August 2007

Back in March, I took a quick look at the performance of homes which had been assigned value range pricing versus their “fixed” price counterparts. For the approximate first quarter of the year, the stats for Scripps Ranch home sales went something like this:

(All data is from Sandicor and is deemed reliable but not guaranteed. Patent pending, all rights reserved, consult your doctor before using, don’t take before bedtime, and so on).

This morning, looking back over the stats for the past month’s lucky closed escrow winners in Scripps Ranch (an admittedly small sample), the picture was much the same. Value ranges still win the popularity contest when it comes to pricing, and they tend to outperform in both the days on market and sale price categories.

 We used to say, where value range pricing is concerned, sellers see the top, buyers see the bottom and agents see the middle. What I was really interested in this morning was whether or not this tired mantra still holds true in a market of deal-seeking, emboldened, buyers, buyers who are all at once fearful of the market yet fearless when it comes to submitting an offer.

Of the 25 value range-priced sales in the past 30 days, just over 40% of these sold below the low end of the range. Three others sold at the bottom. As an agent who uses value range pricing more often than not, my only surprise was that sold-below-bottom cases were not greater in number, yet I think this is a trend that will continue until our market stabilizes. When it comes to dilusionally low offers, I have certainly been “feeling the love”. It seems that now, sellers see the middle, agents see the bottom, and buyers see the bottom as “full price”.

The market tides have shifted, this much is certain. For too many buyers, making simultaneous and outrageously low offers on multiple properties is the new pink for Spring. Let’s throw it all against the wall and see if anything sticks. One agent was so frustrated with the practice recently, that he told me in all seriousness he is considering intentionally overpricing his listings so that when the “low” offer comes in, it is actually closer to what the seller was shooting for all along. His theory was that price is of less concern to today’s buyer than the need to feel they have negotiated a smoking deal. While I am not quite prepared to jump on the overpricing bandwagon, I understood where he was coming from.

Pricing has become a sticky wicket. Leave too much room for negotiation, and you will never see an offer or, worse yet, your home will never be shown. Leave too little, and you are committing yourself to spending every evening for the next month hanging out with your agent, killing trees and writing futile counter offers.

The real estate news is SO bad! Hide your young, board up the windows, and assume the crash position. You could just be hunkering down for awhile.

At least, that’s what the papers say. Yesterday in the San Diego Union Tribune we enjoyed the article entitled ”San Diego new-home sales hit lowest point in five years”. We are so suckie! Today, we were treated to “S.D. home-sales dip is lowest in region”. Apparently, we are suckie, but much less so than other counties. Phew! What a relief.

Of course, if you actually read the articles, you would get a glimpse of a more balanced picture, the whole story, if you will, and things are not so dismal as the headlines might imply. Yet, no one reads the “whole story”.

And, no one reads the paper anymore. We are a generation of sound bites. We are such insanely busy people, people busy with such insanely important things that we only have time for the headlines. I, personally, have had one of those insanely busy days (posturing as a crash test dummy for anyone who dared to even glance in my direction). After a day like today, who needs negativity? As a public service, I have devoted my precious, waning twilight moments to summarize the day’s news for other, multi-tasking professionals, in a more positive light. Headlines are all compliments of the San Diego Union Tribune. (Disclaimer: I didn’t actually read the articles, as I was too insanely busy).

The headline: Questions surround official’s departure.
The story: Will you be needing that stapler? Can I have your parking space?

The headline: Internet giants plan to change U.S. health care.
The story: Hospital appointments will sync with Outlook. Emergency appendectomies will now be scheduled within one calendar year, guaranteed! (404 error means you shouldn’t bother - You’re a goner). 

The headline: Mattel recalls more toys.
The story: “My First Bathtub Blow Torch”, “Early Years Termite Fumigator Kit (tent not included)” and “Ninja Nail Gun” deemed potentially unsafe.

The headline: Terror label sought for Iran’s Revolutionary Guard
The story: All members of the Iran Revolutionary Guard will be required to sew label into underwear stating “Property of Terrorist”.

The headline: Stock market caters to the super-wealthy.
The story: Duh

The headline: Homemade ice cream can make you a hero.
The story: “Recipes for homemade ice cream fall into one of two camps: those with a custard base and those without.” GIVE ME A BREAK! ARE YOU KIDDING ME?

Let’s face it. Real estate or not, this world is just nuts! And, tomorrow’s another day.

While my mountain man is off communing with nature, I am reviewing Zillow’s quarterly statistics for San Diego County. What’s wrong with this picture?

Zillow’s quarterly statistics, or Zindexes, are out, and you can see the score card for San Diego County here. The Zindex is a measure of the median Zestimate for a given area. Now, I am still grappling with the logic. If we agree that Zestimates are generally (and often grossly) inaccurate, would the median of the same give a more meaningful, global picture of market trends? At first blush and after an exhaustive study of their figures (Daughter #2 two and I just finished yet another satisfying dinner of local take-out fare, and the dog looks like he can “hold it” for a minute or two more), the answer appears to be “maybe”.

As is often the case here, let’s take Scripps Ranch. Our Zindex is $666,595, which includes all homes, attached and detached. That feels about right. Our quarter-over-quarter and year-over-year changes are shown as -1.3% and -3.0% respectively. Again, this is sort of right, but by my experience, a little on the low side.

At least, Scripps Ranch is fairing better in the popularity contest (most frequently searched on Zillow). We ranked number 10, behind the likes of La Jolla (can’t afford to live there), Rancho Santa Fe (can’t afford to even visit there), and 92121 (think UCSD). Of course, the other coastal communities of Carmel Valley and Del Mar cooked our goose. Joining us in the inland “in crowd” were Rancho Penasquitos, 4S Ranch and Poway.

One new feature which I like is the breakdown by size of home (small, medium and large). Although these categories are not strictly defined, Zillow is showing that higher priced homes in San Diego County have been less affected by the market correction. This correlates with the old adage that the little guys (condos) are the first to fall. So go the condos goes the market, and certainly the recent subprime mess has had a little something to do with this trend. And then there is the obvious - Gazillion dollar home buyers are less affected by silly things like loans and overall affordability than the rest of us.

Not to mention, gazillion dollar home buyers probably have dog walkers on staff. Which reminds me…

(Editors note: If you think I am going soft on Zillow because they bought me, you are wrong. I am still without a complete set of beer glasses, those cheap-skates).

In the past, Kris and I have shared the philosophy that when we start to burn out or we have had enough of whatever, we just head out for a “road trip”, usually by air and usually to Las Vegas where we sequester ourselves for 48 hours in the climate controlled environment of the Planet Hollywood Hotel/Casino. It’s great to get a change in scenery for a couple of days, away from the daily grind of real estate, to gain a new and fresh perspective. 

For me though, I need to be a bit more “away” than Vegas, so just about every year for the past three decades I  have escaped to the backcountry of the High Sierras, where being sequestered takes on a slightly different meaning. Since there are no electrical outlets there for a laptop or hairdryer Kris has, so far, refused to accompany me. She will instead be responsible for covering the homefront. With 9 active listings, a bunch of escrows, another half dozen buyers and a couple more listings waiting in the wings, someone has to cover the biz. Plus, of greater importance is that daughter Emily is in her final approach mode for trying out for the Scripps Ranch High School Volleyball team, a group that is seemingly blessed year after year with several All-American/Olympic-caliber players. At about 5′ 4″, most of the week will be spent by Kris stretching Emily, hopefully to great new heights, literally.    

At the same time I will be introducing daughter Becky to the wonders and surreal landscape of Tuolumne Meadows, including her first visit to a High Sierra Camp (Glen Aulin) and a trip down the Grand Canyon of the Tuolumne River.  At night we will undoubtedly be visited by the local bears with just about 1/8 inch of tent fabric separating their noses from ours. It doesn’t help the sleep cycle, but the odds are they will not be so presumptuous as to come inside for a visit.

Now, I know that I have just broken a record number of rules of real estate blogging, and I’m certain there are many disgusted pro bloggers pooh-poohing this post. I have made it personal and off-subject. It’s also too long, I have not included enough pictures or the proper keywords and pretty much blew off any chance for search engine optimization. In fact, Google will likely put out a cyber ”Wanted” poster on me, meaning they want me off line due to my inexcusable blogging indiscretions. This will do nothing for our ”hits” or “page visits” or any other objective measurement of blogging success.

That’s the point. I don’t really care. Because this week, for me there will be no mortgage mess, no sales statistics, no home showings, no calls from escrow or other agents. I’m off to Yosemite, my happy place, with my daughter to take a break from all this and to rejuvenate myself until, well, the next visit to the Sierras or Vegas. It’s a patch, but a really good one. When I return, I will be fully recharged to do what we do best; Take care of our clients. But, for now, I’m outta here.

I hope everyone has a great week.    

I recently received this stream of consciousness from Tim Fiero, Senior Loan Consultant with First Capital Corporation, workaholic, and all-around great guy. While it was intended as an informal primer for Prudential agents unfamiliar with the recent lending goings-on, I loved the way he summarized our current mortgage mess in lay terms and felt it was worthy of a few consumer eyes (and may be of benefit to other agents) as well. With Tim’s permission, I reprint his remarks here.

(Keep in mind - The style is very charmingly conversational. He admittedly penned this while his toddler son was napping, and it is therefore it just another example of how agents and mortgage professionals tend to get crazy when faced with a little discretionary window of time.) 

Hedge Funds, Private Equity Funds, Derivatives, Credit and Liquidity Crisis in the Mortgage Market and ………..What Does All This Mean to a Prudential California Realty Agent?

I took a personality test once and it listed optimism as one of my faults. I took that as a positive. The opposite (pessimism) does not seem like something I’d like to be known for.

So, with that being said, I would have to say last weeks changes in the mortgage market were historic in nature. Whether you call it a Tipping Point or an Inflection Point only depends on which book you have read. (Both are the titles of books, in case you were wondering). It does not matter what you label it, the point is, there were some major changes in lending and there are more to come.

Why were the changes historic in nature and how does that affect you?  Like the environment, the economy in intertwined in many, many ways. But first, a quick dissertation on what is a hedge fund, what is a private equity fund, what is a derivative, what is a liquidity crisis, and what is a credit crisis?

Derivatives

Derivatives are the most complex to explain, so I will stay with the simplest example. (I have to be simple because that is all my mind can handle).

If a business, in the US, buys copper from Peru, there are things that affect the price of the copper. To keep it simple let’s just say the two things that affect the price are the commodity itself and the cost of the Peruvian currency. A change in the value of the currency could make the cost of copper increase. Companies therefore buy a forward contract on the Peruvian currency in order to keep the cost of the copper the same.

The offset helps create cost stability for the commodity.

The amount of derivatives in our economy is mind numbing and many are very complex. As you can see by the above example they can be very good things, if used correctly. They can also be risky if used incorrectly.

Private Equity Firms

Private firms funded by wealthy people and/or institutions. The private equity firms take the investors money and keep it as an asset. They then borrow additional money form large commercial banks. They then take the borrowed money and buy publicly traded companies. Their goal is to reorganize the company they just bought, make it more efficient and profitable, they resell it in a few years at a huge profit. One such company just bought Chrysler. The keep here is to understand their use of leverage. They borrow the money from banks to buy the company. They use the investor’s money as a form of collateral.  So, they are leveraging the investor’s money.

Hedge Funds

Hedge funs operate in a similar manner. They take investors money and at the same time they borrow from banks in order to leverage their investments. Hedge funds tend not to buy business, but they hedge their money in commodities, stocks, and bonds both foreign and domestic. They tend to widely use derivatives!

Credit and Liquidity Crisis in the Mortgage Market

This situation started off the year in the meltdown of the sub-prime mortgage market.

Hedge funds, using the above example of how they operate, borrowed money from banks. From there they funded the operation of sub-prime lenders as well as Alt A lenders. (Alt A are borrowers one step up in the pecking order from sub-prime).

So the hedge funds and some private equity firms fed the lenders the money to loan out. Once the loans were funded, they turned around and sold the loans to other investors.

They were making huge profits, so in a low interest rate environment there was huge demand for these mortgage backed securities. More demand for these securities from Wall Street, more demand to fund more loans.

How do you increase the loans you do? Reduce credit/underwriting standards. If you reduce standards, more people can qualify. If more people can qualify more people can buy homes. Not a great idea, to increase the speed of the train as you get closer to the bend!

First the sub-prime market was affected and now, in the last two weeks, the Alt-A market got hit. What do I mean got hit? The companies underwriting and doing Alt-A loans could not sell their loans. Why, Wall St. investors do not trust the credit quality. Here is an example.

(Where the investor might by a $500,000 loan from a lender for $505,000, because they are buying the future cash flow, they may now only offer $490,000 for the same loan. They only offer $490,000 due to the credit risk. You multiply that example by a large portfolio; you can imagine the losses that have been incurred.)

Wells Fargo and Indy Mac were two of many lenders hit by this last week. One company, American Home Mortgage, was hit so hard they went out of business. AMH was not doing anything really wrong; they just got caught with the wrong business model in the middle of a rapid shift in the way the world works. They could not sell the loans they had and the hedge funds, funneling money to them for operations, cut off their source of additional funding sources.  That is why some people who were getting loans from them had to go find someone else to do their loan.

How will this continue to play out? Well it will be interesting to say the least. Remember the part about Leverage? Now, remember the hedge funds that pulled their money back from the mortgage companies? Well their investors want their money back and guess who else wants their money back? The banks who lent the hedge funds the money to do their leveraging!  Oh the drama of it all!  Soon to be playing out on a computer screen near you! (watch the stock market).

So, how does this affect us at Prudential and the rest of the real estate market?

The biggest affect for us will be in the jumbo or non-conforming loan amounts. (Non-conforming meaning loans greater than $417,000 or non- Fannie Mae/ Freddie mac loans).Guidelines and pricing changed, in the last two days, faster than my wife asking me to do the dishes after dinner. Add to this that Fannie Mae did issue new guidelines stating that, interest only loans must now be qualified at principle and interest payments.

More than likely stated income loans will be tightened also, we will just have to wait and see.

I personally am very optimistic (are you surprised?). Prudential is a great company and First Capital is positioned well for these changes… (We) have been through tough times before, (remember the S&L crisis?) we learned to adapt and charge forward… Lending will be done more similar to the way it was done in the past. Assets and income checked and guidelines will need to be met! Loans could take more time to process. This is where experience and competence will show through.

Why did I take the time to write this letter? Well for one, my son Lucas is asleep for his nap, so I had the time. The main reason is, if you chose to keep informed and want the readers digest version ( meaning short, not written on a 8th grade level ), I hope this helps. We will have to be realistic about the lender process as we move forward, but I for one believe optimism rules over pessimism any day!

Yesterday I wrote about the inherent inaccuracies of statistics derived from Multiple Listing Association (MLS) data. Sometimes, I think I’m psychic.

Now I learn that last week, RE InfoLink (REIL), the MLS serving the counties of Monterey, San Benito, San Mateo, Santa Clara, and Santa Cruz in Northern California, has adopted a rules change concerning entering sales price data into their MLS upon property closing.

REIL’s Board of Directors and NAR have approved adoption of a new REIL policy enabling buyers or sellers to withhold the sale price of a property as a condition of a transaction. By completing an “Authorization To Withhold Sale Price” form and paying a $500 fee, the listing price rather than the actual sale price will be entered in the “sale price” field at close of escrow. The listing agent will be required to enter a code in the Confidential Remarks (agent only) field indicating that the sales price was withheld.

I can certainly understand that there are circumstances under which the principals or their agents would not want this information published. Unusual circumstances might occasionally beg for withholding the actual sale price, and I have personally been involved in a transaction or two where this would have been a welcome alternative. Distress sales and sales where there is an unusually large credit from one party to the other are two examples of situations where the actual sale price is not representative of either the market or the true effective price. The problem is that, for anyone relying on MLS statistics, while the “price withheld” remark is present in the MLS text, it becomes a laborious task to visit each property description to look for this needle in the haystack. And if you are not an agent but rather a consumer who is the recipient of the Recent Sales Update postcard sent by your neighborhood specialist, you will be none the wiser.

It will be interesting to see how widespread this burying-the-truth practice becomes and what the impact will be. The good news is that you can’t hide from the County tax stamps; any market data derived from County Recorder’s records will necessarily portray the real picture.