May 28, 2008

Bottoming Out - Wall Street Journal Agrees

Hello again Neighbors,

As you know, we are using this forum to bring you "real world" updates on the local housing markets. We hope you are finding it useful. We will continue to post data from our own actual transactions - so that you can make your own informed housing decisions.

...and, guess what? For a change, the media is starting to report what we've been documenting here in this blog since March... we are bottoming out!

This just in from the Wall Street Journal (thanks WSJ!):

The Housing Crisis Is Over
May 6, 2008; Page A23

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Thanks again WSJ, nice to see some in the media are getting it!

- Jim

May 27, 2008

Property Taxes Dropping!

Hello friends of Neighborly Realty,

GREAT NEWS, and finally an answer to a question many of you have asked.

Yes, property taxes are dropping. With all of the foreclosures, bank owned property sales, short sales, and general decline in the marketplace between 25% - 65%, state / county property tax assessors are adjusting property taxes to match.

This won't impact everyone though.

Here is a direct cut and paste from a letter sent by Sacramento County to some of their property holders:



Reflecting the fact that much of the residential real estate market has been in a decline since mid-2006, Sacramento County Assessor Ken Stieger announces that the Assessor’s Office has reviewed the market values of residential properties in Sacramento County and will be reducing the assessed values for over 85,000 properties on the 2008-09 property tax roll. These decreases are often referred to as Proposition 8 reductions, reflecting the 1978 ballot proposition that authorized them.

Generally speaking, properties purchased in 2004 and later are affected. Most decreases will range between 10% and 30%.

The majority of the remaining residential properties in the county, some 300,000-plus parcels, will continue to be assessed under Proposition 13 provisions and will not be receiving notices. If a property was purchased prior to 2004, it is unlikely to receive the Prop 8 decrease in assessed value.

In the next few weeks, the Assessor’s Office will send letters to the owners of these properties, notifying them that the assessed value of their property will be reduced for the 2008-09 property tax roll. The letter will advise affected owners of their new Proposition 8 assessed value and will also include their Proposition 13 factored value for comparison. The Prop 8 assessed value will be reflected on the tax bills issued in October of 2008.

Proposition 8 value reductions are temporary. Once a property receives a Prop 8 reduction, its value must be reviewed as of January 1 each year to determine whether the current fair market value remains less than its Proposition 13 base year value plus inflationary adjustments. The Prop 13 value is typically the property’s acquisition value plus inflation factors for intervening years. The lower of these two values is the value used for property tax purposes.

Since the reduced Proposition 8 value represents the property’s current Fair Market Value, it can fluctuate from year to year without limitation, to reflect changes in the real estate market. When the real estate market recovers and the market value exceeds the Proposition 13 factored base year value, the property’s Proposition 13 value will be restored.

The anticipated decrease in assessed value for the 85,000 properties should approximate $6 billion, and will result in a revenue decrease equal to 1% of that amount, or $60 million. The lower amount of property taxes in the County will impact local schools, cities, and special districts.

Assessor Stieger also wishes to alert the public that property owners may receive solicitations from private businesses and individuals offering assistance in this process for a fee. While property owners are certainly at liberty to use these private companies, they can apply for this reduction themselves at absolutely no cost simply by writing a letter or otherwise contacting the Assessor’s Office.

Taxpayers may visit the Assessor’s web site: for more information or call the Assessor’s Proposition 8 Customer Service Line at (916) 875-0455.

That's Sacramento County.

Other counties are following suit, like Placer County for example:

Need specific info on your situation? Give me a call and we can figure it out together.

Many thanks, and Happy Memorial Day,

- Jim

May 22, 2008

Onsite: Real Estate Extravaganza, Friday May 23rd

Just an FYI to those of you who might like to talk about Real Estate services in person.

Neighborly Realty will be at the Addison Avenue Federal Credit Union tomorrow, Friday May 23rd from 11:00am - 1:30pm.

Addison Avenue has asked us to participate in their "Real Estate Extravaganza" week. They would like us to sit in their branch office and talk to their members about the local real estate markets.

If any of you are in the area, please do drop by tomorrow at:

1210 Roseville Parkway,
Suite #120
Roseville, CA
(in the "BJ's Brewery" complex)

Obviously, if you need questions answered about loans and/or re-financing, this is the place to ask!

...stay tuned for an announcement on Addison Avenue too, and their recently announced "Lender of the Year Award" - congratulations Addison, and rightly deserved!

- Jim

May 21, 2008

The Market is Turning

We posted a note here in March that said the market was turning. We provided actual data from our own offers / sales to support the ramp up in activity. At the time, the data was confirming that the $300,000 and under segment was booming.


Now the $400,000s are starting to see similar action.

A few days ago, we tried to submit an offer on a bank owned house listed at $419,000 in Roseville. We were too late. Within 6 days the home went from ACTIVE (for sale, no offers) to SOLD (escrow done!). Amazing. The sales price was $415,000.

No chance for a competing offer, no backup offers accepted. Done.

Today I was standing in a home in Orangevale with a client. The list price for this home is in the mid $200,000s. WHILE WE WERE THERE - 3 other Realtors came through with their clients. This was in the span of roughly 25 minutes. Middle of the work day (a Wednesday at 3:15pm).

I had another agent call me yesterday to ask advise. He isn't with Neighborly Realty, but he's a good guy so we helped him out.

He was going after a Short Sale. His Buyer was tired of waiting on Short Sales and/or missing the chance to even submit an offer. He was effectively "done" with this process and wanted to know how to act.

He submitted an offer for that client that was $15,000+ above list price. He was competing against 3 other offers.

The market is turning. Those who aren't seeing these trends and who are waiting for the "bottoming out" are going to miss this chance.

Keep watching this space. I will continue to post real-world experiences. Ignore the popular press. I will post the actual transaction data, and let you be the judge.

Many thanks,

- Jim

May 16, 2008

Upcoming California Legislation & Eminent Domain

Several of you have asked for advise on the upcoming California Propositions 98 & 99, and their impact on Eminent Domain.

First though, what is Eminent Domain?

That's when local, city, state, or federal government groups take private property from an individual (or family) for "public use". The state delegates eminent domain power to certain public and private companies (typically utilities) such that they can bring eminent domain actions to run telephone, power, water, or gas lines. In most countries, including the United States (under the Fifth Amendment to the Constitution) the owner of any appropriated land is entitled to reasonable compensation, usually defined as the fair market value of the property. Proceedings to take land under eminent domain are typically referred to as "condemnation" proceedings.

OK, so what is the fuss with Propositions 98 & 99?

We went out to the California Association of Realtors web site to get some details.

A tangent too.... Do you know who the 3 largest lobbyist groups in the United States are working for? A Real Estate Finance professor once pointed it out to me:

#1 is the NRA (National Rifle Association)
#2 is the NAR (National Association of Realtors)
#3 are the Oil Company lobbyists.

Politics aren't discussed here, but know that the group in the #2 position fights time and time again for private property rights. They also fight for more legislation to keep home ownership the best vehicle for building a family's financial future.

So? Their advise on this particular matter is probably pretty good.

Here's what they had to say:

Vote YES on Proposition 98 and
Vote NO on Proposition 99
on the June Ballot

Local governments are abusing eminent domain to seize homes to give to private developers. It’s a rotten deal for Home Owners. Here are some real examples of eminent domain abuse:

-In Baldwin Park, CA, the city is threatening to use eminent domain to take 400 homes and businesses so developers can build new, higher cost retail and housing.
Los Angeles Business Journal, April 7, 2008

-In Vista, CA, city officials are attempting to classify 37% of the city as “blighted,” making it easier to seize properties within that area.
San Diego Union Tribune, April 13, 2008

SOLUTION: the June Ballot
REALTORS® – Support Proposition 98 and oppose Proposition 99.

The Solution -- Proposition 98:
-Provides real protection for homeowners.
-Limits eminent domain to legitimate public use.
-Prohibits price controls on private property.

Proposition 99 is a TRICK designed to maintain the status quo. It is particularly dangerous because if both propositions pass and Proposition 99 gets more votes, it CANCELS OUT Proposition 98.

Remember, YES on 98. NO on 99.

A YES vote on both measures is a vote against Proposition 98.

Thanks to CAR for the insight,

- Jim

May 5, 2008

Be Careful Out There!

Hello Friends of Neighborly Realty,

It is with sadness that I type this update. It is also with a word of caution for our friends and clients that I type this update. Be careful who you work with in this industry.

90% of the professionals I've worked with in these transactions are just that - professionals. Diligent. Competent. Accountable. Doing the best for their clients at all times. Living up to the Code of Ethics we all subscribe too. In short, they are nearly always people I would like to do business with again.

Of course it had to happen eventually.... We've run into our first transaction with a "professional" who is anything but.

It would be illegal and unethical to manage a “black list” of agents that we wouldn’t want to do business with. Just thinking about such a thing is nearly a violation of free trade legislation!

However, I’ve run into an agent on one of our transactions who is in a bit of legal trouble himself. This person runs both a real estate brokerage and a mortgage company. This person's methods are questionable and motives unclear, with several threats of litigation towards us. I've instructed my team to pass this person along to me as the single point of contact for Neighborly Realty, if we ever get into another potential transaction.

What's really unfortunate is that this person has been in this business for DECADES.


Be careful. Watch who you work with. Ask for referrals from people you know and trust. These "transactions" are anything but - they are life altering, significant, and extraordinarily important processes to a family.

To treat them as anything but... just isn't the Neighborly Way.

- Jim

May 1, 2008

Technology & Neighborly Realty

As an ex Information Technology manager with Hewlett Packard and Agilent Technologies (and some time with IBM in San Jose), use of technology to help our clients is at the top of the Neighborly Realty business plan priority list.

As such, we've linked this blog to Technorati (blog management and publication service) and will be enabling RSS capabilities shortly.

Stay tuned.

The goal? Not to be sexy and wasteful with this technical stuff.... but use technology where it fits to better communicate with our clients, and to provide a level of service that outshines our peers.

- Jim

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