Mayor McKae's Market Commentary

722 Roble

2011-10-10T11:09:00.000-07:00

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.

New Post

2011-09-05T11:56:00.001-07:00

Hi everyone,

I just updated my website and thought you might want to check it out. To visit, just click on the links below or paste the URLs into your browser.

McKae Properties Blog http://www.mckaepropertiesblog.com
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2011-02-15T11:56:00.001-08:00

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2011-02-15T11:54:00.001-08:00

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2010-06-02T13:06:00.001-07:00

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May 6, 2010 European Union

2010-05-10T10:50:00.000-07:00

Mayor McKae’s Blog
May 6, 2010
“May you live in interesting times”?

There is supposedly an old Chinese Curse, “may you live in interesting times”. I would say that certainly appears to be the case today. The motherland of democracy, Greece, has protestors against the democratic process in the streets; the Communist Party of Greece has taken over the Parthenon. Greece may be the first Sovereign Nation of Euro land to default on its debt. Portugal, Ireland, Italy, Spain and possibly the UK are looking like they are next to the “chopping block”. Gold has broken $1200 an ounce and forecasters are saying, “$5000 is the target”. Glass Steagal Act is being brought back from the dead as the political parties now bite the hand that has fed them for years, Wall Street (if we get a return to Glass Steagal watch financials drop 25%). To make that all confusing the rate of interest on U.S. Government debt has dropped! All forecasts for rates were that they were to rise. Yours truly was making that forecast too!

OK, what’s going on? First I must admit that it appears we are getting a return back to post Euro. This means that world banks had prior to the Euro; Gold, the U.S. Dollar and their local currencies were used as bank reserves. When the ECB and IMF came about, the reserves of Gold were jettisoned and the Euro Sovereign Debt was replaced along side the reserves in U.S. Government Debt. The mix I hear is 65% US Debt + 25% Euro Sovereign Debt + 10% Other Sovereign Currency Debt) That all sounds wonderful, but if one nation can keep on printing debt without any backing other than the “full faith” of the Euro or the US Dollar, is that a reserve worth?

Let me digress on this subject and take you back to the days of Teddy Roosevelt. Not really TR but his predecessor, McKinley. The US $ back then was 100% backed by gold. When Teddy went up San Juan Hill and the US became a nation to be noticed, Governments of the world were astonished that this pipsqueak country, the United States of America, financed the $50 million Spanish-American war with its own reserves. We were a nation of savers. Today we go hat in hand to those same Barbary Pirates, who the Marines made humble, “on the shores of Tripoli”, and borrow so we can live!

Enough digression, the change you are witnessing is not changing but a return back to the original status quo. The world banks are returning back to the old reserve system. Gold is back as a reserve. You saw it not too long ago when India bought the full IMF offering. You see it today as Gold vaults over $1200. U.S. Treasury bonds have rallied in price and dropped in yield. This is a great opportunity for the FED to unload their inventory of bonds. The FED has already stated that it does not need to unload all the $1 Trillion plus in debt. The FED says only half need to be sold in an orderly fashion and the balance will mature or be redeemed through re-financing. To my pleasure, my forecast for higher rates is now put off.

Europe will go into a recession; if austerity is in vogue in Spain, Italy, Ireland, Greece and Portugal; who is buying and with what? I lost track on the amount Greece gets in loans, but I do know it has an interest rate attached and the payment of the rate of interest will be paid before a pension is paid, a hospital is built, a tank is bought, a building is built and increased taxes will create a burden on businesses. Greece needs to re-invent itself. It needs to create an environment for investment and an industry to attract investments. Listen, I was a successful broker in Hawaii. I loved the view of Waikiki while I worked the market. The Aegean is a beautiful blue body of water. Reinvention, money to help transition, some sacrifice of the socialistic society and return to economic health without the chaos of the Euro being terminated.

That takes Europe out of the world trade equation for a while. What about the rest of the world? Who or what country or countries or geographic area will pick up the slack? China, the Asian Tigers, Latin America, Africa or maybe a new orientation of countries; may be it will be just a singular country. Maybe it will be a country that is known for safety, security and is the most trusted world currency. Could that be the US?

I wrote in the past that this recession and bubble burst is no different that the 1974 recession. Look to the past to predict the future. I will expect the reserves of world banks to return to US$, Gold and Sovereign debt. Frankly, I doubt if I were a Banker I would own Greek Sovereign Debt, rather, I would replace it with German Sovereign Euro debt, US Treasuries and Gold.

Investing in the US will become the new vogue. Hard Currencies will be in vogue and assets on the books will be hard assets first and debt last. Hard Assets like Gold, Real Estate, local business loans and government debt. I can tell you, I would prefer to have a loan from a local business on my books than a foreign government who uses repo’s and other sham transactions to hide its debt.

We will go back to the old fashion way of making money, “Earning it”, “Saving it”, “Investing it” and “making it productive”. China has jumped the game. China has begun to diversify its broad portfolio of trade balances. The Euro’s and US Dollars and other currencies are being circulated into the system as China buys companies and hard assets like Gold.

I don’t think that the Euro will end. It is logistically too difficult to terminate the Euro. There is no mechanism to force a country out of the Euro. The solution may be the most unpalatable of decisions, default. Default will not ruin the Euro. Greece borrowed using the Euro as a crutch and hid their finances with sham transactions. Look here, we had New York City in default in the 70’s and it did not collapse the $US. New York City came out of it, there was something called the Municipal Assistance Corporation to help NYC regain and solve their problems. All it took was money. Generated by debt, guaranteed by the US Government. We bailed out Europe once before, it was called THE MARSHALL PLAN, and IT WORKED! We did it with more debt historically than ever as a result of financing from WWII. We survived and so will Europe and the US!

If you want to see a real crisis in the World try and figure out how to untangle the complex transactions in Euros. I can imagine mountains of debt left with countries unable to service them. The results could be legal wrangling, mass personal bankruptcies and creditor losses. Then there is what to do the European Central Bank? Not an acceptable solution! All it is going to take is MONEY, LOTS OF MONEY!

Let me give you another sickening feeling in your stomach, while money is being thrown as the solution. If you’re upset about the spending to help banks and Wall Street and the new health care bill, or the great bonus to traders; get ready for the IMF bail out of Greece. The US owns 49% of the IMF and will put in some $39 billion. Yes, Mr. and Mrs. American Taxpayer you will now bailout Greece. How do you feel about that? Oh, wait on your timing using Maalox; soon it will be Portugal, Ireland, Italy and Spain. Don’t drink the full bottle all at once. The kid with the Big Ears in Washington needs some too! But wait, you may not need that full bottle. The contagion may end with Greece. If Greece is allowed to default and re-structure and survive, the rest of Europe can sit back and have a sigh of relief. Better yet, if the money allows Greece time to re-invent itself and re-structure, so much the better and the same sigh of relief. The line is in the sand and we must wait out the outcome. I think of a TV series of the 50’s, “Life with Riley”, his favorite saying was, “what a revolting development”.

With all this chaos what is happening here in our real estate market? To tell you the truth, it is GREAT! I have listings, I have buyers, the sellers are now realistic and the buyers know that the days of stealing a property are over. One of our Keller Williams agents has been rumored to have had closed $150 million in real estate transaction so far this year. Yours truly has over $21 million in deal pending. That does not look like a dead real estate market to me.

Keep looking for my tweets and short emails on daily events.

Good Buy!

Gary McKae
May 7, 2010

Goldman Sachs Indicted for Fraud

2010-04-20T14:31:00.000-07:00

Mayor McKae’s Blog
April 16, 2010

Goldman Sachs Indicted for Fraud

Just when you thought things were getting back to normal. This pops up, or was it the comment a spouse makes to another, “honey maybe we should put another $100,000 in the market”? GOD FORBID!

The next 8-10 years you will see an enactment of the 1974 to 1983 years. 1974 was then the worst recession since the Great Depression. More money was lost out in the stock and bond markets than in the Great Depression. Well it happened again.

I have written this before, but it is highly improbable you will see back-to-back 40% returns on the stock market and a similar bull market in Bonds. From a probability and statistical standpoint the chance of a 40% standard deviation in the stock market is less than 10%, it happened last year. Two years in a row very slim.

Sooner or later investors will find the returns on Money Market funds to low and the stock and bond market too risky. Private investment in Hedge Funds, are you kidding me Mr. Madoff?

Where will they go? I look at the past and I say it is real estate. The real estate market is coming to life; REIT’s are being bought by other REIT’s, median home prices are going up. Foreclosures and short sales are becoming a smaller piece of the home sale market as higher end homes are pushing up median prices. Silicon Valley is hiring and confidence is being restored in Silicon Valley.

Timing was auspicious for the SEC to announce the indictment of Goldman Sachs. The Senate is deadlocked on a finance regulation bill, Obama’s Boys are upset, banks are not lending and pay is outrageously high for Wall Street. Look at the fellow who has lost his job and has stopped looking. He reads that the average pay on Wall Street is at record highs. Are you not surprised the Tea Party is growing across the country?

Let me tell you why I think interest rates will move up. It is called the “Carry Market” among traders. Let’s take a bank-trading department. The bank management must review risk and capital against loan applications. On one hand the bank has their capital invested in Treasury Bonds and Treasury Bills. Let us say this bank has their excess capital in 10-year Treasury Bonds. 10-year Treasury Bonds most mimic mortgages. The Bank has the bonds at par, for example $1,000,000. The coupon is 3.83%, example only as this is the last quoted yield. The Bank does not put up $1,000,000. The Bank is allowed to use leverage. They put up $100,000, actually much less. But I will use this as an example. The banks borrow money from the Federal Reserve System at ¾%.
$100,000 invested
$38,300 annual interest
$6,750 interest expense ($900,000 times .75%)
$31,550 net returns per year
31.6% annual return on invested capital

Alternative is Home Buyer with 20% down 700 credit rating and 4 to 1 ratio of income to mortgage payment including property taxes. The interest rate on a jumbo 30-year mortgage is 5.9% with 1 point.

Do you think there is an incentive for the bank to lend money to the homebuyer when they replace a 31.6% return on capital? Why should they?

Prior to March 31, 2010 the bank had a field day, the FED was buying, 90% of the mortgages ended up in US Government hands. The banks acted as intermediaries and servicing agents and they received double-digit returns on their capital. Why should there be a surprise when banks announce record earnings and trader’s earn record earnings. The traders made it, not the old-line bankers.

Do you understand why the examinations on Capitol Hill are over the bank using the trading desk for their own benefit rather than providing loans to businesses and home buyers. The banks are using taxpayer money to line their pocket with leveraged trades. All they are today are Hedge Funds insured by the US Government. That is why the Finance Index has out performed all other indexes and averages. That I why the Tea Party is getting stronger as they see tax payers are lining the pockets of bank traders at the expense of tax payers.

Now, I am not a Tea Party member, but I do know history. If you go back again in time and read Teddy Roosevelt life story, you will see a similarity of the Robber Baron of the late 19th Century and TR work as a Progressive to change and stop the abuses that were going on at the time.

What stops this? The FED raises short-term rates, the Discount Rate; a rate that does not affect the Average American. It only affects banks and brokers. When this happens bond prices drop as yields move up and the bank losses money on the bonds and their cost of money increases. If the FED raises rates by ¼ of a point or .25% to 1%, what is the effect?

$100,000 invested
$38,300 interest income
$9,000 cost of money

$61,274.51 loss on value of 3.83% bonds in a market where bond yield is now 3.83% - .25% or 4.08%
-$31,974.51 loss on investment.

When that happens the game is over and the banks are now back to where they should be lending money to qualified borrowers and helping the economy grow and employing the fellow who stopped looking for a job.

From Yahoo Finance this is the rate market as it was at 4PM Friday April 16, 2010:

30 Year Fixed
Today: 5.19% Last Week: 5.23%

15 Year Fixed
Today: 4.38% Last Week: 4.48%

1 Year ARM
Today: 3.37% Last Week: 3.89%

30 Year Fixed Jumbo
Today: 5.90% Last Week: 5.95%

5/1 ARM
Today: 3.94% Last Week: 3.97%

3/1 ARM
Today: 4.33% Last Week:4.40%

Study the history books and see why I am saying interest move up and why median home prices will move up.

Gary McKae

2010-04-08T15:28:00.000-07:00

MAYOR McKAE’S BLOG

APRIL 6, 2010

My initial intention was to write you about my experiences as Mayor and Town Council Person of Woodside and how you can interact with Planning Departments when you decide to buy, remodel or build anew. What changed my mind was a visit from a Well-Known Big Bank Mortgage Representative who covers our office. He asked me to give him direction of interest rates. WOW! I thought, a Big Bank is unable to give him direction; I must get my BLOG out!

Then after I wrote the Blog, this came out and I went back to the Blog to add and update.

END OF CHEAP MORTGAGES MAY BE NEAR AS RATES LEAP, Front Page, San Jose Mercury News, Thursday, April 8, 2010

On March 31st the US Government by way of the FED, Federal Reserve System, stopped buying mortgages in the after market. The total is somewhere’s around $1.25 trillion to my recollection. That is 80% of the mortgage market. The FED has kept short-term rates at or near Zero and has no intention of moving rates up at this moment. The major complaint of the Obama Administration has been banks have not been lending to the degree the administration desired. On Good Friday we had two bombshells explode, first was the employment/unemployment numbers and the other was the direction of bond trading on the shortened day. Most other markets except bonds and futures were closed, and they were only open for a partial trading session.

As I have said or written in the past, I expected rates to move up. I expect home prices to increase and right now I think you could see a substantial pop in home prices, as inventories are low. What will cause this all to happen?

With the FED buying bonds rates were kept artificially low and the spread between US Government Debt and Mortgage Debt had a lower or narrower than normal relationship. In addition to the spread difference banks were unwilling to lend until they knew the direction of rates and the removal of the artificial peg created by US Government buying. While there were buyers of real estate, many of them were frustrated over the terms and conditions and underwriting necessary to complete a loan. The major road block had been the terms the US Government had put on buying bonds in the after market and the terms FANNIE MAE and FREDDIE MAC put on buying the bonds. With the banks belief rates were artificially low they failed to issue loans for their portfolios to other than strong clients with long term relationships, in my opinion

The POP or Bombshells we had on Good Friday was better than expected employment numbers added to continuing good numbers on the economic recovery. A recovery that appears to be without inflation to make things even better! The US Dollar rallied and interest rates went up. When trading began on Monday morning 30-year treasuries touched 5%, and 10-year US Treasuries hit 4%!

The Dollar continued its rally as Greece remained a question and the Euro remained under selling pressure.

I asked him where are conventional 30-years mortgages, and Jumbo’s at? 5.25% and 5.75% he said. Gone are the days of 4.75% where I advised all of you to load up on! But, he said, I don’t know how long they will last, that’s why I am here. Where do you think the rates will go? I said, 6.5% on jumbo’s and the floodgates of loan availability will open. His next comment was what about housing prices? My next comment was a move back to my Bull Whip Economics, A big POP in prices I said.

Why 6.5%, how did I come up with that number? That is simple, the mortgage rates at the time prior to the FED Mortgage Buying Program was 6%! It is reasonable to assume mortgage rates will move up to that level. I gave another ½% for the printing presses and U.S. government spending. Frankly, I expect we will see 7% within a year and a half.

What else makes me believe that mortgage rates will move to 6.5%? It has to do with the spread relationship between 30-year US Treasuries and Mortgages. If you look at conventional and jumbo loans at 5.25% and 5.75% and the 30-year trading at a 5% yield the spread is too narrow. There should be at least a 100 basis point (1%) spread.

On the floodgates opening, it is my opinion that the spread between cost of funds, short term interest rates and long term mortgages will open up to give bankers the spread that guarantees them a profit and their ability to manage their portfolio of loans by maturity.

My next call was to check with a well-known architect who works with builders over his outlook for the market and his workload. I have many clients looking to build but they are waiting, he said. Waiting for what, I said, a signal. I guess so, he said, but based upon the inventory out there, I expect a POP in prices as they all scramble for homes to buy, blow down and build new. What about those that are in the planning stage, how are they doing. Looking for financing, he said.

To me, that all ads up to the Bull Whip hitting the backside of home prices. Why the Bull Whip? It is all about money and availability of credit. Liquidity moves prices. When you have a lack of liquidity prices goes down. The availability of liquidity prices go up. Banks create liquidity. The FED creates liquidity to the Banks. Value is all in the eyes of the beholder. If cash is available to buy value is there. If cash is not available value goes down to the level of available liquidity. Do you remember the Law of Supply and Demand from Economics 101?

Again I tell you get out and buy today! If you have great credit and can get loan commitments you are in the drivers seat. You can call your prices. Don’t wait until the bell rings; the door of opportunity is not going to expand to you and all the others who decide to buy. It always happens, one day 3 people call for the same house and a bidding war ensues. It doesn’t matter how long it has been on the market. I recently spoke to a manager of another office who told me about that situation of there agents in his office putting offers in on a property in Portola Valley which was on the market for 6 months and then POP, the Bull Whip hit and it became a bidding war.

The final comment I need to add is a comment from CNBC. Just as I finished my commentary, the “bing” rang on my IPhone and CNBC announced that, “Most Americans Say Now Is the Time to Buy a House: Poll”. The article goes on to say that nearly two-thirds of Americans think the time is right to buy a house, with a majority believing prices will be the same of higher over the next year. The poll comes from a survey released by Fannie Mae today, Tuesday, April 6, 2010. I will be emailing the link to you later today.

See the attachment for more on Where Rates Are Heading.

Good Buy! Gary McKae

Market Matters Beyond the Headlines

2010-04-08T15:25:00.000-07:00

Mayor McKae’s Blog March 19, 2010

Subject: Market Matters Beyond the Headlines: Nabbing bargain basement about to end?

I have attached an article from the Wall Street Journal specially formatted for consumers. You are welcome to print it, share it via email or post it on your social websites.

At the end of this month the Federal Reserve will stop buying mortgages in the after market. Many analysts predict a rise in interest rates by year end.

MAKING SENSE OF THE STORY FOR CONSUMERS

Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers. With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.

The federal tax credit for home buyers also is scheduled to end April 30. The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers. In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to California Association of Realtors otherwise to be known as C Association of Realtors 2009 Survey of California Home Buyers.

Rising interest rates will have an effect on home buyers. For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment. If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.

By JAMES R. HAGERTY

Is it time to rush out and buy a house before mortgage rates go up?

As the Federal Reserve winds down its intervention in the mortgage market, rates on home loans are generally expected to rise at least modestly during the rest of this year from today's unusually low levels. Some analysts believe mortgage rates will jump to around 6% by year end from 5% in recent weeks, while others see only a slight increase.

Meanwhile, federal tax credits available for some home buyers are due to expire at the end of April, adding to the sense of urgency many shoppers feel.

"I'd hate to miss out on really low [mortgage] rates" or the tax credit, says Jennifer Hale, a veterinarian who is looking for a new home near Minneapolis with her fiancé, Lawrence Nystrom.

If rates do go up sharply, that will have a big effect on home buyers. Richard Redmond, a mortgage adviser at All California Mortgage in Larkspur, Calif., offers the example of a couple with combined pretax income of $100,000 a year and debt obligations (excluding mortgage) of $500 a month. At a 5% mortgage rate, he figures, the couple could qualify for a loan big enough to buy a $590,000 house, assuming a 20% down payment. At 6%, that would fall to $540,000.

Since late 2008, 30-year fixed-rate mortgages have been available for people with strong credit records at around 5%, near the lowest levels since the 1950s, thanks to the Federal Reserve's heavy purchases of mortgage securities. At the end of March, the Fed is due to stop buying the securities. Most mortgage analysts think the immediate effect of the Fed's withdrawal will be modest.

More Weekend Investor

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Getting Going: The Home-Credit Derby Has Its Price

Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York, estimates that the Fed move will add a maximum of about 0.25 percentage point to mortgage rates. "There is a lot of private money on the sidelines," waiting to buy mortgage securities once the Fed stops gobbling most of them up, Ms. Goodman says. She points to banks, money managers and foreign investors.

What happens to interest rates over the rest of this year depends on many factors that are hard to predict, including the strength of the economy, Fed policies and foreign investors' willingness to buy U.S. debt.

Projections vary widely. At the lower end of the scale, analysts at Credit Suisse and FTN Financial Capital Markets forecast that mortgage rates will be in a range of roughly 5% to 5.25% at the end of 2010. Moody's Economy.com projects about 5.7%, and Barclays Capital 6%. Barclays cites a general rise in interest rates propelled by heavy government borrowing and a strengthening economy as the main factors.

John W. Anderson, a broker at Twin Oaks Realty of Crystal, Minn., who is helping Ms. Hale and Mr. Nystrom search for a house, says the tax credit and fear of higher interest rates are motivating buyers "to move a little faster." But he cautions against moving too fast because of the risk of overpaying or ending up with a home you don't really like. "Getting the right home is the No. 1 thing," he says.

Today's Market Looking A Lot Like '75

2010-03-01T12:51:00.000-08:00

January 31, 2010 Commentary

New Homes Sales fell 7.6% in December and median home prices increased 5.2% (What are the figures hiding?)
Existing Homes sales sink the month after the federal tax credit was slated to expire
Existing year over year sales up 15%
Obama and Crew under pressure
Bernanke approved
FED to stop buying bonds
January a loser month for the stock market, what is the forecast?
More sales off MLS in Silicon Valley?

When I look at 2010 I recall my forecast from 2009. I saw that merger and acquisition activity would be high, I saw that major corporations would see that it was cheaper to buy than to build. I saw that commodity prices would stop their upward move as buyers of commodities for a store of value would revaluate their position as the US$ gain in strength. I also saw that real estate would become the new store of value and the US$ would begin a move bank into confidence.

Let’s look at the present situation. President Obama’s honeymoon is over. He does not walk on water and neither do the “super majority” democrats elected on Obama’s coat tails. The economy has not turned around on a dime and “change you can believe in” has become the SOS, not to be confused with save our souls or save our ship, of prior political campaigns. The plus is that we have stopped an economic melt down and the negative is the banks are doing the business that created the nightmare we watched occur.

What does that all mean for us who are looking to buy or sell real estate? I think it is very positive. Of course you may think he is a sales man. He makes money whether we buy or sell. That is not my objective. I don’t want you to sell or buy unless there is value in your action or you are achieving goals you established. What I see is that we are returning back to the market after the recession of 1974.

If you look back to 1975 and the aftermath of the greatest bear market since the great depression we had a complete dissatisfaction of investors in the stock market and the bond market. It did not matter back then where you invested, you lost money. Gold soared, inflation soared and the economy was stagnant, it was called stagflation. Today we are somewhere at the beginning of 1975-76. Unemployment is still high, 10% or more, economic growth is slowly coming around, banks are trying to re-build their balance sheets and REO’s abound!

But today things are a bit worse. The banks are evil! Davos has told the banks regulation is around the corner. Populism and Progressivism are in vogue and those who are “flower children of the 60’s say “whoopee”.

Now with all this negative commentary, is there a light at the end of the tunnel to copy a Nixon’s comment on Vietnam?

I think of it like Buffet, the sage of Omaha. Warren is no different than my colleagues from the trading floor on the Chicago Commodity Exchanges. They said when prices collapse and the blood on the floor reaches the top of your boot tops, look to buy! Well we don’t have any blood to our boot tops, but if you listen to the media you swear it is there.

Let me give you some interesting observations. Inventory in our area are at lows in the prime areas of Woodside, Menlo Park, Atherton, Portola Valley and select sections of Redwood City. Do you know that in Emerald Hills there were 42 home sales in the last 180 days? Do you know that with in the last 30 days buyers of homes in Atherton in the multi-million dollar range went directly to builders and contractor to buy homes that will never show in the statistics of the MLS? I have three situations where this has occurred in the plus $10 million range. I had one contractor tell me that he had a woman come to him and said she wanted to buy the partially completed house. He said not for sale. She wrote him a check for $14 million on the pot and said, now will you sell and complete the house? He sold the house. Do you know that contractors and investors are looking actively for prime properties in Menlo Park (Allied Arts especially), Portola Valley, Woodside and Atherton with the view of knocking down and building 9-18 months from today? Do you know that venture capital pools in recent months have had a number of “blind pool real estate funds” presented to venture fund investors. Do you know that real estate brokers and agents are constantly being called with requests for listings before they go on MLS?

This does not sound like the doom and gloom of the media. But of course, the media needs to sell doom and gloom. How else would they exist? Would you buy a paper that said all is well, the sun is out the days are pleasant, it is Hawaiian weather in our economic and daily lives? Of course not!

Let’s look at reality. Interest rates are rising if you have not noticed. The FED, that is Mr. Bernanke’s organization, has stated they will keep near term interest rates at or near to zero. Surprise is we have the first dissention in the FED vote. The recent bond offering on 10 year bonds and greater has seen less interest and rates have risen. This is very good. That means the yield curve in rising and banks love that. Why do banks love that? Because, my dear friends, banks borrow near and lend long. If rates are near zero near term and they can lend long term they make the spread. Of course if they continue their proprietary trading, unless President Obama stops them. Banks will look at the reserves they have and make a decision on weather it is within their risk reward criteria to lend long term. If long term rates are at long term historic lows and monetary expansion indicates inflation they will not lend. If they see economic growth and a spread between long term rates and the inflation rate as a positive spread they will lend. So what does that mean for real estate? It means prices move up and or at worst, stabilize and mortgage rate increase. The only reason long term rates have not increased due to the heavy US borrowing is simply that the FED had been buying bond in the long term market. As of March 31, 2010 that ends. INTEREST RATES WLL GO UP!

When we reach December 31.2010 we will see higher interest rates on mortgages, we will see an active real estate market and we will see mortgages back to the sensibility of the 70’s and 80’s where it will be 20-25% down 4 to one income to mortgage payment ratios.

We are in an interesting market. Homes in Silicon Valley have an inherent price stability based upon our strong economic base and our strong employment base. We are not in the rust belt; we are not dependent on Wall Street and The Belt Way. We have ingenuity, innovation and a highly educated work force. In addition we still have an excellent educational system of public and private schools. Don’t SELL SILICON VALLEY SHORT!!!

See you in two weeks. Gary

GUNG HAY FAT CHOY

2010-01-12T12:42:00.000-08:00

GUNG HAY FAT CHOY
HAOLE MKA HIKI HO

It has been over 26 years since I left Hawaii to work the “mainland” as we Hawaiians refer to this part of America, so forgive me if my spelling is incorrect. It says, Happy New Year!

2009 IN REVIEW

This being December 31, 2009, I will spend this letter reviewing the past year per my letters and give you a forecast of the new decade of 2010.

December 30, 2008 I stated that the banks were holding onto their “bail out” funds from the Federal Reserve programs. That has remained to be the case throughout 2009. That lack or reluctance of banks to lend from the reserves created by the Federal Reserve ‘ investment in banks or from the TARP program has remained. I stated then that banks had “free” money at 0% and they would invest at 3% and make the spread to repair their balance sheets and take no risk in providing loans to the American Economy. That has been the case as the major “too big to fail” banks have repaid the investment of the FED. The key to these reserves and their ability to finance the expansion will be dealt with in 2010 forecast forward.

January 10, 20009 I wrote,
• “About a month ago I wrote you on the interest rate situation, TBills and Tbonds, mortgage rates and other related items. Today we have seen much of what I stated begin to see fruit. Interest rates have risen on Tbills and Tbonds. On December 18, 2008 the 30-year TBonds hit a low yield of 2.546% return, on January 6, 2009 the yield rose to 3.06%. Mortgage rates declined and money became available for mortgages.”….
• “2009 and where do we go? The first thing to remember is that money in circulation is inflationary. Sooner or later the money from TARP and the Bailouts will be taken off the balance sheets in the form of Tbills and Tbonds and go into the economic system. When it does it will cause prices to rise. If you haven’t notices, the price of gas is now up 10-15 cents a gallon and oil is up over $10 a barrel.”

On February 12, I wrote that I expected growth to come from “Platform” companies. I was wrong in that point. Growth has come from economizing of companies. Economy has come from lay offs and cutting on expenses. In reality there has been no growth but a rebound in earnings due to cutting of costs. That has not bided well for the American Worker.

The key to 2009 and our rebound is found in the April 4th letter. Confidence and a return of the acceptance of “risk” sums it all up. Homes sold quickly ion March and April after almost nothing from the prior 6 months.

By Mid-Year (June/July) not only were homes selling in our area, they were closing escrow. The fear I had in late spring was that all the offers that took the homes to pending would have closing problems as new underwriting terms were instituted. Buyers in Woodside, Palo Alto, Portola Valley and Menlo Park had money and good credit. The only slow down was in the time it took to close a transaction, 30 to 45 days were now the norm.

Fall 2009 brought about an 11% jump in homes sales, an increase of 7.2% in existing homes sales and the first time in 5 years that home sales increased 4 months in a row. Inventories began to decline, but unemployment in Silicon Valley continued to rise.

As leaves began to fall and pumpkins began to have smiles on their toothy or tooth-less faces homes sales continued to rise; but also so had commodity prices. The US$ was falling and offshore investors were looking for hedges for their dollar reserves and gold and commodities became a store of value. With that came the realization that the offshore investor was now becoming a noticeable factor in Silicon Valley as realtors were giving tours to visiting Asian Buyers.

While everyone planned for Thanksgiving the disparity between new homes sales and existing home sales became evident. The prices to build new homes had escalated due to the rise in commodity prices and existing homes were selling for less than construction cost to replace them.

As Santa approached and retailers looked to keep their stores open another year, housing starts continued to fall and inventories of homes for sale declined.

In summary, 2009 was not a bad year. The inventory of homes that all feared would cause a collapse in housing and a new depression did not occur. Sellers became more confident of the future and pulled homes from the market when the price did not confirm to what they felt their home was worth. Buyers on the other hand had confidence and the return to normal was beginning to occur. Existing homebuyers remodeled and obtained financing at historically low rates with substantial down payments. The buyer of the multi-million dollar property now came up with enough of a down payment to qualify and obtain a low interest small mortgage. A major change from the past, but in reality a return to way things were done in the not too distant past. Interest rates remained low and slowly more mortgages were available from numerous sources other than “too big to fail” banks.

2010 FORECAST

The key to 2010 is, or was, the key to 2009, THE RETURN OF RISK ACCEPTANCE.
We all became complacent with the various investments available prior to the fall of Lehman Brothers. If it had “insured” we invested. Money Market funds were well proven and many failed to consider the downside as ever a possibility. It had the makings of a fall. Fall it did and the repercussion was the lack of faith in anything other than U.S. Government Bonds, ergo, 0% on U.S. Treasury Bills. 2009 brought faith back into the investor mentality. Investors are need in a capitalistic system in order for the system to grow. Without investors it is a barren wilderness. Individual Investors can only go so far until the need of Institutional Investors are required. To understand Institutional Investors you must understand the “Prudent Man Principal”. Institutional Investors are fiduciaries. They are legally liable for the lost of funds placed in their care through the failure to follow the “Prudent Man Principal”. Prudence was waiting to repair one’s own house then waiting to determine if the system would survive. So it has, we did not fall and the system survived.

What justifies that comment, mergers and acquisitions are the answer. This will be one source of growth in 2010. Corporations that held large amounts of cash or had pristine credit ratings began to buy. With the purchase of companies, shareholders’ were liquefied. That liquidity will come back into the capitalistic system. It will come back in equity or debt, but come back it will. Whether the investor puts the money in a savings account or directly into the system the funds go back into the economy.

Where else will money come from to expand our growth? The “too big to fail banks” will be a major source. For most of 2009 the cry heard from economist was that bank reserves created by Tax Payer money was not flowing back into the economy. That is easy to understand. For all that one knows and hates about banks and bankers, they do know lending and interest rates and risk. They don’t know squat about running an investment bank or a trading operation, but they do know interest rates and risk of return of capital. With “insured” and “guaranteed” now only in the hands of the U. S. Government, banks can make sensible decisions on lending money. Here I go by my dear departed Father’s comments to me as a very young boy, “use your common sense”. Would a bank lend money long term at the historically lowest rate to waiting long term to regain it when inflation through the debasement of our currency through deficit funding was evident? Stupid, a fiduciary mistake and it could put them not only out of a job but next to Madoff making license plates.

I expect that interest rates will increase from 2010 forward. I expect a slow growth in lending from banks as they balance foreclosures, REO’s and Short Sales as they pray commercial loans remain balanced in their portfolios. I expect “median home prices” to increase. The increase will not come from increase values of homes, but from the sale of high-end homes; where to fore, the median home prices were composed of foreclosures, REO’s and Short Sales. I expect investors to begin to look at existing homes to buy at a discount, remodel and flip. I expect the new group of venture funds to be blind pool real estate funds composed of local (U.S.) investors and offshore investors. I expect offshore investors to continue to move their assets into the United States in the form of real estate investments. I expect that it will take a long time for the Dow Jones, S&P and NASDQ to regain their old highs for many years, 10 or more. I expect a picket fence of stock market indices, up and down, to frustrate inventors and that will drive them to real estate as a store of value. I expect the United States to dominate Technology and Innovation and that dominance will continue to draw students to the United States for education and training to help their countries and eventually lead them to relocate to the U.S.

The greatest fear I have is what I fear we may have in the next few years, STAGFLATION! That will be a return to Jimmy Carter and a stagnate economy with inflation. It was great for real estate and it was great for small growth companies and their development, but it was horrible for the U.S. economy. While I didn’t vote for the Kid with the Big Ears, I truly hope he can provide to the U.S. what I and those of my generation felt Jack Kennedy was going to provide. Good Luck Barry, do your best and that is all that you can hope for, with a little luck from above.

Happy New Year to All, and to All a Good Night.

POP!

Cindy come sit next to me by the fire while we watch the Ball Fall in Times Square.

Gold Sweet Gold

2010-01-12T12:40:00.000-08:00

Gary’s Market Commentary

• Unemployment unexpectedly drop
• Commodity prices break led by Gold
• Dollar rallies
• What is the real value of a dollar
• Who has all the money and where will growth come from
• Results for November: new listings declining, inventory declining, closed sales declining, days on the market increasing.

The decline in unemployment to 10% was a complete surprise. It put the US$ in a turn around and gold and commodities in a sell of. Of course it was not unexpected as many analyst were calling for a halt in the decline in the US$ and a break in commodity prices especially that of gold. As we come to the end of the year, hedge funds, traders and investors will want to lock in their gains. Clear the decks take profits and lets take home our 20% of the profits, say the Hedge Fund Managers. It will be a big payday for the hedge fund industry. Of course, none of that will accrue to poor Mr., Mrs. and Miss America as they wonder: will they lose their home, keep their job or find a new one.

The rally in the US$ is good for our real estate market. As many wonder about the inventory of foreclosed homes and the potential for a commercial real estate bust; having buyers over seas with US$ to invest is a good omen.

As I stated in my past letters gold and commodities had nothing to do with supply and demand rather it had to do with the store of value. The US$ is basically a worthless security. It represents the “full faith and credit” of the United States of America. There is no Gold backing, no Silver backing; just paper that measures your labor. I recall the term a “fiat” currency from Economics in college. It is a transfer from your hard work and a measurement that allows you to buy something of hard value; like a home, a piece of jewelry, a car, commodities like gold and silver or a security that provides you a return of investment measured in income of equity growth, and goods and services.

Prior to August 15, 1971 the dollar was backed by gold or at least partially. The convertibility of US$ to Gold was in the hands of governments. Then on that date Richard M. Nixon ended the convertibility. The stock market ended its bull cycle in November 1972 and declined to a low and loss not seen since the Great Depression. Inflation soared, commodities soared, gold eventually stopped somewhere around $800 an oz.; but most importantly, real estate became a “store of value”. The foreign investors relied on their local government to convert the amassed US$ into gold put their faith in gold on the open market, commodities and U.S. Real Estate.

Many of you may not realize that the US$ was a gold backed currency for years. It was the Gold backing that helped move the U.S. out of the Great Depression. Yes, the U.S. Government spent billions to get us out and up and it was not until WWII that we really spent enough to get out. Did you know it was not inflationary? The spending from the time of FDR’s election until the end of WWII was financed with Gold at Fort Knox. All the dollars that were created and in circulation were Gold backed. Gold was $20.67 for years until FDR discovered that all he had to do is revalue Gold to $35 per oz. and our currency in circulation could expand by 69%! In fact FDR would joke after taking his breakfast and with cigarette and coffee decide whether to increase Gold another dollar or two.

So where are we today; and is it any different? Not really and yes it is different.

Not really is that the expansion of the US$ during the 60’s was from the Great Society of LBJ and the Viet Nam War. The expansion and deficit funding along with an imbalance in trade created another deficit, a trade deficit. Nations which began to accumulate US$ from their trade imbalance cashed the dollars in for Gold. There was not enough Gold in Fort Knox to cover the US$ in float, so Nixon ended the exchangeability. Too many dollars chasing too little goods resulted in inflation. The U.S. could have funded the Great Society and Viet Nam if there was a positive trade balance in favor of the United States! There was not a favorable balance and inflation was created when convertibility ended. What happened next was that “smart Money” realized that even hard assets, as in Gold and Silver, could become over priced and the next hard asset was Real Estate. What is the key to buying Real Estate? It is LOCATION, LOCATION, and LOCATION. Where is the safest most secure most equal place in the world to live? IT is the United States. So where is LOCATION, LOCATION, LOCATION located? It was then the United States. San Francisco, New York, Los Angeles, Honolulu took off, and then farmland took off as wheat, corn and soybean prices escalated.

What the politicians who created the imbalances missed back in the 60’s and 70’s was that the U.S. was no longer the cheapest and most competitive source of production in the world. The U.S. was losing the competitive edge. The Baby Boomers wanted it now and did not want Dad’s Cadillac, they wanted a BMW, a Mercedes, and Brooks Brothers was passé. The inheritance of the Baby Boom Generation from the Depression Generation’s frugality was spend, spend, “been there, seen that, got that”. A strong dollar and a change in spending attitude by cheap goods overseas was a part of the increasing imbalance of trade.

Today all the ills of the past are coming home. The imbalance of trade, deficit spending, lack of government regulation has created a weaker dollar. The crisis of September 2008, the failure of Lehman Brothers, the breaking of the “buck” by a Money Market Fund created a crisis of faith.

Looking back, where did the excess US$ go in the past and today? They went into Gold, commodities, and real estate. Who owns all those excess US$? China reportedly holds US$2.7 trillion. What backs the Yuan? It is the same thing that backed the U.S.$, competitive and cheap productivity and products. What was the first location the newly rich in China placed their bounty? Hong Kong was the first LOCATION. Today it is said that Hong Kong demands $US 1000 per square foot! Where will and where are those excess US$ looking now? The same place they went in the past, San Francisco, Los Angeles and New York City.

I believe that waiting to buy real estate will be a regret many look back on and regret their failure to act. The US$ you hold is worth only what it can buy. The yield on US Treasuries are lest than the historic inflation rate, the stock market is up over 60%, Gold is up over 50%. So where is the historic store of value that has not risen? You know the answer it is REAL ESTATE. The US Government is subsidizing the purchase of real estate; interest rates on mortgage have never been lower. Waiting will be your error.

The November report on Atherton, Menlo Park, Palo Alto, Portola Valley and Woodside show a decline in inventor, sales and new listings. Sooner or later you will see a “POP” in prices brought on by a “POP” in demand. We, Jim, Craig and I are waiting to help and negotiate for you now. Call us today and arrange a viewing and tour!

Gary's Market Commentary

2009-12-08T13:49:00.000-08:00

November 18, 2009

• UNEXPECTED DROP IN HOUSING STARTS, NOT FROM THIS LETTER!
• MIXED MESSAGES ON HOUSING
• US$ CONTINUES TO BE WEAK, CHINA REFUSES TO RE-EVALUATE THE ASIAN TIGERS ALL APPEAL FOR STRONGER US$
• $ FOR CAUKERS NEXT?
• % RATES UP BEFORE THE ELECTION IN 2009 OR 2012?
• INVENTORY DECLINING, PENDINGS DECLINING, SALES DECLINING, CANCELLED/EXPIREDS/WITHDRAWNS REMAIN UNCHANGED

Gold continues to move higher as it stands at $1144.60 per troy ounce today. India has purchased 200 metric tons for their reserves and other Asian Tigers have informed the International Monetary Fund they plan to purchase at present and future auctions. Cotton has more than doubled from $38.71 to $72.55. Copper is higher up over 7% for the week at 313.35, which is from a 52 week low of 125.00. Finally, the other builder need, Lumber is at 233.90 from the 52 week low of 137.90. Of course, let’s not forget Crude Oil at 80.33 and a 52 week low of 32.40!

I saw a paving contractor I recommended for a project in 2003. I asked if he remembered the project and the price he bid. “Sure do”, he said, “that project at $58,000 would cost about $150,000 today”. “Oil and labor benefits are the reason for the higher price”, he said.

Should housing starts be unexpectedly low when cost of construction is rising and the inventory of short sales and foreclosures and REO weigh in on the market? I don’t know where the newspaper people are getting their forecasts from, I do know common sense tells me unless builders work for no profit housing starts will be low.

That leads us to existing home sales. With the tax credit ending 2010 ( sign by April and close by June 2010), will home prices begin a slide back down, remain the same or slowly inch up? Oh Boy, where is Merlin now? Let’s try and take that apart.

With the tax credit gone will the benefit for buying lessen? That really depends on interest rates. Bernanke has said he will not raise rates. The rally we have in the stock market has been on profits by US Corporations based upon their ability to cut back, lay off rather than increase revenue. So that means we need employment to increase. The Congressmen are already looking at the November 2010 election. Congress knows that if unemployment remains high and is not declining their job is on the line. Do you want a job Mr. congressman, get employment moving. Are the Congressmen up for election intent on passing a universal medical coverage or moving on the employment issue? My common sense tells me jobs will replace health care issues. At present the expectation is that unemployment will move to 11% next quarter and then down to 10% by end of 2010. That is not going to help the Democrat “Blue” majority! The GOP, “Red”, is already aiming at employment.

Adding to the unemployment question is the Household Creation question. 2008 was the first time in years that household creation fell. Household creation was a major motivator of home buying along with employment numbers. It has since flattened with a pent up of demand of the household created in 2008 and 2009 laying to the question of how long will they rent? Many economists are optimistic on this pent up demand bursting into the housing sector. If you add the potential of employment declining, we could very well see a stronger market in 2010. The National Association of Realtors expects home prices to increase 4% in 2010 with sales hitting 5.7 million units slightly above the 2007 level.

Of course the key to this will also be interest rates. Bernanke says rates will remain the same as we have no inflation, economist look at rates increasing by the 4th quarter of next year. Other economists see flat rates for 2 more years or 2012. The “4th economists” of the national poll think the employment numbers will be declining, job creation expanding and most probable is the household creation log jam busts and renters become buyers. On the “other side economists”, the forecast is for a weaker economy, weaker dollar and increased unemployment. With all pressure on the US$, I put my money with Congressman wanting their jobs and job creation as the major focus of the remaining 2009 and into 2010. What does your common sense tell you?

Obama got the message from China, no on revaluation of the Yuan! The U.S. will only hurt the rest of the world who use the US$ as a reserve currency by keeping the US$ low or falling. This will only drive the 3rd world and maybe other allies into the China Circle. Let’s get back to basics. We can drop the price of commodity prices and control inflation at the same time we raise interest rates and strengthen the US$. Does that make sense? What I am saying is that commodity prices are rising only because they are a store of value versus owning the US$. The rises in commodity prices were and are not from supply and demand for end product use. The Chinese are supposedly buying for their stock pile. Where they, or was it to put further pressure on the US and the populace. Their citizens are subsidized to a great extent. Individual rights are not a subject for discussion China told Obama. OK, Obama back to the drawing boards. IF and that is an IF, the economy picks up production begins to increase, inventories accumulate and interest rates increase what happens to the speculator and investor who bought commodities for a hedge. The answer is they sell. Gold is ONLY a store of value. If the US$ strengthens the move is from GOLD which cost to hold to the US$, Treasury Bills and Bonds which pay interest!

So where is the new wave of stimulus that will help in job creation come from? How about a new twist to an old success story: Cash for Clunkers becomes Cash for Caulkers. One highly successful program was Cash for Clunkers. It would not have induced a boom without it! John Doerr of Silicon Valley and former President Bill Clinton have suggested Cash for Caulkers and it has one of the top things Obama is looking at per Rahm Emanuel Obama’s Chief of Staff. Doerr’s plan would cost $23 billion over 2 years and most for incentive payments of $2000-$4000 for weatherization projects. The homeowner would pay half the costs. $3 billion would be allocated to retailers and contractors to promote the program. Bill Clinton points to the Houston program that pays about $1000 to winterize a home. It worked because homes need other improvements and the cost is bore from the stimulus. Not bad thinking!

Oh yes, watch out for a correction in the stock market if this all comes out. Commodity driven companies will be liquidated, the bond market will go down and we could see another bubble burst. So go out and take some profits before the end of the year!

The key to the buyer is VALUE! Oh yes, a new chart with more information. Let me know if you want other cities added.

Market Commentary

2009-11-11T12:20:00.000-08:00

November 2, 2009

Last week I wrote about the disparity between “New Home Sales” versus “Existing Home Sales”. My commentary rationalized the disparity to the cost of construction and the escalating price of commodities due to the weakness in the US$ and the accumulation of US$ by developing nations, most notable to that being China.

This last week New Home Sales fell 3.6%, while big order ticket items such as cars, washing machines and the like increased 1%, and economists forecasted a 3% GDP growth for the 3rd quarter 2009. Add this to the thought process; “remodeling prices” are down an average of 5%-10% across the U.S. With the cost of construction being material and labor it tells me that the labor part is being discounted to accommodate for the rise in material costs. With “New Homes” sales being down, new home contractors are competing for remodeling jobs. This is a great combination for the reason for increasing existing home sales. The competition from the new homes sector could be increased competition from laid of Commercial builders. The SF Chronicle states commercial vacancy rates are now at 14% and 70 projects for new home construction remain on the drawing boards. The S&P/Case-Shiller home price index composite of 20 cities rose 1.2% in August from July 2009. The best performing areas were Minneapolis at 3.2% and San Francisco at 2.8%.

And The Story Goes...

2009-10-29T12:42:00.000-07:00

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:

"Use Your Common Sense"

2009-10-29T12:38:00.000-07:00

October 13, 2009 - SF Bay Area (Peninsula)

1)Commodity Prices Rise
2)International Economies Rebound
3)Dollar Still Weak
4)Where is the Growth Coming From

Australian is “Commodity Currency Country”. What that means is that Australia relies on commodities; such as grain, metal ore and the like to prosper. In fact; all Natural Resource Countries have had a rebound in their economies and their currency. The demand from China for raw resources has returned and the world economy has bounced back. So why has not the U.S. I think the major reason is we lost our competitiveness because we kept a strong US $. The strong $ allowed the developing nations a favorable spin against our businesses. You all know the fact about the person in Silicon Valley who was laid off and replaced with a worker in India or another developing nation, simply to save money for the parent corporation. A strong $US did that. With a weak dollar the situation will change. Sooner or later the developing country employee becomes more expensive than the domestic employee. Our goods become competitive to foreign competitor’s goods and the tide will swing and the balance of payments will become positive.

The next wave is the present wave, foreign investors and residents will look for a secure environment to raise their families and protect their newly accumulated wealth. Where else but the United States? They will use their strong currency to purchase weak currency US$ assets. Stocks are necessary a stable asset that can be bought on a discounted level, but at present real estate is a discounted US asset.

I recently attended a “Angel Venture Capital” investor forum for Keiretsu Forum in August and September. I was interested in the subject of the August Forum and the venture capital investment Keiretsu would introduce to their members. The August forum was in San Francisco and dealt with depressed real estate. It was STANDING ROOM ONLY! I am not talking about small investors. I am talking about institutional investors and investors with a minimum net worth of $5 million net of home. In fact, a venture capital investor will take 20 or more positions on the basis of not all working. With a minimum of $1 million per investment we are talking about investors with $20 million of speculative money to invest and that speculative money is roughly 5% of their net worth. What I am talking about are big time investors!

The September Forum had 5 investment 3 were real estate oriented and two were funds to purchase real estate.

This group of venture capital investors invests for a 5-year time frame. If they think real estate is the place to look, where should you be?

As the only hard asset that has not participated in the commodity boom; as gold, silver, oil and other natural resources, physiological forces not real forces have kept down real estate.

Let me explain that comment, what is asphalt’s major component? Oil is it not? What about copper prices? They have increased along with other metals. What are pipes and home wiring made of? What about the circuit boards in the electrical panels? The roofing is wood or a composite made from, oil. There is not one part of a home that is not a natural resource commodity. The trucks that bring equipment to the employees and the material; they are all natural resource driven. What country has the greatest source of natural resources? You got it, the United States. Would we purchase high priced foreign resources with low priced US $? Of course not is the logical answer.

Where do we go now? We touched upon natural resource value and the weak dollar; but who will drive our future growth?

Immigration is the answer. I have retired my designation as a certified financial analyst and investment advisor, but I still keep up to date with many of the publications. Martin Barnes wrote one of the publications that I kept in my files in 2004. It is titled “Global Demographics: An Economic and Geopolitical Time Bomb. WOW! I will attach it here or a link to it for those of you who wish to read the article in full.

http://isvr.net/usr/1024408819/CustomPages/Gobal_Time_Bomb.pdf

The basis is this, the baby boom generations of the post WW II years are retiring and moving out of the work force and are no longer the age of Conspicuous Consumption. That goes for the US, Britain, France, Germany, Japan, Russia, Australia and Italy. Only the US will have a positive growth in population. In fact, the US growth projected for 2000-50 will be # 1 at +123.7%. Where elsewhere will there be growth: Yemen +66.4%, Afghanistan +48.1%, Iran +39.1%, Iraq +34.7%, and Saudi Arabia +32.6%.

If the US is losing the greatest generation, the Baby Boomers, where will growth come from? Immigration. The projected fertility rate is 2.05 for 1995-2000 in the US; in Mexico it was 2.75, India 3.45, Egypt 3.51, Saudi Arabia 5.09, Pakistan 5.48, Nigeria 5.92 and Yemen at 7.30.

Based upon those statistics will real estate prices remain at their present levels? I must say that my father told me as a very young boy, 8 or 9, to use your common sense when I made a mistake. When we will all do the same? Sooner or later the inventory of homes will decline, sooner or later the news commentaries will talk about the escalating cost of home construction, repair and remodeling and sooner or later home values will increase. Sooner or later a solid form of lending will occur and a change from the old system will be accepted. When that all occurs home prices will increase. How far away is that? I use the venture capitalist time fame, 5 years or more. 10 years from today people will brag about buying in Woodside, Atherton, Menlo Park, Portola Valley and Palo Alto at the depressed levels of the Great Recession of 2009. Will you be one of them?

I added a new column to the statistical page below, it is “expired, cancelled and withdrawn” homes. I decided to add this page since I sent out letters to this group every 14 days. The average number is usually about 39 or more. We have dropped sharply. What does that mean? My guess is that sellers are staying pat with their listings. The seller has realized that it may talk longer to sell a home, but it will sell at or near their listing price. Sooner or later the buyer realizes that the price will not decline any further and they will make their offer.

October 13, 2009

City
Active
Pending
Pending 2
Sold
Exp/Cxl/WD

Atherton
43
5
8
0
1

Menlo Park
75
19
10
10
10

Portola Valley
28
4
4
3
3

Woodside
53
9
3
0
1

Palo Alto
103
22
33
12
9

September 24, 2009

Inventory
Pending
Pending contingencies removed
Sold

Menlo Park
85
14
12
16

Portola Valley
28
2
8
4

Woodside
54
5
1
4

Atherton
39
5
6
11

Palo Alto
114
22
28
36

September 2, 2009

City
Inventory
Pending
Pending contingencies removed
Sold

Menlo Park
72
12
11
17

Portola Valley
27
2
6
5

Woodside
52
2
1
5

Atherton
40
5
6
6

Palo Alto
93
21
28
28

July 28th report as a comparison

Cities
Active
Pending
Pending Do Not Show
Sold

Menlo Park
90
10
13
58

Portola Valley
33
5
1
6

Woodside
57
2
5
3

Atherton
37
3
10
7

Palo Alto
117
13
25
27

Has The Real Estate Market Bottomed?? Part 2

2009-10-29T12:22:00.000-07:00

SEPTEMBER 24, 2009

· Real Average hourly earnings up 4.5% over the year

· CPI, Consumer Price Index up .4% in August, unchanged July, less food and energy up .1%.

· CPI for SF, Oakland and San Jose +. 2% 12 months ended August 2009 and 0.0% for past 2 months.

· Housing prices were forth art do thee go?

· Interest rates in the crystal ball

· Local market performance

By the look of the economic reports we are still looking for the end of the tunnel. I still go by my forecast that it will take us 10 years plus before we surpass the highs of 2007-8. Inflation is lacking; irrespective of what the investment gurus tell you about Gold, precious metal, commodities and the inflationary impact of the bond-selling binge of the

US Government. The key item here is to remember that the US wants inflation. The US want risk to come back into the investor mentality. We have inflation and we have risk again and we will have low unemployment and a growing economy with increased tax receipts and healthy banks and consumers. We do not have that now, that is why the US is feeding the economy with $$$$$.

I know we hear about gold and commodities, but did anyone notice the Real Estate indexes all had dramatic move upward in the stock market? For investors real estate was just as popular as precious metals and gold.

The stock market is up over 50% for the year. Is that not confidence in the future. At least in my experience and training the stock market is the forecaster of the future. Things will be better in the future says the stock market.

It is too soon for our economy to be moving in its old fashion. The old economy was built upon poor foundations of synthetic securities and over seen by blind watch dogs. We need the consumer protection agency in force, a new-invigorated SEC and FTC. Too big to fail means just simply TOO BIG, and they should be dismantled for the betterment of our society. Risk need to return and that can be seen by a yield curve that returns back to normal with a normal range between government, corporate debt. Investors need to be buying mortgage-backed securities, not the Federal Reserve System. This will all take time. Housing prices will stabilize, move up in some areas and stop declining in others. Foreclosures will end, and a new mortgage environment will emerge from the ashes of the old.

Where will interest rates go in the future? I say they remain flat for the near term into the first quarter of 2010. The FED has agreed to expand and continue its mortgage purchase program. This will keep rates down, increase affordability of homes and diminish the inventory of homes. Mortgages will be changed and banks will no longer be sellers of real estate. It will take time. Don’t expect the turn around to be noticeable. It will slowly occur in areas that will slip by you.

Sort of like grass growing, you don’t see the blade rising, but one day you look at the grass and say to yourself, “it needs to be cut”. That is how the real estate market will treat you.

To me the indications are in the high-end market. Buyers of Atherton and Woodside do not need mortgages because they are all cash buyers. When I created the report below, I looked at the homes that sold and the homes that are pending in Atherton and Woodside. The prices were from $3 up to $12 million and a few were not quoted in the sales price but listed ion the $6 million range. The homes had been on the market beyond 6 months and some over a year. Was there price sensitivity, yes some; but not a knock down and drag out kicking and screaming to the Title and Escrow Company.

On the other hand, the areas or towns that grew in the past boom like Menlo Park and Palo Alto are not the darlings of the past, they are seeing the inventories increase, but no matching increase in pending and sold properties. None of the high end home dominates the sold and pending list.

It is a time for value hunting, a time to buy rather than build new, a time for re-modeling, a time for paying down debt and saving and a time for buying real estate as an investment NOT A SPECULATION!

Gold, precious metals and commodities do not shelter you from the cold, rain and wind. They cost money to carry. They do not give you the satisfaction of hosting friends and family for the holiday. They do not store you precious belongings and remembrances that give you comfort during times of loss, sickness and death.

It is time we all get back to basics and realize that real estate is a home not a savings account to draw upon for fun and excitement.

For the buyers out there, get in touch before the end of the year. I see many places of opportunistic buying. For the sellers, don’t rely upon the past for your sales price. Remember you can’t work and play as you did ten years ago and you can’t expect the prices of a year or two ago to be good this year.

Rental properties should be considered for those of you who do not want to take on the risk of the stock market. Values are returning and the rents to debt coverage ratios are now coming back to a point there is positive carry in California Real Estate.

To the sellers, remember if you are down sizing or moving to another area, you are getting the same deal you are giving. We called it “Same Day Substitution” in my stock market days.

Don’t let your ego; greed and fear dictate your actions. Evaluate and ask questions, like busses and elevators; there is always another one coming along.

Has The Real Estate Market Bottomed...Part 2

2009-09-27T23:12:00.000-07:00

• Real Average hourly earnings up 4.5% over the year
• CPI, Consumer Price Index up .4% in August, unchanged July, less food and energy up .1%.
• CPI for SF, Oakland and San Jose +. 2% 12 months ended August 2009 and 0.0% for past 2 months.
• Housing prices were forth art do thee go?
• Interest rates in the crystal ball
• Local market performance

By the look of the economic reports we are still looking for the end of the tunnel. I still go by my forecast that it will take us 10 years plus before we surpass the highs of 2007-8. Inflation is lacking; irrespective of what the investment gurus tell you about Gold, precious metal, commodities and the inflationary impact of the bond-selling binge of the
US Government. The key item here is to remember that the US wants inflation. The US want risk to come back into the investor mentality. We have inflation and we have risk again and we will have low unemployment and a growing economy with increased tax receipts and healthy banks and consumers. We do not have that now, that is why the US is feeding the economy with $$$$$.

I know we hear about gold and commodities, but did anyone notice the Real Estate indexes all had dramatic move upward in the stock market? For investors real estate was just as popular as precious metals and gold.

The stock market is up over 50% for the year. Is that not confidence in the future? At least in my experience and training the stock market is the forecaster of the future. Things will be better in the future says the stock market.

It is too soon for our economy to be moving in its old fashion. The old economy was built upon poor foundations of synthetic securities and over seen by blind watch dogs. We need the consumer protection agency in force, a new-invigorated SEC and FTC. Too big to fail means just simply TOO BIG, and they should be dismantled for the betterment of our society. Risk need to return and that can be seen by a yield curve that returns back to normal with a normal range between government, corporate debt. Investors need to be buying mortgage-backed securities, not the Federal Reserve System. This will all take time. Housing prices will stabilize, move up in some areas and stop declining in others. Foreclosures will end, and a new mortgage environment will emerge from the ashes of the old.

Where will interest rates go in the future? I say they remain flat for the near term into the first quarter of 2010. The FED has agreed to expand and continue its mortgage purchase program. This will keep rates down, increase affordability of homes and diminish the inventory of homes. Mortgages will be changed and banks will no longer be sellers of real estate. It will take time. Don’t expect the turn around to be noticeable. It will slowly occur in areas that will slip by you.

Sort of like grass growing, you don’t see the blade rising, but one day you look at the grass and say to yourself, “it needs to be cut”. That is how the real estate market will treat you.

To me the indications are in the high-end market. Buyers of Atherton and Woodside do not need mortgages because they are all cash buyers. When I created the report below, I looked at the homes that sold and the homes that are pending in Atherton and Woodside. The prices were from $3 up to $12 million and a few were not quoted in the sales price but listed ion the $6 million range. The homes had been on the market beyond 6 months and some over a year. Was there price sensitivity, yes some; but not a knock down and drag out kicking and screaming to the Title and Escrow Company.

On the other hand, the areas or towns that grew in the past boom like Menlo Park and Palo Alto are not the darlings of the past, they are seeing the inventories increase, but no matching increase in pending and sold properties. None of the high end home dominates the sold and pending list.

It is a time for value hunting, a time to buy rather than build new, a time for re-modeling, a time for paying down debt and saving and a time for buying real estate as an investment NOT A SPECULATION!

Gold, precious metals and commodities do not shelter you from the cold, rain and wind. They cost money to carry. They do not give you the satisfaction of hosting friends and family for the holiday. They do not store you precious belongings and remembrances that give you comfort during times of loss, sickness and death.

It is time we all get back to basics and realize that real estate is a home not a savings account to draw upon for fun and excitement.

For the buyers out there, get in touch before the end of the year. I see many places of opportunistic buying. For the sellers, don’t rely upon the past for your sales price. Remember you can’t work and play as you did ten years ago and you can’t expect the prices of a year or two ago to be good this year.

Rental properties should be considered for those of you who do not want to take on the risk of the stock market. Values are returning and the rents to debt coverage ratios are now coming back to a point there is positive carry in California Real Estate.

To the sellers, remember if you are down sizing or moving to another area, you are getting the same deal you are giving. We called it “Same Day Substitution” in my stock market days.

Don’t let your ego; greed and fear dictate your actions. Evaluate and ask questions, like busses and elevators; there is always another one coming along.

Inventory: I, Pending: P, Pending Contingencies Removed: PCR, Sold: S

Sept. 24, 2009...

Menlo Park:
I: 85...P: 14...PCR: 12...S: 16

Portola Valley:
I: 28...P: 2...PCR: 8...S: 4

Woodside:
I: 54...P: 5...PCR: 5...S: 22

Atherton:
I: 39...P: 5...PCR: 6...S: 11

Palo Alto:
I: 114...P: 22...PCR: 28...S: 36

July 28th Comparison...

Menlo Park:
I: 90...P: 10...PCR: 13...S: 58

Portola Valley:
I: 33...P: 5...PCR: 1...S:6

Woodside:
I: 57...P: 2...PCR: 5...S: 3

Atherton:
I: 37...P: 3...PCR: 10...S: 7

Palo Alto:
I: 117...P: 13...PCR: 25...S: 27

Has the Real Estate Market Bottomed?

2009-09-22T11:06:00.000-07:00

• New home sales in nation jump 11%
• Existing Home Sales increase 7.2% the 1st time in 5 years existing home sales have increased 4 months in a row!
• Silicon Valley unemployment rates edges lower at 11.8%
• Inventory of homes decline in past 30 days

It seems as if the newspapers have finally gotten the message that people started to buy homes. I was beginning to think that the only thing that could be reported was what was being franchised in the New York Times or other out of the area news organizations. We began to see the log jam of inventory bust in March and continue through until May and June. Thos sellers who were holding on since October and November 2008 finally threw in the towel and dropped their listing prices. Buyers stepped up and many of them cash buyers or at least those with great credit and substantial balance sheets.

On quarter does not make a year. Very much like the stock market where “give ups” were registered with prices dropping below intrinsic value, or book value, there is a rebound. Right now will that rebound be tempered with new selling or walk away to watch attitude.

The key element her is UNEMPOLYMENT. While I read about how the Golden State and our area will grow in population over the next 10-20 years, which does not help today. On the long term home prices will appreciate from demand. But more people are worried about home prices dropping further. I think that attitude needs to be addressed.

A home is a not something that you trade around at the local market. For some reason too many people became enamored with real estate as a wealth generator. That is certainly the case in income property and probably is a stronger case today than ever before. Too many used their home as a savings account. They drew on it like it was their stock portfolio and or a money market account. It is not! Wall Street and bankers alike convinced us that it was easy to get a HELOC with a credit card and don’t worry, we will refinance you later at a better rate. This attitude caused many over extensions in debt and over extension in housing suitability. The result is a clean out. Just like the stock market when values drop below book value other companies come in to buy the weaker and the vulnerable, so is the case in real estate. The unfortunate fact is that too many people bought into the song that really was taken. It did not matter if they were immigrants, English as a second language or middle to low class citizens; the high end and the well educated were taken too! How can you argue with a Wharton School of Business, Harvard MBA, and Stanford MBA when they tell you the statistical probability of the event in highly improbable. That only a Black Swan will cause such an event. HUH?? Black Swan? Highly improbable? What are they talking about? The average Joe relies on the educated and those in power to lead them right. They were lead wrong! Lies, unrealistic estimates, a system based upon return above all were the down fall of what has occurred. How long will it take to cure? I still go by 10 years before we return to where we were in 2007.

Will that make real estate a bad investment? It is like saying having children will be a good investment. The average child will cost the parent $250,000 per my wife and her news station. That is not an investment that is a life decision based upon giving, love and understanding. That what a home is, love, life style and sharing.

I believe you can buy at less than list and I believe that homes can be bought below appraised value. Why, because I recently helped families to so. My Partner Jim Massey and I are proud to help families in Silicon Valley find the Family Home they can raise a family in. We are proud to help those families negotiate the difficulties of financing, architects and builders.

What happened the past 30 days in our area?

Menlo Park:
Inventory: 72
Pending:12
Pending contingencies removed:11
Sold: 17

Portola Valley:
Inventory: 27
Pending:2
Pending contingencies removed:6
Sold: 5

Woodside:
Inventory: 52
Pending:2
Pending contingencies removed:1
Sold: 5

Atherton:
Inventory: 40
Pending:5
Pending contingencies removed:6
Sold: 6

Palo Alto:
Inventory: 93
Pending:21
Pending contingencies removed:28
Sold: 28

July 28th report as a comparison...

Menlo Park:
Inventory: 90
Pending:10
Pending contingencies removed:13
Sold: 58

Portola Valley:
Inventory: 33
Pending:5
Pending contingencies removed:1
Sold: 6

Woodside:
Inventory: 57
Pending:2
Pending contingencies removed:5
Sold: 3

Atherton:
Inventory: 37
Pending:3
Pending contingencies removed:10
Sold: 25

Palo Alto:
Inventory: 117
Pending:13
Pending contingencies removed:25
Sold: 27

As you can see from above we had a slow down in Menlo Park in the SOLD category, inventory has declined. Portola Valley is still slow with a slight decline in inventory, probably taking them off the market until later. Woodside is a ditto for Portola Valley. Atherton slowed down, but what was noticeable here the over $5 million kept on going. Good for the high end buyers to note that value can be gotten. Palo Alto has finally slowed down and the sales are dropping off and the inventory pulling back simply from taking off the market. The high end here is dead. Sales of over $3 million are non-existent.

The good news is that jumbo loans are improving. We had two sales that went through very quickly, les than 20 days from removal of contingencies until close of escrow. US Trust and Schwab are the players here. For those of you who are looking for trust worthy jumbo lenders we have referrals for you.

July 28, 2009

2009-07-29T09:19:00.000-07:00

• Long Island Tea Circuit
• Market Analysis& Statistics
• New Loan Requirements

One of the annual events of summer for the East Coast/NYC circuit are parties on Long Island. They are usually at a Beach Club or Country Club; and they all have one thing in common (What’s Hot in the Market). Of course the market on the Long Island Sound is Wall Street, Hedge Funds and the Hot Managers. This Saturday it was the annual Keller William Bar-B-Q. I was given the great complement from the newer agent to our group specializing in Commercial Investment Real Estate to be asked: “based upon your experience and training, what is your outlook on the economy, real estate and investments”? Boy what a big subject, my wife then said “are you sure you want to hear it?”

My Response: One of our greatest Generals was George Patten. General Patten believed he was the re-incarnation of military men going back to Sumeria, but could not determine if he was an officer then; but was certain for all the succeeding lives he was an officer. General Patten attributed his success with his tank corps in Europe to studying the battles of Caesar. Patten move so quickly through western Europe against the German’s he went beyond his supply line and was ready to cross the Rhine and take Berlin. Well what does that tell you? History is your greatest teacher. Lord Toynbee said “history repeats itself”.
The last “great recession” we had was the 1973-74 recession. The loss in value to the stock market was greater than the Great Depression as the Dow Jones Industrials declined some 55% from a hair over 1000 in 1971. What followed was a recession, unemployment of 10% and lay offs and slow down and cut backs. The exception was GM and Ford Cadillac and Lincoln Continental division ran 3 shifts. It took 10 years before we once again had steady growth and the Dow Jones went beyond its former high of 1000+.
It will take us over 10 years before the Dow and the various averages you follow to regain and exceed their former highs. The industries to follow and invest in will be “Green”, Biotech, and selective Technologies. Real Estate will stabilize in growth sectors of the US as the “rust belt” and industries de-stabilized from the reorganizations, but don’t expect a return to the growth and real estate market of the past. Value will be gotten from “estate sales”, “divorces” and “relocation”. The residential rental markets will see stable growth in rental income and amortization of principal of mortgages. The commercial area still looks foggy and needs a cleaning out. Expect regulation to return similar to the late 70’s and early 80’s, expect mergers and acquisitions to be the sole sector of growth in companies. To Big to Fail, will be the FTC battle cry as it dismantles Big Business, Banks, Financials, Insurance Companies and sues to stop mergers. Expect tax rates to increase; do not expect interest rates to escalate in the near future. The day of real estate for wealth growth will not be here for quite awhile.
Jeremy Siegel, of Wharton School of Business wrote a paper a number of years ago about the decline of growth and the future of the Western World as the “baby boom” generation mature. Baby Boomers will now be sellers of stocks, real estate and buyers of bonds as they look at retirement. The big homes for families will be sold and the available buyers will be limited. The take up in buyers will come from immigration. Immigration will come from the countries will large population increases such as the mid-east and Latin America. The “baby boomers” will live longer and probably work longer, they will have numerous careers. That means smaller homes, community life styles and inheritance will be further out for their children that it was from their parents, the frugal savers of the Depression Children. Days on the market will increase as it will take longer to sell the more expensive larger home to buy the empty nester smaller home. Don’t expect China to take over as their birth rate is below 2 and they will be importing or out sourcing labor duties to the nearer nations with higher birth rates.
My wife’s elbow in my ribs stopped me there!

This week’s statistics:
Menlo Park
Actives:90
Pending:10
Pending No Shows:13
Sold:58

Portola Valley
Actives:33
Pending:5
Pending No Show:1
Sold:6

Woodside
Actives:57
Pending:2
Pending No Show:5
Sold:3

Atherton
Actives:37
Pending:3
Pending No Show:10
Sold:7

Palo Alto
Actives:117
Pending:13
Pending No Show:25
Sold:27

All markets except Palo Alto had increases in homes sold. A home is sold when it closes escrow. A home remains pending until the contingencies are removed and then it becomes Pending Do Not Show. The active list is a new category for you to review. Every 14 days about 38 properties are either canceled or expire.

The Federal Reserve has put in more regulations for lenders to comply with in the Truth-in-lending area. Here are some items per US Trust Company Bank America.
• At application a “disclosure statement” is sent to applicant.
• If rates change 1/8% from the rate quoted in the disclosure, a new disclosure packet is sent and the applicant has 3 days to review.
• Loan Documents are drawn after 3 day waiting period and approval of loan.
• If applicant changes any of the terms and type of loan and if interest change by 1/8%, a new disclosure packet is sent and new documents written after 3 days and approval of loan.
• There is no 3 day right of recession with a new loan on a purchased property
• There is a 3 day right of recession on a refinance or Home Equity Loan.
• If you have great credit, balance sheet and income a loan could close in 15-20, increases in time line dependent on stable interest rates and no changes in the loan by the applicant.
• What should you look forward to in a loan closing? How about 45-60 days.

June 23, 2009

2009-07-10T11:25:00.000-07:00

• Market Statistics
• San Carlos is "hot"
• Palo Alto leads list is closings
• Pending's and the risk
• Are we in a bubble?
City Pending/Show Pending/Do not show Sold
Palo Alto 21 43 39
PortolaValley 4 5 0
Woodside 5 3 0
Atherton 4 10 0
Menlo Park 17 19 2
RWC +$800K 16 10 0
San Carlos 23 19 1
The past 3 weeks has seen some notable changes. The pending does not show, or those offers that removed all contingencies, have dramatically increased. We are either to have an avalanche of sold's within the next week or some offers collapsing, and home back on the market. The risk, as I see it, is FINANCING. I am hearing more comments from agents that lenders are asking for another appraisal, increase in deposit, compensating balances, and or more due diligence in closing a transaction.
What started the buying?
1. Commitment letters for financing were based upon rates of 30+ days ago when interest rates were 1% point lower. "Use it or lose it" is the short answer.
2. Pent up demand caused by the dead zone from November 2008 to March 2009. Buyers walked from the market when the financial system tottered.
3. Cash no longer placed in the stock, bond and or hedge fund market saw greater value in real estate.
I have been asked to explain why is our real estate market vibrant when the rest of the world east of 101 and north of San Francisco and south of Los Altos struggling? Cash is king, alternative investments are lacking, and technology still remains to be the driving power of our employment figures. Once the excesses of the past leveraging era are cured, the substance or firm base of our technology base holds our economy together. Let's look at Telsa versus Ford, GM and Chrysler. The former is building plants in our area and will be hiring people; whereas, the later will be closing plants and laying off people. The RUST BELT continues to erode away.
Our residents are not stock market investors, they may own stocks, but they own them from Venture Capital deals and stock options. Investing to our Valley people come in cash in banks, and treasuries, investments in VC partnerships and then the ties of success: cars, homes and education for their children. That is different from the east coast and the mid west. They are stock and bond investors and to some extent hedge funds, usually fund of funds. When the stock market tanks the mid west and east coast feel it hard and their real estate market suffers; because their economy is based on industrial production and finance.
Are we in a bubble, I don't think so. We just have a stronger and more solid economic base. When the crisis hit in November it was not based upon the same economy of the "29" Crash. People had money in banks, money market funds, and various other cash equivalents. The trust had been broken when Lehman was allowed to fail and the short term paper in Lehman failed. The dominoes began to fall and trust disappeared. Then fell the money market funds, the banks began to shutter and the commercial paper market disappeared. Investors went to the safest paper, the US Government paper. The dominoes not only fell in the US they fell all over the world; we are in a global economy.
Where are we now? Cash buyer predominate the over $2 million market. Atherton homes are beginning to close very quickly. Those sellers who had to sell are now gone; whether that be Atherton, Menlo Park, Palo Alto, Woodside and Portola Valley.
The market of under $1 million gets very hot once you drop down in list price. If I give you San Carlos as an example; the price of $500,000 to $800,000 last days once listed.
A client said to me businesses are closing in SF, the news on the economy stinks and I can't buy a home in San Carlos because I can't move fast enough. It is not the economy it is de-leveraging of the financial system and all those who relied on excessive leverage. The excesses will be eliminated and sound base of our economic system will remain. If our economy is in trouble ask yourself who is buying the IPhones in such unprecedented numbers. Or how can a band make $1 million on 99 cent downloads onto an IPhone IF are truly in a recession? Or how many Telsa's sold at $100,000+. I remember the last big recession in 1974. I bought my first Mercedes for $1000 more than a Ford Fairlane for one simple reason, I had cash.
It is unfortunate that some business will fail, that could simply be the fact that they only existed due to unsound leverage.

Use your common sense when making offers. Do not think that because you are a cash buyer you are going to steal a property. There are other cash buyers in the same situation. Some of whom will pay up to get the house they like in the neighborhood they want. If you are listing or selling a house or plan to sell a house, make reasonable expectations. This is not 2006. If you bought in 2006 and must sell, you make take a loss.

In the next several weeks we will see if pending’ do not show become sold’, or if fails occur and homes are back on the market, or if the pending’ continue. Sellers may see a greater risk by canceling an offer rather than working with buyers. My bet is they work with buyers.

Regards To All

June 10, 2009

2009-07-10T11:24:00.001-07:00

I am returning to the old form of communications. We have moved offices, the phone lines are in, but not the internet. My laptop at home has a problem accessing the Blog. This will have to do.

Big TWO WEEKS, homes went pending all over the area. Sounds like the return of the past market with those who were waiting for a bottom, or those who could not wait any longer jumping in. The big change was the price per square foot paid. Three weeks and more ago, buyers were getting big discounts for last year. Menlo Park saw the larger homes of 3000+ square feet going down below $600 per square foot. West Menlo and Allied Arts were down to the mid $700 per square foot. And then, pop went the weasel. What caused the pop and what happened?

The big POP was how quickly homes went pending. Multiple offers were not uncommon. In Palo Alto on Middlefield a home went off above list with 7 offers above and one offer below. Multiple offers were not uncommon in Menlo Park. There were over bids too!

What these homes sell at will be the big question on all buyers and their agent's minds.

What caused the run? I think two things caused the run. School ended and those parents who wanted to enroll their children in Oak Knoll and Hillview want in early. From what I have heard form listing agents, the offers were all cash. The other cause could be the jump in mortgage rates in the past two weeks. We saw rates move into the 5.5% to 6% range from the 4.5% to 5% range. If buyers had a locked in rated they jumped in once they rates increased, rather than lose the lowest rates in history.

Here is how the stats run:

Atherton 10 pending
Portola Valley 8 pending
Woodside 11 pending
Menlo Park (west of 101) 42 pending
Palo Alto 60 pending
Redwood City (over $800,000) 32 pending

All it tells me from the statistics and my experience with buyers is that we have seen the end of the wait and see group. New listings are returning to the $900 range in Menlo Park. Palo Alto is picking up along with Menlo Park. Redwood City is seeing great activity outside of the REO, Short Sale, and Foreclosure market.

We have some time to see what the FED will do on interest rates. If home sales/pending sales continue to move along with rates in mid 5's to low 6's. We may not see the FED buying bonds in the after market to drive down rates. If pending and sales slow down, the FED is a buyer and rates will come down.

Buyers have finally gotten smart about price versus rates. If you have a 4.5% loan it is cheaper than have a 5.5% loan and a lower price. Go figure it yourself. $500,000 with a 1% savings is $5000 per month, per year $60,000. Over the life over three times the original mortgage. Waiting for the bell to ring at the bottom will cost you in mortgage rates.

April 16, 2009: Market Update

2009-07-10T11:23:00.000-07:00

• Once bitten by Bears, Twice Shy of Bulls?
• FED Bond Buying piddles out the first day
• Outlook on Economy is Brightening, Poll Finds
• SURPRIZE! They made $$$$$$, more than they said they would!
• Intel says we passed the bottom
• Economist react, Housing may finally be near a bottom
• Is Silicon Valley’s housing market leveling off?
• Homes Sales and Homes Pending
• 10 Things Every Remodeling Contract Should Include.

There was a great article in Friday’s Wall Street Journal of April 10th, on the attitude of investors after a Bear Market. For all those of you, who thought shares prices only went up, SURPRIZE! , even the best Bull’s die. Welcome to the new Bear Market. Of course the big question is, have we hit a bottom? Is the rally just a Bear Market Rally and a Bull Trap? What do I do with my 401K and my savings? Back to the article, do investors shun stocks or do they flock back into the in search of reward? A study found that from 1964 to 2004 those who suffered a loss in bear markets were less likely to return quickly. Of course quickly was dependent on age and past experience. You would think that Depression Babies would shun the market, right? But would you believe it that young people with experience in the past 10 years were the most pessimistic! That pessimistic attitude would last 10 to 20 years. History tells me that. I remember the 1974 recession and the enormous losses taken by investors in that bear market. It took until 1983 for the Dow Jones Industrial to break out of the old high! That was 9 years. So this market should have the same effect, a picket fence of highs and lows and no long term trend.

What do you invest in, what did the investors of 1974 invest in? Would you be surprised if I said REAL ESTATE? See is Silicon Valley leveling off below for details. I saw the frustration of investors in 1974. From then on real estate was the chosen medium. Second homes, rentals, condos were all part of the chosen medium. Of course it all went too far as real estate was then bought with negative income, rather than positive income. The rationale was higher prices will pay off. Sooner or later those bull market beliefs all have a lesson to be learned, trees do not grow to the sky!

The FED is buying $300 billion of Treasuries over the next six months. TIPs, or Treasury Inflation Protect securities was the first buy yesterday. $1.5 Billion were purchase by the FED from dealers and $15 Billion tendered….OOPPS! It was not surprise to see US Treasuries sell off today!

Another great paper I have read since my college days was is the New York Times. It is now my favorite in electronic form. April 7, 2009 it was sated that Americans have grown more optimistic about the economy and the direction of the country in the 11 weeks since President Obama was inaugurated. GOSH, I knew that, my phone and in box was turning red form all the requests to see homes. The same people who told me in December that it is getting worst were now looking to buy. It is all about confidence. Bush did not have it, Obama has it. It is not the case that people do not have money. Wrong, there is a great deal of money around, especially here in Silicon Valley. I am sorry for those in the “Rust Belt” or the East Coast who are suffering, but we here have suffered the ups and downs of the technology cycle. It is fast and one day a new technology has workers looking for a new employee. That makes saving very important. They also know that the high flyer of yesterday is not the high flyer of today. Do you know that the Hoover Vacuum Tube was once in the Dow Jones? It is confidence that creates bottoms. I don’t care if it is housing, stocks, bonds, pork Bellies or Gold. If you have confidence you will buy, support and trust. That is where we are today and that is why foreclosures and REO’s are being bought in record numbers and multiple offers.

Banks and financials are making money, more than the experts forecasted. I don’t want to be a party pooper, but let’s face it. If you can borrow money free or almost free and lend it out at 29% on a credit card would you make money? This is Tony Soprano’s game. Steal the money and lend it to someone at usurious rates. Oh, I forgot the law lets the bank do so. Wasn’t that our tax dollars that we gave them at almost no interest? There has to be something done about this game of high interest rates to people who cannot afford them or are not smart enough to understand. I am beginning to think that the KORAN is right, interest is sinful

Otelini of Intel has declared the bottom of our economy, hurray! But more important is that the San Jose Mercury News has the housing market leveling off. More homes changed hands last month than in March of 2008. Is that a sign of lack of confidence? A number of readers and clients have asked me is it a bottom, will it go lower. If that was the case would people be buying in record numbers? Bottoms and recovery are characterized by mixed news, good and bad. The comment is “climbing a wall of worry”

Market Action since April 4, 2009

1. Palo Alto: zero closed escrow and 37 pending + 6
2. La Honda zero closed escrow and 3 pending + 2
3. Portola Valley, zero closed escrow and 11 pending + 1
4. Woodside zero closed escrow and 5 pending
5. Atherton zero closed escrow and 6 pending + 2
6. Menlo Park (east of 101 not included) 1 closed escrow and 27 pending + 4
7. Redwood City (over $800,000) zero closed escrow and 17 pending. - 1

The + and or the – represents the change since April 4, 2009.

April 4, 2009: Weekly Commentary

2009-07-10T11:22:00.001-07:00

• Existing Home Sales up another 5.1% as of March 23, 2009
• Pending Homes Sales up 2.1% nation-wide with West leading
• Market to Market accounting returns ( little) to the past standards
• California Association of Realtors Launches Mortgage Protection Plan
• Bargain Prices bring out Investors and Novice Buyers
• Larry Kudlow of CNBC Declares New Bull Market
• Market Value versus Replacement Cost advantage for buyers Protection notice to owners.
• 5 Home Trends for 2010
• 6 Landscaping Tricks to WOW buyers
• Special Commentary: Does your DNA affect your investing and home/selling attitude?

Sorry for the lapse in a week, as the two notes at the top state Existing Homes Sales were up and Pending were up. That translated into calls, showings and listing presentation for Jim and me.

Amazed aren’t you? With all the Media news on lower home prices, and the poor situation of America, America was out buying what they have faith in before all else REAL ESTATE! Here are our local numbers for the past 14 days:
1. Palo Alto: zero closed escrow and 31 pending
2. La Honda zero closed escrow and one pending for 15+ acre Ranch for $1,399,000 list
3. Portola Valley, zero closed escrow and 10 pending
4. Woodside zero closed escrow and 5 pending
5. Atherton zero closed escrow and 4 pending
6. Menlo Park (east of 101 not included) zero closed escrow and 23 pending
7. Redwood City (over $800,000) zero closed escrow and 18 pending.
A big pick up in sales or offers pending closed occurred in the past 14 days. Is confidence back and the pent up demand beginning to show itself. From my stand point it is. If you are a buyer don’t wait, the tendency of sellers to accept lower offers will stop as the news begins to filter out among the agent community. By the time the media picks it up the opportunities will be over!

To jump out of sequence to my notes above the SF Chronicle featured a story on how investors and novice buyers are active and buying the low end of the market of foreclosures and short sales. There is a good article in the Saturday April 4, 2009 issue of the San Jose Mercury News, Real Estate Section in the “Market Wise” column. “Be Realistic in offers, even in a buyer’s market”. The question given is that the writer has made many offers and are rejected, no response or out bid and don’t even get a counter offer. In short sales and foreclosures the lender’s loss mitigation departments will not give property away. The response is that the buyer and agent will keep writing offers until the market shifts. It further states that the prices reflected in today’s listing prices do reflect the present “market”. Well crafted offers will get the property with experienced agents. ALL WELL SAID! Here is one experienced agent willing to help!

California Association of Realtors (CAR) has launched a Mortgage Protection Plan. It is for 1st Time Home Buyers. It is to give peace of mind when purchasing a home. It will provide six months of payments up to $1500 to meet mortgage payments for 1st Time Home Buyers who lose their jobs. For more information write or call me or see www.car.org/aboutus/hafmainpage/carhafmortgageprotection/

Larry Kudlow you’re the man! If you don’t watch CNBC in the morning it is a good show to give you a pulse of the Financial Markets. This guy puts on quite a show! I enjoy watching and listing on my headset while I work out in the gym at 7:30 am to 9:30 am. Larry has stated that the stock market begins a new bull trend 6 months before and economy bottoms and the recession ends. The Wall Street Journal recently stated that Bear Markets average length is 17 months and we have either seen it or we have 3 months to go. We will see if Larry is right. To back Larry though is Friday’s Wall Street Journal front page “Stocks Leap as Fear Ebb”. It has been happening for some time if you have read my prior letters. This time it was more pronounced. Investors bought globally equities, oil futures, industrial commodities, technology stocks, and junk bonds! These same investments they shunned weeks ago says the article. But if you were watching the slow movements up in the prices of these investments the pros were slowly nibbling weeks ago. What did they sell? “They were selling Treasury Bonds, gold, the US $ and other safe-haven refuges”.

Market Value versus Replacement Cost drives markets off of recessionary bottoms. Whether it is company shares or home values; it is cheaper to buy than to build is the motto of takeover plays, mergers and acquisitions. We get USAA Magazine, our insurance company. The spring issue had a great article on Market Value versus Replacement Value. It stated that what you buy your house for may actually be lower than the cost of building the same house from scratch. That is important to know if you presently own and are in the process of buying. In many parts of the country home prices have fallen as much as 30%. While Silicon Valley may be protected in some regards there has been a fall off in home prices from 2006 of at least 13% on average. Meanwhile construction costs which include concrete, lumber, steel and labor are ever rising. A tip for the buyer who is looking at buying and fixing up the property, take the purchase price and cost of repairs and add that together and look at another house that needs no work for the same price. You will buy it with a cheap mortgage in historic terms; Home Mortgage Rates have NEVER been this low. Does it really matter cutting off on the sales price and missing a buy when you will have the cheapest mortgage rate ever for the next 30 years?

FIVE HOME TRENDS FOR 1010
1. The Live-in Kitchen
2. Living Within Our Means
3. The Green Kitchen
4. The Wellness Kitchen
5. Cooking for Fun
“For more on this subject write me for details.”

SIX LANDSCAPING TRICKS
1. Add Splashes of Color: iceberg roses, purple salvia, lavender, crape myrtle tree will add color to the seasons.
2. Size trees and shrubs to scale. Don’t block doors, windows and other architectural features on the home’s façade
3. Maintain a perfect lawn. Don’t have brown spots, some rocks, pebbles, boulders, drought tolerant plants and ornamental grasses will generate more kudos, especially in drought times and water conservation times as we may have after our rain season ends.
4. Light up the outside with good illumination, create drama at night. Use low voltage lamps to highlight branches of specimen trees, a front doors, walks, and corners of the house.
5. Let them HEAR THE WATER, nothing is more soothing than the sound of water. Use fountains or create a small stream with rocks to provide pleasant gurgling to block street noise.
6. Use decorative architectural elements, a new mail box, planted window boxes, and a low fence wrapped in potatoes vines ass cachet, particularly in winter months.

Special feature: DOES DNA AFFECT YOUR INVESTING PERSONALITY?

Again a feature in the WSJ (Wall Street Journal), thanks to Jason Zweig, did you buy high, sell low zig when you should have zagged. Maybe it was your ancestors who gave you this trait. Or are you the fortunate that are just never on the wrong side?

25% of people with European ancestry have a gene that dampens their fear circuitry when it comes to making money. 20% of Caucasians have a gene that makes them more responsive to gambles. Some people are 50% more sensitive to fear. Well, does that mean we all go out in swab our mouths and get tested? 20% of the variation in risk taking among individuals is genetically determined; the rest comes from upbringing, experience, education and training. There is always a tug of war inside us all between nature and nurture. Bear Markets and Recessionary Markets give nature the upper hand, it never more important now to stick to disciplines that can over ride your genetic impulses.

Warren Buffet said it perfectly, during time of greed there should be fear, during times of fear there should be greed. Find a seasoned pro and work with them to guide you through the times of nature. I didn’t get this gray hair from a bottle!

Until later…..

March 21, 2009: Commentary and updates

2009-07-10T11:21:00.000-07:00

• Federal Reserve announces a Bond Buying Binge!
• Interest rates decline from FED action
• Mortgage rates at 4% level
• Housing Starts Surge 22%
• Multi-Billion Dollar Mergers a way to get money home
• Tax Credits for home purchase and home construction
• Home & Design: Staging on a Budget

FED ANNOUNCESNEW POLICY:
It is called Quantitative Easing, for the record and for those in finance and economic theory. The pro’s and those in the know thought it would not happen, but Professor Bernanke surprised them all. From all I have read Bernanke had studied this strategy long before anyone had any clue it would ever be used.

Before I explain the process and how it could benefit us all, let me start with a lesser known fact. The FED, Federal Reserve System, is the ONLY department of the U. S. Government that positively contributes to the income of the United States. It should it is a legal insider trading department. Just think it over, the FED creates which way interest rates will go, they can buy or sell in the market bonds, inject cash buy gold and virtually anything the FED deems necessary to manage our economy. If they bought bonds before the announcement the FED already has a profit as those bonds are worth more because interest rates declined!

The bond buying binge will put $300 billion in a purchase program of long-term treasury bonds. The FED will also buy mortgage backed securities. All told the FED will buy $1.15 Trillion into the economy in the next 6 months to jump start the HOUSING INDUSTRY and REAL ESTATE.

When I started my career as a floor trader I was told one CARDINAL RULE: DO NOT FIGHT THE FED! If there is any sign you will see our real estate market pick up this is it!

HOUSING STARTS SURGE

Boosted by an 82% increase in construction of apartment buildings housing starts in the U.S. surged 22%.

MORTGAGE RATE BELOW 5%!

(COMPLIMENTS OF MIKE COLYER OF COUNTRYWIDE)

High Conforming Loan Limit at 80%
REFINANCE - 30 year fxd = 4.625 with 1 point
PURHCASE - 30 year fxd = 4.375 with 1 point

417K and under
REFINANCE/PURCHASE - 30 year fxd = 4.375 with 1 point

JUMBO TO 1.5MM to 80%!!!! 3MM to 70%
REFINANCE/PURHCASE - 30 year fxd = 5.75 with 1 point
REFINANCE/PURHCASE - 5fxd Int Only = 5.25 with 1 point

Mike Colyer
Sales Manager
Countrywide Bank, FSB
650-257-7777 Office
650-288-8170 Cell
866-511-9024 Fax 40 Hawthorne Ave
Mail Stop: BR 737
Los Altos, CA 94022
http://www.TheBayAreaLender.com
Mike_Colyer@countrywide.com
ARE PLATFORM COMPANIES BRINGING THEIR OFFSHORE CASH HORDE HOME?

On February 12, 2009 I wrote you about Platform Companies. To review the company definition, A Platform Company has a fractionalized production process, keeping knowledge intensive activities like design and distribution in-house, while outsourcing low-value added physical production. They develop new product, new markets, and new products for new markets. They aggressively invest in foreign countries, they are growth companies like our Silicon Valley Companies, and they are Drug Companies. The amount of potential repatriated $US is estimated at $545 Billion.
1. Roche is buy Genentech for $6 Billion
2. Merck is paying $41.1 Billion for Schering-Plough
3. Pfizer purchase of Wyeth of $68 Billion.
Why is that important? Tax write offs of R&D and Goodwill and merger expenses will allow the potential re-patriot of billions of $US held over seas without a tax potential. Billion of $US here mean more for the U.S. Economy.

Economic growth comes from money. If any of you are history buffs, like me, you will know the Dark Ages did not disappear until Gold was taken from the Aztecs, Incas of the newly discovered America’s and used by the King of Spain and the Pirates of England to jump start the stagnant European Economy. Locally 2001 DOT.COM fueled our real estate and economy just as the low interest rates after the DOT.COM bust fueled the real estate industry further.

TAX CREDITS & INCENTIVES GALLORE!

• $8000 Federal Income Tax Credit for first-time home buyers with $10,000 State of California tax credit for buying a new home.
• FHA loans in the 4% range for up to $729,750
• Purchase price mortgages up 7.1% in February
• Energy efficiency upgrades for windows, insulation are eligible for a tax credit of 30% of qualifying costs
• Renewable Energy Systems as solar, wind, and geothermal may qualify for 30% tax credit
• Heating stoves that use renewable biomass fuel: such as, wood pellets, plants, now qualify for a tax credit.

HOME & DESIGN

Deciding on listing your home? Here are some budget ideas that can help you on the CHEAP!

Expand the Closet: One of the most overlooked areas of staging is the closet. Declutter stops at “out of sight out of mind”. It should take into effect the closet. If it looks stuffed, remove it. The ideal closet should have two hanger spaces between the next hanger.

B.Y.O.B. (BRING YOUR OWN BED) I love this one; arrange some moving boxes into the shape of a bed. Dress it up with some nice bedding and pillows. It takes about a half hour, great idea right?

PUT A LID ON IT: The best thing you can do to eliminate odors and bugs is to close all your drains, sinks and tubs; close all the lids on toilets close all the closet doors. Now, let all the sun in! You will get immediate results for zero dollars

GO GREEN: If your home has green features like EnergyStar Appliances, generator, double paned windows, bamboo flooring, make certain you list them in your MLS listing and advertising. Continue the theme with strategically placed soy candles, homemade guest soaps, and green cleaning products under the sink. Believe me this will put your home up a notch to current day buyers.

CREATE A FOCAL POINT: Pick out a visible corner and put in a large plant, live or silk will do just fine. Set up a spot light behind so it lights up the leaves and throws a shadow on the wall. It is a space perception, especially for a large room without too much natural lighting.

SET UP A CHAT ROOM: Whether it is a living room, family room, breakfast nook or den; set up an area that furniture does not have to be moved around so a conversation can proceed. Place fresh flowers and bring in a sense of caring and pride of ownership.

ADD BATHROOM ELEGANCE: Get some decorative hand towels, tie a sheer ribbon around them, and place them on towel racks in all the bathrooms. Use dried flowers and candles to complement colors and add a little SPITZ!

NIX THE PERSONAL PHOTOS

BRIGHTEN IT UP: Get the energy efficient light bulbs in with higher watts. Keep those drapes and shades open and up!
FRAME A LOCAL SCENE: Take those family pictures out and replace the family photo with local photos. Use some you have or from local calendars. The web is great for giving you great pictures of the bay and the ocean and the area around us.

REDO THE PET AREA: My wife has a trick of using a bowl or container of coffee beans to take away the odor of the pet area. She also uses them in closets. New food bowls are a must clean litter boxes and beds and put them in an area such as the laundry room or utility room.

ENTICE THEM AT THE ENTRANCE: Tighten the loose doors and cabinets, re-stain and paint or varnish the doors. Paint the trim on the floors and the ceilings. Paint outside trim, nicks on the house especially where the buyer comes in the house.

More next week on staging on the cheap, 6 Landscaping Tricks that WOW Buyers!

March 16, 2009: Happy St. Patty’s Day

2009-07-10T11:20:00.000-07:00

Did you know there were never any snakes in Ireland? Apparently, snakes came from our prehistoric past and Ireland has always been locked by water, ergo, no snakes. The same holds true for New Zealand another island without snakes. I am like Indiana Jones, I HATE SNAKES!

• Good-bye McMansions
• Looking for a Mortgage says the New York Times, Check out FHA rules
• Stock Market Bottom, New York Times says even for veterans this is unchartered waters.
• New York Times says Housing Market’s Upside: AFORDABILITY
• Upside Down on Stocks, check out rules for tax loss selling
• Private Equity, Apollo Management raises stakes on Realogy in attempt to keep it afloat.
• Mortgage Applications Raise
• Mortgage Bankers seasonally adjusted index for Re-financing surges 13.3%

Mortgage Rates: CNBC.com
• 15 year fixed 4.54% down from 4.73%
• One year adjustable rate mortgages increased to 6.21% from 6.13%

Mortgage Rates: Mike Colyer Countrywide Bank
• $625,000 30 year 4.875%
• $800,000 30 year 5.875%

Housing Inventory & Statistics
Palo Alto Active Pending Sold
129 * 25 0
* $4,098,000
La Honda Active Pending Sold
11 * 2 0
* $625,000
Portola Valley Active Pending Sold
20 * 4 0
* $2,898,000
Woodside Active Pending Sold
44 * 6 0
Atherton Active Pending Sold
41 *2 0
* $1,399,000
Menlo Park Active Pending Sold
120 * 23 0
* $2,195,000
Rwd City Active Pending Sold
161 * 64 0
* $2,499,000
I made some changes to the lnventory statistics for the week and I have added the highest sales to the “Pending” list. When sales occur I will add the highest to that list. A present the gap between pending and sales is attributed to the delay in financing approval. What use to be done in 30 days or less is now in the 45 days or more category. I also added all of Menlo Park and all of Redwood City. There are areas in each city where the districts are lower income areas that are hard hit with REO’s and Foreclosures and Short Sales.

Good-bye McMansions was an interesting article in the latest issue of California Real Estate an issue sent to all realtors who are members of the California Association of Realtors. You can learn a great deal of housing history from the homes. Cookie-Cutter rows of small tract homes indicate the lack of building materials. Grand Victorians are time pieces form the early 20th Century. McMansions and their energy inefficient cathedral ceilings will remind us of the excesses of the Dot.com era and the sub prime melt down, says the CAR article. Evidence is trends are pointing to smaller homes, possibly with attached units, sound proofing and closer to other homes, energy efficiency and solar panels are noted demands for new buyers.

The National Association of Home Builders reports that 89% of its members planned homes of 2438 square feet down from 2629 square feet.

Look at the FHA rules says the New York Times. As I noted in a previous letter FHA is an area home buyers should look when getting competitive pricing for mortgages. FHA loans were once an area for low income borrowers the FHA has become a new area for all borrowers. The reason for this is the fees that lenders are tacking onto all mortgages. At present the FHA loans can be obtained for as little as 3.5% down and has become the least expensive when it comes to fees. Loan limits do apply and at present for our area the maximum loan is $729,750. FHA never marked the exotics of sub prime, 30 year and 15 year and adjustable rate mortgages are in the FHA offerings. Contact me or see the Department of Housing website for approved lenders. In many cases you will have to work with mortgage brokers.

Even for Stock Market Veterans it unchartered territory say the New York Times. During the last commentary I noted that all charts indicated the stock market had hit the downside targets technicians forecasted, but today we have the veterans unsure where we are going. Bryon Wein of Pequot Capital says he is an optimist. Barton Biggs, forever a bear o, of Traxix Partners places himself in the optimist’s camp. Peter Lynch, forever a bull, declares himself “bullish as ever”. That being said, I still believe it will take many years, maybe 10, for the new bull market to take over. There has been too much technical damage done. The trust has been destroyed and it must be earned back. Large investors both domestically and internationally are looking at the base strength of the United States, Real Estate, as the first to come back. As one of my clients has sate, “Dirt will always be worth something”

With that last comment in mind it makes much sense to consider A rising dollar lifts the U.S. but adds to the Crisis Abroad. Last week a colleague held a bus tour of visiting Chinese investors looking for high end and luxury homes in the East Bay. Two weeks ago I had the same tour in the Skyline area. The world is seized with anxiety. The safest place in the world for store of value (savings) and political and personal safety is the United States. American investors are ditching foreign ventures and bringing their dollars home. The raise in the dollar is adding to the inability of Third World nations balance their budgets or to finance their internal programs. The cost of the dollar makes Chinese goods more expensive at a time China must use their reserves to support their economy. This is common to all the Tigers, India, Pakistan and the rest of the Third World nations who prospered on the dollar’s weakness and the consumer spending of the United States. This tilt is also forcing locals within those nations to look at the safety of their accumulated wealth and personal safety as the authoritarian governments look to ways to fiancé their short falls and blame to their woes. Add to that the OPEC countries’ inability to finance their budgets due to the falling price of oil.

Before ending the Stock Market commentary, Upside Down on Stocks, selling stocks for tax losses? While the end of the year is the best time, around October and before November is the best time to install tax strategies, many investors panic at tax time to think about selling now and take the tax loss. Before doing so, talk to your tax professional or seek the help of one before dumping wholesale out of panic. There are many strategies from doubling down to 31 day buy and sell or sell and buy strategies.

The Wall Street Journal says Apollo Management raises stake on its Realogy stake. The price tag keeps growing for Apollo Management and its investment in Realogy. Realogy is the largest residential real estate brokerage business as parent to Coldwell Banker, Century 21, and Sotheby’s International, Better Homes and Garden and other major brands. Apollo pledged $150 million to keep Realogy afloat for 2009. Realogy continues to cut costs and is trying to increase market share by launching Better Homes and Gardens Real Estate brand.

U.S. Mortgage applications rise for the first time in three weeks. The jump came after the strongest government action recently taken to aid homeowners.

The Mortgage Bankers Association said the seasonally adjusted index of mortgage applications surged 13.3% for refinances to 3470.7, up 41.8% from one year ago.

March 7, 2009

2009-07-10T11:19:00.000-07:00

• Pending Homes Sales Index (PHSI) a new indicator of housing market activity.
• Mortgage Rates decline for the week
• Mortgage availability continues to expand
• Pending homes in our greater area continue to expand
• Unemployment in San Mateo County 7.4%, lowest in Greater Bay Area.

Pending Homes have become the new market indicator watched by home buyers trying to get an answer to,” Is this the bottom, should I buy now?” question. www.realtor.org/research will be able to help you here. The west has seen a 2.4% and a 13.5% increase from last month and last year in PHSI. Locally, in my covered area homes sales pending are:
• 0-$500,000 = 45
• $500,001 - $1,000,000 = 44
• $1,000,001 – 2,000,000 = 45
• $2,000,001 – 3,000,000 = 10
• $3,000,001 – 4,000,000 = 0
• +$4,000,000 = 3

After looking at these numbers I did something to check on my business career based upon past recessions. We hear and or read about the “worst recession in 26 years” and so on until we want to look for Looney Tunes on TV. Well forget about Buggs Bunny for now! In 1981 I took my wife on our first date, we were at the peak in unemployment nationally at +8%, my business was never greater. I had buyers coming out of the wood work. Prices were down and sellers were giving great offer. Interest rates were so high that sellers were taking back notes. When we married in 1984 unemployment was declining and we bought our first house in SF, a REO in Cow Hollow for $267,000. The recession was waning and employment numbers were getting better. Business was not as hot as it was in 1981. We did sell our home for $400,000 in October of 1984 13 months later and bought our first house in Woodside for $425,000, listed at $650,000. By 2000 we were in another recession and unemployment was +6%. We sold the Woodside house for $1.9 million and bought 5 acres in Woodside for $800,000. What that tells me is that Recessions and high unemployment numbers are “buying opportunities” If that is in your mind, do not hesitate. For the sellers, you have heard me tell you to wait. Refinance to end your monthly pains. I can help you with some great mortgage brokers.

As to Mortgage Brokers, below is something from Zack Hoffman of Pinnacle Bancorp:
Conforming
30 Year Fixed
4.750%, 1 Point Fee
15 Year Fixed
4.375%, 1 Point Fee

Conforming Plus
30 Year Fixed
5.375% 0.75 Point Fee

Jumbo to $5,000,000
7/1 ARM with Interest Only Payments
5.875% @ 0.50 Point Fee
10/1 ARM with Interest Only Payments
6.250% @ 0.50 Point Fee

Still available: 80% financing to $2,000,000 and 75% financing to $3,000,000 for qualified borrowers

This is not a commitment to lend nor should it be considered such. Rates quoted as best case scenarios on 3/6/09 and 30 day rate locks. Rates subject to change to due to market conditions. Please call for details on closing costs or qualifications. APRs in order of presentation: 4.88% and 4.60% based on $417,000 loan amount, 5.48% based on $650,000 loan amount, 4.62% and 5.15% on $5,000,000 loan amount

Zachary Hoffman
Pinnacle Bancorp
Mortgage Broker
Direct: 866 433 1719
Fax: 866 543 3050

Office Locations
11400 W Olympic Blvd, Suite 1700, Los Angeles CA, 90064
220 Montgomery Street, Suite 1950, San Francisco, CA 94104
136 Heber Avenue, Suite 208, Park City, UT, 84060
6400 S Eastern Avenue, Suite 15, Las Vegas, NV 89119

If you need another name use Eric Trailer, write or call me for more on Eric.

Eric notes in his letter to me that PSHI has historically peaked at +100 and this leads to strong demand and eventually constrains supply and pushes home prices higher. With no new homes being built, the inventory of available homes in your searched area will decline and prices will move up.

Eric recently is helping a client refinance their home in Menlo Park and saving them $2000 per month in payments.

The unemployment numbers continue to expand, but not as much as December and the outlook is for declining numbers as we see pick ups in Health Care, Government and Education. Manufacturing and auto have been in a bear market for years. The “rust belt” is just that and has been for over 20 years, so don’t focus on it! Focus on where we live. Focus on our businesses and on our industry. Why is Genetech sought after to a point billions more are added to the take out offer? Why would a company want to buy in a recession? The simple answer is it is cheaper to buy than to build. That goes for businesses and it goes for homes. Would you buy a home in Central Menlo Park for $2 million on a 10,000-12,000 square foot lot upgraded or a newly built home of the same square footage on a 6000 square foot lot in Menlo Park County area with the same interior square footage for over $2 million that was recently built? The answer is simple the county comes down and it sells. It is all about buying opportunities. The cost of carry for spec builders and contractors will sooner or later be dictated by their bankers and prices will cut and homes will sell! Just as the REO and Short Sales in Redwood City have created values and now inventories are down. President Obama will soon end all of that nonsense of below market sales that cost the Tax Payers money for the Banker’s stupid mistakes and yet maintain their high power bonuses!

So much for the week, for those who fret about your stock portfolios? We should see a meaningful rally soon as many of the point and figure charts have all hit their downside objectives. Do you sell, I can’t tell you that. Until next week, keep a positive attitude. I believe we are seeing the greatest opportunity of a life time.

March 2, 2009

2009-07-10T11:18:00.002-07:00

• Gold reigns atop Great Divide
• Renters Lose Edge on Home Owners
• Raiding your 401K to Finance/Refinance
• 5%, 10% and 15% down, YES WE CAN!

Active Listings Number
Atherton 34
Menlo Park 102
Woodside 41
Portola Valley 20
Palo Alto 122
Los Altos 80
Los Altos Hills 44
Mountain View 83
Sunnyvale 144
Total 670

Pending Sales Number
Atherton 2
Menlo Park 29
Woodside 6
Portola Valley 5
Palo Alto 22
Los Altos 19
Los Altos Hills 2
Mountain View 16
Sunnyvale 59
Total 160

Sold Number
Atherton 0
Menlo Park 7
Woodside 0
Portola Valley 0
Palo Alto 4
Los Altos 3
Los Altos Hills 0
Mountain View 3
Sunnyvale 6
Total 23

The gold market continues to be the place for “fright money” to seek a haven of psychological security. Analysts are looking at $2000 as a target. With all the fright being generated many analysts are failing to point out that the offshore investor is now looking at the US as their Haven of Safety. The big news is that real estate is now becoming the investment of choice for investors both here and offshore. With the stock market hitting new lows, the place to put cash is limited.

The big news is that “renters” have lost the edge on “homeowners”. The relative cost of owning a home versus renting is now in the homeowners favor. Over the past 18 years, the after tax benefit of owning versus renting has favored renters. Now after 2 years of rapid home price depreciation the hoe owner is back on the plus side. What have also generated this favorable ration have been interest rates.

Raiding the 401 K plan has now been mentioned as a source of finance money, which I stated months ago. Check this out before you refinance. It can save you money and allow you to make money off your mortgage deductions.

FHA loans are available for 3.5% down. Buyers of homes up to $440,000 can buy with 5% down. Loans at $810,000 can be obtained with 10% down and at $2,350,000 15% down. Loans of up to $417,000 are priced aggressively at the high end of 4%. Loans from $417,000 to $625,500 are mid-priced in the low 5% range. Loans from $625,501 to $729,750 are TO BE PRICED HOPEFULLY SOON. Loans from $729,751 + range are priced from 5% to low 6’s% based upon terms. What it all means that there is money out there for home purchases.

February 22, 2009:

2009-07-10T11:18:00.001-07:00

• Yields fluctuate within a narrow range with mortgage money available with FNMA, Freddie Mac and FHA.
• Traders take profits on short positions on Real Estate Investment Trusts
• Gold hits old high
• High Yield Bonds are popular
• Websites are becoming the place to go to find property and agents
• $8000 tax credit available to families making $200,000 per year.
• 30 year fixed conforming rates dropped within the past week to 5.26%, 15 year at 4.86%, 5/1 ARM at 5.53%; 30 year jumbo at 6.96%, and 5/1 jumbo ARM at 5.93% per www.bankrate.com.

The Wall Street Journal was full of conflicting articles over the trend of rates. My analysis is that investor funds are beginning to travel away from US Treasury Bonds and bills toward “risk”. Money Market Funds have hit a new high in size. Junk Bond Funds have continued to see more investor demand for them. Their yields have dropped and their prices have risen from a dismal 2008 when yields on the Merrill Lynch High Yield 100 Index was 17% to 11% recently. Since November 2008 investors have poured $4 billion into mutual funds that hold these bonds, according to fund researcher EPFR Global.

Gold hit a new high of roughly $1005 from the old high of $1003.20 since July of 2008. Declines in the stock market, concern over the fate of the Euro, Asian Banks and Eastern Europe all added to the move toward hard assets.

The move to hard assets can be seen in Trader’s decision to cover their shorts and their bearish bets on the Real Estate sector represented by Real Estate Investment Trusts after President Obama announced a multibillion dollar plan to stabilize the housing market. The “Options Report” of the Wall Street Journal indicated that traders were expecting rebound after a year long decline in REIT values.

Real Estate buyers continue to move to the Internet to find homes and realtors says the Wall Street Journal. I have seen that occurrence over the past 4 years, as I have dedicated more of my advertising and listing information to various sites. Some very interesting trends have shown up.
• Buyers are more sophisticated and internet savvy.
• Buyers are seeing value for long term commitments in real estate
• Buyers are looking for second homes near their primary residence and places of work
• Buyers have some to the misinformation of the press and media confused with the strength and stability of “Bay Area” communities and locations.
• Buyers are looking at the Santa Cruz Mountains for primary residences and second homes.
• Buyers are looking at real estate for investment value first and residences second.
• Motivated sellers are not from financial stress but marital dissolution and death, or a change in work location.

The tax credit for new home buyers of $8000 is available to buyers making $200,000, buying a $1.2 million home IF

1. Self Employed
2. Paying alimony
3. Paying tuition
4. Funding an IRA
(See your tax advisor for more details on this)

The impact of this tax credit is said to add 500,000 in additional real estate purchases, which is a decrease of 10% of the present inventory. For those who are waiting for a bottom, YOU ARE HERE! To add to that FNMA stated real estate investors may qualify to have up to 9 existing mortgages on their schedule of real estate holdings to still obtain conforming loans on their next real estate investment. FNMA also announced the postponement of foreclosures until March 6, 2009.

FEDERAL HOUSING AUTHORITY has been a new area for my buyers to seek mortgages. For years many buyers have been directed to FNMA, Freddie Mac and various other types of conforming loans. While I am not a mortgage expert; I too rely on Mortgage Bankers for advice, but common sense tells me that this is an area buyers must look for the mortgage money. The following is from Eric Trailer of Absolute Mortgage, www.absolutemortgage.com, 1-800-517-LOAN.
• 102.5% financing on $650,000 purchase. That means 96.5% financing or a 3.5% down payment with 6% in closing costs added to the loan principal.
• Rates below 6% on 30 year fixed programs
• Low PMI, principal mortgage insurance, at .55% or .5% of loan amount. This is half of the normal PMI rate from public lenders.
• Down payment and reserves can be a gift of funds from family.
• Fees for FHA are 1% loan fee and an advanced payment of PMI of 2% of loan value.
• Approval is required of both borrower and property. This helps buyers in the contingencies based upon condition of the property. Condo’s not already approved
• Closings from 30-45 days.

For more details on FHA loans, let me introduce you to Eric. He is a wealth of experience and knowledge. What else would you expect from a former Investment Banker!

Other sources of financing should include state and local agencies, community banks and credit unions.
• Many buyers fail to look at state and county agencies that have funds for borrowers who qualify due to income or geographical limitations. Teachers, state and county employees can benefit form their pension funds and local agencies as well.
• Open accounts with community banks. They have been the bright spot in the banking crisis. Community banks, in general, did not have toxic assets and did not participate in the TARP program. Research this with local community bank before you open an account and apply for a mortgage. Again, generally, they do not use mortgage wholesalers for clients, but generate their portfolio of loans from depositors.
• Credit Unions are another source of mortgage loans. They too, in general, did not have toxic assets and did not participate in TARP. They hold their own loans and do not have “red tape” when dealing with loan staff.

Where to the direction of interest rates? Watch the auction next week of the massive US Treasury offering from the Stimulus Package. Germany, the strongest nation in the Euro, had difficulty raising money in their Euro Offering last week. So far, my discussions with Mortgage Bankers expect higher rates within a year.

Thank you for all your comments and continued encouragement, Gary

February 12, 2009

2009-07-10T11:17:00.001-07:00

• The news of the week is a big surprise in US pending homes sales, +6.3% and existing home sales +6.5%!
• Bond market winter thaw is on as Cisco seizes the opening in the credit markets to raise $4 Billion, GE raises $10 Billion, ConocoPhillips raised $5.95 Billion, AT&T $4.48 Billion, Verizon $4.23 Billion, Altria $4.22 Billion, GE Capital $3.94 Billion, Caterpillar $3 Billion, Proctor Gamble $1.99 Billion and Amgen $1.99 Billion
• Junk Bond Funds begin buying the best of the worst to drive yields down from near 18% to slightly above 12%.
• Per the Wall Street Journal Inventory of Homes For Sale in the US drop in January in 18 of the 29 areas down an average 2.5% nation-wide; which includes the Bay Area.
• Tax Credit for new home buyers going soon to the President’s desk for signature as a part of the new rescue package
• Gold continues to rise as investors seek a safe-haven ending near $950 an oz. ending at the highest level in 7 months.
• Pending sales in the past 7 days are: Palo Alto 24, Redwood City 58, Menlo Park 32, La Honda and surrounding area 1, Portola Valley 5 and Woodside 3.
• Mortgage rates per CNN 30 year fixed at 5.27%, 15 year fixed at 4.96%, 5/1 ARM at 5.61% (see me for detail rates for your situation and home search)

Comments: The Credit markets are thawing and faith has returned back to the credit markets. Investors are moving out of US Treasuries into corporate debt. Home buying has picked up both on a local level and national level. The fact that credit worthy companies are raising record amounts of capital through debt sales tells me that they believe rates are too low and will go higher. Cisco has a cash horde of $29.5 billion; of which, only $3-4 billion is in the US (more on this in “Where is the Growth Coming From, see below) From a safety of capital basis and store of value gold continues to rise in value as I believe the demand for real estate will continue to rise. The increase in junk bond purchases from High Yield Funds tells me investors now feel comfortable with the high yields to commit funds. This is shown in the rise in yields on 30 year US Trsy Bonds to a near term high of 3.75% in the past 5 days. Watch for this to continue with securitization of mortgage resuming soon.

WHERE IS THE GROWTH COMING FROM?

Going back 40 years or so to the last big recession gives a method of looking back and looking forward and the same time, one becomes the mythical God Janus.

Since 1974 the growth in the market and the economy has been spectacular. But, along with the growth comes “bubbles”. We went through a number of them recently, but let me take you back to the one that most particularly hurt our area, the DOT COM BUST. From the DOT COM BUST we had an excellent look at our area and area companies’ strength and growth potential. The Key word here is “Platform Company”. A Platform Company has a fractionalized production process, keeping knowledge intensive activities like design and distribution in-house, while outsourcing low-value added physical production They develop new product, new markets, and new products for new markets. They aggressively invest in foreign countries, that investment accounted for 10% of total non-financial corporate assets and generate some $4.7 trillion in sales per year and $700 billion in earnings. Allen Sinai in his Decision Economics concluded that if the US lowered tax rates it could lead to the repatriating of US$545 billion.

The precedent and the growth in California real estate from that action can be seen in 2004 when $360 billion came home as a result of a 5% temporary tax rate contained in the American Jobs Creation Act.

The result can be seen in the chart below, complement of the California Association of Realtors and Eric Trailer at Absolute Mortgage.

The dramatic rise in 2004 to date is my belief that our Bay Area Platform Companies brought home the Bacon in more ways than one.

Gary McKae

February 6, 2009

2009-07-10T11:16:00.001-07:00

30 year Treasury Bonds are now at 3.68% and on my last letter to you they were at 3.06%. Mortgage rates were at 4.5% for conforming loans and now they are at 5.56%. This month the Government will raise approximately $36 billion of maturing debt and raise $30 billion of new debt. Gold has rallied from a low in December 2008 of $707.32 to $914 today.

A recent article in the Wall Street Journal, January 30, 2009, quotes George Sorros stating that if the Euro may not survive as a common currency unless the European Union presses for an international agreement on dealing with soured assets. Milton Friedman famously predicted that the euro would not last past their first economic crisis.

What does that mean for us who are looking to purchase or sell real estate? I suggest you look back in time to 1973-74 the last great recession we had. Like today there was world chaos, a recession, unemployment of over 8%, Presidents under pressure and gold as a source of store of value.

In 1977 Real estate values jumped over 40%. In many growth areas values were stronger. European and Asian buyers were considered "flight to safety" buyers as they purchase U. S. Real Estate. Banks were over loaded with REO's found ready buyers with "fright" money.

So is it today. Rates will increase as the U. S. Government raises Trillions of Dollars to stage our economic recovery. There is no chance that the mistakes of Japan in the past will be created today. With the increase in rates you will witness a strong demand as the dollar strengthens and the Euro weakens. Asian investors; as well as, Middle Eastern investors will look to stabilize their portfolios with U.S. $ denominated assets. Will they buy stocks, bonds, or hard assets?

I think the price of Gold will tell where they will go, hard assets. Gold will be the first choice and then hard assets which provide income, real estate.

As commercial mortgages become delinquent, assets behind them will be sold and investors will pounce upon them as they have pounced upon foreclosure sales, REO sales and short sales. If there is any fear in your mind that real estate is shaky, look at the sales of foreclosures.

I suggest you buyers begin to look at what is available today AFTER you obtain a financing commitment. There is not one mortgage broker I have spoken to that does not believe that interest rates on mortgages will be higher one year from now. The math is simple. Take that one percent and multiply it against the 80% you will owe on your mortgage and that is what it will cost you for at least the next 15 years of a 30 year fully amortized loan. If you want to be exact take out the HP and work the numbers and see what 1% means. It will be a substantial sum over another 10% in real estate prices.

From my stand I have been over whelmed with new buyers. All have cash and all have great credit ratings.

To those of you, who are looking to list, wait a few more months. The inventory levels are high, a carry over from December. December is a normal month of historical high inventory. As we reach into March and April inventories are low and buyers who have waited for the decline in price and increase in inventory find themselves stuck into a larger crowd all trying to get through a increasingly smaller doorway.

January 10, 2009

2009-07-10T11:15:00.001-07:00

About a month ago I wrote you on the interest rate situation, TBills and TBonds, mortgage rates and other related items. Today we have seen much of what I stated begin to see fruit. Interest rates have risen on TBills and TBonds. On December 18, 2008 the 30 year TBonds hit a low yield of 2.546% return, on January 6, 2009 the yield rose to 3.06%. Mortgage rates declined and money became available for mortgages.
As to mortgage rates, money is available. An example is Countrywide, you remember them don't you? The rates on $1 million 5 year one year adjustable, interest only is 5.125% with no points and 4.75% with one point, full documents, owner occupied and 60% loan to value. That means 40% deposit. To those of you who are looking at first time purchases and below the $625,000 mark there are 85% loans out there.
I have two loan brokers who can get 5.25% rates on 75% LTV with seller take backs of 10% with buyer downs of 15%.
As a result of the weekly letters to you I have had a number of inquiries on what to do with 401 K plans and can you use them for real estate purchases. The enormous hit that has occurred in 401K plans is leading many people to re-consider their asset allocation options. You can use the 401K to help finance your real estate purchases. Rather than taking a risk on a mutual fund or your company stock, try yourself! Lenders are willing to take on first position mortgages with your 401K plan as the second mortgage. The interest you pay yourself is tax deductible and the interest you earn is tax deferred. That is a pretty good deal! If you have any further questions, write or call me. Check with the administrator of your 401K plan for their terms. If there are rollovers IRA's in your name or spouse’s name the proper administrator will allow real estate to be purchased in the account. Again, talk to the plan administrator regarding the terms.
2009 and where do we go? The first thing to remember is that money in circulation is inflationary. Sooner or later the money from TARP and the Bailouts will be taken off the balance sheets in the form of TBills and TBonds and go into the economic system. When it does it will cause prices to rise. If you haven't notices, the price of gas is now up 10-15 cents a gallon and oil is up over $10 a barrel.
There have been 14 properties go pending with firms offers in hand in Palo Alto, one in Portola Valley ($3,980,000), two in Woodside, One in Atherton, and 5 in the Prime Areas of Menlo Park and three in the over $1.7 million to $2.2+ million range in the past 10 days. It is time to re-visit your home searches and get financing lined up.
Financing is the final comment. Where do I expect rates to be this year? I do not expect 4.5% mortgage rates to last long if ever available in the 80/20 full doc level for 30 year fully amortized loans. Why? The yield on 30 Year TBonds is 3.06% the FED has stated that they want the spread between mortgages and TBonds to be 1.5%. The spread is now at 2% points. I believe rates on TBonds will go up rather than mortgage rates going down. Why? The banks must sell Bonds to offer mortgages. When bonds are sold and the banks were the natural buyers, yields go up, if there are no willing buyers. If you look at the Treasury Inflation Protection Bonds the yield is 2.5% the CPI is 2% for an adjusted yield of 4.5%. That means the non-protect 30 year TBonds will go to at least 4.5% and mortgages could go back up to 6%. Lock in rates as fast as you can and get looking at property.
Inflation will mean home prices in the Location, Location, Location areas will firm up and possibly increase.
See you next week and keep you encouraging letters coming in!

December 30, 2008

2009-07-10T11:13:00.002-07:00

In my last email to you I detailed the interest scenario and banks holding the "bail out" money they received to bolster their balance sheets. Let me add here that the reason again is the year end accounting on December 31st. This is when the banks balance sheets are completed. Those balance sheets will be then presented to the rating agencies for the bank's credit ratings. If the banks can maintain or raise their credit ratings the cost of money in the open market place for their borrowings will be the same or lower. If their ratings drop the costs will be higher. Therefore, it is imperative that the money they have obtained from TARP will be in high grade securities, US GOVERNMENT BONDS. That is why we have 0% on TBIlls and less than 3% on 30 year TBonds.

Whereto from here? How do we get out of the basement? The answer is, ONE STEP AT A TIME!

Let me take that one step at a time, first inflation. We have no inflation at the moment and the BIG FEAR is deflation. Let's face it we want inflation, with inflation we have jobs, the economy booms and home prices increase; along with stock prices booming. Look at your retirement account, would it not be better to see you are up 5% than down 40%? What a foolish question, reality is the FED became so entranced on Inflation, it forgot that inflation benefits everyone. Deflation hurts everyone. As much as I like $1.69 for a gallon of gas, I would prefer to see home prices move up and the economy growing. Would you not feel the same?

Liquidity is the next step. We all know that the media says that mortgage are hard to come by and liquefy has compacted? That is where the 0% is very important. With 0% how can a bank earn money? The banks paying are interest in the form of interest to the US Treasury for the bail out funds, the interest they pay on passbooks, and certificate of deposits? That is why the FED wants bonds so low, the banks are forced to get competitive and use the bail out $$$. If not, investors go to CD's. Money market funds will not survive with 0% TBIlls. Who will invest in them? Where do they go? CD's, short term insured commercial paper. What happens with that money that goes into CD's? Will the banks buy more 0% TBIlls? Are you serious? Pay interest out and get nothing back. How long can you keep a business going that way? At some point mortgages become available for securitization. The banks cannot get greedy, because at the same time the FED is buying bonds in the market place driving interest rates down. The more money tat is in circulation we have inflation, another step out of the basement.

Great rates in mortgages are the next step. Do you remember ARM"S (adjustable rate mortgages) and the reset problem? It was not too long ago the Media spoke about the risk and how those ARMs were going to have double digit rates. Well, I have not heard one word from the media about the reset problem. Why? BECAUSE IT IS NOT A PROBLEM! Good News is not worth selling! It is sunny today and sunny tomorrow, why listen to the weather? Back to the ARM. A majority were 1 year LIBOR or 1 year Treasuries. 1 year Treasuries are .39%! 1 year LIBOR is 2.09%. ARMs with interest only tied to 1 month LIBOR are now at 1.75%! Is that a problem? HEY America wake up! Rates are down, mortgage payments are down and ARM's are adjusted to the new low rates. Doesn’t that sound like a great story for buying and investing?

Last week the emails I received from lenders and mortgage brokers all spoke of "We have money for Mortgages. Countywide has money, Wells has money, and Bank America has money. There is money for Jumbo loans up to $10 million!!!Countrywide on December 20, 2008

Jumbo's 1.5MM - 2.5MM 5.875 No points
Jumbo's 1.01MM - 1.5MM 5.625 No Points
Jumbo's 625k - 999K 5.875 No Points
Conf loans up to 60k - 417k 4.875 with no points
Conf loans up to 417k-625k 5% With no points

Time to get your buying hat on!

I hope you enjoy my comments. I think it is something I bring to my clients with my experience, knowledge and Wharton Certification that most other Realtors cannot bring. You referrals are always welcomed and appreciated; as well as, your comments.

December 8, 2008

2009-07-10T11:13:00.001-07:00

I have a degree from Wharton in a field call Investment Management Analysis. It is a bit like statistics and probability, but the important part of it is knowing and understanding cycles.
What we went through in October was a complete breakdown in trust. Fear and panic ruled the day and anything other than US government securities was RISKY!!! What occurred was that mortgage backed securities were sold along with all corporate debt and foreign debt. Foreign money sold all their debt and all piled in the US Treasury market. In one day in October the US Treasury issued some $40 Billion in Treasury Bills for 0%, that's right no return. People wanted no risk and would take 0% return for it. Once the T-Bill market went to almost 0, the rest of the Treasury market went the same way. Last week I think we hit the top in price and bottom in yields for Treasuries. The 10 year was at 2.5% and the 30 year at 3.1%. The inflation rate in October was 3.7%. That meant that a negative return was created for investors. Whereas, the Treasury Inflation protected bonds yield over 4%.
Real Estate is a function of money. The great move we had in real estate was from the securitization of mortgage debt. Pensions bought it, foundations bought it, foreign investors bought it and speculators leveraged it and created investment plays over the fractions of a percentage point moves called basis points. They fled the market and mortgages dried up. Only Portfolio Loans from Banks were available at their terms!
T-Bills are 90 day duration. In January the first wave of 0% bills mature. Where do they go? If you look at the corporate bond market you will see that there was a 5% rally in that market this month. As the fear and panic of risk subsides, mortgage backed securities will take hold. This is especially good for the market because the leaders in it were Freddie Mac and Fannie Mae, both now US Government entities. The bonds will be US guaranteed. The yields on those bonds were 7%. That will make the investor holding a 30 year to think, "Why do I want a 3% government bond when I can have a 7% bond. You don't need a masters from Wharton to figure that out. The way back to the credit markets will occur from January forward as the T-Bills mature and the bond yields of Treasuries will go back to an inflation plus relationship.
What does that mean for real estate in the Peninsula and the stronger markets are looking at? Sellers have taken their homes off the market. It is only the estate sales, divorces and fixer uppers that remain; as well as, a few spec builders who want to end their pain. I would look very carefully at what is out their now before the end of the year. If you don't mind paying up and having the comfort of knowing the economy is not going to zero that is your option, wait until next year. My goal is to keep you informed so you can make the wise and comfortable decision.
Happy Holidays,