Home Seller Alert

Both home sellers and real estate agents are hoping that the recent increase in home sales will continue, if not increase.  The improved stock market has fostered the belief that the economy has bottomed and will now improve going forward. 

We are very skeptical that the improved local real estate market will last more than a few months.  We believe the increase in sales is due primarily to rising interest rates. It caused potential home buyers sitting on the fence to act rather than risk having their buying power diminished by further rate increases.

In April, Silicon Valley shed about 5,000 jobs!  As long as job losses continue the market will weaken. Additionally, there are many home owners who bought between 2003 & 2005 with 5 year adjustable loans that are now resetting at unmanageable payment levels. They will be forced to sell. And, unfortunately, many of those owners purchased with 10% down payments and they actually owe more than their property is now worth. More foreclosures and short-sales are still ahead of us.

In spite of the recent bounce in consumer confidence and sales activity, the correction is not over. Therefore, if you plan to sell during the next 12 months now is the time.

 Jeff and Steve

Interest Rates and Buyer Demand Rise

The interest rate for 30 year fixed loans has risen about .75% during the last two weeks.  This happens regularly as banks are quick to raise rates when they receive economic data signaling a stronger economy and the potential for inflation.  In the past we have seen fixed loan rates rise as much as 1.5% in a week.  Remember as recently as 2000 fixed rates were 8.25%!

 It is also common for rising rates to fuel a burst of home sales as buyers who were sitting on the fence jump in before rates rise further.  The number of homes sold has jumped by 100% from March and April sales, and up by 500% from January and February sales in the south Peninsula market areas (Los Altos, Palo Alto, Menlo Park). 

Jeff and Steve

Getting a Loan Isn’t Difficult – But the Appraisal Sure Is

What a mess!

The Fed has established, via Fannie Mae, appraisal guidelines that are currently creating havoc for buyers and sellers of homes. It is delaying the process, costing the consumer more, driving the good appraisers out of the business. It’s also making a mockery of accuracy in areas like ours where there simply are not enough sales to satisfy the minimum number of “comparable sales” required which forces appraisers to use sales that can often be in lower-priced neighborhoods. 

A good article explaining some of the issues can be found in today’s SF Chronicle, by Kenneth Harney.

Jeff and Steve

Sam Zell & “The Donald” Call a Bottom for Residential Real Estate

Real estate legend Sam Zell believes that residential real estate is bottoming. 

He believes the supply-demand ratio is causing the bottom to be formed as low interest rates, formation of new households, and an uptick in consumer confidence have increased demand.  Zell is famous for having called tops and bottoms in the past.  At one time his company was the largest holder of commercial property in the U.S. but now he owns none. 

In a more general vane, Donald Trump agrees, having recently told the Associated Press that “real estate is a great investment right now”. 

Locally, we believe prices have a ways to fall (10-15%) before bottoming.  However, record low interest rates make this a great time to buy and hold local real estate for the long term.

Jeff and Steve

Economist Agrees – Buy Now!

In an article by James Temple in the Business Section of today’s SF Chronicle titled, “Forecaster sees woes in state, US” , Ken Rosen (chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley) is quoted as saying, “…now is a good time to buy a home for those with long-term plans to live there and a solid job, thanks to a combination of low prices, favorable interest rates…”

He continued, “I would not wait two or three years. Interest rates are going to be much higher with all the money we’re printing”

He must have read our April 6th blog!

=)

Jeff and Steve

Why Buy Now?

Articles like Friday’s San Jose Mercury News article on plunging home values will surely cause many buyers to put their plans on hold.  If they are looking to buy in one of our better areas, that could be a mistake.

 

With record low interest rates and prices back to roughly the 2004 levels, opportunities abound for courageous home buyers. The trade up market (typically $1.2m to $2.2m) has been particularly hard hit by the sudden change in lending guidelines. This is the price range where the most of the better buys exist.

 

For the past twenty years buyers have easily been able to buy first and sell later as most banks only required buyers to qualify on the new mortgage, not both – but no more.  In addition, buyers could take out 10% of their new purchase price from their existing home, via a credit line, buy the new home with 10% down, get a second loan of 10% plus a normal 80% first mortgage, then pay off the 10% second when they sold their original home – but no more.

 

Now, unless buyers are willing to sell first and move twice, the best way to trade up is the old fashioned way: by buying contingently upon the sale of their current home.

 

Agents, buyers, and sellers all have to relearn this buying technique.  Until they do, demand is low and great deals are available in the “trade up” price ranges.

 

 Jeff and Steve

Better Buy Now – Inflation Ahead!

Home buyers better not wait until inflation kicks in!  Prices of assets, loans, goods, and services are all likely to rise quickly once the economy recovers.  With nearly two trillion dollars in circulation (according to a recent Federal Reserve Economic Data graph), inflation is going to be extremely challenging for the Fed to contain.  As a result, interest rates and home values are likely to spike in the years ahead.  Now, however, rates are at 50-year lows and home prices have dropped significantly.  It’s a great opportunity!

Jeff and Steve

Got a Job?

The Conference Board released their “Employment Trends Index” yesterday and it is declining faster than at any time since the 1974 recession.  The decline suggests there will be considerable job losses for the next several months. 

 

This further supports our January forecast that local home values will decline for all of 2009.  Real estate values will reach a bottom 6-9 months after the economy bottoms.  And we do not expect the economy to bottom anytime soon. 

 

If you are contemplating selling your home, do so soon.  Or plan to wait 4-7 years to sell at today’s prices!  If you are thinking of purchasing a home, make sure you have solid advice on how to best take advantage of the current “buyers’ market”.

 

Jeff Stricker & Steve TenBroeck

Time to Establish a Real Estate Investment plan?

Low interest rates and low home prices, coupled with reduced retirement accounts, are causing many to consider a real estate investment plan.  Throw in the mistrust caused by numerous financial scandals, plus the easy-to-understand basics of rental real estate, and it looks even more attractive. 

 

It is pretty difficult for a property manager to “cook the books” when an owner reviews rents and loan expenses each month.  Additionally, the advantages of leverage in increasing one’s net worth can’t be ignored. 

 

Invest $100k in the stock market and when it doubles in value you’ll have $200k equity (timeframe? your guess is as good as mine).  Invest $100k in a $300k investment property and when it doubles you’ll have $400k of equity (600k-200k loan).  The key is to have a “break-even” or a “positive” cash flow.  You’ll then have the staying power to wait for the value to double. 

 

Over the last few decades, you had to go to Texas and other similar areas to achieve a good rental cash flow.  Now you can find those opportunities in Northern California and even here in the Bay Area!

 

This is a great time to start buying investment property, perhaps one every year or two, thereby dollar cost averaging into the eventual real estate recovery.

 

Jeff Stricker

A “Great Depression 2.0″ Update

Before you sink deeper into this depressing depression we’re in, consider these two pertinent points:

1.  If you live in SF Bay Area, be glad – be very glad!   According to an article in this morning’s SJ Mercury, 39% of the total domestic VC investments were made in the SF Bay Area region in 2008.  That was 11 Billion dollars worth, by the way.  Naturally the total dollar amount will be much smaller this year, but we will undoubtedly get the lion’s share  of VC capital again.

2.  Potential home buyers are (understandably) extremely nervous at the moment.  We hope that by offering some long-term perspective, it might ease some of that buying anxiety. 

Over the years since WWII, the housing market on the SF Peninsula has generally followed the business cycle which has ebbed and flowed in 7 to 10 year cycles.  Starting from the previous market top, the local housing cycle typically moves like this:  2 to 3 years of depreciation (down 20-30%); then 1.5 to 2 years flat; then 1.5 to 2 years of appreciation (values get back to previous high); then 3 years of appreciation (typically 25%/yr – homes in the better areas will have doubled in value from the previous high!). 

The best time to buy is during the downturn.  It’s emotionally hard to do, but a buyer has all the advantages on their side: a large selection to pick from, the ability to negotiate the best price and terms, plus good interest rates.  We have seen that when ones buys during the downturn is much less important in the long run than what one buys.  Product selection will trump timing at this point in the cycle.  A buyer should look for a home with the least number of un-remediable defects.

Is now a good time to buy?  Yes!  One makes money by buying low and selling high, right?  That means buying when others are selling and selling when others are buying.  This is clearly the time to buy.   But it will take more than money.  It will take courage.

Jeff Stricker & Steve TenBroeck