The San Diego Home Blog

If it sounds a bit strange, think about this. During the past week in the world of our little team, we met with clients seeking advice regarding the three  homes they purchased over the past two years with a 100% financing. The negative amortization is currently adding (collectively) approximately $3,000 a month to their debt, which already exceeds the value of each of their homes. At the same time, one of our buyer agents represented a client in the successful purchase of a bank-owned property - that had multiple offers. This after missing on another property that also had multiple offers. Concurrently, we took a nice higher end listing, priced it aggressivley to the high side and still sold it with, you guessed it, multiple offers. Whew! What a strange week!

So, what’s going on here?

I have been following real estate trends in San Diego since 1979 and I have not seen anything like the current market. Dichotomy is an understatement. We are, like many other agents, seeing more clients/homes that are in financial trouble (primarily due to overleveraging, teaser rates, interest only and/or negative amortization loans), but at the same time seeing robust buyer activity.  Homes priced correctly and presented well are selling briskly, many with multiple offers.

Yes, the number of sales and the prices have come down over the past two years, but nothing like the 1989 - 1996 debacle where we saw prices drop 20% or more in many neighborhoods.

What we currently have is a real estate version of a parallel universe. The downturn in pricing being a combination of a natural evolution of the real estate cycle, made worse by the loose mortgage lending practices of the past several years and the misguidance of buyers, agents and/or lenders.

Contrast this with the fact that we are still enjoying an interest rate environment that seems to defy gravity. Employment growth in San Diego remains stable. Although sales are down from previous years, one must not lose sight of the fact that those “previous years”, particularly 2003-2005 posted record numbers of sales and now we are back to a level more in line with historical averages.

I must say, it is more than a little strange to be working on multiple transactions that are simultaneously representative of a pretty decent market and one that is sadly distressed.

So what is the forecast for the relative near term future? Sunny and warm or turbulent storms? A case can be made for both.

Right now, the saving grace is interest rates, still relatively low and the fact that the economy has not fallen into a recession. But storm clouds can appear quickly out of knowhere. If China decides, for example, to shift their massive currency investment into something other than U.S. Goverment Treasuries, all bets are off because the days of moderate mortgage interest rates will be gone. Ironically, the China investment here is due to the massive profits they are making on their exports to us - All the stuff we buy from them. If China shifts away from purchasing U.S. Treasuries, she risks taking away the favorable financing that is driving a ton of U.S. consumer spending to buy their products (thus generating the money they put back into our Treasuries). Almost and incestual relationship when you think about it.

The other potential storm factor is the recession scenario. The last one was short-lived in 2003. But we are close to entering an election year, so to the degree the FED can avoid bumping up interest rates, they will. The question is, will other economic factors such as a slow down in employment, reduced GDP, inflationary pressures, etc. send us down the slippery slope? 

For the moment,  I think the forecast is partly cloudy, meaning that one should remain objective and cautious in their real estate investments  in San Diego. Prices are still healthy and demand is stable, just not frantic like the 2004-2005 timeframe. As anticlimactic as this sounds, it is consistent with what Kris and I have been saying for the past two years - Be prudent, invest for the long term, do not overleverage and resist budget creep in your purchase. Hopefully the sun will keep warming our souls. 

The long term out look remains good. There just isn’t much of a supply of land left to develop in San Diego County, yet the demand will remain and continue to grow, notwithstanding the current slowdown. It may take up to another year of filtering through the bad loans and unfortunate purchases but, as history has shown us many times, we will re-establish a base and move on.

Sadly, the reality is there will be more owners who will incur extreme difficulties and hardships over the next year. We can’t stress enough the need to seek strong advisors to help you as early as possible.

I don’t like this Parallel Universe thing.

I bet my broker didn’t know I am the whole office!

From this morning’s San Diego Business Journal:

Kris Berg, a broker with San Diego Castles, the Scripps Ranch office of Prudential California Realty, said CAR’s March report should look similar in future months.

Berg, who admits she has a less rosy outlook on the market than both the national and state realtor groups, expects April’s numbers to hold steady.

“I would expect April to be flat or even down some as well,” she said.

She also anticipated that this slow or declining trend will continue for the rest of the year.

What has changed is that the spring real estate season has not picked up as it usually does, according to Berg.

“This spring has been different than past springs because we haven’t seen a lot of the typical seasonal things we usually anticipate. We haven’t seen a huge increase in inventory and we haven’t seen a ton buyer of activity,” she said.

She sees a significant slow down in buyer activity in entry-level purchases. High-end properties in San Diego tend to hold their value better than their lower-price counterparts because that market is naturally less affected by interest rates and tightening of lending standards, according to Berg.

“What we are seeing is that the tighter standards are having a significant effect on the lower price entry-level properties. We have a diminished buyer pool for those homes and that is largely due to the lending issues going on right now,” she said.

Berg expects that diminished buyer pool coupled with high median prices has created a “trickle up effect” on markets of all price ranges. She said if typical first-time home buyers can not sell their condo, in turn they can not buy into the single-family detached market.

“We were starting to feel it a year ago and now it is becoming really clear it is a reality,” she said.

Well, that is sort of what I said, with one caveat. We are not seeing seasonal Spring buying and selling activity to the same extent as years past. And, while I am not generally as bullish as David Cabot, I do agree with his assessment that ours is not the picture of doom and gloom that many perceive. As a footnote, I also said (see the invisible ink) that I anticipate the remainder of 2007 to be sluggish with any reversal of the current market trends to come in 2008. Having gotten that off my chest, we personal put one listing to bed this weekend after a mere four days and with multiple offers, serving as a reminder that there seems to be more than a little life left in our San Diego real estate environment after all.

We received this question yesterday from a reader:

If a buyer of a home has gone past the agreed contract amount of time and has not released contingencies can they be penalized for anything or amount of money? In this case the buyer agreed to a 15 day contingency removal and it is now 18 days with no response. I know the 24 hr notice is a possibility, but just wondering if their are any rules or penalties on this issue? Thanks!

In answering the question, first I will assume that you are speaking to a contract written on the California Association of Realtor’s standard Residential Purchase Agreement. That being the case, the contract does include buyer contingency provisions. The default language specifies that all buyer contingencies including loan and appraisal be removed in writing within 17 days. It sounds like, in your circumstance, that a shorter 15-day contingency removal period was negotiated, which is fairly common practice.

By way of background, the purchase agreement of yesteryear (pre 2000) specified a passive method of contingency removal. This meant that once time frames had come and gone, related contingencies were deemed to be removed. Conversely, the contract now in use employs an active method of contingency removal which requires that the buyer affirmatively remove a given contingency in writing. Absent this written removal, the contingency in question remains in effect.

The importance of the buyer’s removal of contingencies is naturally related to the disposition of his earnest money deposit, and the amount of the deposit which is considered customary will vary by region. Here in San Diego, a customary deposit is considered approximately one percent of the purchase price. Until contingencies are waived, the buyer can effectively cancel the contract without penalty, that is, take his money and go home. Once all contingencies have been waived, however, any failure to perform is considered a breach and the earnest money is at risk. This is where the earnest money comes in. I always advise our selling clients that the amount of the deposit is important only in that it should be sufficient enough to “hurt”. One must keep in mind, however, that a purchase agreement is a bilateral contract. It takes two sets of signatures to enter contract and two sets of signatures to undo the mess. If your buyer has breached, you may be entitled to retain his deposit as damages, but his signature is required by your third-party escrow to release the funds to you.

Now, let’s assume that the buyer has failed to remove all contingencies within contractual time frames. What’s a seller to do? Unless the contract has been otherwise modified to include penalties, your only remedy is to issue a Notice to Perform (NOP). By default, the NOP gives the buyer 24 hours to perform (do what they are supposed to be doing), and many agents negotiate a longer NOP period, usually no more than 72 hours. If after this period they have still failed to perform, the seller may cancel, and with the cancellation, the buyer would be entitled to… take their money and go home.

When the standard contracts were modified to include the active method of contingency removal by default, attorneys told us that this was intended to take the guess work out of who gets the money in a parting of the ways. The prior “passive removal method”, they held, was largely responsible for their most common disputes - disputes involving who gets the green stuff.

Practically speaking, the buyer holds all of the cards until they sign on that contingency waiver on the dotted line. When acting as the seller’s agent, we are often forced to use the NOP, but it is not so much a hammer as a rubber mallet. With the seller’s only remedy being cancellation (and presuming the seller doesn’t really want to cancel and start over again 15 or 17 days into contract), you have got to ultimately hope that you have a well-intended buyer who is going to respond favorably. If you as the seller issue an NOP and the buyer continues to ignore his contractual obligations, you need to be prepared to cut bait and put your home back on the market.

Adorable 2 bedroom 1 bath totally remodeled, new exterior, new interior paint, new kitchen and bath, new flooring, carpet, windows and roof. Bring your buyers! Seller is licensed real estate agent.

Then, shouldn’t she know better? Alert Husband Steve pointed out this very compelling property photo direct from the Sandicor MLS this morning. After we wiped the spittle from our lapels, we were able to figure out what happened to this poor home.

Clicking to the photo page for the property, we found this:

Now, compare this to the photo page for one of our listings. Here you are seeing the top of the screen only, which has been identically sized for demonstration purposes:

Apparently, this agent-owner is using the popular Playschool Lil Agent Point N Shoot camera. Important marketing advice: Tiny little pictures will get resized to fill the space set aside in the MLS for your primary photo and may get a little fuzzy in the process.

Unbelievable.

It’s something that perpetually bugs Steve and me - The proliferation of open house signs we see each Sunday. Rather than placing a helpful, periodic sign to assist in directing people to the main event, the open house sign has taken on a Burma-Shave life of its own. By all accounts, the Sunday open house ritual has become an escalating contest of wits and resources among agents to see who can attract the most attention to their name (alas, not the home itself). He with the most signs wins.

POINT

Yesterday, for example, at one intersection near my home I counted five signs placed in succession by one agent. If the motorist didn’t see the first one, or even the second or third, they really shouldn’t be driving. But as we all know, they see them all, and that is precisely the point. I highly suspect that this particular agent is not holding your home open in an attempt to (gasp!) sell it; he is there (or rather, one of his minions are there) in an attempt to sell themselves. That nobody comes to their party on the occasional slow weekend doesn’t matter. Hundreds or thousands of unsuspecting motorists now have this agents name ingrained in their subconscious, like the melody to “It’s a Small World” after a trip to the Happiest Place on Earth (or, in Steve’s case, that stupid WooHoo song from the Vonage commercial).

So rampant is this cancer that having the most signs in place on any given Sunday is no longer a definitive victory for the notoriety seeking agent. Now there is a separate war being waged to determine who can outlast - Survivor Scripps Ranch. The traditional 1:00 open house is now being signed at 10:00 am or even earlier, and it is not uncommon to see these signs remaining long after the ice has melted in the happy hour cocktail.

In the case of our immediate neighborhood, I am at a loss as to why the community isn’t in an uproar. I tried submitting to our community newsletter an open letter to agents calling for some self-respecting self-policing awhile back, yet they declined to publish it. (Ironically, coming from an agent, they felt it was too commercial). So, absent enforced rules (and we all hate those), we must live with this weekly signage blight that not only litters our neighborhood but further soils our profession’s image.

COUNTERPOINT

We recently took a listing in a new community with a very strong Homeowners Association (HOA) in place. In case you are familiar with San Diego, I won’t mention the community by name (San Elijo Hills), but suffice to say that they have taken HOA empowerment to new heights.

The owner of this home dutifully presented me with the community’s Open House Sign Policy, which reads much like a Communist Manifesto, although I am unclear which Marx wrote it (Karl or Harpo). The policy consists of a full page of eight-point font drivel, so I will share only the low points:

Homeowners may use a standard open house sign approved for use by the Community Association… agents can purchase the approved signs from any sign company (and) may obtain the artwork from (name of vendor and phone number)… Each sign must have a small label along the bottom to… include the name of the homeowner or agent, the office, a contact number and an email address.

Okay, so I have to buy “their” signs to ensure uniformity in “their” special community.

Approved Open House signage is allowed for use on Saturday’s and Sundays from 1:00 to 4:00 pm only.

Fair enough, although I am assuming that there is some grace period here, since, as dexterous as I am, I am unable to simultaneously place a half-dozen signs at various corners at the stroke of 1:00 and be present in the home to greet the incoming. But, wait a minute…

Only one sign directing traffic either left or right may be installed at each corner. The first… agent to reach an intersection on route to their open house will place their sign at the given location. (If an agent reaches an intersection and a sign is already in place), agents should continue to the next intersection on route… place their sign as necessary.

So now, I need to be the first one at each intersection along my “route”. I can’t actually erect the sign prior to 1:00 pm, but I must establish my territory and stand unwavering, armed with sign and rubber mallet to claim my corner. If I am not victorious, what happens when the owner of that corner decides to close up shop early you ask? Those clever protectors-of-our-way-of-life have thought of everything…

Because the benefit of the directional signage may be shared by other agents, signs may not be removed before 4:00 pm.

But, not after 4:00 pm, either. So, do we all meet in the Town Center (which consists of a park, a “refueling venue”, a “cafe” and a lot of dirt to soon be home to a “food replenishing facility”) and synchronize our watches at 12:55?

Too many signs = bad; too few signs = bad. So, what is the answer? Absence of reasonable enforceable and enforced rules (we still hate those) does negatively impact the community. We as an industry have demonstrated, at least in my neck of the woods, an unwillingness to practice common sense and restraint. My example of HOA’s Gone Wild (soon out on DVD), however, will have the opposite effect of that which they intended. Making it all but impossible to market my client’s home is not going to protect property values. Maintaining your “exclusivity” simply puts the seller at a competitive disadvantage.

Looks like I am going to be free this Sunday.

Steve has somehow become empowered, as three of the last four posts here bear his smiling likeness. This will simply not do. So, inspired by the need to regain some control and by the gauntlet thrown my way in Steve’s comment Monday regarding our latest San Diego Union Tribune article on the housing market (”I will leave it to Kris”), I am offering my thoughts on the subject.

The gist of the article by Dean Calbreath was that the National Association of Realtors®’ chief economist, David Lereah, has been inconsistent in his remarks, painting a falsely positive picture of the state of the real estate market lo these many months. His most recent remarks conceding that home prices will decline through 2007, Calbreath suggests, are long overdue.

I do not disagree with the article; I, in fact, applaud it. My take on Lereah’s failure to call a spade a spade is a little different, however. First, we need to remember that Lereah’s role is one of spin doctor. He is the Realtor®’s equivalent to the White House Press Secretary. The question is, are his remarks truly dangerous or even influential? (The other question is whether NAR even needs an in-house economist, but that is for another time).

My favorite Lereah-ism this past week, apparently no longer able to spread the “good news on the horizon” message with a straight face:

“Simply stated, a loan with the lowest monthly payment probably isn’t in your best interests – borrowers need to understand worst-case scenarios,” Lereah said last week. “If you’re in a mortgage you aren’t comfortable with, now is an excellent time to refinance, if you can, with historically low rates on safer conventional loans.”

“If you can” is the caveat that packs the punch. Those who purchased homes in the past three years will likely find that refinancing into a safer conventional loan is not in the cards. The buzz lately, of course, has been surrounding the subprime market woes. Simply stated, too many people who purchased homes over the last several years did so with low-down, adjustable loans, and now are finding a surprise package of higher, oft-times unaffordable payments, not to mentioned negative amortization issues. Couple that with a declining (or, in NAR speak, “correcting”) market environment where home values have not increased but in fact declined during this period, and you have the makin’s of a no-way-out crisis for many.

What is sad is that this was so avoidable. Yes, buyers need to accept more than a little responsibility for the purchase and loan decisions they have made. But how can the mortgage brokers and agents truly defend against the charges that buyers were coerced into biting off more than they could chew when their own professional lobby has been repeatedly singing the refrain to Everything’s Coming Up Roses?

Just “yesterday”, the Public Awareness Campaign du jour was “Buy, buy, buy”!

2007 marks the 10th year that the Public Awareness Campaign has been working on behalf of the National Association of REALTORS®’ members to educate and persuade consumers about the value of hiring a REALTOR®. This year, the campaign goes a step further by encouraging consumers to consider real estate as a strong long-term investment.

If David Lereah and NAR were at the helm of Best Buy, then their approach is a good one. “Everyone needs a plasma TV whether they know it or not, and owning the biggest TV on the block has never been easier”! This is a classic latent demand approach; if I have to move electronics, it makes perfect marketing sense to create a buzz, to generate excitement, and to manufacture a wide-spread demand for my product, whether one exists or not.

Homes, however, are not bought and sold in this manner, and you can not manufacture a demand for a lifestyle or a true necessity: Shelter. Some will defend Mr. Lereah’s past inaccuracies as unfortunate errors inherent in any forecasting activity. I am not so generous. From our perspective in the trenches, Steve and I saw and acknowledged (both here and to our clients) the correction coming long before it was here. And, one can argue all day long that failure to predict the future is forgiveable. Failure to admit reality once it is upon us and speak the truth, in my opinion, is not.

Phoenix agent-extraordinaire Russell Shaw said about Mr. Lereah:

I don’t think most REALTORS even know who he is, or what he has to say - let alone the general public. I don’t believe that most people who live in the United States give a crap what he or anyone from the National Association of Realtors has to say about much of anything. Therefore, I don’t see how anything he may have ever said (knowingly or unknowingly wrong) could possibly have “harmed” anyone.

“Harmed”? No, I doubt that as well, except to the extent that his sound bites continuously appear as headlines in the local paper or lead-ins to the top story on News at Five. The public may not remember that a quote was attributed to “David Lereah, National Association of Realtors®”, but what they do hear is “blah-blah-blah-Realtors®”. That is my beef.

I think we will all agree that NAR and Lereah, in their questionable statements, are simply trying to do their job - They are trying to provide advocacy for the real estate industry. They are a lobby, and they are lobbying on our behalf. However, if you want to truly help me, I submit that you rechannel your energies into working toward building an industry that needs no public relations campaign. Try self-policing, try tightening licensing requirements, and make sure your house is clean and ready for company before you spend all of your efforts begging people to come to your party.

In 2006, the California Department of Real Estate reported that there is one licensed real estate agent for every 52 adults in the state. This presents a bit of a supply and demand issue, wouldn’t you agree? It would seem that NAR’s answer to this is to encourage more people to move more often. Too many agents? Let’s just churn more homes. Forget that, unlike the discretionary flat screen purchase, people will buy and sell real estate when they need to buy and sell. Of course, many of today’s agents will be working at Best Buy tomorrow. Supply and demand.

So, NAR, if you want to help me, please stop focusing on the spin and start minding the store. If you want to help your Association, take a step back and consider our image crisis, recognize that it is sadly, often deserved, and work toward renovating our industry practices and strengthening our licensing requirements. Start insisting on a true level of professionalism and ethics among real estate professionals, a level of professionalism and ethics similar to the one that you promote already exists. Accomplish this, and you just might find that there is no longer a need for the spin.

(As a footnote of some interest, Steve was approached by a Title Company representative yesterday at a Brokers meeting who, in reference to the “terrible” San Diego Union article, assured him that they were working on a rebuttal piece in our defense. Alas, we still don’t get it).

Yesterday (Saturday) morning I finally got out for a long overdue run. As I huffed and puffed my way up the hill away from my house, I immediately saw the sign, a small rectangle with “Garage Sale” printed on it and realized that it was the first of two very important days each year when Scripps Ranch has their semi-annual community event. Yikes!! It’s a great tradition and always one I hear about and then promptly forget. Having been in my current home for 7 years, this should be enough motivation for me to get off my butt and rally the family to clean, thin and have fun making a few bucks while I get rid of the thousands of items the girls have me saving in what used to be MY garage. 

Upon my arrival home Kris says, “Hey, tomorrow is the annual Scripps Ranch garage sale so we should clear out the girls closets and your garage.” “Wrong Kris, it’s today!” What to do?? I’m frustrated because I have missed yet another opportunity (until I hear about and promptly forget the date for the next community garage sale in October) to clean and reclaim my garage and free all of the closets in the  house of their considerable burden. At this rate, I will be parking my car in the driveway for lack of garage space.

So as not to lose momentum entirely, Kris suggests that we at least take this rare opportunity when neither of us have a Saturday work commitment to go ahead and clean out the garage. This is kind of an all day affair where we basically take everything out, sweep, vacuum and/or blow out the dust and cobwebs and then put everything back in a (hopefully) less chaotic looking form. Still all of the same crap. It’s just more aesthetic.

Fast forward to 30 minutes later and we have assorted stuff all over driveway when a nice lady walks up and asks, “How much for the bikes?” I say, “They are not for sale. We’re just cleaning the garage.” After a strange look, she starts eyeing up the many other things laying on the driveway and starts making offers on stuff to Kris. Before we know it, we have a major garge sale going with about 10 people in the driveway at any given time for the next three hours. Even Becky and Emily join in on the fun bringing some unidentifiable ancient “stuff” from their rooms.

So all was not lost. Our garage cleaning project turned into a great day of full-fleged participation in a great community tradition and we realized that we don’t really need to prepare much for the next Scripps Ranch Garage Sale (whenever it is). Truly a piece of Americana. What a great country.