This has been on my mind for a while: Two ways to hedge against or reduce the potential for problems in a tough market, today and for the future.
#1) Buy something that you can improve.
Not a disaster, but a home that is priced right for the condition of the home.
If you are a do-it-yourselfer, have some home improvement skills and don’t necessarily mind some effort and sore muscles, locate a home that may need some improving.
Benefits of improving a home:
saving tens of thousands of dollars over time
gaining more skills
obtaining pride of ownership
realizing sweat equity
making improvements that suit your style and tastes
Challenges:
dedicating enough time to do it right (been there)
costly mistakes (been there)
poor budgeting & planning (no comment)
marital tension (been there, been there again, and will in the future).
it costs more than you think (can’t discuss this on a public blog due to potential for more marital fireworks, please forgive).
throwing in the towel and hiring contractors (never done this, but have threatened so by yelling curses out towards the sky or at snickering neighbors peering through their kitchen window as I work in the mud and rain; cursing particularly after nearly cutting off my left forefinger and middle finger (Dr. said very important to save that finger for I-5 freeway discussions with other motorists). Note to self: place blade onto drywall, not human flesh. Props to Swedish Med. Ctr. in Ballard. I digress.)
The advantages of sweat equity really do outweigh the challenges. Patience and perseverance will pay off.
#2) Buy the right location with the end game in mind (ie, life happens, so you may have to move).
Because housing is not necessarily a quick sale, as many are finding today, it is important to never lose “location” in the midst of your search.
Although location has been an cliche for so long, it really has lasted the test of time. Location means a lot of different things to people. It could mean reasonably close to employment, school or school district. Perhaps you prefer a newer development.
So, when the time is right for you to buy your first home or move up to a home that meets your needs today, then don’t be afraid of being patient enough to find the right house in the right location and getting your hands a little dirty. It can pay off handsomely and may put you in the drivers seat through market ups and downs.
Bonus: #3) Invest in Case-Shiller Index Hedge Fund
Quick Note: If you are thinking long in this real estate market, this is an exceptional time to consider a purchase or refinance with rates this sweet. The motivation level is rising among many selling. Contact your loan officer or me for suggestions for lending professionals (no obligation of course). I have no ownership stake in any financial services company (mortgage).
I want to talk about Snohomish Co., not that there’s anything wrong with King Co. (hey, I grew up on 23rd and Prospect on Capitol Hill, so I know the area). Not everyone in Snohomish Co. drives Ford trucks, has big hair/mullet and listens to Cinderella or Quiet Riot. Yeah, cheap shot. Moving on…
The question most interesting to me is that of “who understood the path we were on during the last three years or so and who did not? And, why? What shaped their perceptions?” I’m an amateur enthusiast of the markets with a small wrinkle, so you can take what I discuss with a grain of salt if you wish. The wrinkle is that I have no credentials whatsoever other than being on the front lines, per se. I have no interest in a slowing market, as it translates into lower revenue, but I do have in interest in assisting readers in garnering sensible market knowledge. And I’m very keen on strategies to keep money in consumers pockets, but that is for another day and another blog.
In escrow you see what the majority of those outside can’t and to a scale (conservatively) of roughly 50:1— meaning that your average allied real estate professional is closing one transaction for every 50+ in a busy escrow office. It is an interesting perch to be on, looking at the frenzy below like an Eagle in wait. The simple graph below show steady price increases in Snohomish Co. in 2006 up from 2004 and 2005 levels. During 2007 you can see that the market bounced around and was “trying to find its legs.”
In late 2006, something very interesting occurred. Agents started to see very small downward pricing adjustments appear in the NWMLS. Why did it catch my interest? Because downward price adjustments were virtually non-existent during all of 2005 and much of 2006. As we moved along into the 4th quarter of 2006 and beyond, the downward price adjustments for listed property picked up a steam and continued in earnest throughout 2007. As inventory began to increase, houses taking longer to sell, other characteristics started to come into play as well. Sales incentives started showing up— in commissions paid to agents and in other forms such as cars, trips or upgrades in new construction. These distinctive signs were the beginning of the “winds of change.”
Today, the one common denominator everyone can agree on is that the market has changed. One of the changes I’ve noticed is the pool of entrants into the market are meaningfully healthier, at least in closings our office has performed. For example, the credit worthiness and down payments of recent clients are of higher caliber. Also, casual interactions (with people who don’t know I’m in the business) over the past month or so lead me to believe that housing is really on the forefront of minds, perhaps superseding that of our election year festivities. There are not many places you can frequent without somebody discussing housing. Much of this is attributed to news and the mortgage and credit market dysfunction that came to a head in August, just a few months ago.
I thought I would tap a few of my resources to find out how 2007 ended the year compared to the market of 2006 in Snohomish County. My interest is in single family home data, so the simple chart below exclude condominiums. The focus on single family homes really is two-fold in my mind. First, the majority of housing inventory is single family homes, both resale and new construction. Second, I am of the belief that the inventory of resale homes is a bellwether for the general sales activity of the market and is most easily understood as it impacts and triggers sales activity of other segments of the market.
As 2007 came to a close and I had some time to look through files and reflect over the differences of 2006 and 2007 transactions, I came away with a few things:
the transactions our company closed in the 2nd half of 2007 involved more price negotiations
there were more inspection related work orders (just about non-existent in 2005-06.)
more commission credit being allocated to a buyer or seller from agents
started to see more repeat clients in the refinance arena
started seeing distress sales and distress refinance transactions (must refi or must sell)
anecdotal pricing confusion was evident as the market tried to get it “legs” back. Seller confusion about the direction of the market started to become noticeable in wide pricing swings.
some sellers today are probably still unrealistic about what the market will bear in today’s credit environment and are not necessarily prepared for expectations of buyers who believe they are now in the drivers seat.
In Snohomish County, we have gone from a median single family home (SFH) price of about $382,500 in March of 2007 to close out the year at $358,000, a meaningful adjustment. Sales of SFH’s finished the year in December 2007 at 570 units sold vs. 950 in December of 2006 (excluding the for sale by owner market). To give you a scale of price increase the county experienced since Jan of 2004 to the median price peak in 2007: the median price in January 2004 was $232,433 and at the peak in March of 2007 it reached $382,500.
Looking back, there is absolutely no question in my mind that one of the largest triggers of the price increases was due to the type of financing available: 100% loans with sellers increasing prices over and above the list price to offset buyer closing costs paid by the seller to fulfill that type of loan program. It was artificial appreciation at its core, not based upon traditional fundamentals. And that is the biggest story nobody covers. Today, the removal of many of these products (or heavily pared down with many strings attached such as low LTV, large down payment, can afford the loan and 700+ FICO scores), has led to the opposite market movement.
My best assessment of the market moving forward is that we will see sustained inventory, probably increasing, (after one week of 2008, we are already off to a swift start) which will lead to further price pressure even in the realm of what I would consider exceptionally good interest rates on mortgages. As of today, a few resources have indicated that 30 yr fixed rates have been as low as 5.375 paying 1/8th of a point to 5.5 at par. For those that have decided that buying is right for them, it is hard to argue against locking in 30 yr rates at these levels. Just a few weeks ago they were over 6%. In light of the recent drop in 30 yr fixed rates, I expect to see a tick up in mortgage refinance activity and perhaps some sales as well. Overall, I’m bearish on the market in aggregate. I hope I’m mistaken.
Once again, thanks for those that have supported our small business during 2007 and have corresponded with me during the last couple years or so.
Although I have noticed homes dropping off the market in my neck of the woods in Snohomish Co, generally speaking, for semi-serious sellers, early and mid-October is a bit soon to pull the property off the market. I can understand if it was during the full holiday season from a few days prior to Thanksgiving through New Years. But, if you pull out this soon, the potential for back-firing increases if the thought process is “I’ll try again after the Holidays.” Many others will do the same. Maybe a Realtor can chime in on the efficacy of this reasoning.
I have a sense though that some of these homes going off the market today, either by expiring, Realtors giving back the listing, or mutually taking the home off the market, are being replaced by others. No hard Data, but maybe a Realtor can confirm this.
That being said, one of the things I’ll be curious to follow is if inventory as a whole (system wide) drops without replenishment. If we maintain the current inventory levels going forward, then I would guess the region will be in for quite an increase after Jan. 1, 2008. If that happens, then we will see further downward pressure on prices. It is also important to not forget about the underground market of FSBO’s. I read somewhere that this market is roughly 10% of the inventory/sales that are not accounted for by regional MLS statistics across the country. So in theory, there are a lot more homes on the market than reported.
Remember, many agents suggest to their clients that they can try again after the New Year. All these homes that expired or were mutally taken off-market will come back on the market with the same agent or another real estate company. And, all those reading about market struggles across the country who are holding off until after the first of the year are going to be competing with like-minded-soon-to-be sellers. On balance, my sense is that we are going to see a lot more inventory come on the market after the year.
The list price reductions appears to be on cruise control right now, along with incentives for closing cost contributions, rate buy downs, etc..
Over at Rain City Guide, Rhonda Porter mentioned that 30 yr fixed rates are now under 6% again. That is probably going to move some folks to write earnest money checks for a purchase or refinance.
Musings
I went to the Everett Silvertips game last week with Steve Hatloe of very long time Everett business institution Hatloe’s Interiors/Carpet One. Naturally his business is also dependant upon housing and household improving. Prior to the game he asked me about if he was the only one ‘out there’ who thought to himself, “how are people doing it?” I looked back and said, “gosh, that makes two of us. But, since you asked………”
Someone asked me a while ago what it’s like to be in escrow? I said, “like a referee.” We try to make sure everyones obligations are met, but sometimes the referee get’s the ire of one’s temper.
Golly, this housing slump sure isn’t much fun (for never-ending appreciation-believers and real estate agents), is it? But hey, at least it’s almost over, right? Wait, what’s that you say? It’s not going to get better soon? Pfft. You’re just some doom-and-gloom blogger, why should we listen to you?
Almost the only good news for WaMu shareholders Wednesday was that the company’s bad news wasn’t quite as bad as outlined earlier this month.
More borrowers are falling behind on their payments, foreclosures are rising, home prices are down in much of the country, and the mortgage markets that seized up earlier this summer still are closed to nearly all but the safest loans.
And none of it, WaMu executives say, is likely to get better any time soon.
“This is perhaps the most challenging cycle for housing that we’ve seen in many decades,” WaMu Chief Executive Kerry Killinger said in an interview. He and other WaMu executives said they don’t see any improvement in the near term.
You know what though? If you want to turn a blind eye to reality and believe that the turning of the seasons will wave a magic wand over the housing market and make it all better come spring, you go ahead and believe that. Just try not to read the news or spend any time researching actual facts.
Because it’s easier to believe in what you wish to be true when you don’t bother looking up the facts.
But hey everybody, get out there and buy a home, because there’s never been a better time to buy!
Rather than place a lengthy remark, I thought I’d place it as a post. Hope you don’t mind. I’m going to type as I think, so I get a free pass on typo’s.
Regarding the Steve Tytler’s Everett Herald piece:
Steve & fellow bubble believers,
In the spirit of your article, I don’t disagree with your observations. But, as one of the folks that you reference as working in the marketplace or real world, I believe that if the Puget Sound area and Snohomish Co. where our office is located, experiences a 10-20% drop in housing prices, many clients of ours in which we closed their purchase transactions are going to be in a world of hurt. Many people in general will be in a world of hurt. I think of all the folks with piggyback/100% transactions and the countless “serial refinance” people who closed their transactions all across the country. It’s staggering to be honest.
A 10-20% drop in housing prices will put people into a major pickle to say the least. A less severe drop in the single digits will reach out and touch many as well. My belief is that homeowners who are selling need to hear that the market has changed in a meaningful way.
The key element that is absent in the comments from those in real estate leadership positions locally is this:
Our local region and more broadly, the country as a whole, has NEVER experienced the rate, scale and level of housing price inflation as we have over the last three years or so. There is no benchmark. The previous local correction in Spring of 1990 forward does not compare. In my opinion, those who suggest that this current correction will mimic corrections in the past may be underestimating the euphoria that drove our market to unbelievable heights. The recent lending absurdity was not present in our last correction. There was no better seat in the house to experience the market than being in the escrow business.
Look, I’m not in favor of the market changing gears as it affects our small business too, but it tires me to no end in hearing and reading local and national professionals in leadership positions (Lawrence Yun among many others) continually spin the “rates are great, economy is doing well and job growth is good.” Tell that to the thousands who will lose their homes across the country, the scores of people who can’t refinance because lenders are gone or standards have tightened enough that refinacing is not an option. Tell that to the thousands of honest, ethical loan officers who have no jobs because of the bull crap lending and behavior that enabled this market frenzy and subsequent and inevitable correction.
The idea of the “normal market” garbage rhetoric is meaningless to markets across the country experiencing severe corrections. What happened mid-August was not a “normal” event in the financial markets. I humbly ask as a small business owner in the real estate business that the real estate community start building their credibility back in a positive manner by discussing the market for what it is. True, currently the local market is not crashing and the sky is not falling, but housing prices are softening. We only started to hear no-nonsense analysis after the evidence was so obvious that those in leadership positions were seen publicly as foolish or worse.
The sooner everyone calls the market as it is, the sooner our correction will be over. People will continue to buy and sell homes in any market, but they won’t be buying because “real estate always” goes up. They will buy because it’s a place to call home, establish roots in and become part of the fabric of a community.
When people sitting across the table from me signing their paperwork to buy a home talk about everything BUT how much money they will make in “perceived equity”, I’ll let you know we are back to a “normal” market. When loan officers sitting across the table from escrow staff in offices across the country stop telling their clients “we can just refinance you again after your pre-payment penalty expires” in a year or three, then I’ll tell you we are back to a “normal” market.
Tim Kane
Co-owner
Legacy Escrow Service, Inc.
Blog Handle, “S-Crow”
