We have have had a great year. Median prices for homes have risen. Loan terms have loosened. Multiple offers and over bids are selective. The economy is moving up slowly without inflation. The Federal Reserve continues to have a loose money mentality and has kept and will keep rates low. The stock market is at new highs. Employment is picking up.
So where do we go next year?
Analysts say the Double Digit Appreciation will come to an end by 2014. Borrowers are less healthy in the third quarter of 2013 as home prices have moved up and Loan to Value ratios have risen. This will stop the sharp rise we have seen in home prices as things settle down to a normal market as home ownership begins to level out and more people begin to qualify again for home ownership. We still need to come to a conclusion and decision on Fannie Mae and Freddie Mac, they are the major processors of mortgages in America.
What are the reasons for a slow down in our housing market. First is the Bubble Fears. Certain areas in our market place have had a run of over bids and multiple offers. While I do not believe we are in a bubble; in as much as, the bubble has to be universal. We do not have a over bid and multiple offer environment in certain sections and cities in the Peninsula. In fact once you move over to the East Bay or South of Los Altos the market sits loaded with inventory.
Next the low inventory may really be caused by under water homes. Homes in which the mortgage is more than the value of the home. Do we really have more vacant homes that we are aware about. Have owners simply walked away and left it to the Bank? Are there properties servicing agents/investors still have on their books because the owners care the property?
Like the recovery in stocks, real estate is an asset class that has come under extreme pressure from the 07 Crisis forward. Even with the recovery, the Government Bail Outs and low interest rates from the FED from the past present and future at least until spring 2014 many sections of our real estate market are far from the highs of the Pre- Crisis level.
The buyer market still has a long way to go when one considers that foreclosures and short sales put a time line on when a buyer can qualify. That means that we will not see from the foreclosures of 2007 until next year and most likely 2015. Then it will be a slow process of each following year a new crop of buyers will come on the market. unless there is some extra-ordinary rule changes in loan qualifications, the housing market will be in a slow process of recovery fed by returning buyers.
The signs that our market may be in for a rest is the October Existing Homes Report. It fell 3.2% nationally, but in some sections in the West they were down 7%. Parabolic rises collapse or consolidate.
From my previous Blogs, I have noted that the high End market was DEAD. Realty Trac is quoted here:
Ultra High-End Foreclosures Are Up 61% in 2013
“Overall U.S. foreclosure activity is down 23 percent through October 2013, but foreclosure activity on homes in the $5 million-plus value range is up 61 percent from the same time period in 2012, according to a RealtyTrac analysis just released this week.
The number of these ultra high-end properties with a foreclosure notice in 2013 is relatively small, but each of these high-value homes represents a much bigger potential loss for the foreclosing lender compared to a median priced home.
From Miami to Malibu, visit us online to see a slideshow and learn the details about 10 spectacular multi-million dollar foreclosure properties.”
Talking about Foreclosures, the past several weeks I have been sent 3-4 Broker Price Opinion Requests. A BPO is a precursor to a Notice of Default, which leads to foreclosure.
Were are the BPO’s centered? They are 2 in San Mateo, 2 in Menlo Park, 4 in Alameda, 6 in Oakland, 3 in Redwood City, 9 in Sunnyvale and 2 in Hayward. All in a two week period, with 3-4 to 4 a day coming in for the past several month.
Now do you think we have a bubble? I think that home prices will stall, and the market will begin to absorb the new buyers. Buyers will absorb the future short sales and foreclosures.
Continuing on this vein, Bank Of American has invited me to several Short Sale Seminars. If we are done with the crisis, why the seminars.
To sellers, be realistic. This is not a return to the past where you will see your most over priced expectation come to fruition. While home prices are higher than last year, over pricing your sale will find it languishing on the market. Once one price cut comes in the buyers smell blood and will look for others. Price your home under the market and continue to expect over bids and multiple offers from buyer’s realized value.
As I initially looked in anticipation of the underwriting in Face Book, I did not see the new buyers from the underwriting coming to buy homes. I saw the pipeline of offering that would have hit the market as the “IPO window” was now open, to give my old career slogan some use. When I was working the IPO market in my prior career, buyers were willing to take on an underwriting once they saw that the IPO market was booming. Prices in the after market were up and value could be gotten from the issuance of new company stock. Once a well publicized deal flopped, it was time to pull in one’s horn and wait. So it is the case with Face Book. the pipeline of IPO’s at the lawyers who specialize in Silicon Valley are now on hold as they await for a repair of trust. This repair of trust may take some time. This is especially the case as so many underwriting investment banks took some very large losses from the inability of the NASDAQ to report executions. “What did I buy, how much and when are you going to report it” takes me back to the old ticker tape days when executions came in at the end of the day or sometimes the next day. In this time of high technology, the days of 40 years ago are unacceptable. That means the window will remain shut until the trust can be re-assured and some risk in IPO’s can show some success, especially large capitalization IPO’s.
Successful IPO’s in real estate point to the Ultra High-End Markets of Woodside, Portola Valley, Menlo Park, Atherton and Los Altos to name a few. In ALL of these markets inventory has Sky-Rocketed.
Atherton went from 23 at the end of February to 48 as of this writing. Los Altos went from 39 at the end of February to 81!. Menlo Park with a well publicized 87% increase from 58 at the end of February to 94. Portola Valley at the end of February was 18 and as of this writing is 32. Woodside was at 43 at the end of February and today at 68.
The lone stand out was Redwood City At the end of February there were 58 homes and today there is 68 homes. The lack of of a sizable increase to match the 87% increase in Menlo is the “short sale and REO” category. There were only 5 homes in this category in Redwood City as of this post.
The “Law of Supply and Demand” came back into gear as when size increases in listings so does price come down. In Atherton alone we saw price cuts of existing properties for sale in the high end of 20%. One large estate in Woodside was put up for auction as no new buyers came form MLS or Off MLS attempts. Woodside saw 20% cuts home 150 days on the market and more. On the exclusive Moore Road 3 properties had prices cut and one taken off the market.
Redwood City was a standout for price and inventory for one reason. No bank pressure on short sales and no bank issued REO’s. Why? First we must look at the foreclosure market and the bank shadow inventory. Shadow inventory has dropped to its lowest level since 2008. Without bank inventory building up thee is no pressure on owners in default to be pressured into a short sale. But do not look at that situation to exist for long. While shadow inventory is declining the foreclosure activity has picked up. Sounds a bit confusing? Not really as foreclosures are a function of local conditions. I wrote about the foreclosure activity going east in my last post. That is an indication of the markets. The west coast had the prospect of a successful Face Book IPO and the follow up of IPO activity as the “window” was open.
What we have before us is a pick up in short sales as banks have put together trained real estate agent to handle short sales with a select agent(s) to handle their defaults. I have been selected to represent short sales for Bank of America. It is certainly an honor, on my part. The process has been very demanding. Bank of America processes their short sales on an internet platform called “Equator”. Not only must I know the system and operate within Equator, I must know the Bank of America procedures in filing a short sale and the documentation necessary to process a short sale. While many readers may think that the “BANKS” are the owners of the mortgages, this is incorrect. Banks only service the mortgages. In the case of a majority, say 80% or more, the owners are FDIC and Fannie Mae. Very few are the banks themselves or hedge funds and institutional investors. In addition to the investors who own the mortgages there is PMI, principal mortgage insurance. PMI covers the first 20% of the 1st Mortgage in case of a default. In this case the investor and the PMI must give their approval to the short sale. The delay in short sales has impacted the amount of short sales on the market in inventory. Do not expect that to last Banks will be speeding up short sales. With the speed up in short sales and the creation of a system of short sale approved agents and a system of bank short sale departments there will be the inevitable decline in “Median Home Prices” as the Law of Supply and Demand comes back into play.
Now that we see the inventory increasing where will the demand come from? The signs of a global recession are every day in the news. But with the recession are the seeds of opportunity in low or lower interest rates, which reflect into lower mortgage costs. With lower mortgage cost is the desire to refinance existing mortgages. This summer could mean a hot market in the housing sector for refinance, lower home prices bringing in buyers who do not have to fight and over bid, and investors. Investors have been the major portion of buyers in the REO and Short Sale Markets. The reason is high rent yields. As more people find themselves looking for homes in a flat real estate market, investors find that the rental market is buoyed by rental increases as demand for rental out pace supply.
Look for the market forces to correct themselves in the upcoming months. Somewhere along the time line, short sale offering will increase and those home owners who fight the system, foreclosures will be the ultimate outcome.
If you know of anyone, friend or family, in financial stress, please have them call me. There are options to foreclosure. Even in the short sale area there is the opportunity of a Loan Modification. To those who have a Freddie Mac owned loan the chance of a lower rate in a modification remains strong. they need to know their alternatives. You can help by directing them to me.
Fall is usually the 2nd best active market in real estate in our area. I say usually. There have been changes to that trend in the past. Buyers that have been forced out of the market due to bank inability to borrow, or stringent lending rules find any window of opportunity to exercise their pent up demand.
The volatility of the stock markets, either nationally or internationally , questionable security of international currencies and banks; along with a sell off in silver and gold has driven buyers to the luxury home market.
Bloomberg News, sent from my iPhone. London Luxury-Home Prices Gain as Buyers Seek Secure Assets Sept. 26 (Bloomberg) -- Luxury home prices in central London climbed the most in 11 months in September, Knight Frank LLP said, as the European sovereign debt crisis encouraged investors to buy less-risky assets. Values of houses and apartments costing an average of 3.7 million pounds ($5.7 million) rose 11.4 percent from a year earlier, the London-based real-estate broker said in a report today. On a monthly basis, prices rose at the slowest rate since October 2010 as buyers delayed purchases after the worst riots in Britain since the 1980s. “The Eurozone crisis is probably the biggest concern, primarily because people are very uncertain about what would happen if the euro broke up,” Liam Bailey, head of residential research, said by telephone. That makes assets in the U.K. attractive because they’re denominated in pounds, he said. On Sept. 20, Italy became the sixth euro-region country this year to have its credit rating downgraded. Two days later, the Stoxx Europe 600 Index slid to the lowest level since July 2009, extending a decline from this year’s high on Feb. 17. The world economy faces high “downside risks,” International Monetary Fund Managing Director Christine Lagarde said in an interview with Tom Keene on Bloomberg Television last week. Gross domestic product in the euro area will expand 1.7 percent in 2011, according to the median economist estimate in a Bloomberg survey. Last year there was growth of 1.8 percent. Russian Buyers The number of prospective buyers viewing prime central London properties increased 25 percent in the third quarter from a year earlier, according to the report. Prices are at a record, 4.5 percent higher than the market’s last peak in March 2008. The U.K.’s record-low interest rates and the pound’s weakness are making central London’s real estate more attractive to overseas buyers, Bailey said. International purchasers now account for 55 percent of luxury-home deals in the city compared with 49 percent a year ago. “Russians are rising in number at the moment,” Bailey said. “There’s a bit of uncertainty because there’s an election next year and people are looking to invest money overseas.” Buyers from Russia accounted for 6.3 percent of all purchases in the 12 months through September, followed by the United Arab Emirates with 4.7 percent and the U.S. with 3.9 percent. About 3.2 percent of sales were to French buyers, the highest of any mainland European country. Homes bought by billionaires in London cost 3,090 pounds a square foot at the end of June, a 3 percent increase from six months earlier, Savills Plc said last week. Prices in Britain’s most expensive city climbed 38 percent in the five years through December 2010, the London-based property broker said. London Riots Values rose 0.6 percent in September from a month earlier, the market’s worst performance since prices fell 0.2 percent in October 2010. At the beginning of August, arson and looting in the city’s Tottenham district sparked riots in which more than 3,000 crimes were committed in the capital alone. “In the final weeks of August and first week of September there was a slowdown in deals being made,” Bailey said. “There was a slight knock-on from the riots, which delayed a few purchases.” Knight Frank said luxury-home prices will increase by as much as 12 percent this year, maintaining a forecast the broker made last month. Values climbed about 10 percent in 2010.
In the U.S. the carry over of Spring Buying has boosted Home Prices for the fourth straight month in most major U.S. Cities. READ
I have stated that real estate and especially residential homes will find themselves to be the safe haven for investors, either domestic or foreign; as well as, just everyday folks who look at their home as their castle and security from outside chaos.
Start looking at the news that generates the concern to pull in ones horns and place assets in the safety of real estate. Not only the Blomberg article of above should convince you, let’s look at the news of the week.
European Banks Downgraded as EU fights over bailout. U.S. Facing Dangerous Threat From Euro Debt: Greenspan
Here in the Camelot; also known as, Silicon Valley, we had a Russian billionaire purchase a home for $100 million!
The article I find most interesting is in the California Association of Realtors for September, “REO Properties in Short Supply”.
In a move counter to the nation and the news reports of the nation’s real estate woes, California homes sales improved on a month to month basis and on a year to year basis. Median price homes increased slightly from December 2010 due to the steady increase in “EQUITY SALES”. This should be a new term to you. It refers to the sale of NON-DISTRESSED home sales. That means REO, bank owned properties, and Short Sales.
In our area, sale price to list price and days to sell rose slightly. This chart offer some insight to the change in the normal cycle.
What I find interesting in this chart is the low days on market for the months February to August. This to me indicates that buyers were now out of the normal cycle of buying in spring, off on vacation in the summer, back in fall and off for the year after Halloween until spring the next year.
What could be happening in rise in September may be found in this article from the California Association of Realtors, Pending Home Sales Index Post the Largest Year Over Year Sales in More That Two Years. Our normal closing has increased. Gone are the days of 7-15 day close. Today the closes are 45-60 days to close. Short sales and REO’s are even longer. With the trend of longer closing the register of a sale creates blips such as the one we see in September. Only October will tell us if this is the case.
I spoke with my brother in law this morning and he is the voice of many. “I can’t stand this up 500 down 500 in the Dow”. Investors are leaving equity funds in droves. Foreign investors are looking elsewhere to place their money. On top of it all you can’t trust the money market fund which may have short term European Bank debt as an asset that could become worthless over night. Even if the money market fund ducked the bullet, the rate of return is so low and will be for at least 2 years, per Bernanke, that one wonders WHY risk my assets.
The long process of stability in our banking and credit markets will take time, a long time. We are now seeing the public disenchantment with the solutions of Congress and Governments with the growing size of protesters in Wall Street growing to other parts of the nation. I saw a sign that sums it all up, “Save the banks, bailout Wall Street and I loose my house!’ That says it all. The next response as the wave continues as the Arab Spring unseats entrenched dictatorships, will be for Congress to return back to the legislation of the 30’s that separated banks and brokers. To Big to Fail will be a curse rather than a blessing. The SEC is now looking at the program trading. The volatility must stop, but that will not happen over night. It is your chance to look now. Short Sales will not continue to be the best place to buy homes, simply because they will become less available as the sales take out the weak hands and home prices increase and negative equity vanishes. The opportunity is there take advantage of it now.
Gary McKae, a veteran of the financial services industry, has a broad, diverse and highly successful background. His interest in investing began and culminated in over 30 years in the securities industry from portfolio management, investment analysis, office management and a Certified Investment Management Analysis from Wharton. His trading and investment pattern is to look at the developing cycles and capitalize on it using his many yers of investment experience. He has a recorded record available at request.
Department of Real Estate California #01452438
