Afordability Index

Originally Published January 31, 2009

I just saw an article from the NY Times that was addressing the affordability of housing across the nation. Click the follow through for the chart and some explanation. Interesting numbers. Could be very positive for the outlook.

Granted, these numbers come from the National Association of Realtors, who I try to quote as little as possible. They are always trying to spin things positively, and I respect their position, but not always impressed with their USAToday quality stats. This chart, however, got my attention for two reasons 1) Because the NY Times found enough interest to put it out there, and 2) Because it is a 35 year look at housing in America.

The NAR has taken a look at Median Income in America and compared it to the income needed to qualify for the Median home price in today’s market. So this looks at home prices, income, and mortgage rates. Back in the 80s when mortgage rates were 18%, the median family had only ~65% of the income needed to buy the median home. From 1989 until the run up in 2003, that number remained between 105% and 120%. As the prices went up in mid part of our current decade, the numbers dipped as low as 100%, but with mortgage rates lower than any time in 50+ years, the Median Family now has nearly 160% of the income necessary to purchase the median home.

This should mean that there is access to more and more first time home buyers to enter the market in the near future. It all relies upon consumer confidence now. Mortgage money is flowing. Wages support the purchase of new homes. The question still falls back on whether people are willing to take the plunge or not.

SEC Oversight

Originally Published Dec 12, 2008

I read today about an author who has been screaming the demise of the housing market for quite some time. He has written a book about the Housing Bubble and now has a new theory. Realtors should be watched by the SEC the same way Financial Analysts are. Hmmm… The idea is that stock brokers can’t make predictions regarding future performance of stocks, and Realtors shouldn’t make predictions regarding future home values. His rationale for this is that Realtors’ continual misrepresentation of the marketplace led to the bubble.

I have too many different perspectives on this proposal that I am not really sure where to start. I suppose the first and easiest is to start with the absurdity of it all. The SEC is there to regulate and provide transparency to the world’s financial markets. In fact, the market that is regulated is extremely finite. To sell a stock, you must register with the SEC and maintain constant filings, because your sale is a perpetual sale. All of this is to keep the market extremely liquid.

Real Estate is the exact opposite. Properties are not continuously being marketed, and there is no liquidity expected in the market. Real estate (especially commercial properties) actually thrives on insider information. If you have knowledge that Wal-Mart is going to be announcing plans for a new store on the corner of Routes X&Y an investor would be wise to purchase neighboring properties before the announcement.

I am not a believer that Realtors are “responsible” for the bubble. And this isn’t just me trying to shirk responsibility. I think we certainly helped it along and benefited from it. But to say we are responsible to the level that Mr. Roberts wants to believe is a tad naive. What made the bubble happen is that people were greedy, and changes in lending practices allowed more people than ever before enter the market. Because there was a sudden change in demand, the prices went up. Its that simple. Now that the buyers are gone, the market has no where to go.

Perhaps the salespeople at Neiman Marcus should be regulated by the SEC because they tell women every day that they look ravishing in the beautiful dress that no one else wants.

Update on Short Sales

Originally Published July 7, 2008

As I reported last week, there were a total of 14 short sales listed for sale out of 3,687 listings as of last week. I found it interesting to see that today, the National Association of Realtors projected that out of the projected 4.99 million existing home sales that will take place between May 2008 and May 2009, approximately 400,000 are expected to be short sales. That’s nearly 10% of the market, compared to Charlottesville’s less than 1/2 of 1 percent. It looks like local lenders did a better job of lending, and the prices just haven’t dropped the same as in many other areas.

VOWs and Real Estate

Originally Published on May 28, 2008
Earlier this week, the National Association of Realtors and the Department of Justice came to a settlement regarding access to the Multiple Listing Services or MLS’s around the country. The case centered around Realtors denying access to an MLS by non-full service brokers who typically discount their fees. One of the specific changes deals with a group of providers who operate Virtual Office Web sites or VOWs. What they are and why they exist may surprise you. It certainly is not to lower the transactional costs of real estate.

In the CNN report that I read first, the DOJ settlement sounds like little more than an agreement to stop bad mouthing limited service agencies. In fact, there are no punitive aspects of the settlement and no admission of wrongdoing. If you can survive a DOJ inquest with this outcome, I’d say, “Well done.” However, the other reports that I have read discuss who will benefit from the settlement, and I find the answers to be rather odd.
One company Sawbuck Realty claims that they have a new way of saving money for real estate buyers. I have gone through their web site and can’t quite figure out where the big savings are, and certainly can’t see where the service is or the advantage. But it is an interesting enough model to discuss here.

A full service real estate agent is one who represents you through the full process of buying or selling a home. In buying a home, this includes being prepared to talk with your or refer you to someone who can handle the financial questions regarding qualifying. It includes educating a client about the market, the neigborhoods, the builders, the schools, everything. For persons moving from another city, this is enormously important. The full service agent helps to cull the data so you don’t have to. Previewing property is but one thing an agent does for his or her client. Being able to provide information about homes already sold (and not just prices and square footage). The full service agent helps to understand the right price to offer on a good home once it has been identified. In contract negotiations, the full service agent creates a Chinese Wall to keep the buyer at a distance from a listing agent or seller and maintain control. Once a contract is obtained, the agent is responsible for helping find the professionals for the home inspection, the insurance companies, further negotiations on agreed repairs, etc… Clearing the attorney and getting through closing with financing in place.

A limited service agency is not necessarily a discount broker. The term discount broker simply refers to someone who charges a lower than traditional rate for transactions. These may be set fees, they may still be a percentage commission. In some sense, all agents are discount brokers in that commission schedules are always negotiable. For instance, clients that list a home and purchase a home with me always receive a rebate at the second closing.

In limited service agency, real estate agents or brokers provide an a la carte menu of services and charge for them. One broker in particular will list a home on the MLS for a set low fee. However, in the contract it states that if you call and talk to an actual agent, there is an automatic $2,500 fee assessed. For sellers who believe they can do everything themselves and do not need any representation, this is not always a bad option, and money can be saved.

But now on top of full service and limited service agency enters a no service agent on a Virtual Office Web or VOW. Sawbuck Realty is just such a company. Their web site discusses why agents are important, and then incorrectly discusses kickbacks that they claim take place in the market. It is illegal in RESPA to take a kick back from a mortgage lender or a settlement company, so fact is, nationally, this isn’t happening. Real Estate firms are indeed forming separate companies that own mortgage brokers or settlement fees, and those relationships are spelled out very clearly, and agents are not allowed to be compensated on their use. The advantage to the agent and consumer is that many of these mortgage brokers answer almost exclusively to a single firm, and thus their customer service and committement is higher to those agents. It is not a monetary thing for the agents.

Sawbuck has formed relationships with companies and in return have negotiated lower fees. Interestingly, agents do this all the time, but Sawbuck seems to ignore this. I work with prefered lenders all the time on new construction projects, but never are clients required to use them. It is always at the discretion of the client.

The Sawbuck model is simply a web site to collect names and e-mail addresses. They actually provide no service at all. They interview agents who they claim are experts in their markets; however, nowhere do they define the requirements for these experts. You fill out the web registration and your name is SOLD to an agent in your area. It’s that simple. It is nothing more than a referral site. Wonder how much you were sold for? If you are buying a $400,000 home, you were just sold for around $3,000. (Full disclosure here: I do not work with Sawbuck, and they may take less than the industry norm…. or maybe even more… There are plenty of corporate relocation companies that take $4,200 on this size transaction.) Now when you meet with your agent, you have no ability to negotiate a fee. Keep in mind the agent just lost $3,000 of their commission. This was the buyer’s money. But they never knew that they were going to pay a fee. In fact, the web site says that their service is absolutely free.

Working with any agent buyers and sellers must always keep in mind that fees are negotiable. Unfortunately, signing on with a VOW gives your negotiating power away. If interviewing agents is all Sawbuck does, I’d Google for some questions to ask agents and move on from there.

Was That Good News I Heard

Originally Published March 24, 2008

Today, the NAR (National Association of REALTORS) released numbers for February. Against all pundits’ best projections, the numbers beat the Street. Despite low consumer confidence and a shaky credit climate, the numbers for home sales in February were up 2.9%. While the growth is hardly considered epic in its greatness, it is better than anyone expected, and that is great in and of itself. Does this mean the market downturn is over? Probably not. What it does show is that consumers believe that the market correction is just that, a correction — Not a bubble about to burst. If the public saw 20% more loss in prices, they would continue to hold off and bring prices down more before entering the market.

But, not all the news is good. While sales are up, prices across the country as a whole are down. Down over 8% in the last year to be exact. So, is that the correction? I doubt it.

What we are seeing is pockets of the country pulling the whole country numbers up, while pockets of the country continue to take a slide. I have a client who is moving from out of state. They are going to rent for a year. Not because they don’t trust the Charlottesville and Albemarle Real Estate Market. They are going to rent because they are fairly sure that selling their home in the Midwest is going to take all their savings just to get out from under the loan, but they still think that is the right decision to make. They are not interested in finding out if Lake Effect Mortgages take as much to shovel out of as Lake Effect Snow.

So, here we are in Charlottesville. I think the positive here is that the market is moving in the right direction, leveling out. For people in Charlottesville, one of the hardest things to stomach is an offer on your home that is contingent upon the sale of the buyer’s home in Anytown, USA. If the buyer is coming from Charlotte, maybe that is not a bad thing; but if the buyer is coming from Modesto, CA, look out! It could take a while.

As with any national trend, the pockets are important, but local news is even more important. As I have pointed out in the past, the Charlottesville City market still looks pretty good. I had multiple parties interested in my most recent city listing, and have people lined up and ready to talk about more.

Let’s just hope the rest of the country (and Albemarle for that matter) can get the enthusiasm of the City.

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