August 2006

Greg at the Blue Roof blog (Salt Lake City) in a recent post expressed his frustration with the proliferation of licensed real estate agents, and I couldn’t agree more. I’m all for free enterprise, but the ease with which one can obtain a saleperson’s license and the delusion of guaranteed riches promulgated by our many years of active resale activity has resulted in an industry which is bloated and teeming with less than stellar “professionals”. All too indicative of what our profession has become, I was at Home Depot a couple of months ago buying my client a washer and dryer (a story for another time), and the helpful appliance department guy points out what a coincidence it is that he too is a real estate agent. Coincidence? I think not. Show me someone who isn’t, and it is someone who is considering it.

According to First American Corporation, approximately 22,500 Realtors belong to Sandicor, my MLS. Now granted, many of these members are Broker members (who might not directly sell homes) or Appraisers, but remember that many real estate agents practicing in our County are not members of Sandicor (they operate independently or are from out-of-area). So, let’s assume that 22,500 is a conservative number for practicing agents in San Diego County. Within the past 12 months (according to Sandicor), a total of 22,685 homes have sold, representing 45,370 sides. On average, that means that each agent will sell about two homes a year. Clearly, that is not the case, as the top agents will sell many, many homes while others will sell one or none.

What this means is two things, in my opinion. We are headed for the ole cleansing process, which is a good thing. I don’t worry as much as some about the tarnished image our profession has suffered at the hands of too many, inexperienced agents flooding the industry. As the market continues to slow, there will be a natural attrition and the “fittest” will survive. Consumers will get wise and recognize the differences among licensees, and part-time or fair-weather licensees will realize that representing homebuyers and sellers consistently and well is hard work and a lot less lucrative than originally thought.

Which brings me to the second point. There seems to be a nearly-universal impression that Real Estate as a profession is easy and easy money. A San Diego Union Tribune article by Roger Showley published in June, 2005 (just one short year ago) parroted the sentiments of most, namely, that real estate agents are grossly overpaid. I for one would love to see this thesis revisited in the context of our current environment, but last summer at least, this was the argument: “Today, it takes commissions from just over two sales to nearly equal the median household income (for a family of four) of $63,400″. Yikes! Someone is sure botching my paychecks!  Obviously, the premise was that two median priced homes ($493,000 at the time) paying 6% commission would equal $59,160. Bear with me while I straighten out the “facts”. Commissions are not always (or even, mostly) 6%; I wish they were, but they are not. Assuming you are dealing with a 6% commission, half of that customarily goes to the side bringing the buyer and half stays on the listing side. Of one “side”, agents are most often required to split the commission with their Broker. Generally, all agents pay their Brokers an advertising or franchise fee of 6 to 7%. Additionally, they are required to split the remaining commission at a predetermined split level, usually based on the agent’s past production. So, it is reasonable to assume that the agent “keeps” an average of 75% of the remaining commission (which is much more generous than most new agents will experience). Now, those two median-priced sales will result in a total “gross” pay to the agent of $20,854. Next, business and marketing expenses are often 20 to 25% of an agent’s gross pay, so we will be generous and assume 20%, which leaves an income of $16,683. Oops - No employer-provided health care, so we need to deduct another $12,000 a year for a family of four, leaving us $4,683. Jeepers - It’s tax time (four times a year, if you are self-employed), and that agent has to pay self-employment tax in addition to ordinary income tax. Too bad he or she sold both those houses in the same month, because now they have to stress about cash flow for the next eleven months when they may not fair so well. You see, the agent only gets paid when an escrow closes. Of course, they haven’t had a real vacation or a weekend off in years, but the “job flexibilty” is fabulous, leaving plenty of free time for blogging.

I was invited by the moderators of this blog to join in the discussions as a participant-at-large. My name is Fred Adler. I am NOT a Realtor, real estate investor or builder (except for some commercial real estate stocks in my portfolio), or anyone that directly makes any money on the buying and selling of real estate. I am just another average person who deals with real estate issues for my personal home and for my business. Oh, I forgot. I am also the owner of a small biotech company in San Diego with 18 employess. And finally, no, I am not “rich” enough to move downtown for an ocean view.

I would like to start into this blog trying to stimulate some discussion on the San Diego real estate markets from the perspective of a business person that has to engage the realities of them as a “user” and not from the perspective of a “provider”. While it has been delightful to sit and watch the “net worth” line on my Quicken go up the last few years due to appreciation of my San Diego home, one needs to step back and consider the “downsides” and the “realities” of the situation. I will start with one perspective which is as a small business owner.

As an employer in San Diego of modestly paid “biological production workers”, I will tell you that the skyrocketing home prices are a definite deterrent to company growth. My production employees cannot afford to buy homes here even on two incomes. The most recent San Diego Employers Association Salary Survey indicates a weighted average wage for manufacturing non-exempt (supervised) employees of $26,189 per year. So my first conclusion : San Diego will NEVER be a large manufacturing site for biotech since it is just too expensive to live here for the workers. They want homes just like you and me.

We also research and develop diagnostic test kits (you know “science stuff’”) that we get approved through the FDA, the European Union and individual countries like China. My employees are again paid above the weighted averages but the weighted average for a laboratory technician is $43,295 in the 2006 survey. Again, it is pretty difficult to buy anything in San Diego on that salary. Think twice before you encourage your kids to get a “biology” bachelor degree. It doesn’t pay that much.

You might at this point say why don’t you just pay them more? Well, that is pretty darn impossible also. Governments around the world dictate our prices in their reimbursement schedules. We don’t get to charge what we would like to in order to pay our employees more. We can only charge what governments allow us to charge. Diagnostics consume about 4-5% of total medical costs. It is a relatively small business in medicine. We pay above the local averages and it just is not enough for homes for our employees. Think about what it costs you for your mortgage and back into the numbers. The averages for less educated and less trained people are even lower. I have those averages also. What do these people do? They rent.

The next deterrent to business growth is the obvious. If the prices of property go up, so do operating costs for things like rent and property taxes. Our “property costs” for the business go up 4 to 5% each year. When the markets in San Diego were depressed last time (remember 1989 to 1994?), our company could file for lower property taxes through our landlord. We had more cash. Cash is king. Cash flow is everything. A line on Quicken is just feel good stuff. As the Fed Chair says, “a wealth effect”…………. not cash.

I plan to scratch at another “irritation” next time…… Is it really more net worth if the replacement costs rise at the same rate as your house and you have to live somewhere? House value only enters cash flow if your living expenses decrease (move to Iowa or North Carolina) or if you check in at the Soylent Green factory.

Most of us are familiar with Roger Showley, a highly respected real estate writer for the San Diego Union Tribune. Roger’s latest San Diego Union installment comes this morning (8/12/06) with the shocking headline “House Sales Down Again”. Two month’s in a row, he points out, we have seen no year-over-year price increase in single-family resale housing. Before we all head to our underground bunkers and await Armageddon, I thought it wise to take a step back and look at this situation rationally.  Let’s take his example of impending doom, namely, a home in Stonecrest which has failed to sell in over four months.

Roger’s poster child is a 1410 square foot patio home which was originally purchased in 1999 for $226,500, was purchased by the current owners two years ago for $480,000, and now, listed at $619,000, “hasn’t interested buyers”. Forgetting for a moment that people in almost any other market in the country are currently choking on their coffee at the thought of paying over $600,000 for a home of this size, let’s look at actual market performance over the past two years. The home in question is asking a hefty 29% more than the two-year-ago sale price. Looking at second quarter sales for 2006, this compares to an approximate actual sale price increase during this same two-year period of 11% for all San Diego homes and 5% for all homes in this particular zip code (per SANDICOR MLS, based on price per square foot). Gee, why can’t these poor people sell? Must be the agent. Or, just maybe…. THE PRICE IS TOO HIGH!

Call our market what you will (adjusting, declining, normalizing) and blame it on what you must (interest rate concerns, national economics, global economy), but the fact remains that we needed a reality check. Might it just be possible that inventory is rising and demand is falling because it was unrealistic to maintain double-digit price increases forever? Is it conceivable that buyers got to the point where they no longer perceived value in the context of prices being asked or that they felt they could no longer afford the product at current pricing levels? I have said it before; we are at an impass. Sellers continue to, for the most part, hold the line on prices (which drives up inventory as their homes remain unsold), and buyers have drawn their line in the sand as they have chosen in larger numbers to wait it out. Something’s got to give, and, as much as I loathe the term, it is time for a pricing paradigm shift.

We represent both buyers and sellers, and therefore we hear both sides. I just shared the buyer’s perspective. Now, based on what we are hearing from the sellers, here are some of the antiquated ideas that deserve rethinking.

1. I AM PRICED IN LINE WITH OTHER SIMILAR HOMES. Comps-Schomps. Active listing prices are meaningless! The asking prices of your competition are of interest, for sure, but they haven’t sold, so they ARE NOT A COMP. Listings may have been comps three years ago when inventory was low, buyer enthusiasm was high, and the pervasive buyer mentality was “I am buying something today - Let’s pick one”. Today’s buyers will wait if you are perceived as overpriced. And if everyone in the neighborhood is perceived as overpriced, then no one will sell. We have been hearing quite a lot of this from sellers, as a matter of fact. Many find it difficult in this changing market to recognize that being priced “in the ballpark” of other listings means nothing, especially when those other listings are not selling.
2. I PAID, I OWE, I NEED. Buyers do not care what you paid, what you owe or what you need. I do have a lot of sympathy for those who purchased within the last year or two and now, needing to sell, find themselves up-side-down due to either diminishing values, cost of sale, or a combination of the two. Unfortunately, we are seeing far too many sellers who have taken all of their equity (plus some) through refinancing and now “need” to sell at a certain price to avoid coming out of pocket to close the transaction. Most recently, I met someone who purchased three years ago for $545,000 and while their home is now worth in the neighborhood of $600,000, owes $685,000. This is not a reflection of a bad market, it is just a reminder that the check has been cashed before the sale took place.
3. THAT “ONE” HOUSE GOT $X. Anomolies do exist. Get over it. So what if the house around the corner sold for $1 million while everyone else in recent history sold for $950,000? In real estate, like life, there are occassional outlyers (buyer paid too much, seller got lucky). Accept it; outlyers are not the norm, and don’t bank your real estate success and financial future on the exceptions. You may enjoy similar success, but you may not.
4. I’VE GOT TIME. No you don’t. Unless you are the one hold-out who thinks prices are on an upward trend, longer market time means lower sale price. Much like you can’t expect to scare away a buyer with an unrealistically high counter offer and then come back later with a “never mind, I’ll take it”, you can’t initially overprice your home and expect buyers to return in droves at the news of your price reduction. They are mentally gone, over it, on to the next one. Miss that first wave, and you are in the position of waiting for new buyers to enter the market; the thundering herd has moved on to greener pastures.
5. ASK ENOUGH PEOPLE/YOU’LL EVENTUALLY HEAR WHAT YOU WANT. Realtors, like any other profession, represent a cross-section of America. There are good ones and, of course, not-so-good ones. The “good” ones were here yesterday and will be here tomorrow. They understand market dynamics, their primary role as an advisor (not “salesman”), and the reality of current values. They will tell it like it is and risk losing your business in the name of honesty and fiduciary duty. The not-so-good ones will be most concerned with your approval and the listing, not possessing the experience (or, dare I say, ethics) to recognize that an overpriced listing is not a listing at all and a dissapointed client is not a future client. They have not experienced past market cycles and will likely not be around for the next.

Mr. Showley’s article correctly points out that agents are resorting to gimmicks in an attempt to sell their languishing listings. From my angle, all the free gifts and ice cream socials in the world are not going to persuade me to make a purchase of this magnitude. In 1992, it was “the economy, stupid”. Well, this may lose the election for me, but today… “It’s the price, stupid.”

Thinking about buying a new home on sale by the builder? If so, consider this:

If you are like many other buyers, you may need to sell your existing home first and use the equity for your down payment (and to qualify for the new loan). But I want to make you aware of a disturbing trend we have noticed recently. I say “trend” because I am aware of several of these encounters with my own clients as well as others. I should also qualify the fact that my comments are directed only at certain homebuilders that have an ”independent”, but affiliated real estate sales division, separate from their new homes sales division (I will not name names in order to protect the guilty) and who force their agents on unsuspecting buyers. It typically starts at the new home sales office and goes something like this:

New home sales agent: “So, what do you think?”

Buyer: “I really love the Plan X, but I have to sell my home to be able to buy this one”.

New home sales agent: “No problem! If you can’t qualify to buy the Plan X and carry the cost of your existing home, you can use one of our “independent” agents to list and sell your home.”

Buyer: “But I have an agent whom I really trust and knows my neighborhood extremely well. May I use this agent?”

New home sales agent: “No. Sorry. If you need to sell your home to buy this one, you MUST use one of our agents.”

Believe it or not, this is about how the conversation went when I visited a new home development recently. Beyond the questionable legality of this requirement (IF THERE ARE ANY REAL ESTATE ATTORNEYS READING THIS PLEASE COMMENT), there are even more important implications to this restriction.

The reason I went to this sales office in the first place was to confirm this requirement because of a recent sale in a neighborhood where Kris and I had a model-match listing competing with a home listed by an “independent” agent (who is affiliated with the builder). Conflict of interest? We will explore just how much in a moment.

The home listed by the ”builder-affiliated” agent was virtually an exact model match to ours including; both located in the same high-end neighborhhood (one street apart), exact same size and floor plan, number of bedrooms and baths, similar upgrades, lot size, orientation and view. Both homes went into escrow in June and both closed escrow in July, 2006. This is where the similarities end.

Since we were competing for similar buyers, we were keeping a close eye on our competition. We also knew the agent was associated with a builder. meaning that the seller was most likely buying a new home from that builder. Soon after this listing came on the market (at a similar price range to our listing) they started lowering the price (which put pricing pressure on our listing and others in the area). Now we all know the market has slowed down and that prices have softened. But we were shocked at the frequency and magnitude of the price reductions of the builder-affiliated agent listing. Bottom Line - It ultimately sold for $85,000 LESS than ours. Why then, am I upset. For one, I might have been able to get a higher price for my client had my competition not been unreasonably influenced. The “below market” sale will now also have an impact on this entire neighborhood for months to come.

Now there is no logical reason in the world that two strikingly simliar homes in the same neighborhood would sell for a difference in price of $85,000 in one week, unless there were outside forces at work, namely having an agent that works for the builder first and not their client, whose home they were responsible for selling. The other agent (in cahoots with the builder), in my opinion (and I’m just speculating here), sold her clients down the road. I suspect that they were under severe pressure to sell with the threat from the builder of losing the new home they were seeking to buy. Plain and simple. This conflict of interest cost their client a lot of money. I hope they like their new home…a lot!

The moral of this story is, if you consider buying a new home from a builder who requires you to use their agent in lieu of one you prefer and who actually knows your neighborhood, tell them to get screwed! This actually happened to one of my clients several months ago (where a new home builder tried to impose their agents on my client) and they told the builder to “pound sand”. I was able to represent them.

Although technically the builder-affiliated agent, like any agent, has a fiduciary responsibility to their clients, you can now see how the conflict of interest can potentially overwhelm this obligation and cost you big time.

Greg Swann at the Bloodhound calls it “link-baiting”, but I’ll take it. Imagine my surprise when at 5:00 AM over a cup of coffee I found that the Ubertor Blog graciously included me in their A-to-Z list of top bloggers. If only my name was “Ardell” (with an “A”), I could have headed the list! While I don’t pretend to be worthy, I do have an ego afterall, and am quite proud of what we have accomplished with our little Blog in such a short period of time. OK, I didn’t make the Sellsius Top Ten Women Bloggers list (hey, who can compete with Ardell?), but Rome wasn’t built in a day, and Dustin at the Rain City Guide defended my honor by including me in his short list. (I’ll consider this honorable mention). Now, as I enjoy what is remaining of my “15 minutes”, I will accept these nods on behalf of all of us at the San Diego Home Blog and ponder how in the *&^% I am going to live up to the task of continuing to keep such heady company.

First, for this morning’s good news.  We finally have our new photos, although we will all miss Steve’s mustache and my “June Cleaver” hairstyle. Also, the Zestimate on my home is up another $8,000, and I am already thinking of ways I might capitalize on my growing personal wealth. Who says our market isn’t strong?

Well, the stats, for one. Rather than clutter this post with a bunch of excel spreadsheets and dry data, I am providing links to a bunch of excel spreadsheets and dry data for those of you who care. I will speak to the single-family detached home market, although the numbers are similar for attached homes. San Diego County is sitting at an absorption rate of nearly 9 months, while the I-15 corridor communities of Scripps Ranch, Rancho Bernardo and Penasquitos have current absorption rates hovering around 6 months, with Mira Mesa at approximately 6.5 months and Poway at 7 months. This would suggest we are slightly on the far side of a normal market (and I am sure I will be hearing from our friend Jack Tong on that one). Looking at the trend lines, the market lost steam in July, which is historically the most active month from strictly a seasonal perspective. Fortunately the Feds held the line on interest rates yesterday, so we will have to wait and see where that leaves us as we head into Fall.