That’s great, it starts with an earthquake, birds and snakes,
an aeroplane – Lenny Bruce is not afraid.

It’s the end of the world as we know it!  The United States has been downgraded by Standard and Poor, interest rates are going to skyrocket, it’s just a matter of time before the Four Horsemen ride.  The earth will shatter.  They’ll be crying and gnashing of teeth.

Stop right there! I think this is Paradise by the Dashboard Light.

Currently the national average for a 30 year fixed rate is 4.31%, down from 4.51% last week.  Did a great time to buy just become better?

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. ~Warren Buffett

The bulk of the country is in a twist over the stupid debt ceiling non-issue.  Non-issue because it was raised by both Democrat and Republican Presidents and Congress 102 times previously and NOBODY CARED.  After 102 times, everybody hears about it for the 103rd time and it’s the end of the world?  No, it’s opportunists creating fear in the market.  It has every thing to do with market manipulation and politics.  They want you to be afraid to make a move so that they can make theirs.  Don’t buy in on that.  Buy on that fear.  Be greedy.  Be bold.

This particular complex had what I referred to as the trifecta.  The owner occupied to tenant ratio was too low for financing.  The “delinquency rate” which refers to the percentage of units that are delinquent was over the FNMA cutoff and there was a construction defect  lawsuit.  That’s the trifecta!  No lender will lend on a complex with those issues.  Sometimes you can get past one or even two but all three are nearly impossible.

Why do those issues matter to a lender?  Let’s start with the owner occupancy rate.  When that rate gets too high, pride of ownership disappears.  Blight can follow, devaluing the lender’s position.  Lenders like a low tenant rate in the complex.   FNMA’s requirement is 51% at the time the loan is originated.

Next is the delinquency rate.  When a homeowner is losing their home, there is a good chance that they are not paying their Homeowner’s dues.  When a lot of homeowner’s are losing their homes, a lot of them aren’t paying the Homeowner’s dues.  When that rate gets to 15% they are outside FNMA guidelines.  At 15% the Homeowner’s Association is in danger of no longer being solvent.  If the HOA becomes insolvent, the condition of the community is compromised.  There are a few solutions for this issue.  In the most extreme circumstance I’ve even heard of buyers paying the dues on several units to bring the complex into compliance.

The most dangerous of the trifecta is the construction defect lawsuit.  This type of litigation has become a bit of a racket.  Essentially builders slap up new construction irrespective of proper construction standards.  The project is always insured.  When the new owners discover the slip shod construction, they sue the builder, who promptly refers the matter to their insurance company.  They’ve already taken their profit.  They don’t care.  And away everyone goes.  Generally the Board of Directors is not privy to this kind of racket and buys in.  Everybody lawyers up and the only ones that win are the builders who are protected by layers and layers of Limited Liability Companies and the lawyers.  The homeowners and the Homeowner’s Association always lose.  Lenders won’t touch this situation and I can’t blame them.

Some of the unknowns include the attorney’s fees, the amount necessary to actually remedy the situation and the Association’s will to fight the fight.  If the Board takes a position of injustice it could get very ugly.  If the Board takes the position of mitigating loss to the association, there could still be tremendous soft costs if the builder’s insurance company wants to scrap.

Construction defect lawsuits are a great unknown.  So when a gentleman calls me and tells me that some other real estate agent said that construction defect lawsuits are no issue to the buyers, I nearly lost my mind.  Firstly, the buyer assumes all the liability from the case when they purchase a unit in an affected complex.  Secondly, unless the association’s attorneys totally obliterate the builder’s insurance company, there will never be enough funds to cover the corrections and the attorney’s costs.  Few associations have the reserves to pay for either.  That means that either the association will do a special assessment to each unit to cover the costs or finance the costs with a deed of trust on the common area and add the debt service to each unit’s monthly dues.  Either way, the buyer is financially impacted by the lawsuit.  Lenders won’t lend because they fear that a buyer will walk away from a large assessment.

The complex my listing was in had units selling for $30-40k under what they should have been selling for because it was impossible to finance the units.  That’s what happens to complexes that get into that much trouble, they end up being grossly undervalued because of the unknown of the health of the association.  There are deals to be found out in those complexes but be informed, with risk comes reward.  Do your due diligence to mitigate your own risk, then reap the rewards!

What?  I’ve spent the last several weeks arguing debating with buyers what an acceptable purchase offer would be.  I’ve laid out the facts in every way I can imagine, but because it’s not on the internet no one believes me.  So I’m putting it out on the internet so buyers can find it and feel good about listening to me.

Real estate is having a sale.  It’s your Nordstrom annual sale.  You are going to want to get up at 7am and come on down here in your bunny slippers.  This is it.  Prices are down, money (interest) is cheap and it’s not going to last.  The only difference is that Nordstrom can tell you the exact day their sale ends and I don’t know the exact day this will be over with, but I promise you it won’t last.

Housing Affordability

If a picture is worth 1000 words, here is your 100o words.

Now, in 2008 Housing Affordability was at 137.8 a 20 year high.  January of 2011 it was 191.0.  It went UP from the last number on this chart.  Unthinkable numbers.  This will not last.  That’s the thing about business and charts, it’s cyclical.  An all time high is always followed by a drop.  Now is not the time to be tripping over a dollar to pick up a nickel.  Lowballing in this market will only get your shut out.  Some properties are now getting multiple offers.  Do your homework and bid within the comps.  If the comps show the property to be underpriced, bid within the comps.  Especially on short sales.  Banks aren’t stupid.  They aren’t going to take a low ball offer.  They would rather foreclose if nothing else is forthcoming. Repeat.  Banks aren’t stupid.  They have charts and matrixes and layers of management to be sure that they get as much as possible on a short sale.  If the short sale offers aren’t fair and reasonable, the bank will foreclose.  Why?  Because the insurance on the loan will make them whole.  They don’t need to sell short.  Bid within the comps.  If it’s a multiple offer scenario, leave the appraisal contingency in place as a stop gap.  If the appraisal comes in low, negotiate the price back down.

A thermometer I always recommend is put yourself in the sellers shoes.  If you received that offer, what would your response be?  Now, what number would be just enough to entice you to get off of your couch and answer the phone?  Bid that number.

Now is the time to pull up your big boy pants and call your lender, your agent and your landlord.  It is not going to get any better than this.  If you sit paralyzed on the fence because of something said on the 6 o’clock news or something your read over at some supposed “consumer” website advising you not to buy real estate the train will have left the station and you will still be on the platform.

If you’re looking for an agent call me and if I don’t work the area, I will get you a referral to a qualified agent in your area.  Now is the time.

You can reach me at 925-381-2998

Well, looking at that, I’m wrong.  But let’s delve into the numbers.  The average sold price was $358,458.  It was driven up by a sale of a monster home Crystal Ranch.  Once that home is removed from the equation October drops down to $351,696 average and $335,000 median sales price.  July popped up due to the sale of a gorgeous custom home on Ridge Drive.  The average over that period was $334,752.  The median home price was $317,500 once that large sale was removed from the equation.   The average for the year was $335,698, the median was $315,950. 

October was still abnormally good for the area which I attribute the less closings.  If you look at the number of closings, it’s way down comparatively to the other months.

The devil is in the details.  The number of solds for a two year period are off 37%, down from 84 in January 2009 to 53 in January 2011.    I can attest that there were not a lot of real estate professionals working last December.  I was able to get four clients into properties that were under priced or had wallowed on the market long enough that the seller’s resolve was broken down.  Some of these numbers reflect inaction in the real estate community.

The long and the short of it is that I believe the markets are basically stablized.  There is nothing in the technical charts that would lead a fundamental analysis to the conclusion that there will be a sharp drop or rise in the future.  I do believe that when applying sound investing principles it will show that it is a good time to get into the real estate market.  As Warren Buffet says “Buy on fear, sell on greed”.  Knowing that, I’d say it’s a good time to buy.

Adobe soil is a clay soil, full of fine-grained minerals.  When it rains it becomes water laden, heavy and “full”.  In the heat of the summer it becomes hard, dry and compact.  Many of the older homes built in this area on a pier and post foundation will shift slightly during the year with the soil.  Doors that work in the summer (when the house was built) stick in the winter or vice versa.  It doesn’t indicate any instability in the structure itself, or a propensity for a home to slip off of it’s foundation, it’s simply a minor shift.  Writing off a house because it has a crack in a wall is as unrealistic as ignoring the cracks all together.  Only a licensed professional can truly assess whether the shifting in the home is inconsequential or the beginning of a structural nightmare.  If the floors are even and level, I’m a lot more incline to recommend that my buyer move forward on a property.  Even then, that is why I always recommend that my clients order complete inspections from a competent professional.  The money spent on the inspection could save my buyer thousands in unexpected repairs.  It could also clear the way for my buyer to get a deal on a property that was overlooked by the junior engineers.  This is a market that requires scrutiny and expertise.  I see a lot of potential buyers out on a ledge over some “expert” advice they read on the internet or heard at the water cooler.  I certainly wouldn’t ask my Doctor to operate on me based on something I read on the internet or something a friend of a friend told me about.   I always wonder why this sort of “advice” always carries more weight in real estate than the real advice from true professionals.

“Is your house on the market?” No. 

“Did you sign a listing agreement?” Only one day.  “Huh?”

I ran the property on the MLS and it was not on the MLS at all.  And I began to wonder “How would he short sale the house if it wasn’t on the market?” 

This out of area agent put this house on an out of area MLS for exactly one day back in July.  What he was doing was advertising the house on craigslist looking for a buyer.  He got one, did a one day listing and asked the bank if they would take the offer.  He was all about double ending the transaction, not doing what was best for the client.   If this guy was ethical or knew what he was doing he would know that banks want to see short sales on the market for a minimum of 10 days.  The “short sale” failed because the bank rejected it.  The family said the bank wanted $600k.  I doubt that was what the bank said.  I know the house is worth $525k.  I work that area.  I know every house that’s sold in the last year off the top of my head, more if I think about it for a moment.  This out of area agent did this family a huge disservice. 

But it gets worse.  I had checked for a Trustee’s Deed since that was all I could do without any of the paper work.  As of last Friday there was none.  On my way to the appointment last Wednesday I asked my title company to do one more check for me.  One of my old friends dated the property down by hand and found the Trustee’s deed recorded on Monday.

I had two choices.  One was to call the homeowners and say “Sorry, I can’t list your property because you don’t own it any more”.  Two was to drive to the appointment and compassionately explain to them that the Trustee’s Deed had recorded and they didn’t own their home any more.  I sat in horrible traffic for an hour to do the latter. 

I could see in the woman’s face that she simply wanted to cry so I tried to move as quickly and simply as I could through the explanation.  Before I went to Keller Williams I worked for one of the biggest REO guys in the area.  I knew what was going to happen next to this family.  I took the time to explain that someone would come to her door and offer her money to move by a certain date.  That offer should be at least the amount of two months rent in her property.  If she had any questions about that process, I would be available to explain it to her. 

I’m not going to make a nickel on any of this.  But it’s the right thing to do.  I just wish the out of area guy had done the right thing.  This family should have been able to short sale this house under HAFA.  It should have been relatively simple.  Yet he got in the middle trying to make a buck for himself and this family has now been foreclosed on.  He is what gives us a bad name.

I like to have my sellers do their termite inspection before the property comes to market.  That way any issues are found and dealt with in the beginning.  If I know there is $12,000 termite damage at a property, I’m going to suggest my client either corrects the problems or adjusts the price to reflect the termite report.  Recently my client found out that there was damage in one of the bathrooms and the floor needed to be replaced.  This is actually common.  The floor will be replaced before this property comes to market.  This will protect my seller from potential buyers muscling the price down because of “unseen” matters.  The termite will be clean on this property when it comes to market.  My seller is protected.

It’s helpful to know what to look for as a homeowner.  When I purchased my home there was $11,000 in termite damage.  In the case of my home that included the presence of subterranean termites in the garage.  I took the property subject to the damage in the bathroom because I was going to remodel anyway.  I asked the seller to deal with the subterranean termites by having a licensed professional treat the property with Timbor or a similar product.  This particular property is pretty wooded.  I have 19 trees here.  Actually 17 now, two have died and I’ve cut them down.  They were both infested with termites.  There are a lot of termites in this neighborhood.

Your termite company will reinspect your property every year for a nominal fee, generally $75.  That’s cheap compared to replacing timber chewed up by bugs or damaged by water leakage.   I had my property reinspected last year and it was clean, however last Sunday I looked up in my garage and saw this.

That is what’s called a “tube”.  Tubes are built by the termites from particles of soil, wood and debris.  I’d seen some debris on my workbench a couple of weeks ago, but I looked up, not forward.  I thought it had come from the roof of the garage.   This house had been treated three years ago and reinspected last year so I knew it was recent.  I immediately called my termite company and asked them to come out.  They’ll be here on Friday.  Then I set out to figuring out what happened.

One of the things the termite company will tell you is to be sure there is no wood to ground contact.  There isn’t at my house. The concrete foundation sets above the ground in all places.  Last night I set about finding the point of entry.  There it is.

That’s what’s called a shelter tube.  That allows the termite access to food as they cross the foundation to the wood of the house.  The good news is because I am diligent in checking my property, I caught these guys quickly.  I painted this house last October and they weren’t there then.  Since October this appeared on the side of the house.

California law does not allow a termite company to come out and treat a property without an inspection.  I’m absolutely certain that this is a termite infestation and the Inspector will arrive here on Friday and say “Yep, them’s termites”, but the State requires an inspection.  Once the inspection is complete, the treatment will occur next week and that will be the end of them for a while at my place.

If you live in an area where these are prevalent, it is imperative that you are vigilant in protecting your home and your investment against termite damage.  The $750 treatment I will pay for is peanuts compared to the damage these pests can do to the home if left unchecked.  It’s one of the easiest ways to save money when it comes to your investment.

The other reason I like Broker’s Opens, besides it’s an easy way to see all the homes in the area in about ninety minutes, is the conversations I have with other professionals. Something that I noticed, and I always notice trends on the ground before everyone else, is that the phone quit ringing.  I call it “crickets”, because it’s so quiet all you can hear is the crickets singing.  I’m currently advertising seven properties, I have signs on another 11 properties and no one is calling.  I listened to the lenders talking and the interest rate is below 5 with a point right now.  That’s beautiful money.  So why is it so quiet?  I talked to several of my colleagues about it yesterday.  They all noticed it too and one of the prevailing theories was that people are scared.  We are living in scary financial times.

We’ve just watched businesses go under, many of us have lost our jobs and can’t get new jobs.  We’ve watched friends lose their homes.  We’ve watched families on the brink of ruin and marriages collapsing under the pressure.  It’s scary out there.  For the risk adverse home purchaser it’s very hard to get off the sidelines right now.  But it’s necessary, because the market is going to change again later this year.  The opportunities that exist right now will be gone forever.

I’ve talked before about how real estate is one of those industries that anyone thinks they can be an expert at, whether they’re in the industry or not.  Last week I fought a traffic ticket.  I haven’t been in traffic court to fight a ticket since 1989.  I got demolished.  Because I don’t do that every day.  It should have been a simple process, but I should have hired an attorney.  If you’re not living and breathing an industry every day, you’re going to get demolished going it alone.  Real estate is no different.

Yesterday one agent told me that he heard that the banks were going to release all the foreclosures in June.  Really?  No, he laughed.  Some soccer mom told him that while he was waiting to pick up his kids from soccer practice.  I work for one of the biggest REO brokers in the area.  We’ve been hearing that directly from the asset management companies since March of last year.  It’s just wishful thinking on the part of the asset management company.  They ain’t coming.

Why?  Because 2008 was essentially a run on the banks.  It sent this country to the brink of ruin. Banks failed under the weight of it.  They drove down prices by dumping into the market which made people walk away, driving the market down even further in a snowball effect.  The banks aren’t stupid.  They’re not going to do it to themselves again.  They will release these foreclosures, but in a measured fashion over a long period of time.  There are several factors that make this favorable to the banks.  One, tax treatment.  There have been changes in the rules that allow the banks to go back three years and take the whole loss off of their profits.  Win.  Two, some of these loans are government insured so they are made whole anyway.  Win.  And dumping them on to the market has been a PR nightmare.  I truly believe that the CEO’s of the banks saw what Obama did to the CEO of General Motors and don’t want to be next.  They like their salaries and bonuses.  If hanging on to these assets for an extra six months keeps them off of Obama’s radar, that’s a good thing to them.

How does that affect the local market?  We’re bottomed out.  We’ve been skipping along the bottom for a while now. I called the bottom back in April and I was pretty darned close in most local markets.  In spite of the gloom and doom reporting out there, we’re done.  It’s over.  Now is the time.  It’s not going to get any better than this.  The one thing that is going to change is if the interest rates pop up.  That will lessen affordability and box some people out of the market.  That’s why the time is now.  Are you ready?

The crux of her talk was that we were in the sweet spot of the market right now.  She outlined two market pull back scenarios.  One was an area would pull back to 2002 numbers.  The second was that if the area pulled back past 2002 numbers, it would pull back all the way to 1998.  Hello Brentwood.  Hello Antioch.  Hello Central Valley.  Conversely, areas like Walnut Creek, San Ramon, Danville, parts of Oakland and the LaMorinda area were done. I think she’s dead on.

Why am I talking about this?  Because I received an email yesterday pitching a loft in Oakland.

An absolute bargain and 100k less than they sold for two years ago.

Sounds like quite a deal right?  Except two years ago doesn’t matter.  Not one iota.  What matters is today’s market price, that’s what determines value.  A hundred thousand less than two years ago may or may not be a bargain depending on the area’s comparable sales.  Not the area’s comparable listings, but the area’s current comparable sales, say within the last 3-6 months.  Even a year ago doesn’t matter.  To know my history as a stock broker is to know this truth. I love charts.  I love juxtaposing them and making them in different colors and taking a slide rule to them and every thing in between.  And that’s great for us chart geeks.

Median Sale Price

This one doesn’t go back to 1998, but it doesn’t need to. San Ramon pulled back to 2002 numbers. There has been a lot talk about a second downturn in the market. Looking at this chart, I don’t see a reason for a second severe downturn. That’s the nice thing about charts, they tell stories. The run up is clear and if I were better at playing with ShockwaveFlash, I’d draw in little red lines to demonstrate my point, but imagine a line connecting the highs and another connecting the lows. I don’t see another pull back in that chart at all. The reason for the crash is as plain as the nose on my face, no second crash.

While we’re playing with charts, lets add another chart in.

Zillow Home Value Index

Now let’s compare the two. The first one is actual sales over the last 10 years. The second is Zillow’s Home Value Index which is a computer generated guesstimate of value based on six month trailing trends. This is the best argument I have ever made for not relying on Zillow for home values. Say you were a seller in late 2006. Or a buyer in late 2008. The Zillow numbers would not have been your friend. It’s fine for spotting trends, not so good for actual valuation of property.

The best bet for property valuation is a qualified real estate professional who understands the local markets, studies them and understands where they are going and why. I can be reached via phone, email, twitter or facebook. Ask for a Comprehensive Market Analysis. It’s from me to you.

Reading that, it could be argued that the mortgage crisis is over and we can all join hands and start singing “Happy Days are here again”.  We’d be premature.  I’ve been watching the so called “shadow inventory” for over six months now.  The San Francisco Chronicle wrote about it back in April 2009.  Here’s a little slice of ugly from last April as shown in that Chronicle article. 

Chart from 4/8/2009 SFGATE

Quite honestly, I can’t figure out what the motivation is.  In an effort to answer that question I did a little research.  First, let me define the “shadow inventory”.  This is the property that is in the process or has been foreclosed upon and is either in the possession of, or should be in the possession of the lender who had the original loan on it but has not shown up on the marketplace.  That is, houses in default or owned by the banks after foreclosure but not for sale.  Research by Amherst Securities estimates are as high as 7 million properties nationwide.  Read the report here.  The numbers are staggering.  Currently in Contra Costa County there are 6331 Notice of Defaults filed, 4824 properties up for auction and 5649 bank owned properties throughout the county.  Total=16,408.  The homes that are either on the market or pending in Contra Costa County currently equals 6978.  Houston, we have a problem.

There has been thousands of conversations throughout the real estate community regarding this phenomenon and what the solution might be.  One Realtor opined that the  bank had already taken it’s write down and they were good holding on to the property until the market came around.  Others, including myself just scratch our heads.  You know when you have to do something you don’t want to and you keep thinking about it and mulling it over and pacing the floor and avoiding it?  Then you’re finally forced to do something and when it’s all over you sit there and think “Why did I put myself through all of that?  Why didn’t I just bite the bullet and get it over with?”  That’s what I think the banks are doing.  I think the management of these banks don’t want Wall Street to see them taking a second beating on their watch so they’re sitting on their hands and doing nothing.  Maybe the next guy up for retirement will pull the trigger on the situation. 

The market is currently artificially stabilized.  Is the artificial stabilization by the banking industry and more right than the artificial stabilizing by the Government?  Not in a free market.  In a free market it has to behave as it’s going to, and we, as members of a capitalist society have to ride it out, whatever “it” is.