November 2008 - Sacramento Metro
Real Estate Update
Timing, Psychology, and Location – These are the 3 important rules of real estate. Ignoring “timing” means you would buy at the top of the market in a good area. As we are seeing now, even the best areas are not immune to correction. Psychology is ever-present and difficult to predict. National and local events make a big difference. And location, although important, is less critical with a remote workforce.
Banks who own real estate (“REO” listings) are aiding this correction in more ways than one. The correction is being accelerated because banks are highly motivated to get the [non-performing] assets off their books.
Banks are not in the business of owning homes. They sell promises, not dirt. They are pricing their REOs to sell. And because they don’t pay attention to those homes, they become neglected and, in a lot of cases, damaged and stripped. This drives prices even lower.
So, in a way, this quasi-seller’s market is pushing the correction [possibly] lower than where equilibrium would otherwise occur. Buyers demand a discount due to the outlay required to make the home habitable. And the spiral continues.
The life of a distressed homeowner is not an enviable life. First comes the delinquent mortgage payment and realization that a debt collector has cause to begin the foreclosure process. Then comes the Notice of Default (NOD) which marks the beginning of “pre-foreclosure” [and the first ding to their credit].
The clock is now ticking and can only be halted by a cure or a purchase offer. After several months of pre-foreclosure, if the homeowner has not cured their default or if no buyer has submitted an earnest offer, the bank files a Notice of Trustee Sale (NOTS) which tells the homeowner [and the world] when they can expect their home (which is not really their home any more) to be on the auction block.
The homeowner can still cure their situation or attempt a Short Sale but, realistically, the homeowner starts packing. By the way, homeowners who mail their keys to the bank will likely get treated more harshly than those who try to sell “short”.
If you know someone contemplating a vengeful action, urge them to consult a real estate attorney. Of course, if you know someone who wants to attempt a short sale, urge them to consult with me so they understand their options.
My opinion is always free and if a short sale is successful, banks are ready and willing to pay commissions to Realtors.
As the indicators show, the other way banks are “helping” is by postponing the inevitable for many distressed homeowners. Banks are postponing the foreclosures of many homes that are in default. Unless the thousands of homeowners in default magically cure their situation, there will be a spike in foreclosures in the Spring months. As you may know, Short Sales help the market, the owner, the neighborhood, and the lenders. The homes are not neglected. Prices are usually higher than a REO. And neighbors don’t have to encounter squatters, criminals, and blight. Some banks welcome a Short Sale. A few even insert a local negotiator that works with the Realtor and the owner.
In the short-term, extremely low mortgage rates could help. In the long-run, these low rates could cause hyper-inflation. Dumping money onto the market makes money less valuable and, hence, prices higher. Ask your local economics professor. They will concur that the Fed will need to correct the situation to mitigate the long-term effects of low rates.
But if we were collectively concerned about the long-term, we wouldn’t be in this situation. And to qualify for these low rates, a buyer needs 25% down payment, Anything less would bump the rate up at least one point. “Skin in the game” is what helps for the long-term. That’s what would have helped between 2001 and 2005.
There is nothing the new administration can do. And creating jobs does not mean “giving more high-paying political appointments”. (The New Mexico Governor has been doing that and now his cabinet appointment makes me very afraid that he’ll do the same for the nation. ) I digress. Excuse me.
The bottom line: Supply is still ample. Competition is low. Rates are even lower. Sellers are motivated. This is a GREAT market for investors, 1st time buyers and folks who want to move up to a larger, nicer home. The stars are aligned.
Remember, my indicators and analysis are similar to the concept used in commodity trading (real estate is a commodity). While this is most useful to an investor, understanding the market is necessary even when buying or selling your family’s shelter, not an investment property. This is an investor’s tool to predict the direction of the NEXT data point. Explaining history should be done but it’s the NEXT action that makes a difference. Refer to this month’s charts and note where the Momentum indicator crosses it’s zero axis (red axis & typeface) — it has been a predictor of the change in actual volumes.
- Existing Home Sales — Momentum fell below zero in Aug ‘05 indicating the drop in Sales in Jan ‘06. Momentum hit bottom Dec ‘07 indicating the Sales spike in Mar ‘08. Momentum is still positive although the holiday effect is upon us.
- Permits — Momentum exceeded zero first in Apr ‘02, spiked with the last big builder push, and has stayed at or below zero since Sep ‘04. Now the builder’s are lobbying for buyer-incentives and bail-out monies.
- NODs — Momentum exceeded zero in Nov ‘05 indicating the NOD increase in early ‘06. Momentum peaked in Aug ‘07. Banks are postponing notices.
- REO Sales — Momentum exceeded zero in Jan ‘06 indicating Apr and 05 ‘06 spikes. Momentum is positive and is showing the holiday effect.
- Rate — Momentum went below zero in Aug ‘07 indicating the Oct ‘07 drop. The bond market is still chaotic but rates are at historic lows.
- Median Price — This is county-wide. Momentum peaked in Feb ‘05 indicating the Price peak in Aug ‘05. Momentum fell under zero in Nov ‘06 and Prices really started to fall in 03 ‘07. Momentum is still negative and is showing the over-depreciation forced by REO listings.
What is YOUR NEXT ACTION?
- If you are an experienced or 1st time investor, let me educate and guide you.
- If you are a Buyer — You have choice, low cost of funds, lower competition, and motivated sellers.
- ACTION PLAN: Hire me. Discuss and decide on strategy. Bank your cash. Determine your buying power. Understand your housing requirements so I can build you a custom and private website. Eliminate homes you won’t consider. A new home can be a great start now and builders are giving great incentives (especially if you bring a Realtor with you). Let me escort you on your first (and every) visit. Tour the homes you desire. Make your best offer. Go into contract. Settle all disclosures, inspections, and conditions. Sign, buy, and move!
- If you are a Seller — If you are in dire straits, call me immediately. This is the only reason you should be selling now.
- ACTION PLAN: Hire me. Discuss and decide on strategy. Stage your home. Keep home clean and available. Market, market, market your home. Consider ALL offers. Go into contract. Settle all disclosures, inspections, and conditions. Sign, sell, and move!