And The Story Goes...

OCTOBER 27, 2009



· SEPTEMBER EXISTING HOME SALES ROSE 9.4%

· COMMODITY PRICES CONTINUE TO HIT HISTORIC HIGHS

· CHINA BEGINS A DIVERSIFICATION OF ASSETS

· HOW TO PRICE YOUR HOME PURCHASE

By all appearances, LOCALLY, it looks like a bottom was hit in our real estate market. From our local statistics foreclosures sales have dropped substantially; although, there continues to be an increasing number in the amount of default notices.

Copper has hit a 30-year high and Cocoa has hit a 28-year high, Oil over $80 while gas has not followed suit and natural gas remains bogged down a historically low prices. Other basic commodities continue to move up toward their historic highs seen in the 70’s. Interest rates for convention 30-year bonds have moved up as Chairman Bernanke has stated the economy has improved and interest rates may move up.

With all the indications that the economy is improving, employment has not improved and forecasts are that there will be a 10% unemployment rate in the first quarter of 2010. The consumer is not spending and the main theme of getting the consumer to spend is VALUE.

VALUE is also the word when looking to purchase real estate. Frankly, value should always motivate any investment. When “FEAR” and “GREED” motivate the real estate transaction is either over valued or under valued. So, how do you evaluate the real estate in a transaction?

The evaluation is part of the statistics that are given each month; it is NEW HOMES SOLD, which still is unimpressive. Why is that so, it is cheaper, to buy than to build is the sole answer. Whenever an economy comes out of a recession there is a recovery phase. During that phase you will notice that Companies are active buying other companies. Why is that, it is cheaper to buy than build. The price of the company being acquired is a function of the stock price of that company. Acquisition companies, like Oracle, use their cash reserves and their balance sheet to purchase other related companies who are weaker, smaller; or just under-priced. So is the case in real estate.

As an example let us look at a home from what they are built of. From my last letter I referenced the cost of oil and commodity prices being a part of the construction of a home. There was a time when West Menlo Homes sold at $1000 per square foot; they since have fallen to $750 or less.

Take apart the cost of a home and break down into land and improved costs. It is not that difficult to find a tear down and use the sale price as a cost of land. You can also look at title of a recent sale and find out what the County Tax Records has for land and improvements. With the County records you will know what a 10,000 square foot lot in West Menlo Park, or a lot in wherever you are looking is worth.

With that price in you can now look at the difference between the asking price of the home you are considering and the latest comp in the area land value. Now divide the square foot of the home into the difference of list and land. What is the result? Take that number and determine what will be the costs of improvements to update or cure the ills of the property. Now you have a new price, divide it by the square foot of the property. What is the resultant? Now look at a newly built property, do the same. Now you know the comparative value. The seller’s are both vulnerable. Here is how you proceed.

Which home do you like? If it is the older home make the offer less the cost of improvements and the cure of the ills. If it is the newly built house use the older house as leverage against the seller. The seller of a newly built home is not in a strong position. The seller is usually a contractor or speculative builder. The seller has bank money invested in the property and has pressure to sell the property either due to the cost of carry and or lender pressure. The seller of the older home may be in a strong position or may not. You need to find out more about the seller. Is it an estate sale, does it need court approval. Are the owners long-term owners and why are they selling.

This is what I do for my clients before they even make an offer on a home. If they are listing a property I look at what is needed to make the home competitive and tell them how many days on the market they must look at in today’s new market place. All of what I have written about is what an appraiser looks at and the lender looks at. It is called “comparative market analysis”.

You can go one option further and that is to contact a builder and find out what is the average construction costs are for a typical size home you are considering purchasing. Find out what the contractor mark up is and then the cost of permits and architectural fees. Once you have that you can make a cost comparison on the “Cost Basis”

Sound complicated, that is what you pay a realtor for, not only to know the market; but how to evaluate the market. Just because the realtor spends money to advertise in the local papers and magazines does not mean they are cost or comparison analysts. They may be simply great sales persons!

Now on to what is causing the increase in commodity prices in a major recession. It’s all about the US$. A strong US$ created growth in the world economies. After WWII the US was the sole economy and country that was not devastated by the war. The strong currency was the US$. The world was building back and their currencies were weak. Weak currency means competitive prices on the world market for goods and services. Since WWII the US has subsidized the growth of all the world’s economies by having a strong dollar. It makes sense, does it not, to look at providing goods and services at a cheaper rate than the same goods and services provided in the US. Therefore, we saw large accumulation of dollars in a country like Japan. Japan has kept its currency weak and they accumulated US$ and provided competitive goods; sometimes at the expense of US companies. Now we have China, but in this case the US$ is weak. The currencies and countries of the world have grown up. It is now time for the US to get back its competitive edge; ergo, a weak dollar. China and many of the world economies have accumulated dollar holding is the form of US Treasury Bonds. These bonds are the countries’ reserves. Too many weak US$ coming in means they must diversify. They cannot sell the bonds they hold dominated in a weak currency of the US$ or the value of those bonds and their reserves would collapse. What decision do they make? How do they offset the loss in value due to a weak US$? The decision was made to accumulate commodities with the excess dollars and offset their reserves with Gold, Copper. These commodities when then be available for their economies. Remember this, China and the Asian Tigers are still controlled economies and subsidized by the State. Mao maybe dead and there is a Western Look to Beijing, but his creation is still there

To me this is a slam-dunk formula for high housing prices and a revival in the Real Estate market and the US economy. Excess reserves, higher construction costs and the off shore buyers come in to acquire homes in the safest government in the world; the foreign buyers did it in the last recession of 1974, they are doing it now.

This Monday I drove to San Francisco to deliver a packet for a listing we have in Portola Valley, 5070 Alpine Road, to an attorney representing a Hong Kong conglomerate of buyers. San Francisco was like a Sunday when I lived there. Parking in the Sutter parking center was readily available on the 4th floor when normally I would be required to go to 7 or 8. As I walked along Kearny and Sutter Streets, I notice parking spots available. What, parking spots available on a weekday in San Francisco? The stores along the way were snack shops and fast food stores. The clothing stores were not open or having big sales. When I returned I asked the girl at the shoeshine spot in the parking lot main floor why it was so slow. She said that it was always that way now. Stores are closing and the restaurants are losing business to the cheaper fast food outlet. That was not the case in Menlo Park and Palo Alto when I returned back from San Francisco. Like they say in Hawaii, “lucky you live Hawaii”, now it is lucky you live in the Peninsula!

From now on you will have charts and graphs to look at. The year-end is usually the best time for buyers to get “value”.

Click the link below for the charts: