Sold!

Toddi Gutner

Right after I blogged about whether my family should sell our Aspen condo (Jan. 17th entry), I sat next to a fellow on an airplane and we ended up talking about—you guessed it—real estate. It turns out he had just sold his beachfront home in La Jolla, Ca. six months ago--at what he thought was the top of the market. His return: A whopping 110% a year for three years.

Let’s put it this way, at 44-years-old, he doesn’t have to worry about college for either of his two teenage children or his retirement. Now, he and his family are renting a beautiful home in the La Jolla hills overlooking the ocean. The kids didn’t even have to change schools.

My new friend figured the real estate market in the San Diego area is a 12-year-cycle—up six and down six. He’ll rent for the foreseeable future until the market drops enough to warrant buying another home.
He used the same logic to encourage me to sell our Aspen condo. His rationale, similar to one of the readers who commented on my blog, is that Aspen (like La Jolla and every other building-limited locale) market will slide, we could invest the sale proceeds, and then buy another condo in Aspen after the market softens.

I appreciated his free real estate advice and told him so. But I realized that for some people, real estate is more than an investment, it can be an emotional experience. For this fellow, who grew up moving every few years while his parents made money selling their family homes, it wasn’t hard for him to sell his much-loved home on the beach to bank the outsized returns on his investment. For me and my sisters, real estate property is for keeps. Sometimes, I wish it weren’t, because I sure would like to be set for retirement, too.

Who buys those ugly houses?

Chris Palmeri

You've probably seen the billboards. Big black and yellow signs proclaiming "We Buy Ugly Houses." Just who are these people with bad taste and money to burn? Turns out the signs are a creation of HomeVestors of America Inc., a Dallas-based firm that sells franchises to investors who want to use the company's formula for making money in real estate. It works like this: Franchisees pay $46,000 to join the program and for that they get a two week training course, a personal coach, an exclusive territory and the company's proprietary software program that helps them analyze how much to pay for a home and how much it will cost to renovate. The goal, says company chief executive John Hayes, is to buy houses for 65 cents on the dollar, fix them up and either rent them, sell them or flip them to another investor in the company's network. Is that kind of discount really possible in the kind of hot market we've had in recent years? Hayes says yes. Last year, HomeVestors' 250 franchisees purchased 6,500 ugly houses, a 27% increase from 2004. "There are more distressed properties than meets the eye," Hayes says. "We're not talking about million-dollar ocean front condos." Indeed, the average home his franchisees purchased cost less than $100,000.

The Mortgage-backed Bond Bonanza

Chris Palmeri

Standard & Poors, which like BusinessWeek shares the same corporate parent, The McGraw-Hill Cos., just reported its 2005 stats on the mortgage-backed securities market. These are the pools of home loans that get sold on Wall Street to institutional investors and mutual funds. Despite rising interest rates, 2005 was another record-setting year with $2.787 trillion worth of mortgages, sliced, diced and sold on Wall Street. That record issuance was due entirely to originations of riskier loans. The number of new subprime loans reached $465 billion. Issuance of Alt-A loans--those where less income documentation is required--more than doubled to $332 billion. S&P; still reports that upgrades in its ratings of these loans exceeded downgrades by nearly ten-to-one. That's good news. But, ominously, 2005 was also a big year for downgrades. Some 150 securities were downgraded last year, up from 69 in 2004. Last year's downgrades were mostly due to performance of those riskiest loans. Lenders' increased willingness to extend a mortgage to just about anyone is beginning to show its dark side.

When is the High, What is the low?

Toddi Gutner

I’ve just spent several hours reading housing bubble blog entries and comments. It seems there is some general consensus from the American public (if there can actually be one on the world wide web) that the U.S. real estate boom peaked in the last 12-18 months-depending on the market--and the bubble is slowly leaking.
Of course, real estate is local, so it’s not every market in every state, but many of the cities people blog about (read: either live in or want to live in) wrote about some indication of a slide.

Continue reading "When is the High, What is the low?"

The Historical City

Chris Palmeri

New Orleans Mayor Ray Nagin was in the news this week, unfortunately calling for his hometown to return to being a "Chocolate City" and suggesting that the storm that wiped out so much of the city was retribution from God. It was those remarks that made headlines and Nagin apologized for them. At the same time, however, his Bring Back New Orleans Commission was releasing its sweeping plan of action. Nagin was right in the sense that New Orleans' tragedy was of biblical proportions--108,000 houses under at least four feet of water, as many as a quarter of them Creole cottages, shotgun houses and other dwellings of historic significance. The Commission's plan includes a number of public infrastructure initiatives, from strengthening levees to building a new light rail system that would spur local development. The plan also includes $18 billion worth of tax incentives, below-market loans and outright purchases of property, designed to get New Orleans' housing stock habitable again. All of that's necessary to save New Orleans' rich cultural heritage. That's worth writing about a lot more than Nagin's silly "Chocolate City" comments.

Back Under 2 Million

Peter Coy

No question--housing construction is slowing. The Census Bureau said today that starts on privately owned housing in December ran at a seasonally adjusted annual rate of 1.93 million units. That's down almost 6% from a year earlier. It's also the first time since last March that the annual rate has been below 2 million.

This is ...

*Bad for construction workers
*Bad for homebuilding companies because it means their sales will fall
*Good for homebuilding companies because the drop in construction lessens chances of a glut
*Bad for real estate agents, because there's less new inventory to sell
*Good for home sellers because it means there's less fresh supply to compete with
*Bad for homebuyers who were hoping for the same glut that homebuilders fear

Did I leave anything out? Oh, yeah:

*Good for crows. The corn fields they feed on won't be bulldozed under for subdivisions quite so quickly.

Is it time to sell?

Toddi Gutner

It’s already starting…the difference of opinion between family members about what the best move is concerning some real estate. As a personal finance writer, I know there are no easy answers or strategies to working through these types of disagreements. Maybe this blog can provide some insight.

Here’s the situation: My 78-year-old father owns a 2-bedroom condominium in the heart of downtown Aspen, Colo. He bought it for $30,000 in 1969 and it was recently appraised at something north of $800,000. Call him lucky. It is a ground floor condo with views of Aspen Mountain out the front windows and Independence Pass out the side windows. The lodge owners next door are planning a multi-million overhaul of their property which may or may not block our views. My father is considering selling, convinced that this new next door development can only hurt our property value. He isn’t in need of the money, but thinks he can find a better investment opportunity with the sales proceeds (hedge funds? stock market?).

I say, he’s wrong. The condo is already paid off, and at this point, is a cash cow—the rental income more than covers the expenses. Plus it is available for family members and friends to stay—and that is priceless. It is by no means a luxury accommodation, and is likely to need some remodeling work in the coming years, but it is perfectly adequate as a mid-priced rental right now.

My father responds to well-reasoned advice and recommendations, especially if it’s not coming from his three daughters. So I asked Jim Keene, co-author of the recently-published book Retire on the House (John Wiley & Sons) and a regional manager for Wells Fargo Private Client Services, what he thought we should do. Keene recommended that we hang on to the property. The real estate market is all about local markets and Aspen is Aspen--land in that valley is a limited commodity. That means there isn’t likely to be much that can negatively affect the property values there.

I figure as an investment property, it doesn't get much better. But then again, I'm only the heir and not the owner.

Zillow.com: How Scared Should Brokers Be?

Peter Coy

In the 1990s, Rich Barton founded Expedia, the hugely successful travel website that wiped out the jobs of untold thousands of travel agents. Now he's starting up a real estate website called Zillow.com Inc. that he hopes will be equally revolutionary.

But this time, Barton says, he's not out to wipe out the jobs of real estate agents and brokers. The "flashing-in-neon-lights difference" between travel and real estate, says Barton, is that lots of travel agents are/were just order takers. In contrast, he says, "human advice-giving is absolutely fundamental in real estate." Brokers are hoping that he's not just buttering them up before the kill.

I caught Barton speaking this morning at a highly entertaining meeting called The Real Estate Connect NYC Conference run by Bradley Inman, publisher of Inman News Features. (I recommend Brad's conferences to anyone who wants to stay abreast of what's new in residential real estate brokerage. Here's a link to his blog.)

Most of the people in the audience had heard about Zillow and hoped that Barton would finally spell out exactly what he had in mind for the company, which still hasn't launched any product or service. But Barton kept mum except to make a few points:

--He's hoping brokers will be Zillow's customers, not its competitors. "If we succeed," he said, "brokers will use Zillow as a marketing vehicle."
--"We're not going to be like Expedia." That is, Zillow won't act as an agent by earning commissions from sales. One reason: It would require too much skilled staff. "I can't hire enough professionals. It doesn't scale."
--Zillow won't be some kind of national Multiple Listing Service of homes for sale. In fact, Barton said he thinks anyone trying to create such a list is wasting time. The reason: "The Web is the national MLS already. It's happened. You're arguing over yesterday's news."
--It will make its money from advertising on the site (presumably lots of it from brokers)
--Lots of its information will come from users of the site--a model that has been proven highly successful by real estate blogs like curbed.com.
--Zillow will launch as a beta site--i.e., with kinks--within the next six months. Barton promised to shave his head if he hadn't launched Zillow by the next Inman conference, which is in July.

In an email to me and my colleague Tim Mullaney, Barton added two other tidbits:

--employee count: 75, majority engineers
--we’ve raised $32m

As near as I can figure from listening between the lines, Zillow.com will provide lots of information to help people buy homes more intelligently. That does sound like a threat to brokers, because one of the key things a broker provides to buyers and sellers is information. Already the headlock that brokers have on the market is being loosened by the availability of all kinds of information on the Web. (One company that goes super-deep into the data: Property Shark, which started in New York City and is expanding to Florida, Los Angeles, and eventually--it hopes--all the major cities.)

Barton says the best brokers will be able to build on what Zillow offers. The bad ones could get squeezed out. He cited a California Association of Realtors study that found that buyers who searched on the Internet spent an average of 1.94 weeks with an agent before buying, while traditional buyers spent an average of seven weeks.

Said Barton: "It's very easy to think, 'Great, he's done all the work and I can earn a big, fat commission on 1.94 weeks of work.' You have to rethink that."

Scary words for brokers. The winds of change are blowing.

More and More Unsold Homes

Peter Coy

A huge boom in housing construction may be about to create a glut in the market.

The inventory of unsold new homes doesn't look too scary when you view it the conventional way, namely, in proportion to the rate of new-home sales. In November, the inventory added up to 4.9 months' worth of new-home sales, vs. 4.3 months' worth one year earlier.

But the inventory looks scarier when you look at the actual number of unsold homes--503,000, seasonally adjusted, in November. That's up from around 350,000 in the early 1990s, the last time there was a glut.

The only reason there isn't a glut so far this time is that the rate of sales remains strong. But if the rate of housing sales drops, the inventory is likely to pile up faster than builders can dial back on construction. That's what happened in 1991, when the inventory of new homes topped out at more than nine months' supply. Now, with a lot more homes in the market, it's easy to imagine the ratio of inventory to monthly sales getting even higher.

Thanks to John Burns of John Burns Real Estate Consulting Inc. (who, by the way, is not a housing bear) for pointing out this issue.

Deflating Bubbles, and Tanking Markets

Toddi Gutner

Okay, so let’s say our reader, who commented on my last entry, is right. Wes said that:

"We will have a number of months (18?) where the numbers show close to 0% appreciation, before finally going truly negative and doing the needed correction before returning to positive levels (2009-2010?)... I expect a full generation of investors will be scarred from the aftermath of this bubble."

I can imagine a pretty grim scenario for the residential property market if this reader’s prediction is right. I'm not so sure we can expect such a healthy rebound in 2010. That year, the youngest of the baby boomers will be 46, the oldest 64. They will likely begin to think about cashing out and the selling the homes where they raised their children. I know I’m already thinking along those lines and I’m only 45.

In 1997, there was a baby boomlet. There were the most number of children born since the last year of the baby boom in 1964. In 2014, those kids will be going off the college, and their parents (read: me) will no longer want to pay the exorbitant property taxes to support their local school districts. They will be looking to sell their homes and move to those up-in-coming active communities for residents 55 and older. The result? A glut of single family homes and then tanking prices. I wonder if this deflating real estate market might last longer than anyone expects?

SUB 500 Mortgage Inc.

Peter Coy

Thanks to anotherf@ckedborrower.com for pointing out a company specializing in mortgage loans for people with abysmally bad credit--FICO scores below 500.

The San Diego-based company, SUB 500 Mortgage Inc., illustrates the home page of its website with a driver's eye view of a race track, which I guess is the revved-up perspective of people who actually think they can go out and buy a house with severely impaired credit.

Rates start at just over 10%.

Maine bubble leaking...

Toddi Gutner

While most real estate watchers are keeping their eyes peeled on the big metro areas like Boston, Washington, D.C. and Los Angeles, folks would be wise to pay attention to second and third tier property markets as well. After all, only 24 million residents, just 10% of the U.S. population, live in the most-populated 10 cities in the country.
One such market is Portland, Me. This article in the Portland Press Herald (free access, but registration is required) features a couple who got caught owning two homes, not because they wanted to, but because they couldn’t sell one due to the slowing real estate market. While the stats of sellers dropping their prices aren’t as dramatic as those in Boston, they’re telling nonetheless.
Perhaps even more interesting is the mini-blog thread that follows the story. I suspect the bursting of the real estate bubble is going to be more like a slow, gradual leak than an actual pop like we saw in the dot com crash of March 2000. What do you think?

What makes LA run?

Chris Palmeri

All politics is local, as Tip O'Neil famously said. And so of course is all real estate. That thought was driven home to me recently by a research report that crossed my screen. A firm called Majestic Research tallied up the latest stats on new home sales around the country. Some markets are clearly in a downturn. Sales have fallen by double-digits in Chicago, Washington, D.C. and suburban New Jersey. San Diego and San Francisco are reporting declines. Average selling prices are also falling. But Los Angeles? Sales up 36%. The average asking price is up 6.9% month over month to $647,000. I know from speaking with friends that existing home sales in Los Angeles are taking longer. Gone are the bidding wars and premiums over the asking price. But how long can Los Angeles continue to buck national housing trends? Do readers have any thoughts on what's propping up the LA market?

New and Improved

Toddi Gutner

A new year means a new list of home improvement projects. Each year, my husband and I trade off who gets to spend the budget for house projects---2005 was his year. He takes care of the outside of our Westchester, N.Y. home, and last summer he had a lovely flagstone patio and retaining wall built.

This year is my year, and I take care of the inside of the house. That means two of the four bathrooms in our 1967 colonial house have got to be remodeled. They’re so retro looking that they’re almost new millennium cool, but I’m all for getting rid of the bright yellow and powder blue-tiled bathrooms.

Still, every homeowner has those nagging questions: What’s the financial benefit of a remodeling job? Will I get my money back? Well, I was happy to find out that yes indeed, I will not only get my money back from my bathroom remodel but I can actually expect to make money, according to a National Association of Realtors (NAR) report. http://www.realtor.org/publicaffairsweb.nsf/Pages/CostvsValue2005?OpenDocument Below is an excerpt:

Many homeowners who complete midrange bathroom remodels can expect to make money; the cost on a national average for this project is $10,499, and the return is $10,727, or 102.2 percent, compared with 87.5 percent in 2002. On average, major midrange kitchen remodels cost $43,862 and return $39,920, or 91 percent of the costs to remodel, up from 66 percent in 2002.

Though we're not thinking of selling our house anytime soon, it’s nice to have those nagging questions put to rest.

In 2006, a Harsher Reality for Realty

Peter Coy

One of the smartest and best-read publications on residential real estate is the monthly REAL Trends, edited by an industry veteran named Steve Murray out of Littleton, Colo. (Click here for more info.)

The December issue has a bit of a gloomy feel, touching on the themes I wrote about just before Christmas. An essay by Steve Murray traces the enormous boom in home sales and then speculates on the impact of a cooling-off. Here are some tidbits:

--Home sales volumes exploded from $695 billion in 1995 to over $2.1 trillion in 2005.
--Residential real estate commissions grew from less than $25 billion in 1995 to over $63 billion in 2005.
--Membership in the National Association of Realtors grew from about 720,000 in 1995 to nearly 1,200,000 in 2005.

Now, says Murray, it looks like there will be a shakeout. But who will get shaken out? Traditional full-service, full-commission brokerages argue that the discount brokerages, flat-fee firms, and do-it-yourself operations will be the first to bite the dust because sellers will be willing to pay well for the services of trusted guides in a more treacherous environment.

But Murray isn't so sure. Markets that cooled first like Denver and Atlanta haven't seen any rebound in commissions. And some homeowners who need to sell will have so little equity in their homes that they won't be able to afford full-service commissions. So, he says, the discounters are here to stay.

How can full-commission brokerages survive? Murray says leading firms have added mortgage, title, and other settlement services; established Internet marketing and service to communicate better with customers; and invested more in recruiting and training.

That's expensive, yes. But as Murray says, quoting an unnamed "wise man" (Melchior, maybe?), brokers who hope to make a buck from real estate without investing in the business are like "people who show up at a covered-dish picnic bringing only a fork." That ain't gonna work anymore.