A Crystal Ball and Buyer Incentives

I got it!!

A member of my staff finally got me what I’ve needed all these years…a crystal ball!!!

I will confess to being somewhat frustrated and confused with it though. As much of a gadget freak as I am, I can’t figure out where the batteries go so the dumb thing will work! So, until I figure it out I’ll just have to use the facts and what I see happening in the market.

Activity seems to be steadily moving forward in that there seems to be a continuance of contracts being negotiated to acceptable levels and escrows are being opened. Price and emotion together seem to still be the key.

What has emerged in the past several weeks is some innovative thinking on the part of some sellers and their agents. Agents that have been around for several years have seen more “normal” markets than the ones of the past few years and are accustomed to more creative thinking when it comes to attracting buyers.

These agents understand that giving Agent incentives, like higher commissions, trips to Hawaii for the selling agent etc., does little to entice the buyer themselves. What some Agents are doing now is encouraging sellers to offer buyer incentives like “Buydowns” -the actual buying down of the interest rate for the first few years, hence lower initial monthly payments for the buyer.

Let me explain:

Take the example of a home priced at $700,000. If a buyer puts 10% down ($70,000) and gets a 7% loan for 30 years on the balance of $630,000, the loan payment (not including taxes, insurance, etc.) would be $4191 per month.

Now, if the seller “buys down” the interest rate on the same loan by 2% for the first year and 1% for the second year, then the buyer’s monthly payment is $3381 for year one, $3777 for the second year, and $4191 for years three and on. That’s a $14,648 savings to the buyer in the first 2 years they own the home! It does cost the seller $14,648 to do this though.

So, why not just reduce the price by that same $14,638, you might ask? Here’s why. Let’s take the price of $685,316 ($700,000 minus the buy down cost) and apply the same 10% down ($68,531) and 7% interest and you get $4,103/mo. Which do you think the buyer would want? That’s why.

Yes, your property taxes will be based on the higher sales price by about $13.41/mo, but would you rather have a $3381 payment plus $13.41 for taxes or $4,103. Oh and by the way, there’s no negative amortization with these loans! Now that’s the kind of stuff that motivates buyers to a decision…cash in the bank or cash they don’t have to spend.

What I see when I put cash under my crystal ball is… cash! When I put nothing under it I see clear glass. The voice I hear is that of experience of many years at my craft: be creative, reasonable and go for a win-win and it will all come out in the wash.

Of course, when I finally figure out where the batteries go and I get that crystal ball working I’ll let you know.

A Market Shift???

Well, like many other families I took a vacation in the month of July! Sorry for not blogging while I was sipping Mai Tais.

So what’s the OC Real Estate market been up to?

Well, in brief I can tell you only what I’m seeing, not that it is applicable to everyone, but it is to us. We have seen as much activity within the past week to 10 days as we did in all of last month! I see more Buyers writing contracts, albeit low offers for the most part, and more Sellers willing to accept that prices aren’t as high as they had hoped, but nonetheless acceptable. In short, more people are reaching agreements to sell and/or buy.

In spite of the numbers, reports continue to show that there are 25-30% less transactions closing but with prices that are still higher than this time last year.

Truth be told, that’s probably about right. We’re seeing prices similar to those in December 2005. Although, the same areas that always have success are the ones where pricing seems to be stable or even climbing a little and typically have highly desirable stuff, ocean views certain, exclusive communities, etc.

There still seems to be a lot of property on the market right now. Depending on the area and price range, the inventory sits at around 6 months. However, with single family homes in the $1 million to $1.2 range and condominiums priced between $550K to $650K, the inventory is much more than 6 months.

The Fed’s not raising the interest rate for 18th time (literally) may have helped consumer confidence a bit. In fact, interest rates seem relatively stable if not tending down ever so slightly. (Don’t forget that banks need to make loans or they don’t make money!)

We are seeing a resurgence with some of the financing methods used back in the ’90s which I’ll address in my next blog article.

Whether this spurt of activity constitutes a “market shift” remains to be seen; I’ll keep you posted. So much for now…enjoy what remains of summer vacation! Kids will be back to school soon and attention will again shift back to where we live and not where we’re going!

Ballroom Dancing

Ballroom Dancing, Reality TV and the Real Estate Market

There is a ballroom dance that is reminiscent of the Real Estate market we are experiencing today.

Initially, the female dancer pretends not to be interested in her male partner’s advances as he tries to woo her with his style and grace. Instead, she feigns disinterest, but as soon as his interest begins to wane, she is right there to encourage him on and they proceed to engage, together, in a rhythmic and beautifully sensuous dance we’ve come to know as the “Tango”.

This dance reminds me of what’s going on in the OC housing market!

Buyers and Sellers right now are engaged in the early part of the “Tango”. Buyers pretending that they want the home of their dreams, but not really. Sellers, pretending that they aren’t really interested in unloading the home they have become detached from, are anxious to move on, for whatever reason. On the sidelines, are the pundits and media telling everyone how bad everything is.

This Real Estate “Tango” reminds me of this new reality TV show called, “So You Think You Can Dance”. This is where the Buyers and Sellers (the contestants) dance their hearts out and the Judges (the pundits and the media) sit on their collective butts and tell how they think the dancers should dance! These so-called “experts” (the pundits and the media) make their comments with little or no regard for the contestant’s feelings or future.

The future of these poor dancers may be tied to the often flippant rude remarks of these judges who, by the way, can’t now or maybe never were capable of dancing as well themselves!

And by the way, don’t we have enough pompous, arrogant, self-centered Americans right here at home; do we really have to import Brits to play this role on every reality TV show?? Next thing you know, there’ll be a British columnist telling us how bad the OC Real Estate market will get!

I believe there are two real social blights in society, they are carry-on luggage and reality TV, neither of which are really “carry-on” or “reality”. Neither of these blights have enhanced our lives or given them more meaning. Instead, they only have had the effect of furthering self-centered, selfish, egotistical, impatient and unrealistic behavior where we only care about ourselves without regard for the feelings and well being of others.

I feel the same about all these so-called Real Estate market “experts” and I blame the media for covering all their Chicken Little-isms. Now, if that sounds like a rant ala Dennis Miller it was, I guess, forgive me, but this is wearing on my last nerve.

But, instead of listening to the Judges (the pundits and the Media), Buyers and Sellers should just dance the “Tango”. Get on with it! You either love this house and want to make it your home or you don’t. You either want to unload this house and move on to the home of your dreams and get on with your life or you don’t. If the price is right in your mind and comparable with what other homes are actually selling for then buy it. By all means, try to get the best price you can, but don’t try to step on your partner’s (the Sellers) toes or they may just stop dancing with you all together.

Sellers, don’t ignore a serious dancer (Buyer) who’s willing to put up money and sign their name on the dotted line. Don’t feign disinterest - they just may move on to another dance partner (Seller and house) because right now there are a lot of dancers on the dance floor alone (a lot of homes for sale). You may find yourself with a less competent partner (a lower priced offer) and maybe not dancing at all.

So, here’s to all the beauty and grace of a great “Tango” and to Buyers and Sellers who can reach a win-win agreement where no one takes advantage of anyone else and no one’s toes get stepped on.
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Laughing Out Loud! LOL

It’s been a while since I’ve had a good laugh when reading the newspaper about Real Estate. But thanks to a recent article that appeared on the Reuters wire service and in several national and local periodicals I had such a pleasure.

If you can’t tell by my picture on this BLOG, I’m Italian. I like to dress in black a lot, and I wear baggy suits that are a bit longer than most. I used to carry a Zero Halliburton briefcase and have always been accused of being the last surviving son of Don Vito Carleone, Mario Puzzo’s infamous Godfather character. Any resemblance between me and that stereotype have been purely intentional. (That all came in handy when my daughter was a teenager!)

Now however, in spite of my grooming and clothing preferences, it’s being a Realtor and Broker that has finally managed to officially garner me with the title of being a member of a “Cartel”!

The accusation comes from the Consumer Federation of America. Its report said, and I quote, “…traditional Real Estate firms, the National Association of Realtors and its state affiliates, and tightly controlled regional multiple listing services constitute the last remaining unregulated cartel functioning in America.”

As if regulation has helped protect consumers from real cartels and price fixing when filling their gas tanks this summer! But then I digress.

I function and thrive in an industry that is one of the most competitive in the nation. The simple notion that my competitors, who, by the way, will reach into my chest and pull out my beating heart over a deal, and I could get together and agree on price fixing commissions is ludicrous. We can’t collectively get together on anything!

We fight and scawble with one another over Open House signs in yards. For heaven’s sake, do you really think we could get together and agree not to undercut commissions on one another? Please. There are some urban legends that persist and this is one of them. There is no organized movement within the Real Estate industry to fix commissions.

Is there a concerted effort to protect the industry itself? Yes, probably. There seems to be a varied view of how or what to do to accomplish that though. Real Estate is a financial services industry, not a product industry. The inventory is not produced by Realtors themselves. What clients pay for is the representation they receive in the process of either buying or selling. And it’s a proven fact that seller’s net more dollars from a sale when they are represented by a Realtor.

It is true though that not all Realtors are created equal. You don’t necessarily get the same expertise from all Agents. The Executive Director of the Consumer Federation of America, Stephen Brobeck was right in that observation.

One area, however, where Brobeck and I disagree is that he thinks that the softening U.S. housing market will put downward pressure on commissions. To the contrary, sellers will be willing to pay more to net more and they will turn to professionals who know what they’re doing.

All that having been said, thanks for the belly laugh Mr. Brobeck! And remember, at long last I may make you a commission “offer you can’t refuse” because after all I am part of a cartel!

Shouting from the Top of Saddleback Mountain

Let me tell you about what’s going on in the OC real estate market right now. But before I do, let me ask you a question…

If we’re all so tired of all the BAD news in the media and if there was a medium that published good news, would we buy it??? Somehow I don’t think so. There is a difference between reality and negativity, but the American public has shown that it has a penchant for the negative. We obviously buy it, we read it, and we thrive on it or they wouldn’t all keep printing so much of it!

So what are we to do, those of us who are positive, realistic and tired of all the negativity? I guess we could talk it down, be as positive as we can and try to reason with those poor helpless souls that buy into all the negative stuff that’s out there. Some of us, on the other hand, feel the need to shout it from the top of the nearest high-rise or mountain top…that would be me.

There is no housing bubble in OC! Let me say it again for emphasis… THERE IS NO HOUSING BUBBLE IN OC! (The latter was me shouting from the top of Saddleback Mountain.)

Is the market slower than the hyper speed of the past several years? Yes. Have prices gone down from their peak? In some areas, yes, but by how much? Overall, home prices in the OC are still up and by double digits. Where’s it going?

Ahhhh, here’s where you take out the crystal ball. The charter members of the Chicken Little Society, who seem to get all the ink and press, say “down” but they have no figures they all agree on nor any that they can back-up statistically or with a track record of accurate prediction.

On the other hand, there are the facts and numbers.

What caused our last, and only real drop or “Bubble” if that’s what you want to call it, was a County bankruptcy and massive job loss. Neither of which exist today.

As a matter of fact, we added over 31,000 new jobs in OC in the past twelve months. The Wharton School at Penn University, recognized as the most comprehensive source of business knowledge in the world, ranks Orange County as number 5 in its Top Ten most likely counties for population growth! So, I guess that takes care of growth and demand.

The guys and gals at “The Merc” (The Chicago Mercantile Exchange) where they lay down cash to buy and sell futures, are betting on a drop in housing prices in LA and OC by May of 2007. Of how much? Try 2.8%.

So, let’s put that in perspective: You have a home valued at $700,000 that has appreciated somewhere between 35 and 40% over the past two years - take the middle of the range at 37.5%. You gained over $190,000 in those two years. So, if you loose 2.8% in the next twelve months, it’s gone down by $19,600. Aren’t you still ahead by over $170,000? And, have you lost anything or gained anything if you haven’t bought or sold other than a number on a balance sheet?

Now, if you’re a buyer sitting around waiting for a 2.8% drop in prices over the next twelve months, just offer the seller 3% less now. If your agent doesn’t want or can’t do that get another agent quick!

By the way, the other thing you should be looking for if the infamous “Bubble” were to be lurking out there is overwhelming supply of houses or undeveloped land. I’ve already shared my opinion with you about how 40% of the supply of homes up for sale are overpriced and really not saleable. And now we’re building and selling out high-rise condos in OC. Like Will Rogers said, “Buy land son, they ain’t making any more of the stuff!” That is even truer now than when he first said it.

Believe all the negative stuff you read and hear about the housing market in OC if you want, but that voice you hear shouting from the top of Saddleback, “There is NO housing bubble in OC!”…that’s just me!

An excerpt from Cliff’s BLOG, www.CliffonOCRE.com

Who Do You Listen To Now?

I’m a student of marketing. I love some TV commercials, particularly the classics: the Mean Joe Green Coke commercial, most of the “Where’s the Beef” Wendy’s series, the fast talking FedEx guy, etc…

One ad comes to mind when I think about OC Real Estate right now and that’s the old Dean Witter ad. It went like this…

“When Dean Witter talks…(the room comes to a dead stop, everyone cranes their neck and there’s silence) everyone listens.”

What expert are you listening to about OC Real Estate right now?

Frankly, I’m kind of tired of all the predictions! For the past several months they are all starting to sound like Charlie Brown’s teacher to me, “Wha wa wha wha wa wha”! They all have conflicting ideas, mostly negative right now. It doesn’t matter how terrible your track record is somehow your opinion seems to qualify you as an “expert”.

I, for one, don’t claim to be able to predict the future. If I could, I’d be laying on the beach in Tahiti with a Mai Tai and a little umbrella in the glass! What I can tell you is what I see, what the numbers say and what buyers and sellers are saying. Right now no one knows what’s up and what’s down. See my previous blog posting “Dazed and Confused”.

I’m curious though, since when did we start looking at homes like stock certificates?
Just because our homes have become such strongly appreciating assets these past several years, did we forget what our homes are all about?

When stocks go down we hear Dean Witter and his buddies solemnly say, “Stocks are a long term investment, you should buy and hold…” and everybody is supposed to listen. But when there’s even the slightest rumor of declining home prices Chicken Little and his buds are being quoted in every news periodical across the country like experts. My weatherman has a better track record!

Do you know anyone, in their right mind, who after a hard day comes home and pulls out their stock certificates, puts them all over the bed, lays down in them and says, “Aahhhh, now I feel better”? I mean come on!

I will tell you though, when I drive up and my dog’s waiting for me wagging her tail, my wife offers me a glass of Chardonnay and I sit down in my favorite chair while smells waft out from the kitchen, I know I can handle whatever comes at me ’cause I’m home with a capital “H”…regardless of what any so called expert has to say!

Dazed and Confused!

That’s my best description of the South Orange County Real Estate market right now.

Here’s what’s going on:

The inventory of homes for sale is high; that is to say the number of homes for sale would take approximately 7 months (at the current number being sold monthly) to deplete the market. That would mean high supply low demand. Right? Not really.

So buyers in the marketplace listen to the news and read the paper and think, “The housing market is slowing, supply is high, demand is low and prices are soft, so let’s low-ball the seller or just wait until prices come down further.” Right? Not really.

Sellers look at what price homes have sold for in the past several months and think, “Prices are still high, the house that just sold down the street isn’t as nice as mine and I’m priced just above the last comparable sales, so why isn’t my house selling?” Right? Not really.

Real Estate agents read the paper and listen to the news too and they’re sitting around saying, “Well, my listing is priced right but it’s been on the market for 60 days and hasn’t sold, my seller is ticked off at me and the news does say the market is slowing and interest rates are climbing.” Right? Not really.

Here’s what’s really going on:

About 40% of the homes for sale right now are simply priced too high. So the high inventory really isn’t there because those overpriced sellers are motivated by nothing less than greed. They have no real reason for selling other than cashing in on what they perceive are foolish buyers (which for the most part don’t exist anymore). Consumers, be they buyers or sellers, are more informed these days, confused yes, but informed.

Have you ever been flying down the freeway for a prolonged period of time, then had to exit and finally realized how fast you were really going? I mean 45 or 50 miles an hour seems like you’re hardly moving at all when you’ve been doing 80! That’s what going on with the Real Estate market right now.

We’ve been cruising along at 200 miles an hour for a couple of years now and all of a sudden we’re back to normal speed and everyone thinks, “We’re stopped!” We’re not stopped, we’re just moving at a normal pace again. True, it may feel slow, but it isn’t; it’s just normal speed.

Buyers are still paying reasonable prices for nice homes. Reasonably priced homes in great condition are still selling, albeit at a slower pace than in years past, but in what are historically normal time frames. Yes, interest rates are higher, but they are still at a 25 to 30 year low. So what’s all the fuss about? It’s all about confusion.

Buyers, you need to understand that sellers aren’t stupid. Unless there are serious and extenuating circumstances like death, divorce, sudden and severe health issues or a “killer” job transfer, sellers are not going to sit around and let themselves be taken advantage of. By the way, believe it or not, prices are rising! That’s right; they are continuing to increase not to drop.

Sellers, right now buyers have a lot of choices. Unless your house is drop-dead gorgeous, I mean beyond “Model Home” gorgeous, you need to be priced just below the most recent comparable sales. That’s right below! If not, you need to be willing to sit on the market for multiple months, like 4 or 5 months, until the market changes, unrealistic or greedy sellers drop out, or simply until you get more realistic.

And agents, for heaven’s sake, stop buying into all the negative media about the market! Understand that if you’ve been in the business less than 3 years, you have no idea what a “normal market” is! Houses selling with multiple offers in 4 days is NOT normal! You may actually have to learn how to work at your profession! Learn the skills that it takes to market a home, to price it properly and render customer service - like staying in touch with buyers and certainly sellers. Communicate!

Oh by the way, remember that we live in one of the most beautiful places on the face of the earth. People come from around the world to vacation where we live. Homes are where we spend time with our families, raise our children and come to for refuge at the end of a tough day. Homes are a place to build and store memories. They are a part of the “American Dream”. Yes, here in Southern California they have developed into an investment opportunity, but they are supposed to be, first and foremost, where you enjoy your life!

Inventory on the Market

I wanted to take some time to address the inventory levels on the market.

Being “on the market” isn’t simply a function of placing something on the MLS, although in theory that constitutes part of what it takes to put a property on the market, it certainly doesn’t mean that the property is saleable. If something is un-saleable, is it really for sale?

Here’s a hyperbole:

If the automaker BMW has been in a market where it has had no competition and has been selling its 535 4-door sedan for $53,000. Now, new competitors enter the same market segment, let’s say Audi with their A6 priced at $44,000, Lexus with their GS360 priced at $46,000, Mercedes with its E350 at $46,500 and Infiniti with their M35 at $43,000 and an abundant supply of each available at local dealerships. Would a BMW 535 really be considered for sale at $59,000 when its direct competitors are priced below? Perhaps, but not really.

Right now approximately 40% of the properties currently listed on the MLS are priced well above a saleable price! So, are they in all reality “for sale”?

Failure to educate sellers to the changing nature of the market, and the inability to properly price listings in actually constitutes a disservice to the client and to you as the property then virtually becomes un-saleable.

This change in the market isn’t bad! Granted, it’s not easy, but it is more normal. It isn’t like this was entirely unexpected either. We’ve been watching inventory closely and have been seeing the trend, but what have we be doing about it? For those who are newer to the industry this is abnormal, but for those of us who have been in it for a while it is more normal than it has been for several years now. Why would this be a healthier market for us than what has been taking place over the past few years?