Same as it ever was…

We’ve been here before, and here we go again.

The question I get asked the most is “Are we in a housing bubble?”  Quite simply, the answer is “No.” Just because homes are selling for more than they have before doesn’t mean we’re in a bubble.  A bubble is a fundamental flaw in the market. I like to say it’s like an aneurysm. An aneurysm is a bulge or “ballooning” in an artery.  It is an anomaly and if it continues to expand, it will burst. When a market has a fundamental flaw and is bulging or ballooning, it will burst.  But before that happens, there has to be a fundamental flaw. In 2006, the flaw was terrible lending practices. Borrowers didn’t even have to fog a mirror to get a loan.  A great book about that period of time is Kirsten Grind’s The Lost Bank. It’s about the failure of Wamu, formerly known as Washington Mutual. The lending practices of Wamu, the second largest bank in the country were sketchy at best and fraudulent in many instances.  It wasn’t much better at the largest bank in the country or any of the other ones for that matter. Bad lending practices caused a bubble.

Stated loans, also known as Liar loans became the standard.  Selling everyone an Alt A product (less than stellar credit, larger payment to the loan officer) became the norm, even when the client was A paper (top credit scores, most likely to repay).  They were not governed by the SEC who has my favorite Rule 405. Rule 405 essentially says to put your client in the investment vehicle that is right for their goals and risk tolerance, every time.  Ergo, a retiree should never be in a teaser rate loan, always 30 year fixed rate as they may not have the ability to withstand a shot up in the interest rates. World Savings sold a Pick-A-Pay loan that ended up on 60 Minutes for all of it’s problems.  Borrower could pick their payment. They weren’t educated on why they shouldn’t choose the lowest payment, so many negatively amortized their home having no idea what that meant.

Finally, Realtors had a lot of culpability in what happened in the housing bubble.  Never trust anyone who says a market will always go up. The real estate market, just like the stock market goes up and down.   It expands and contracts. It is cyclical. It doesn’t “always” do anything. The difference is that real estate exists, it is a finite asset.  It does not disappear in bankruptcy or failure. Even if the value is greatly reduced, there is value. That is why, over time real estate is still the most reliable asset.  For instance, if for some reason the market blew apart today and everyone lost 20% of their value and someone had to sell right now, whatever their next real estate move may be, it would cost them less because the market has contracted.  

Everybody has an angle

Today’s has a picture of my house on it and an offer to pay

  • No commissions
  • We pay the closing costs
  • No repairs
  • Moving assistance if needed
  • Fast, Fair Cash Offer

Interestingly enough, today’s missive came from a real estate office, although it was not identified as such.

Nonetheless, I see two things going on here.

First, there are people out there ready to separate you from your home. There is no way an investor is going to readily give you a fair cash offer. None. They may start with one, many investors do, but by the time their contractor is done writing up their bid, you’ll have expensive bids for repairs you never knew you needed being deducted from the purchase price. Why? Because they need to make money and they’re going to make it by squeezing you. Think you’re a great negotiator? Unless you are negotiating every day in your business, the answer is probably not. The experience is just not there for you and you’re going to get your pocket picked. End of story.

I am a decent negotiator. Even I think I leave something on the table from time to time. My current favorite negotiation story involves a home that needed some repairs that were not disclosed. My client wanted $9000 in credits. That was it. Ultimately, I never actually asked for the $9000, because the seller’s agent, a few minutes into our conversation offered me a $30,000 price reduction. I positioned the $9000 so well that she gave me $30,000 without me asking for anything. Most people are not good negotiators, was there another $5000 in there to be had? Possibly but my buyers were happy.

Knowing that you would think that I would negotiate the purchase of my new car, right? Nope. I’m not used to playing in that sandbox and while I think I could have done quite well, I used a concierge who got me everything I wanted and saved me $50 a month.

The second thing going on is that these guys are giving us insight on where they think the market is going. They are doing mass mailings into neighborhoods looking for houses to buy. If they thought we were in a bubble they’d be holding cash, but they’re looking to spend their cash. These investors are bullish on the real estate market right now.

Right now there are entire neighborhoods out there where every single house is in an equity position. Every one. That is not what a bursting housing bubble looks like. Remember, a bubble is caused by a fundamental flaw in the market, something akin to an aneurysm. With every home in an equity position, that’s a healthy neighborhood. That’s not to say that something happening in another market sector can’t create the flaw in the market, just that currently none exists.

Finally what does that mean to the Bay Area housing market? For the time being, it means our market will remain vibrant. If you’ve been on a freeway in the last six months, our full employment is evident by the traffic. There is plenty of talk of a housing crisis and there is a problem with affordable housing. Some cities are making it easier for builders to add more affordable housing, or even more housing. It’s a supply and demand problem solved by more supply. Some cities are loading the builders up with fees and nonsense. They are understandably choosing the build elsewhere and that does not help the situation. I believe if we allow them to build more units regardless of the price of those units, the supply will catch up with the demand and that will be what finally puts some downward pressure on prices of homes and rents. If they want to build $1.5 million homes, fine. Eventually there will be too many of them and the homes that should be selling for $750,000 but aren’t due to demand will go back to $750,000 where they belong.

Wild card: Interest rates. Today’s buyers are spoiled rotten by 11 years of artificially low interest rates. Traditionally a great interest rate was about 6%. These buyers have shown their disdain for interest rate upticks and in response to their disdain, rates softened a bit at the end of the year. The stock market has ceased its rapid ascent but as of this writing seems to be capitulating within an expected margin showing signs of stabilization.

Wild card: Tariffs. The market reacted predictively poorly to the tariffs. They are currently on hold. It is my hope that they are never revisited. I thought they were going to be a problem and they were. The minute they were stalled the markets are responded positively and in my mind predictively.

Wild card: Government shutdown. Day 32 and it trudges on. If this starts turning into something like the Air Traffic Controller strike, we’re going to have a problem. Some key players who are working but aren’t getting paid: Coast Guard, TSA, FBI, and Border Patrol. A lot of these folks own homes and may not have the savings to hold on. If this gets past a second month, all bets are off. I have clients who are USCG, TSA and FBI. I can’t imagine the stress they are going through right now. For everyone’s sake and the sake of our economy, I hope this ends soon.

Time keeps on slippin’ into the future

According to the AARP, 10,000 baby boomers are reaching retirement age every single day right now.  Morgan Stanley will tell you we are witnessing the largest transfer of wealth in the history of this country.  Baby Boomers control almost 2/3rd of the disposable income in this country yet, time is marching on for them.

Part of that unrelenting march of time is the inevitable aging and passing of the last of the Greatest Generation and the Baby Boomers.  That means ownership of their real estate will be changing hands and that’s where it gets tricky.

The final stat I’ll share is that few baby boomers are prepared for retirement or the inevitable.  I’m a baby boomer.  I’ve got a few years until retirement.  I’m not as prepared as I’d hoped I would be.  That being said, if I were run over by a bus this afternoon, my home is in a trust.  It’s full of stuff that shouldn’t be here, but at least once it’s empty, it can be sold by my heirs.  And that is today’s subject, emptying a home for sale.

One of my favorite articles that I didn’t write is “Sorry, No One Wants Your Parent’s Stuff“.  That is the sad truth.  This was the struggle when we liquidated my own mother’s home.  I knew no one wanted her stuff, I had to wait for the rest of the family to catch up.  And I am painfully aware that no one wants my stuff either.

Very rarely can you sell a home full of stuff.  Occasionally a developer will take it on knowing the dump fees will be a few thousand dollars and that is a term they can take off the seller’s plate.  Those homes are rarely sold on the open market and are usually sold at a deep discount.  I supposed if everyone in the family is cool with leaving a lot of money on the table that’s one way to go.

If the family wants to maximize the return on the asset, it is imperative that a strategy is put into place to empty the home and prepare it for sale.  I have developed a downsizing system to help seniors and their families work through the stuff that needs to be dealt with.  It works, I’ve utilized for my clients and have used it in my own family with great success.

The first and most important step is for the senior or the heirs to remove the important family heirlooms.  Those are the things that the senior wants to spend the rest of their life surrounded by.  Pictures, Grandma’s bible, Dad’s uniform from WWII, the letter from great great Grandpa from the Civil War front, those things must be addressed first.  If Mom is going to assisted living, that might not be where those things go.  In the case of my family, Mom went to a memory care facility.  Things come and go there pretty regularly.  They disappear and reappear, things that don’t belong to my Mother appear in her room.  Her stuff shows up in another room.  Sometimes she put them in another patients room, sometimes they took them not knowing what it was.  No family heirlooms went with her.  We made copies of old family photos and framed the copies for her.  In a situation like that, the family heirlooms need to be distributed to the family.

Once that step is complete, we move on to the things the senior needs in their next home.  Clothing, cookware and personal items.  If Mom hasn’t baked cookies in 10 years, no need taking the bakeware.

If the senior has passed, the next step is things that the family wants.  I took some things that reminded me of my father.  An old Hickory knife that he probably paid a dollar for back in 1945 when he got out of the Navy and needed to cook.  He also had a small cast iron fry pan.  My brother took that because it reminded him of Dad.  When I use that knife I think of my old man.

Once that step is complete, I promise you there is a ton of left over stuff that no one wants or needs.  That’s when the estate seller needs to come in.  We couldn’t do one because my mother lived in a condo, so that can be a consideration.  We moved everything out of my mother’s condo that was left over and put it in storage until we could get everyone together for a garage sale.  Then we had the mother of all garage sales.  It was a nightmare.  I highly don’t recommend it, but in our case we had no choice.  If you can get an estate seller to come in and do a large sale, that’s the next step.

The final step is to donate what’s left and dump the remainder.  This is the toughest step.  The family is looking at what’s left of someone’s life knowing it is worthless.  It is the hardest and most painful step of all.  It is the step that brings on the feelings of hopelessness.

We are not our stuff.  We are the love we’ve shared, the children we’ve raised, the contributions we’ve made and the lives we’ve changed.

The problem with the entire process is if the senior has passed there tends to be an attachment to their stuff.  “If I just hang on to Grandma’s <insert item here> I can keep a small part of her with me.”  That list of items grows and grows with the grief and pretty soon the family is paralyzed.   And almost every family has that one family member that won’t help but wants all of the money.  Thankfully, I don’t, but that theme has been consistent in doing this kind of work.

I have run this system for families over and over again with success.  I had a daughter that was so distraught over her mother’s passing that I had to call her every day and make sure she was out of bed and had a plan for the day.  I’ve had a daughter whose father passed unexpectedly young and as a young woman she was faced with liquidating her father’s life.  I sat on the porch with her while she talked about her father, crying ugly the whole time.  It happens.  Eight years later I still tear up when talking about my father.  I’ve helped many seniors wrap up the Bay Area chapter of their lives and move on to be closer to their grandchildren. The thing is, the system is kind and it works.

If you are faced with downsizing or liquidating a home to go to market, I can help.  I will tailor a system to you or your families needs, write you a calendar and get you through this transitional phase of life.

Valerie Crowell can be reached at 925.381.2998.