July 2006

Unless you live in a cave, you are no doubt familiar with the Zillow phenomenon. Zillow is an on-line real estate service that allows users to obtain a free valuation of any property, or “Zestimate”. In addition to the on-line valuation feature, they are now rolling out Zillow Moblie, which allows users to get “almost instant” Zestimates via their cell phones. While most of us in the industry whine incessantly about the questionable accuracy of the Zestimate, I do give these guys props for developing a complex algorithm and a fun tool. The question is, is it fun or is it a tool? Well, a little of both, I suppose, if you keep the information they provide in perspective.

Zillow uses public records in arriving at their valuation estimates, so from that standpoint, the data has value. But, Zillow (not being of the human persuasion) is totally objective and, as we all know, subjectivity is a large component of home valuation. So, LET’S PLAY ZILLOW! I chose the four most recent closed sales in my community as a little test of Zillow’s home pricing savvy, figuring they would not have picked up on the recordation price yet. Here is what I found:

Home A: Sale Price $600,000; Zillow Price $702,837 (Ouch)

Home B: Sale Price $650,000; Zillow Price $643,813 (Not bad)

Home C: Sale Price $1,055,000; Zillow Price $1,010,645 (Close)

Home D: Sale Price $1,169,500; Zillow Price $1,389,248 (After four months on the market, I might add. Don’t those buyers know value when they see it? )

Now, Home D is an interesting case study in that two weeks prior, an almost identical model match sold one street away. Both homes had nearly identical views and lot sizes and virtually identical floor plan and square footage. Upgrades were comparable as well. We will call this model-match “Home E”. When Home E sold, the principals signed a non-disclosure agreement so that no sale price would show on the tax stamp or in the MLS. (Why that was the case is the subject of another post). Therefore, Zillow’s algorithm has no way of taking advantage of this sale as a comp. Since it is public record, however, we can tell you that Home E sold for $1,085,000. Zillow’s estimate? $1,158,057. Why did Zillow value two identical homes $230,000 apart? Beats the heck out of me.

So, was that fun? Sort of (if you are a real estate junkie like myself). If I had relied on Zillow to price these homes, would it have been a useful tool? Not so much, I’m afraid. What have we learned? What every real estate agent out there already knows; pricing is a combination of art and science. Proper pricing requires experience, market knowledge and human reasoning (which Zillow can not provide). Most importantly, perhaps, Zillow is not the “market”; your buyer is the market, and they will be willing to pay what they perceive the value to be, Zillow be damned. I am not suggesting that you shouldn’t continue to play Zillow, but remember that in the department store of Real Estate, Zillow is the toy department. (P.S. Zillow says that the value of my home dropped $10,000 since yesterday. Bummer. I told Steve it was time to repaint).

Thanks to Jack for the recent comment on my “Calling All Buyer’s” post in which he asked for clarification on our current market. Specifically, he expressed confusion about comments he has heard that our market is a normal one, yet San Diego’s inventory of unsold listings is at an all-time high. How is that normal?

In a previous post of mine I talked about the definition of a “Buyer’s Market?”. In short, if at current absorption rates (homes sold per month) it would take six months for all active listings to sell, the market is a normal one; longer would be a Buyer’s Market, shorter would be a Seller’s Market. This Spring/Summer, we have returned to more of a normal market, although coming off of many years of frenzied activity, it doesn’t feel very normal to a lot of us. An article in this morning’s Union Tribune said that San Diego currently has a 7.1 month inventory of homes for sale, which would suggest we are indeed moving toward a market favoring buyers, and I believe few will question that this is a trend. Fall should be interesting. It remains to be seen whether buyers will begin seeing the advantages of a lower interest rate environment which will offset anticipated (by some) future price reductions or will continue to take the wait-and-see approach that is making the listing (and buyer’s) agents crazy right now.

Now, for the exciting contest results. Rank has its privileges, and I hereby award the trip to Starbucks (transportation not included) to Jack.  OK, you didn’t answer the questions, but you asked a good one.  Shoot me an email (hit the “Contact Us” link) so I know where to send your prize. As for what we learned from my little survey, not a lot it seems. The numerous respondents agreed that prices are high and that time is on their side. The investor’s response I found most interesting and indicative of things to come. We have eliminated much of this buying segment, which has historically represented a large component of our San Diego sales, as high prices no longer allow the investment opportunities to pencil out.

OK, Steve. Your turn.

I have been in the mortgage industry for 20 years. (that would be 3 life times in the mortgage business!). One topic that always pops up when markets shift is “option arms”. I don’t want to go into a complete dissertation on option arms at this time, I will go into them more in depth in the future. I want to cover some basic information on them.

So, the first question is what is an option arm?

Option arms are adjustable rate loans that offer 3 to 4 different payment options each month.

Option 1: Minimum payment based on the initial start rate.

Option 2: An interest only start rate.

Option 3: Principal and interest on 30 year amortization (some are 40 year)

Option 4: Some lenders do offer a 15 year principal and interest payment.

In the last 12 months or so I have read a number of articles, that I believe were not well researched by the authors. Each article I read was in a major metropolitan newspaper. Some of the articles referred to option arms as “new fangled loans” “exotic options arms” and of course my favorite “risky interest only loans”. The latter could also be referring to interest only arms fixed for 3,5,7,or 10 years. ( I don’t find them that risky myself and I am about as conservative as you can get!)

First and foremost THESE LOANS ARE NOT NEW!!!! I don’t consider them “exotic”, derivatives on Wall Street are exotic. I also do not consider them risky, although we all have our opinion on what is risky.

Option arms were developed by the savings and loan industry to promote home ownership. Now an astute person may say “well what about the savings and loan crisis?” Why did they all go out of business? The main cause of the demise of the S&Ls were their commercial loans. The goverment allowed them to stray into commercial loans and they did a very poor job in that area. Please make a note, not all S&Ls had this problem. Some stuck with home loans only and ended up merging with other S&Ls and converting to the FDIC as banks. So………..back to the option arm genisis.

Option arms were developed to give clients the option to make different payments and at the same time protect the banks against rising rates. That way the bank was protected and the client has as well, since they could make different payments. The banks were and are not now, in the business to take property back! Taking back property is not a profit center for them, it is an expense! The loans were designed as a balance for all involved.

I personally think these are excellent loans, but THEY ARE NOT FOR EVERYONE!. We strive make sure we have the right client in the right loan. If it is an option arm, we strive to make sure it is understood correctly. There are many abuses by lenders when it comes to this loan and we strive to avoid that with clients. We use spefic spreadsheets to explain them in black and white. Many, many lenders do not even understand the loan let alone explain it correctly.

In the future, I will go into the different indices offered on these loans, what type a client are these loans good for and who they are not good for. I will also cover a bit more on the history side as well.

One last note, if you have this type of loan and you are concerned about rising rates, don’t panic. Rates will eventually cycle down as well. When we do not know, but they do. My advice is do not fall victim to lenders who call you up and tell you “you have to get out of that loan”! Lenders have a habit of telling someone in an ARM that they need a fixed rate and someone who has a fixed rate that they need an ARM. Make sure you are working with someone who has your best interest at heart and not theirs.

Until Next time,

Tim Fiero

First Capital

What a funky market we are in. (The fact that I use words like “funky” just furthers my daughters’ belief that I hail from the Mesozoic Era). I know that Buyers are shopping; I see them at our open houses and I take their interest calls on our listings. What I don’t see are Buyers actually “buying” to any great extent, as sales continue to be sluggish. So, I thought it would be fun to run a little online survey of would-be buyers and those who recently took the plunge into home ownership.

If you are willing to hit the Comments link at the bottom of this post and share your brief thoughts on the market and your decision-making process, you will be automatically entered in my drawing to win a trip to Starbucks, transportation not included. (Is there no limit to my generosity, you are wondering)? Note that you are welcome to sign in with an alias to protect your anonymity. By participating, you will be providing a public service to those listing agents out there who are wondering what you are thinking… and waiting for!  Here goes:

1. What are your biggest considerations regarding making a purchase in this market (ie. the market, pricing, condition of the home, interest rates)?
2. How do you perceive current home pricing (too high, a real steal, just right)?
3. On what source(s) do you rely for market and listing information (online, from your Realtor, print ads, open houses, etc…)?
4. Where do you think the San Diego housing market is heading (up, down, stable)?
5. As a buyer, what is (was) your motivation for purchasing (the world is my oyster - I am in no hurry, I must move by Thursday, etc…)?

Thanks for participating. Your perception is your reality, and you are the market. We look forward to your comments, and will be announcing the winner of my exciting prize next Wednesday.

Greg at the BloodhoundBlog in Phoenix shared a scary encounter with a well-meaning Seller in his “Let’s Get Sued” Fair Housing post, and I couldn’t agree more with his watch your language message. I, too, have run into some cases of law-suit-waiting-to-happen.  As Realtors, we can’t be careful enough.  What Greg’s post reminded me, though, is that as listing agents, we generally don’t but always should give our clients the big “be careful what you say” lecture. This is because we may not always be present when the Seller comes in contact with the would-be Buyers before or during escrow.

I have personally had both Sellers and Buyers ask questions regarding ethnicity, religious affiliation and other personal information that I simply am forbidden to answer.  In advertising, I regularly see other agents using potentially dangerous phrases such as “great family neighborhood”, “safe neighborhood”, “kid-friendly” and “quiet street”.  I won’t go into why each of those are no-no’s, but I think most of you will be able to figure it out.  Some other favorites of mine, while not exclusionary, just beg for a lawsuit. Our industry is so sensitive to Fair Housing issues, that I can’t even talk about a “trash compactor” in my on-line advertising, because Realtor.com won’t allow the word “trash” (derogatory). Naming the school that the children will attend in advertising is not only dangerous, it is irresponsible. What if the school attendance boundaries change (as they do in my area every full moon)?  What if you are wrong?  I am actually familiar will a local case where the Broker had to buy the house back because the Listing Agent represented one school district but the home turned out to be in another.  A recent listing in our area promoted “Walk to (name of school) Elementary”. Problem was, the school name was misspelled, one could only walk there with a trekking pole and a Sherpa, and it WAS NOT the school of attendance for the home in question. On the subject of being cautious, I even had a recent client ask me to use photo-shopped pictures in my marketing since the property looked nicer without some of the “street furniture” cluttering the view. My fear, of course, was that a buyer would close escrow and then suddenly notice the street name sign in the front yard and feel wronged.  Sounds silly, but I have heard of Agents being subject to damages or license loss over much sillier.

On a lighter note, I love this promotional line I saw in an Agent’s ad for a home recently: “Views to the ocean and beyond”!  While not illegal, I am still wondering what you can see “beyond”. Hawaii, maybe?

I had to go to Dallas (actually Arlington, next door to Dallas) this past weekend to take care of some personal business. Coincidentally, I have a client/friend in San Diego who is getting ready to buy a home there for investment purposes. So on Saturday morning I bought the “Dallas Morning News” to check out the real estate section. The “average” price for homes in Dallas (are you sitting down?) is $150,000. I saw homes listed there for $250,000-$300,000 that would cost $900k-$1 million, or more, in many communities of San Diego. Amazing!! I’m thinking, maybe I should consider…

Here is the reality check - It was 103 degrees…at 9:00 pm (107 degrees for most of the day). And I don’t want to hear that it’s a “dry heat”. My shirt was soaked in 3 minutes.  A 10-minute walk outside turned into a “Survivor” episode. View property is defined as a home that sits 5 feet higher on the prairie than the others around it. Arlington is a DRY County. I thought that went out with prohibition. I kid you not. You want to buy liquor and you have to drive across the County line. Oh, and their property taxes are about triple the rate in California. They don’t have a PROP. 13 there. Plenty of sand, but of course, no ocean.

But there is no State income tax. They do have a modern and big airport, a fabulous baseball stadium (for the Rangers) and a new football stadium under construction (for the Cowboys). All with relatively little opposition. Maybe they were able to afford all this due to the lack of Mello Roos assessments.

I may just reconsider my position once I’ve fully recovered from the heat stroke. Great to be home, though.