The Housing Equilibrium

Everything in life seeks equilibrium and balance. It doesn’t matter what it is... everything seeks balance. If you work too hard you will get sick and you will be forced to rest. If you don’t eat you get hungry. When the government manipulates affordability in housing markets it throws off the true market equilibrium. Fundamentally the government was attempting to create a new equilibrium where are greater percentage of the population were home owners. We now know that though well intentioned this push had severe consequences.

I have written a fair amount on this subject before. However the attached article is a compelling reminder that false supports are preventing us from finding the equilibrium. Letting the market correct will bring real stability back into the market. Yes, prices will likely be lower but the footing will be firm. False supports will continue to promote indecision in the marketplace and the reality is that the market is seeking a true equilibrium in spite of these false supports... hence the drop in sales numbers.

See the URL below:

http://money.cnn.com/2010/08/31/real_estate/federal_housing_programs.fortune/index.htm?section=money_realestate&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_realestate+%28Real+Estate%29

Desk of Zach Trailer
By Lanny Berg

The 8K Tax Credit Aftermath...

Those who patiently waited are finding a tremendous buying opportunity, A few months ago I wrote about how those who did NOT buy during the First Time Home Buyers Tax Credit might be the ones who end up benefiting the most... Well, it looks like that was an accurate assessment. The tax credit has expired and home sales are dropping significantly. The reality is that I would rather get 40K off of a 400K home than pay 400K and get an 8K tax credit. Over 2 million first time home buyers jumped in and bought new homes during this subsidized period. For those that did buy it probably wasn’t a bad decision but it demonstrates the real weakness that exists in the market and that people were focused on the wrong thing; a tax credit vs. the actual value of the housing market. Those who waited will now have less competition as there are fewer people in the market generating less demand. There is the additional benefit that they are actually benefiting from historically low interest rates. Now really is the time to buy...

By Lanny Berg
Desk of Zach Trailer

Uncertainty is a strategic advantage...

I have written many times that California is unique and amazing when it comes to real estate cycles. With interest rates fantastically low and housing prices low as well (specific to local markets) in some cases it is indeed becoming less expensive to buy than to rent. This is a pure cost analysis and is more directed at entry-level properties but non-the-less it is happening. People wonder is “now a good time to buy”? Though no one can predict what the future will bring if you have the capability would you rather be in the market to buy now or back in 2007? >Warren Buffet is famous for saying be greedy when others are fearful and be fearful when others are greedy…

Desk of Zach Trailer
by Lanny Berg

A dynamic market

For years I have explained to people that housing prices and the run-up that ensued functioned similarly to the bond market. How so? For simplicity sake lets say a historically a competitive interest rate has been in the 10% range. If rates drop to 5% this essentially doubles your purchasing power. Add in fundamentally unsound loan products, ridiculously low teaser rates, and this fueled appreciation in the housing market. A person able to afford a 200K home in 2000 could now afford a 400K+ home.

Today we have seen a price correction in some places of up to 50%. Interest rates are hovering in the 5% range, which creates a very interesting situation. 5% is historically low and most believe that the days of this rate are numbered. Knowing that 5% is historically low I did a quick calculation to see the impact of interest rates relative to housing prices.

Loan Term Rate Pmt
100K 30yr 5% $537
90k 30yr 6% $540


When interest rates rise 1%, this will offset a 10% further decline in housing prices. This 1 pt. increase is actually a 20% increase in rates.

It would be easy to make the argument that an increase in rates will cause another leg down in the market. However, in resilient markets such as the Bay Area I believe there is greater risk of interest rates affecting affordability and so long as you are planning to be here for the long term the data suggests that this is an extraordinary time to buy and have an affordable monthly payment.

As always, do your due diligence. There are a lot of great properties out there!

From the desk of Zach Trailer
by Lanny Berg

Median Prices are Rising

The headline from the article link below states "Median Price Rises in nearly 60 percent of US metropolitan areas in first quarter".

This is an exuberant headline that would lead one to believe that the macro real estate market is out of the woods and on the road to recovery. We all hope this is the case but we will only have an idea as to the true health of the national market after we have 3-4 quarters with successive gains without the Government's underlying support mechanisms in place. First time home buyers have accounted for a huge percentage of transactions spurred on by huge incentives. Also, the mortgage market has benefited from a plummeting Euro in the last month.

There are some good signs in the market but I think it is a bit early to say that the broad market is out of the woods and that we are in full recovery mode. So, how do you know whether to buy or not? It needs to make sense... what does that mean? It means that you're criteria alone will determine if it is a good time to buy. The reality is that now is a much better time to buy than 4 years ago if you are gainfully employed. Generally, your dollar goes a lot farther now than it did then...

http://www.fox59.com/business/sns-ap-us-home-stretch,0,1815580.story

From the desk of Zach Trailer

A Bit of Perspective

This is an interesting article that brings a bit of gravity back to the encouraging housing sales statics that we have seen in 2010. The crux of this article touches on the fact that a high percentage of our national wealth is tied up in the housing market. Of course, over the last 10 years this wealth was leveraged to consume. The appreciating asset of our homes over the last 10 years created an "ATM" that people could then draw from for all sorts of purchases. Though this ATM has dried up for the average person the truth that this article points out is that this has other consequences that ripple through the economy affecting construction, small business, and government employment all which contribute to the jobs engine in the United States. This is a good read that helps bring to life the ripple effect that an overall reduction of value in the real estate market has.


http://finance.yahoo.com/real-estate/article/109507/real-estates-far-reach-to-continue-to-pinch

Multiple Offers Abound

California is an amazing place: The weather, the diversity, the geography, the innovation... all of these factors make California like no other place on earth. Real Estate in California is no exception. Over the last seven years as a Realtor on the Peninsula in the Bay Area I have seen an historic ride up. What is more amazing is that as other markets have fallen spectacularly across the country, the mid-Peninsula has held-up spectacularly well. This just goes to show the resilience that Palo Alto, Menlo Park, Atherton, Woodside, Los Altos, Los Altos Hills, and Mountain View have. With Stanford and the heart of the of Silicon Valley a stones throw away these housing markets remain incredibly resilient. Multiple offers currently seem to be the norm in the heart of the Peninsula. Low interest rates, a rebound in the equities markets, and low inventories are feeding a sellers market. Weekend open homes inn the 1.3M-1.8M range have seen 50 plus groups of people through in a single day. The oldest words in real estate are location, location, location... this continues to ring true.

High Speed Rail

High Speed Rail remains an unknown in the Peninsula Real Estate market. It has the potential to impact homes and valuations along the rail corridor.

There is the possibility that property could be seized by eminent domain if the current corridor is widened. There is the possibility that the train could go underground throughout portions of the Peninsula leaving real estate generally unaffected. There is the possibility that the track will be elevated. There is the possibility that the project will be over budget and will not happen. The reality is that no one knows at this point what will happen though the public comment period may give a bit of insight into this. Regardless, this is an important issue to keep apprised of on behalf of all Peninsula real estate owners and especially those who have property abutting the current rail corridor. As more information comes to light I will continue to write on this subject.

Cash is King

In a booming market the highest bidder gets the home. In other markets it is often the cash buyer that has the advantage over all other interested parties. A buyer that is obtaining traditional financing may need 45-60 days and sometimes more in order to close escrow. From the sellers perspective during this time anything can happen with multiple contingencies available to the buyer. All of the documentation now associated with loans - appraisals, inspections, etc. provides safeguards to the buyer and lender... and these create transaction risk for the seller. The seller has to hope that nothing will derail the sale. Thus, when a buyer makes an all cash offer it is very attractive to the seller even though the offer may be less than other competing offers. In a truly free market the discount a seller is willing to accept from a cash buyer equals the risk the seller feels exists in the deal.

Long story short. Be a cash buyer if you can and still do your due diligence.

Mortgage Market off of Life Support

The Federal Government has officially stopped buying mortgage backed securities as of March 31st 2010. This government action is credited with keeping the broader housing market alive over the last year by keeping liquidity in the market and continuing to fund first time home-buyer mortgages. These purchases, stimulated by additional tax credits have accounted for up to 50% of purchases in many markets across the country and have provided key support to the broader housing market. Interest rates should be watched closely as the financial markets will determine demand for these securities and thus affect mortgage interest rates. The good news is that prices have not jumped nearly as much as people initially thought they might. Optimistically speaking... this will be a smooth transition.