Thursday, September 29, 2005

C.A.R. REPORTS MEDIAN HOME PRICE INCREASED 20.1 PERCENT IN AUGUST

The year over year increase in sales price of a median priced home in San Diego County may be in single digit percentages, but according to the California Association of Realtors, the prices of California homes over all continue to rise at a higher rate and more homes are selling than ever before.

"The median price of an existing, single-family detached home in California during August 2005 was $568,890, a 20.1 percent increase over the revised $473,520 median for August 2004, C.A.R. reported. The August 2005 median price increased 5.2 percent compared with July's $540,900 median price.

"While fixed mortgage interest rates have not increased, adjustable rates have risen in reaction to the Federal Reserve and a more general increase in short-term rates," said C.A.R. President Jim Hamilton. "Since more buyers are relying on adjustable-rate mortgages to finance the purchase of their homes, buyers may be moving more quickly to make the home purchase decision in anticipation of future rate increases. This is adding more pressure to the price of a home.

"Closed escrow sales of existing, single-family detached homes in California totaled 632,240 in August at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity increased 7 percent from the 591,150 sales pace recorded in August 2004."

Tuesday, September 27, 2005

Why the Real Estate Bubble is not Real - Interview with Gregory Smith

The following interview was provided by First American Title Company

County Tax Assessor Gregory Smith Talks about the Strength of San Diego’s Real Estate market Now, Compared to the Bubble That Burst In the 1990’s.

San Diego has been a key player in California’s latest gold rush. In the past five years, plummeting interest rates have pushed real estate prices upward, transforming moderately priced homes into million dollar estates.

Now, as bargain basement interest rates inch upward, analysts say the real estate market in San Diego is a bubble on the verge of bursting. Other experts disagree.

County Tax Assessor Gregory Smith is one observer who believes San Diego’s real estate market is healthy; current prices are sustainable; and more growth is on the way. His explanation, bolstered by more than 22 years of assessing local property values, is well-founded.

“This isn’t Buffalo,” Smith said. “This is San Diego. First time home buyers, mover buyers, out-of-town buyers; everyone wants to live in San Diego.”

The view from Smith’s office underpins his assertion. Sailboats dot the bay, joggers run along the Embarcadero and a bride and groom exchange vows on the lawn. San Diego’s intrinsic appeal is evident, but that appeal was insufficient in staving off a steep decline in real estate prices during the 1990s. What makes the current situation different?

According to Smith, it’s Economics 101. Supply is limited. Demand is strong, and 5.5 to 6 percent interest rates are still historically low.

“That’s why I still think today is the best of times. You have a buyer’s market, and you have low interest rates,” Smith said. “This is the time to buy.”

“If all of a sudden, interest rates go up to 8 or 9 percent, everything I said is a moot point,” he said. “But that’s not going to happen. They’re going to go p gradually and I think a year from now, we’ll look at interest rates in the 6 to 6.5 percent range. Historically still great, still wonderful.”

When the real estate market collapsed in the 1990s, interest rates were between 8.5 and 9 percent, and San Diego was feeling the drastic effects of the savings and loan crisis. A decrease in military population due to massive deployments to the Gulf War and a loss of jobs from the departures of General Dynamics and Convair exacerbated the financial situation. These factors left developers who had speculatively built hundreds of houses at once to cut costs with large amounts of unsold inventory.

This time, San Diego is better prepared. The area has a steady flow of newcomers; jobs are being created, not cut; the local economy is more diversified; and developers are pre-selling units, then building tracts in small phases to prevent a bubble of unsold inventory.

“For years, we had tremendous population increases but we never produced enough housing for our population,” Smith said. “So now we’re in a position where too many people are chasing too few homes.”

“People want to buy a home” he said. “And that’s the first step, and the best investment you can make.”

Thursday, September 22, 2005

Real Estate Is Having A Sale!

By your real estate dude

I like to keep up with the news as much as the next person. But when you think about it, most news outlets exist in order to make money by selling advertising. So, if the news folks write stories that shock, amaze or simply frighten the %$@#* out of us, more people watch, read or listen and more money is made on the price of advertising. My college journalism professor once told me that “journalism exists to serve the people, because the people have the right to know”. I’m sure he believed that and when I was attending his class at the ripe old age of nineteen, I believed it too. Now, I’m pushing fifty and I know better.

While there are many in journalism who take service to the public quite seriously and work very hard to keep us informed, the fact remains that journalism is a business and sensationalism sells! Knowing this, we would be wise at times to take the news with a grain of salt. News about real estate is no exception. In a time of moderate downturn, such as we have now, just about every media outlet begins featuring talking heads and "experts" screaming “the sky is falling”. They think it will get us all to buy a magazine, read a newspaper or stay glued to the business news on our favorite TV network, and they’re right. It’s all about bumping up the ratings or increasing the readership so the sales folks can use those new demographic numbers to sell more advertising for higher prices.

This practice of sensationalism for hire can be very detrimental for those who don’t see it for what it is. Let me give you an example. Have you ever noticed that when a major department store has a sale dropping its prices by 50% everybody goes and buys something? On the other hand, if the same store raises prices by 50% nobody shows up. However, with real estate the opposite is true. When prices drop significantly (or even slightly) the media talking heads start screaming “the sky is falling” and people stop buying. But, when prices go up those same “experts” loudly proclaim that “prices will be out of reach soon so you better buy now” and everyone can’t seem to buy property fast enough! My Grandpa Charlie taught me about this lunacy when I was a small child and drilled it into my head as I grew up. He always said, “Joel, if you want to get it right sometimes you just have to look at what everyone else is doing and do the opposite”.

Grandpa Charlie was an old time real estate broker and investor. When I was about seven, he folded the real estate section of the newspaper he was reading while resting in his giant leather recliner, looked down his nose at me over his spectacles and said “Let’s go for a ride, Joel”. I asked, “Where are we going, grandpa?” He got that big smile he always got when he was ready to teach me something and said, “We’re going to look at some properties today. Real estate is having a sale!” My Grandpa figured out what most everyone else hadn’t. Just like the department store, when prices of homes go down, real estate is having a sale. The difference is that in the case of real estate, not very many people take advantage of it.

So, I ask myself ... why is this still the case some 40 years later? Why, in a time of low unemployment, a strong economy, low interest rates, lots of homes to choose from and sellers who are willing to deal, are buyers staying home instead of taking advantage of the fact that real estate is having a sale? The simple answer is this: human nature hasn’t changed. Most of us take what we read or see on television as gospel and feel much safer doing something if we see that everyone else is doing it. The problem with that kind of thinking is that sometimes to get it right, you just have to look at what everyone else is doing and do the opposite. Just so you know, everyone else is staying home and waiting for people to start buying again. So, as you sit there reading this article, imagine that I am looking at you over my spectacles and inviting you to go for a ride and look at some properties because, believe it or not, real estate is having a sale!

Friday, September 16, 2005

California's Housing Affordability Index Fell Three Points in July

Another story from the California Association of Realtors Newsletter:

"The percentage of households in California able to afford a median-priced home stood at 16 percent in July, a 3 percentage-point decrease compared with the same period a year ago when the Index was at 19 percent, according to a recent C.A.R. report. The July Housing Affordability Index (HAI) was unchanged from June, when it also stood at 16 percent."

California Assoc of Realtors Donates Additional $310,000 To Hurricane Relief Efforts

This story is from the California Association of Realtors Newsletter:

"The California Association of Realtors donated an additional $300,000 to the hurricane relief efforts in Alabama, Louisiana and Mississippi, the Association reported last week. A minimum of 50 percent of the dollars contributed were earmarked for REALTORS® and REALTOR® association staff, with the remainder to be used as the respective state funds see fit. C.A.R.'s Real Estate Business Services Inc. (REBS) subsidiary also announced a $10,000 donation to the NAR REALTOR® Relief Fund. Both donations follow an initial contribution of $10,000 to each of the three affected state REALTOR® associations through C.A.R.'s Disaster Relief Fund, bringing C.A.R.'s total contribution to $340,000."

Wednesday, September 14, 2005

"Median Price Dips Slightly" - Is the sky falling?

By your real estate dude

According to an article from rereport.com, "The median price for a single family home in San Diego County dipped 0.7% to $586,000 in August from the month before, a year-over-year gain of 6.5%. This is the fifth month in a row year-over-year appreciation has been in the single- digits. The average home price gained 8.2% to $732,378. Condo prices continued setting new highs in August with the median price up 5.1% to $389,000. Annual price gains have been in the single-digits five of the Last six months. Sales of single-family homes continue below last year's record-setting pace. Home sales fell 5%. Condo sales were off 8.3%. The sales price to list price ratio for single-family homes gained 0.1 of a point to 96.1%. The ratio for condos is at 97.2%."

Wow! That’s a bunch of numbers that look pretty frightening to me. But, what does all this mean? Well truthfully, it’s not as terrifying as it looks. The bottom line is that while fewer homes are selling than before and taking longer to do it, the prices are still going up. They're just not going up in double digit percentages because the market has softened. This may be concerning to some folks, but not to those of us who know how to do the numbers. That’s because when homes increase in value by single digits most people have had a double digit return. What?

Unlike stocks, most people do not purchase homes with cash. In fact, the vast majority of homes are purchased with a lender's money. When you take out a loan to buy something, it's called leverage. In grade school I learned about the use of the fulcrum and the lever. By using a lever and fulcrum I could move a big object easily that I could never move otherwise. We've probably all seen the picture of the strong man with the lever and fulcrum about ready to move the earth. That's how leverage works with money. With leverage you can buy more than you could buy without it. When leverage is applied to investments you have the chance to make more money than you would otherwise. With stocks, using leverage can be very risky and only some folks with lots of “green” are aloud to do it. On the other hand, using leverage with real estate works out well most of the time.

Let's look at the 6.5% year-over-year gain for the median priced single family home that’s listed in the article above and apply some leverage. If I had purchased a $500,000 home last year with cash and the home increased in value by 6.5% over the year, my home would now be worth $532,500. Since my original investment in the property was $500,000 I would have made 6.5% on my investment. But what if I had purchased the same home with a 20% down payment and took out a loan for the rest? My original investment would have been $100,000 not $500,000. The increase in the value of the property would still have been $32,500 in one year but the percentage of return on my investment of $100,000 would be 32.5%. Boy… that beats 6.5% any day! "But" you ask, "what about the house payment?" Well... if I purchased the house with $100,000 down and a loan of $400,000 at 5% or even 6% interest, I would still have made more money in appreciation over the last year than the total of that year's loan payments would have been. For example: At 5% interest, my total loan payments for the year would have been $25,764. At 6% interest my total loan payments for the year would have been $28,776. In both cases, my value increase of $32,500 would have been greater than the total of 12 months of loan payments. And let's not forget about taxes. With amortized loans (like home loans), the first five years of payments are mostly interest. You don't really start paying down the principle until after 5 years. That means that the majority of my payments for this past year would have consisted of mortgage interest with very little being applied to principle. As I’m sure you already know, mortgage interest is deductible! That means that in addition to making more money on the value of my house than I would have spent in payments to buy it, I would have had a $20,000 tax deduction for mortgage interest. I would not have had that deduction had I paid cash. So, as you can see, since most people buy homes using leverage the 6.5% growth figure is misleading. That figure only relates to the value of the home, it does not related to the amount of the original investment.

Tuesday, September 13, 2005

San Diego Market Slow Down - What does it mean?

By your real estate dude

It’s clear to the most casual of observers that the San Diego real estate market has slowed down. You don’t need a PHD in Statistics to figure out that there are a lot more “for sale” signs on the street than there use to be. But, let’s take a look at the numbers for San Diego County just the same.

In August of this year, 2189 single family homes sold in an average of 52 days. In August of last year 2395 single family homes sold in an average of 38 days. So, this year 206 fewer homes sold in August and took 14 days longer on average in order to do it. Similarly, 1070 condos sold in August of this year in an average of 49 days, while one year ago 1225 condos sold in August in an average of 23 days. So, 155 fewer condos sold this year and took more than twice as long on average in order to sell. The bottom line is this. More homes are for sale this year than in 2004. Fewer homes are selling and they take longer in order to sell.

If we boil this down to what it means to you if you’re selling or buying a home, we come down to simple facts. Sellers must come to grips with the change in the market. This means that the average home will probably not have multiple offers competing in a bidding war as we had in the earlier market. It also means that sellers must be more realistic in the pricing of their homes. In the market we have today, pricing a home competitively is the key to getting it to sell in a reasonable period of time. Buyers have more choices and more time. Since they aren’t in the position of having to make offers quickly in order to have a chance at the purchase, they can take their time and look for the home that best fits there needs. Buyers also have some negotiating leverage that they didn’t have before.

So, here’s the answer to the crystal ball question that I know you’re dieing to ask. It’s the “should I hold off before I (buy, sell or whatever)” question. The answer is, “it depends”. Each situation is different. That’s why advice is generally useless when given as a general “rule”. Although the general rule might dictate that you hold rather than selling, your individual situation may require you to sell. The same is true regarding a decision to buy or hold off a while. The best advice I can give you is to talk with your real estate advisor about your specific situation.

In the meantime, I'll leave you with this just in case you’re concerned about the change in the real estate market. The market has slowed down and I know that many are playing the “prophets of doom”. But take it from me, your friendly neighborhood real estate dude, the “chicken littles” of the world are wrong, the sky is not falling.

Monday, September 12, 2005

Your real estate dude interviewed by Inman News

This past month I was flown to San Francisco to be interviewed by InmanStories.com as part of a story on a marketing company called HouseValues.com. Click on the title of this post to see the interview. Pretty cool!

Friday, September 09, 2005

San Diego Association of Realtors supports Jerry Sanders for Mayor

(Reprinted from the SDAR Newsletter)

At the Friday, August 5th Board of Directors meeting, SDAR voted to endorse, with support, Jerry Sanders for Mayor of the City of San Diego. The recommendation for the endorsement came through the Association’s Government Affairs committee. The committee interviewed Sanders and several other mayoral candidates prior to the July 26th election.

The Government Affairs Committee and the Board of Directors strongly believe that as mayor, Sanders will be a proponent for increased housing opportunities. He has been a strong advocate for the City of the Villages concept (urban infill and the revitalization of San Diego’s older neighborhoods) and believes that quality of life may be enhanced, rather than diminished, with smart growth principles and urban planning.

A Balancing San Diego Market

A Realty Times article by Carla L. Davis paints a changing picture for the San Diego real estate market. Here are excerps from the article...

San Diego realtors report that the market is leveling “The market today has swung into balance with cautious buyers and many choices of homes in the San Diego, California, area,” comments one local Realtor. "Currently there are over 13,000 homes on the market in San Diego. This is a huge increase over the all-time low of 2,301 homes in March 2004. To put this all in perspective, the record high inventory of 19,000 homes was reached in July 1995 when massive layoffs and a laborious recession forced 1000's workers to exit San Diego."

He continues, "A majority of homes in San Diego that were once $300,000 a few years ago, now sell close to $500,000 (about a 15 percent per year increase). However, there are definitely less offers than before -- no longer 20 offers per property. We see many more 100 percent financing offers than ever. Residential properties above $1,000,000 are more negotiable than those under $600,000. As to be expected, there are several pockets where homes are hard to find while in other areas it seems to be more difficult to find buyers."

"In San Diego the talk between the Realtors I come into contact with is that the market appears to be changing into a more balanced market which is the market the Realtors that I have come into contact seem to be hoping for. The locale news has said a few times that the market appears to be changing to a buyer's market," relates another San Diego Realtor.

He adds, "In my opinion the market seems strong, though home prices do not seem to be escalating at the pace they were, a pace I never dreamed of but prices seem to be tapering off a bit. I do not think prices are lowering they are just adjusting some from their already extremely escalated levels. We still have the supply and demand issue in the county but it is mainly a problem for the first time home buyer, we just have more of a demand then supply of affordable housing. This should fuel the lower priced home market for a while."

Yet another Realtor notes the same leveling effect, "Unit sales volume (demand) has decreased by 12.7 percent. When you just look at single family homes the average price for July was $641,895 which was a 9.1 percent increase from last July. However, again unit sales declined by 11.8 percent period to period."

"Overall demand for the year still looks good for around 40,000 homes sold, very respectful," he notes "The average inventory days are 125 days, but in the $500k range you are at 86 days, the lowest of all price ranges. Other segments of the market explode over 200 days, there will be serious pricing problems here for the sellers that have to sell."

Real estate construction spending keeps $1 trillion pace

According to a recent article in the California Association of Realtors newsletter there’s still a ton of money being spent on the construction of residential property in the state. Here’s a quote from the article…

“Construction spending was at a seasonally adjusted annual rate of $1,099.3 billion in July 2005, nearly unchanged from the revised June estimate of $1,099.7 billion, according to a recent report released by the U.S. Census Bureau. July was the 13th consecutive month where the projected rate of construction spending topped $1 trillion. Construction spending totaled $617.9 billion during the first seven months of the year, a 9.3 percent increase over construction spending for the same period in 2004.

Spending on residential construction in July 2005 increased 8.3 percent over the previous year to reach a rate of $622.2 billion. The value of nonresidential construction put into place in July rose 3.1 percent to a rate of $477.1 billion, according to the report.”

Is there a real estate “bubble”?

By your real estate dude

One of the questions I am asked most often is “do you think there’s a real estate bubble?” followed by “when is the bubble going to pop?”. As a matter of fact, I was asked that very series of questions this morning while standing in line for breakfast at the San Diego East County Chamber of Commerce Meeting.

The answer is not all that simple. If you line up any 10 real estate professionals and asked them if there is a real estate bubble you would probably get an evenly split group of 5 “yes” and 5 “no”. The problem seems to be that no one has really defined a “bubble”.

That being said, what is a “bubble” anyway? In my humble opinion (and keep in mind I do not have a PHD in economics) a “bubble” refers to the phenomenon of having unrealistic growth in an industry or investment based upon nothing. In other words, a rapid increase in the value of something caused mainly by perception rather than reality. My grandfather use to say that perception is 90% of reality for most folks and I have discovered that he was right.

Take the internet explosion for example. I was involved in that “bubble”. And it truly was value based upon nothing but perception in most cases. For example: I was hired as a Business Development Director for an internet startup that produced nothing, sold nothing and generated not one dime of revenue in the seven months I was there. In fact, I was never tasked with the goal of generating revenue. It took only a few months before it became clear that the only reason the company existed was for the purpose of creating the impression that it was worth something so that it might be sold at a profit for the investors. The vast majority of internet companies that I know of were of that ilk. They had the appearance of value without any substance to justify it.

While that was the case with internet companies, it surely is not the case with real estate. Just as houses are built on foundations, the real estate market has a strong footing that supports its value as an investment. I am almost 50 and real estate in southern California has a trend of increasing in value that goes back many decades before I was born. Indeed, my grandfather was investing in southern California real estate in the 1930s for that very reason. There have always been ups and downs in the market, but there has never been a “bubble” that I am aware of and I do not believe there is one now. The market has slowed down recently, but that is simply a normal cycle in the market. Prices may even go down temporarily. But, if history is any indicator, San Diego real estate, when measured over years, will continue to increase in value as it always has.

How Realtors are helping the victims of Katrina

There are several ways REALTORS® can contribute to the hurricane relief efforts underway in the states hit by Hurricane Katrina last week. To make a tax-deductible contribution through the C.A.R. Disaster Relief Fund, make checks payable to the California Community Foundation, and write "C.A.R. Disaster Relief Fund" on the "memo" line. Send checks to the California Community Foundation, 445 S. Figueroa St., #3400, Los Angeles, CA 90071-1638.

Contributions also can be sent to NAR's REALTORS® Relief Foundation through www.realtor.org/relief. To donate by mail, send checks to REALTORS® Relief Foundation, Attn: NAR Finance Division, 430 N. Michigan Ave., Chicago IL 60611.

To make donations directly to the impacted states, checks made payable to the state disaster relief funds can be sent to the following addresses: Alabama REALTOR® Disaster Relief Fund, P.O. Box 4070, Montgomery, AL 36103; Louisiana REALTORS® Relief Fund, P.O. Box 14780, Baton Rouge, LA, 70898; Mississippi REALTOR® Hurricane Relief Fund, P. O. Box 321000, Jackson, MS 39232.

Major airlines also have announced that individuals can donate their frequent flyer miles to many aid organizations, including the American Red Cross, Habitat for Humanity and the Salvation Army. Such groups use the donated miles to send relief workers and supplies to the affected areas. For more information on how to donate your miles, contact individual airlines directly.

In response to the devastation caused by Hurricane Katrina, C.A.R. last week donated $10,000 to each of the three affected state REALTOR® associations through C.A.R.'s Disaster Relief Fund. Initially created to help REALTORS® and local Association staff who had been affected by the Southern California wildfires in 2003, the Fund has since been used to mitigate the effects of other disasters impacting the REALTOR® community nationwide.