Were Home Prices the Next "Bubble"? We have a second chance to make a difference.

Real estate leaders  waiving reports claiming home prices are stable to rising might want to pause and read the  December 2004 report titled Are Home Prices The Next "Bubble"?. Authored by Jonathan McCarthy and Richard W. Peach, a VP of the Federal Reserve Bank of New York, this report took apart the warnings of analysts who saw a problem and tried to raise attention to it. McCarthy and Peach used their  credible analytical skills and resources to produce a 17 page document published in the December 2004 edition of the Economic Policy Review which concluded, "Our analysis indicates that a home price bubble does not exist." Nice work fellas.

Unfortunately for America their paper provided the talking points for politicians and real estate leaders.  Here's Barney Frank who in the Spring of 2005 said there was no bubble because the housing business didn't look like the dotcom bubble business. The Chief Economist of the National Association of Realtors gave us this quote in 2005,  "There is virtually no risk of a national housing price bubble based on the fundamental demand for housing and predictable economic factors." When everyone is reading from the same script and the voices of reason are being drowned out by the marching band of brothers in banking, real estate, and government, we might want to proceed with caution.

Maybe we should turn the volume down and take a look at what it took for the real estate prices to run up to their peak,  and see if it's more probable that prices could be moving sideways or even down for a while longer.  Without complex formulas we can see the volume of buyers can not equal what existed in the first decade of the 21st century because (a) the real estate consuming  population has changed from massive Baby Boomers to much smaller Generation X andY, and (b) the lending rules have changed shrinking the pool of eligible people who might qualify for loans.

In Dane County, the consumer demand has changed. Condominiums, built to absorb the people who we assumed wanted apartment kind of living with the apparent advantage of real estate ownership, are being converted to rental units. And instead of building new condominiums, developers are constructing apartments.  The apartments are  being filled faster than they can be built. The "condominium buyer" has turned their backs on ownership and will remain renters indefinitely. Quality farm land was developed into low quality housing. This housing stock built in 2001-08 and sold at 100%+ financing has already been undermined by the houses built by the same developers who unloaded their land by selling new construction houses at a loss.

Housing prices will recover some of the loss in some areas of our market regardless of what mantras are are touted. But broader progress will be made when we let go of  short term profit strategies and spend our energy collecting resources to create solutions to upside down mortgages, foreclosures, empty homes, and unsustainable property tax rates.  The real estate industry, bankers, politicians, lawyers, economists have the talent pool to do whatever we value most. We can lead, or we can follow the past.

Keeping Memories and Selling the House

The school bus stop was at our corner on Shadows Ct. Kids would begin to congregate in our yard at least ten minutes before the bus churned up the hill. Patrick always had his place in line held by his backpack so he could mess around with the other boys. Middle School-Aaron was rarely out the front door before the bus door was opened. Our boy's places were taken over by younger boys over the years... but the routine and chatter never changed. The bus stop is a memory of home with the boys that I'd like to keep long after the house has been turned over to another family. But keeping the house to hold the memories was not an option.

Entering a new era of our lives, unlike our parent's generation, we are leaving the homes where we brought our new-born children home, raised them, and from where we sent them off to pursue their lives. A few years ago the shakeup of our economy disrupted our best laid plans and a vast majority of the 50+ age group went into a holding pattern with respect to house selling and buying. The early expectation of a "months not years" recovery has given way to a reasonable understanding of the complexity of economic recovery. With understanding has come an adjustment in plans and new directions for homeowners who's homes have outgrown them. In 2011, more people got on with the business of living instead of waiting for things outside of their control to get better. Letting go of houses that were homes and taking advantage of low prices and lower interest rates may be a trend on its way to becoming a wave over the next 24 months.

With exceptions, the value of your home is going to be less today than six or seven years ago. In fact, the value of your property may be less in the spring of 2012 than what you could have received in 2009. Unprecedented interest rates have gobbled up buyers as the 8% mortgages have refinanced into rates below 5%. Those people may be comfortable for a long time in their 4% interest rate mortgage, even if their home is not just right.  As real estate sellers, even a threat of another buyer is helpful to shift the imbalance of power. Without a threat of competing demand, people who submit offers to purchase are negotiating in a position of strength. In some cases, another buyer coming forward any time soon is so remote that the buyer with an offer on the table may be in a position of super strength. These buyers have no fear of loss, no reason to flinch, no reason to concede on anything of real value.

If we paid attention this year and believe what we have seen, the way to sell a house is simple, but not without pain. While the work we need to do to get the house ready for sale is physical, the real pain is usually in the net. Repairs, upgrades, paint, landscape work, etc., all of that is necessary and, (sit down now) none of those items will move your home beyond its market value. The days of poorly maintained homes selling for the market value of well maintained homes (which were selling for over-value) are over. Your home must be priced right AND well maintained to get an offer. Then, and only then can you negotiate. If you have no leverage, (competition, don't need the money...) you will be negotiating on items of insignificant value and conceding significantly on price.

If there is any chance you might sell one of the properties you own in 2012, use this time to get the place in tip-top condition. Preparing your house for sale takes time. December might be a great time to plan the work, January and February are perfect for getting work done. March is ideal for letting family and friends know, sharing memories, and boxing up what doesn't need to be displayed. It's also the right time to determine a selling price and moving strategy. Once the house is sold, finding your next home is a pleasure. Where you live in the interim, if there is an interim, is part of the fun. Have a deadline in mind. It helps to stay focused, in control, and keeps you from wavering.

National Association of Realtors--A profile of home buyers and sellers

DID YOU KNOW?

According to the 2011 National Association of REALTORS (NAR) Profile of Home Buyers and Seller which surveyed 5,708 home buyers and sellers this summer, the average American home buyer has changed in the last year.

 

A shift in the age of buyers

The largest share of home buyers is aged 25 to 32 (27 percent), but this share of buyers is down 9 percent in the last year, a considerable drop for a group that continues to dominate the buyer pool. The median age of home buyers has jumped from 39 years old to 45 years old as first time home buyers have dropped to a third of all buyers, down from half of all buyers. (Predictable: Attribute much of this decline to the end of the tax stimulus for first time buyers)

 

A shift in buyers' incomes

The median household income of buyers in America is now $80,900, an increase in income after the previous two years' decline. (Predictable: A smaller percentage of the market going to first time buyers would cause the average income result to be higher)

 

A shift in married couple buyers

For ten years, single people were accounting for an increasing share of buyers, as married person's purchases dropped by 10 percent in that time. In 2011, NAR reports a drop in single home buyers. Married persons accounted for 64 percent of the 2011 sales, the highest number since 2001. 

 

This is worth noting: The trend of single women buyers making a mark in the market has slowed. Eighteen percent of home buyers were single women, the smallest share in six years.

 

The takeway

According to the 2011 NAR Profile of Home Buyers and Sellers, the average American buyer is now older, has a higher income, and is likely married. Single and lower income buyers are sitting on the sidelines as unemployment continues to concern the nation.  Home buyers are now "staying well within their means". Imagine that!

 

Why the drop in first-time home buyers? NAR 2011 President Ron Phipps notes that first time buyers had more challenging financial obstacles to overcome. Phipps said, "First-time home buyers fell from a record high of 50% in 2010 (Tax Credit induced)  to 37 percent market share in the past year. That's just about right where first-time buyer activity should be for the market to be in line with typical years. 

 

For more information, and to read 33 facts every Realtor should know about the NAR 2011 Profile of Home Buyers and Sellers,  click here.

Your Assessment as a Factor in Negotiations

Is your assessed value equal to the price you could reasonably expect to get on the market today? Good question. The table below shows recent sales of Madison west side, single family homes, with sale prices from $250,000 to $350,000, sold in the third quarter this year. Looks like on average owners priced around 106% of assessed value, typically reduced to a price closer to assessment, and accepted offers just slightly above assessment. 

For what it's worth, and maybe this is too small of a sample, maybe the slim gap between sale price and assessment is another indicator that the pressure is on pushing or holding price down. Buyers are using assessment as an argument in their favor. Competition for the property will trump opinion on assessment--if you have more than one buyer, you have competition; scratch that if both buyers are working from the same playbook. 

Real Estate Might Be Your Second Career for POPs

In 1992 I attended a real estate franchise conference in Las Vegas. I was 33 years old and in my fourth year as a Realtor. At 8:30 AM I exited the elevator at the lobby where I waded into a sea of thousands of my peers. Their excitement for the company and industry hoopla was scary intense. It was early and Las Vegas. I wasn't ready for this.  The crowd started moving toward the main hall for the welcome and keynote address. I was swept along in the heavily perfumed, blue haired, business suited, gold and diamond laden, wave of ladies with high heels, and higher pitched voices.... all speaking at once. Like a  10 year old boy in a church full of nuns, I looked for a way out. If there were  men, young or otherwise,  in the group, I didn't see them.  I grabbed the first elevator back to my room. Any one of those Realtors were probably more productive in sales than me. Their talent wasn't what I fled from. I didn't fit in their group.

Twenty years later, I'm a 52 or 53 year old gray haired broker, in an industry where the median age of brokers is 57 according to the NAR 2011 member profile. In the last few years 22% of the Realtors have left the National Association of Realtors (source) . The doors are wide open for new Realtors and I think we will see business skilled, well connected, savvy people who are at home with technology, take the place of those recently departed.

 Flexibility, support, professional associations, potential for a better than modest income are all available to the person who is willing to apply their skills to this field. Smart people, leaving careers and coming into real estate might look to the established agents and find ways to form Process Oriented Partnerships. (POPs). These are not Teams in the sense that we know them in the real estate business. A POP is a formal business agreement, prepared by an attorney with the input of the partners, to combine the different talents of the partners to achieve outcome goals. Goals can be financial, flexibility, travel opportunities, education, leadership, ... A POP allows the parties to combine their spheres of influence, apply  their systems to the process of real estate service, and by accountability standards, each party puts the effort of their talents and skills into accomplishing the goals.

In challenging times, merging agents into POPs makes sense. New agents have plenty to offer, even if the most they can offer is a wider sphere of influence. Some business to work on is better than no business. Some income is better than no income. That's true for the new agent and the seasoned professional.

Your Assessment. Be part of the discussion of what is fair and equitable

Cross Plains Town Hall was a busy place last week when they held Open Book following their recent property value reassessment. The question on everyone's mind for the hired assessor was, "How do you increase my assessment when the real estate prices are going down?" I heard pieces of the answer. It was delivered with the confidence of a person who has evidence on his side. What made me chuckle was his evidence was actually a lack of evidence. One home owner said, "There are no homes near mine that have sold." The assessor responded that he has comparable sales in the township from 2006. "That was the height of the market", the home owner countered. Disregarding the fact that the sale was 5 years old, the assessor said  the top of the market was 2008, and he agreed the recent sales pool is shallow. I wouldn't want his job.

Certainly assessors, appraisers, and realtors use relevant, but not necessarily comparable, properties to determine a reasonable market value. Appraiser's hands are tied by the lack of recent sales because of underwriting rules which demand new sales in the appraiser's calculations. An assessor, however, may be free to use various data to calculate square foot costs, give land a value by the foot, and when finished, his figure is your assessment number...Provided the method was fair and equitable.

A host of factors trigger new assessments. In Madison, when values were going up, a sale caused the property to get a new assessment... at the new sales price. That's not the same in smaller communities. Townships and Villages for example, go for years without changing assessments. A home with an assessment of $225,000,  could sell for $275,000 and two years later, sell again at $290,000, and still be assessed at $225,000.  I may not be able to convince you, but assessments are not a reliable representation of value for determining a real estate sales value. Of course it's possible to show average sale prices to assessments, but averages mean nothing when we look at one property at a time.

When it comes to real estate sales, assessments are no more than a convenient tool for a buyer or owner to argue their position on their price/value opinion. I noticed this spring that buyers were coming into open houses armed with data showing the sales prices compared to assessments for homes. Even though 20% of the homes in their data were distressed sale properties, the number no the facts carried the most weight for those folks.


Here are a few other observations about assessments:

• People who question their assessment have a reasonable chance of having an assessment lowered
• Sales prices are the best indicator of value
• Homes owned by the same person for decades seem to have higher assessed values than neighboring properties
• In modest priced neighborhoods, the atypical, high value homes are sometimes assessed at a lower percentage of their sales market value than the typical property for the neighborhood
• Elderly home owners could benefit from a family member or friend assisting them with reviewing their assessment

We are in different economic times. If you are interested in being part of the discussion regarding your assessment, take a close look at a guide prepared by the Wisconsin Department of Revenue: Property Assessment Appeal Guide For Wisconsin Real Property Owners   
November through January  is a good time to get ready for next year's assessment. Or, if you were recently reassessed, get in touch with your local assessor.  If the link above doesn't work, copy and paste this: http://www.revenue.wi.gov/pubs/slf/pb055.pdf

If you are interested in comparable sales in your neighborhood to get a handle on your property value, you can select: SEARCH SOLD LISTINGS on  my web site: www.TomMeyer.com, or just send an email to me and I'll do the search for you.

Wishing you well,

Market Muscle in the $300,000 to $400,000 Core Through September

Like a well trained athlete, the Madison real estate market has strength in its core. From data available this morning on the Realtor Association of South Central Wisconsin, MLS, we see 11.5% of the sales through September 30th are in the $300,000 to $400,000 price range. Another 13% of the sales occurred in the $250,000 to $300,000 range. That 24.5% muscle is important  because in this price range, people who sell are likely to be buying, and the buyers more often than not could be expected to have sold something. The exponential impact to the real estate market might look like this: 1 Buyer was 1 Seller and 1 other Seller becomes 1 more Buyer.  We could say the $250,000 to $400,000 sale has a real estate market impact of 4. (1+1+1+1=4). Of course, I could be wrong if the sellers are moving to an apartment or a homeless shelter.


In 2006 the $250,000 to $400,000 price point represented 27.5% percent of the sales. To be certain, a significant number of those sales were builder spec home properties. While the economic impact was surely powerful for a builder owned home sale, (jobs, retail sales, tax revenue...) the real estate impact in that price range might not have been as significant as a sale today since there was no home occupant of the spec home who moved out and bought another property.

Today's version of the spec home as far as real estate impact is concerned are the REO sales, and in Madison we have a bunch under $150,000. In fact, of the 274 homes sold under $150,000, there were 71 homes under $100,000 so far this year! The MLS comments have distressed sale written all over these entries. The real estate impact is negligible, and the economic impact is only slightly better than zero as the banks takes their money and store it in the mattress of the Federal Reserve. For proof that the world has changed compare 2011 sales to the same time in 2006 when only 8 homes sold under $100,000.  On a side note, a quick scan of the roster of sales under $100,000 shows the sales prices average 55% of their assessed values. (There's a story in itself.)

We expect the under $250,000 seller to be the buyer of the $250,000 to $400,000 homes. So far, they've made their presence known and as a reward for participating, they've acquired properties from 10% to even 20% below their highest market values while cashing in on low interest rate mortgage loans. There are 1368 single family, non-condo, homes on the market in the areas that make up the east and west Madison market, including Middleton, Shorewood Hills, Maple Bluff, Fitchburg. 24.5% of the homes for sale are in the core group price points--$250,000 to $400,000.

Notice that the 24.5% homes for sale number is exactly the same as the 24.5% number of homes sold in that $250,000 to $400,000 price range. There's some balance, although the seller's are losing money at closing, at least they have buyers to sell to. I suppose too much of the market activity is in the lowest prices and that's been trending there for a long time. Maybe when we see the a trend of the upper lower price points dominating the market we will be on our way to a more robust economy.