back Bay and Beacon Hill are doing just fine now—while, say, Fall River is still in the dumps and dragging down the entire Boston Metro area," he asserts.

This bifurcated market is seen all across the country. While the Nob Hill neighborhood in San Francisco never saw values drop drastically and is now recovering nicely, Stockton, Calif., remains in the dumps. It's a tale of two cities elsewhere, too. The Santa Monica real-estate market is doing fine, while the desert towns to the east are still suffering. And, in the Miami environs, South Beach is strengthening; Hialeah, Fla., isn't.

Shadow inventory

The biggest impediment to a turn in the home market remains the so-called shadow inventory of some 3.671 million homes, according to estimates by Mark Zandi of Moody's Analytics: those that remain somewhere in the foreclosure pipeline. Payments on some are 90-plus days delinquent; others are already lender-owned properties, known as REOs (real estate owned), that haven't yet been listed for sale.

This inventory sits atop a market for existing-home sales that this January reached an annual pace of 4.5 million units. Moody's Zandi, for one, finds particularly worrisome the recent $26 billion settlement of charges, alleging malpractice in home foreclosures, reached by 49 state attorneys general and the five largest lenders and mortgage servicers in the U.S. If nothing else, as a result of this, the shadow inventory will hit the home market far faster than it would have otherwise.

Honestly we could use more inventory and I wish some of these homes were released. However, these homes will not likely be in the better areas where inventory is lacking, they are likely to be in the already depressed areas where the Real Estate market has been mainly dominated by distressed sales. The actual number is of 3.7 homes on annual sales of 4.5 million units is about a 10 month supply. This quantity, if unleashed all at once would certainly cause prices to re-assert a downward spiral. But of course this will not happen. Right now, inventory is pretty low, somewhere around 2.75 months supply city wide in Long Beach. The better areas are working with only a 1-2 month supply of homes for sale. The market can handle these at risk properties if they came on the market over 1-2 years but it seems that this shadow inventory would most likely keep a cap on prices for maybe 2 years.

Outlook

While I do agree with the Barron's article, there are two items that will drag out this recovery and keep it from being a real barn burner. First, I believe there is a shadow inventory of homes that will be on the market. But let us consider what these shadow homes really represent. They are workers, employees and business owners that are having a tough time making their mortgage payments. This problem can be cleared out and resolved. But these at risk homeowners are also likely struggling because the economy is just starting to recover, and maybe they are in an industry that has been particularly hard hit. So these shadow homes are partly a reflection of poor home financing moves, but more importantly they represent a weak economy. The second concern will be rising interest rates. Right now the Government guarantees some 80% of home loans. The reason for this large percentage is when this had traditionally be the domain of banks and savings and loans. It is somewhat difficult to answer what would be the "right" market value for interest rates today. It should obviously be somewhere around 2 or 3% above the rate of inflation. Is it 2% as reported, or is it more like 5% - 8%, when you only consider the items that people really buy, like food and energy. So while I don't have an answer as to what real market rates should be. It is fair to say that they are at the lower end of the range, and are most likely to only go higher. This will create a head wind to home price recovery.

What if you are a buyer on the fence?

The good news is that in many market homes are as cheap, or cheaper to own than to rent! So if your time frame is 5+ years and you can afford the area where you want to live, then there should be nothing holding you back. It is always impossible to time the exact market bottom, but it is fair to say that there is little risk buying today.

Information via Barron's news article.

March 2012 Long Beach Real Estate Market Conditions

March 8, 2012

The list price you choose serves two purposes:

One - Get people in the door &
Two – Be high enough to not compromise your best possible outcome.

Sellers often think the best way to choose a list price is determine the true value of a home, and then add some or a lot of negotiating room, but this is flawed thinking. I will get back to why this is so, at the end of the article.

To pick the correct list price, review the comparable sales, homes currently in escrow and homes currently on the market. Make an honest assessment of what you think the “Best Possible Outcome” might be. Envision the scenario where you find the perfect buyer, the stock market and consumer confidence stays high and interest rates stay low. Then assume that the sun, earth and the moon align to give you the perfect outcome. What would that price be? Then set your list price there or just above. Maybe $5,000 or $10,000 higher, but not more than $20,000 higher.

Why do you not want to list higher than the “Best Possible Outcome”, or just a smidgen higher? Because the higher the list price rises above the “Best Possible Outcome” the more marketability is reduced. An accurate and attractive list price is one of the most important marketing decisions. It directly affects how buyers perceive a listing. Buyers know when a listing is well priced and this attractive list price creates a “buzz” about a listing that generates excitement and offers.

Setting the list price is a balancing act between the increased marketability and showing activity as a result of a correct list price, and protecting a seller’s “Best Possible Outcome”. Once a list price is high enough to protect the seller’s “Best Possible Outcome”, raising the list price above that figure produces no additional profits, and just reduces marketability. The result, less serious offers or more likely, no offers at all.

“But don’t you worry about a getting a low offer, and not having room to counter?” a seller might ask me. No, this is not a problem at all. A low offer can always be countered or outright rejected. A low offer is still a vote of confidence from the buying public. Even if a buyer is trying to get a “deal”, they will always write an offer on the best listings, so just ignore the low offer and take it as a compliment.

As a seller do you need a lot of negotiating room? The best way to answer this question is to look at the sales data your agent provides to you. The closed sales will show the list price and the sales price. Go down this list of sales and look at how much buyers actually negotiate. What you see is that most listings sell for between full price or slight overbid to no more than $20,000 off the list price. Now keep in mind this is for your average tract home in the Long Beach area. There of course is the rare exception, but large differentials between list price and sales price are very rare, and in certain tract markets non existent.

Estate neighborhoods may have more negotiating room, but the process still applies, just with slightly larger numbers. This is due to less homes for sale, and there being a greater range of potential value for a custom homes with less direct competition.

Now to get back to answering the original question asked at the beginning of this post, “Why don’t I, as a seller, want more negotiating room”, meaning greater than $20,000. Well if out of 20 sales that may have occurred, for homes like your in your neighborhood, none have sold with greater than $20,000 of negotiating room (and this is very typical), then we can use some inverse logic that proves lot of negotiating room will have fatal results.

If no homes in your area have sold where the buyer and seller negotiated more than $20,000, then if the list price of your home is more than $20,000 above where it is likely to sell, then nobody will buy it.

At this point seller will usually wonder, “But why would they not at least make an offer?”. This is a very valid questions. The answer lies in the nature of Real Estate market. In a tract neighborhood, prices have a relatively narrow range of value. As an example, if a buyer is looking at an original three bedroom, 1 bath home in Los Altos, the range may be only $100,000 or less between an absolute Dog Fixer, and a complete Gem of a home. $20,000 makes the difference between your home looking interesting, but not being the Belle of the Ball. $20,000 in mis-pricing most often results in your home being considered, but ultimately it is passed on for the more accurately prices listing.

This becomes even more critical when your home is a at an important price break point. Let’s say you believe the “Best Possible Outcome” for your home is $480,000 – $500,000. If your home is listed for $499,000. Then your home is compared against homes between $450,000 and $500,000. Your home will look like a top performer. If you are priced at $519,000 to allow for negotiating room, your home will be compared against homes in the $500,000 – $550,000 range, and while you may have a nice home, it is likely that buyers will make offers on other homes, especially since these are buyers that can go higher.

What I say applies to tract neighborhoods where there is significant inventory, and homes are more similar to each other. If your home is in a custom area which is exclusive with VERY few homes on the market, then an accurate list price is less critical. If for instance there are only 3 or 4 homes for sale in your entire neighborhood, then it is likely that people will see your home and make offers, even if they feel it is a bit too high. So of course there are exceptions to the rule. The key is knowing how and when to apply these rules, and when to bend the rules to your advantage.

February 2012 Long Beach Real Estate Market Conditions

February 8, 2012

The 80/20 Rule Applies with Home Preparation

I just got off the phone with past clients that are in the process of getting their Dad's home ready for sale. The home is a stunning Craftsman home in a prime historical district. The home has character and presence, the only problem is Dad let maintenance go for the last several decades.

We talked about the scope of work that is underway, and could sense that this has been a big undertaking for the family. I have been consulting along the way and from the outset understood that this is a very worthwhile property to resurrect, but could become an overwhelming all encompassing job as well.

When we discussed individual repairs, I reminded the son that the 80/20 rule applies when selling a home. That 20% of the fix up items will yield 80% of results, and it might even be 90%/10%. The advice that I am about to give, does not apply if this is your own home. Obviously, this type of property deserves loving, detailed attention, but if an owner is looking to get their home on the market, a detailed perfectionist approach may drag out the process for months if not years, and be a financial loss.

The goal should be, with big broad brush strokes, to eliminate a buyer from feeling overwhelmed by work and show off the homes potential. The work should allow a buyer to move in with little expense. A buyer may see details that need to be improved, but they can be done at a later date. A future project that they can get excited about. They can make the home their own. It is this new buyer that is ideally suited to spending the time, money and effort with these finishing details.

So what are these "Big broad brush strokes" that I am referring to? Let me give you an example. Usually I can redo the interior of the average home for around $10,000. 2440 Marber was the perfect example. This actually was Dad's old home and he hadn't done anything in years. We repainted the interior, refinished the hardwood flooring and put down new linoleum in the kitchen and bathrooms. It took less than<strong> two weeks</strong> to complete and you can see the difference.

See photos of before and after on this site.

http://www.lbreblog.com/the-8020-rule-applies-with-home-preparation/?show=slide

Below is an outline of the costs:
Interior Paint: $3,450 + remove "cottage cheese" on ceiling $1,525 = $4,975
Install Baseboards: $725
Linoleum: Kitchen $716, common bath $275, master bath $235 = $1,226
<strong>Total: $9176</strong>

So with less than $10,000 we eliminated pink flowered wallpaper on the ceiling, ugly old carpet and resurrected the beautiful hardwood floors. Essentially 90% of the visual surfaces were redone, new and gleaming. There is no doubt that they home could benefit from a new remodeled gourmet kitchen, but this would cost $30,000+ and take 3 months to coordinate and execute, and still leave the rest of the home in need of repair.

If the buyer had seen the home prior to the $10,000 in repairs, they may have causally estimated the costs of fix up to be $30,000. Eliminating this $30,000 concern, opened up the market to buyers unable or unwilling to fix the home or see the vision. In addition it put an extra $20,000 in the sellers pocket.

Seeing the big picture or having a vision of what improvements will yield the greatest return is not always easy, especially when the home is your own. It is for this reason that we provide our clients with free consultation and assistance when it comes to helping them maximize value. We invite your questions or comments.

January 2012 Long Beach Real Estate Market Conditions

January 9, 2012

Ben Bernanke - Between a rock and a hard place in Housing Market

Ben Bernanke is intentionally trying to devalue the US dollar to prop up the housing market. While I don't agree with him doing this, I do understand why he is trying to destroy the dollar.

Deflation by itself isn't really a problem. I know that the word deflation is always associated with the Great Depression, so it gets a bad rap. But what is really so bad with being able to buy stuff cheaper next year? The people that fear deflation will say deflation causes people to hold off of on purchases, causing a week economy. But electronics purchases prove otherwise. Electronics and computer products have experienced massive deflation, yet this category of products sees strong growth in sales, because people want the product now. So I don't buy the wait for lower prices will hurt the economy theory.

But why would deflation be devastating to the housing market and the economy as it currently exists? Because homeowners are massively over leveraged. As of May 9th of 2011, Zillow reports that 28% of homeowners are "Underwater". Meaning that 28% of homeowners owe more than their home is worth. (http://www.bloomberg.com/news/2011-05-09/u-s-underwater-homeowners-increase-to-28-percent-zillow-says.html)

This is a problem. A VERY BIG PROBLEM. While not everyone of these 28% will become a foreclosure, when a homeowner has no skin in the game they certainly are more likely to let their home go. Even if an owner can still afford their home, if they are stuck with a loan in excess of their value with an interest rate above market rates, they become a likely candidate for foreclosure. Lenders will usually not refi underwater mortgages, and the more underwater, the more feudal holding on for better times will seem.

This extreme leverage in the housing system is where deflation could be devastating. Right now it is fair to say that the housing market is treading water. The low rates, courtesy of Ben, has helped maintain home values, at the risk of causing present and future inflation. Ben said it himself, he wants inflation, with about 2% being about right, in his mind. Imagine if Ben did not provide massive liquidity to help prop up the housing market, might 50% percent of the houses be underwater.

Then the real problem becomes markets always tend to overshoot their highs and lows. Through a self reinforcing cycle, a complete disintegration of the housing market could be possible. If Ben doesn't destroy the US dollar (cause inflation), then home prices go down, if home prices go down, more people are underwater, more homes go into foreclosure, and home prices go down more, and then more homes are underwater.....

Don't get me wrong, I am not a fan of Ben Bernanke, nor do I support his easy money policies. Because it was exactly these easy money policies initially under Alan Greenspan that helped cause the housing bubble in the first place. But then this is exactly the strategy that governments often pursues. They break your leg, then offer to help you fix it.

As I said previously, if homeowners weren't over leveraged in the first place, then deflation wouldn't necessarily be a problem. Why would I be upset if I could by a home cheaper next year? I certainly would be happy as would many first time buyers. I might be able to buy a great rental property, or as a Real Estate Broker, I might sell even more homes. But with the over leveraged underwater housing market we have today, deflation can become the precursor to bank failures and civil unrest.

So while I don't agree with Ben Bernanke and basically the idea of the Federal Reserve, which is basically trying to fix the problem that they created. I do understand why he is trying to destroy the value of a dollar. It is kind of like somebody that has lied, and told a lie to cover the first lie, then lied again and again to cover their trail of lies. It is easier in the short term to just perpetuate the fraud than to come clean.