GPS for the Real Estate Market. Summer 2008

You have heard the most important rule of real estate: Location, Location, Location. You probably have heard the new variations of the same concept: All real estate is local or each market is unique. All of these rules are common sense rules. Many things are portable, real estate, obviously is not. It is not just, what it is, it is where it is.

So real estate is understood and analyzed in terms of where it is. But to be really understood, real estate must be analyzed, also, in terms of WHEN it is. GPS is used as a navigational tool. When looking at real estate we need to add a feature to our electronic map, the ‘when feature.’ The when is now summer 2008?

In the largest sense, Rhode Island real estate has changed significantly. The number of sales has dropped significantly since 2006. The first half of 2008 showed another drop of 19% unit sales of single family homes since 2007. Average price of single family homes have also adjusted downward from approximately $280,000 to $250,000. This is a change of 6.9%. Condominiums have seen a similar trend: Sales unit volume dropped from 944, first half of 2007, to 647, first half of 2008. Condo prices have remained fairly constant changing from $215,500 to $215,000. Multi family sales are up significantly, while average price is down significantly.

These are the numbers, but the real challenge is what do they mean. First, we are still in a correcting mode. The number of active listing has gone down this year versus last year.
This bodes well for a stabilization of price. The number of pending sales has gone up for each of the last three months, communicating that nostalgic sellers with high priced houses are withdrawing their listings, and the prices of the remaining properties are low enough to generate sales. However, there is a fact in the price changes that is most telling: A large portion of the real estate market is bank owned. Almost one is five single family homes sold in the first half of 2008 was owned by a bank. Among multi family properties, more than half of the sales were bank owned. This is why prices have shown a significant downward adjustment. Some sellers, want us to ignore, these distressed properties when determining value. Unfortunately, when such a large portion of the market is banked owned, you cannot ignore the information. Moreover, these properties, although wrapped challenge, are priced so low they are compelling to many buyers.

Secondly, the Housing recovery act is in the process of becoming law. It is the single most important housing bill in at least a generation. It has many elements, over 600 pages long. Its primary features include 1. Shoring up Fannie Mae and Freddy Mac, the largest ‘buyers’ of mortgages; 2. Providing relief from foreclosure of many Americans; and 3. Stimulating housing sales. The last item is being done with several tools; the most effective is a tax credit of $7500 for first time home buyers. This should really help us in Rhode Island. The definition of a first time home buyer is someone who has not owned a house in the past three years. This bill will go a long way to shorten the real estate downturn.

Third, the demographics are strong locally. Very simply, we have enough ‘families’ to fill the housing we currently have available, in the broadest of terms. We do have an oversupply of expensive, urban condominiums, but when you look at the total number of families and the total number of residential units, there are enough families to fill them.
The issue is one of value and affordability. Many people cannot afford to purchase right now. Some very savvy investors are buying multi family properties a priced well below value. It is a smart move, as prices are low, demand for rentals high, and the properties will not only carry themselves, but can generate positive cash flow. We have returned to great fundamentals.

Fourth, the signs of stabilization are visible. In the industry we have been looking for the light at the end of the tunnel. (8000 people had licenses as of April 30, 2008. On May 1st after the renewals, that number dropped to 6000 people. A lower number of sales, at lower prices, translate to less brokerage fees for sales people. It has been, and continues to be very difficult for people in real estate.) The visible light is the number of pending sales and the passage of the housing bills. Both of these are good signs. It is a perception in the real estate community that we are on either side of the bottom. Also the number of bank owned properties are enabling a lot of sales. The investors are buying and buying well.

So where are we? Our time sensitive GPS suggests we are still in correcting mode. After the majority of bank owned properties are sold, price stability will be visible. Condo are doing the best is holding their value at the moment. We expect that trend to spill over to single family soon. So if you have been on the side lines, trying to time the market for the bottom, it is a really great time to look. We will not know where the bottom was until AFTER we have left it. It is only visible in the mirror. Check out the current options. There are some great buys out there now. One important recommendation: Get expert advise. Regardless of whether you are buying or selling, this market is difficult to analyze. Contact a Realtor, who ‘knows’ your market area, so you have some who can help you un-knot the dynamics of this market.

Businesses Feel Pinch

With the credit crunch on Wall Street entering its second year, a widening array of businesses are finding it tough to get credit. And with mortgage giants Fannie Mae and Freddie Mac roiling credit markets, individuals could soon find it harder to get a loan as well.

One company feeling the strain is Chrysler Financial, the financing arm of the Big Three auto maker that was carved out of the former DaimlerChrysler AG last year. The Chrysler LLC unit has $30 billion of short-term debt due to mature in early August. And bankers, led by J.P. Morgan Chase & Co., are pushing hard to get that debt renewed.


While a deal is likely to get done, people involved in the transaction say the terms could be onerous for Chrysler Financial, pushing up borrowing costs for consumers and auto dealers that depend on it for loans. (Please see related article.)

Banks also are pulling back on the amount of rainy-day money they have been giving out to corporate clients in the form of loans called revolving-credit facilities. Retailers such as Sears Holdings Corp. and Talbots Inc. have struggled to renew revolving-credit facilities with their bankers in recent months. Other companies, including Wal-Mart Stores Inc., AT&T Inc. and American International Group Inc., have had to agree to tougher terms on such credit.

Overall, the value of credit held by banks in the second quarter shrank 1.5% from the first quarter, according to Federal Reserve data. That was the largest three-month contraction since 1948.

These tight credit conditions are particularly worrisome because the Federal Reserve has responded aggressively since the credit crunch emerged last July. The central bank has cut interest rates seven times by a total of 3.25 percentage points.

Despite those moves, "it's hard to make the case that financial conditions are especially stimulative right now," says UBS economist James O'Sullivan.

Credit-market woes have hammered the housing market and financial companies, but until recently they didn't appear to be hurting the rest of the economy so much. The latest data suggest that might be changing.

Credit is the lifeblood of economic activity. If it continues to be hard to get, despite the Fed's efforts to keep it flowing, that could spell trouble for an economy teetering on the edge of recession.

Investors had started to believe the Fed might be forced to raise interest rates later this year to fight inflation. But with credit tight, that looks less likely now.

The Fed's overnight target rate, at just 2%, is well below the rate of inflation. But that easy-money stance isn't translating into lower borrowing costs for companies and households. Many borrowers haven't seen a drop in the rates they get charged, despite the Fed rate cuts, which began last fall. Chrysler Financial, for instance, is likely to pay more to roll over its $30 billion debt than it did a year ago.

The bear market in stocks also means that companies can't easily tap the equity market for cash.

Much of the decline in outstanding credit has been due to banks sharply reducing the amount of bonds and other debt securities held on their books, but the slowdown is apparent across all forms of lending. The heavy losses banks have taken on mortgage-related securities are forcing them raise cash levels, leading to tighter lending. Because they can't know what other problems might be lurking on their balance sheets, they are being especially cautious.

Payroll-services company Paychex Inc. has been seeing fewer new businesses starting up, which it attributes to the tighter credit climate. On a recent call with investors, Chief Financial Officer John Morphy said that Paychex itself felt the effects of banks' reluctance to lend when it went to open a line of credit.

"We're working with our No. 1 provider lead bank for the last 20 years. You can't believe what we've had to go through to get this," Mr. Morphy said. "And we're in great shape. They want dividend restrictions; they want all kinds of stuff. Now, in the end, we're going to get what we want, but it was a battle."

Fruit-and-vegetable processor Del Monte Foods Co. bought back $50 million of its stock in the second half of last year at an average price of $9.31 a share. At $7.76 a share, the stock is cheaper now, but rather than buy back more of it, the company says it is shoring up its cash holdings instead in order to reassure bond investors of its credit-worthiness.

"The credit market today is very uncertain, to say the least, and the last thing we want to do is in any way affect our credit rating," Del Monte Chief Financial Officer Dave Meyers told investors earlier this month. If Del Monte's credit rating was dropped a single notch, he suggested, the company's borrowing costs could rise by millions.

In a survey of chief financial officers at 468 U.S. companies last month, John Graham, a finance professor at Duke University's Fuqua School of Business, found that companies with low credit ratings, in particular, were seeing significantly higher credit costs and were having a hard time obtaining or renewing bank credit lines. Many companies said they were cutting back or delaying new investment plans, paring hiring plans and initiating cost-cutting programs as a result of tough credit conditions.

"When credit gets tight, money becomes more precious than ever," says Mr. Graham. "If you have it, you're not going to spend it, and if you can't get it, it affects your operations."

That applies to individuals, too. Ron Phipps, who runs Phipps Realty in Warwick, R.I., says banks are making even the most credit-worthy borrowers jump through hoops, asking for reams of documentation before granting a mortgage.

"The approach now is so hyper-risk-sensitive and labor intensive, it's very emotionally taxing," he says. "Somewhere along the way common sense has been replaced by the check-off menu."
David Stevens, who runs the mortgage operation at Long & Foster Real Estate in Fairfax, Va., worked at Freddie Mac from 1999 to 2005. He says that during his time there, the mortgage lender was never as stringent about the quality of mortgages it would accept as it is now.

With banks and other lenders cutting back, Fannie and Freddie have been "the only game in town as far as credit creation is concerned," said Goldman Sachs economist Jan Hatzius. If the mortgage giants, in an effort to raise their cash holdings, curtailed activity in the same way they did in earlier this decade in response too accounting problems, credit conditions could get oppressively tight, Mr. Hatzius says.

By JUSTIN LAHART
July 21, 2008; Page A3

Draft a Winning Team to Sell Your House

Sometimes in order to sell a house you have to act like you’re trying to win the Super Bowl: you have to have the right team.

To get the most for your biggest investment, you’ll want to draw buyers away from the new development down the street and that cute little fixer-upper around the corner. And that means you may need some special expertise.

“When the market is exuberant, you may be fortunate enough to do a good job selling your house without a team,” says Ron Phipps, a broker with Phipps Realty and Relocation Services n Warwick, Rhode Island. “In a normal market or a buyer’s market, a team isn’t a luxury—it’s a necessity.”

Unless you’re selling the house yourself, start by selecting an agent. The agent will essentially be your selling team’s quarterback and he or she can advise you on the pros you need, offer referrals and give you an estimate of just how much money you need to spend versus how much you’ll get back at the closing table.

The smart move? Audition at least three agents, from three different firms, says Phipps.

What you want to know is what they think your house is worth and how they plan to market it, he says.Hold off sharing personal information and financial details. You need to first understand how each agent would price the house (and why) and exactly what each would do to market it effectively.

Here are some other critical issues to consider before you hire an agent:

How creative is the agent with marketing?
Does the agent understand Internet marketing? (Eighty-five percent of buyers start there, says Phipps.)
How sharp are the person’s negotiating skills?
How will the agent position the property for maximum exposure?
How much has the agent sold this year? What is his or her performance record?
What price range does the agent normally represent?
How do the agent’s list prices compare to actual sales prices?
What you want is a successful agent who understands your neighborhood and has a good track record with homes of similar value to yours. You want an agent with whom you can build a relationship of trust, says Phipps, so go with your gut.

Your agent’s assessment and marketing plan will likely determine the other members of your team:

A home inspector: Get a prelisting inspection. The home inspector will give you a heads-up if there are any problems that need to be addressed. With this information in hand, you can decide whether to fix the problem or discount your home accordingly. Having a home inspection is a good preemptive move that can keep negotiations from falling apart after a serious offer. The price for an inspection generally runs between $300 and $500, although it could cost more if you have a large home.

You can get a referral from friends, neighbors or your agent, or use the professional who inspected your home before you bought it. Look for an inspector who is a member of the American Society of Home Inspectors (ASHI.org), a national organization that provides ongoing education and a code of ethics. (The site also includes a rundown of requirements for inspectors in each state and contact information for the state bodies that oversee inspectors.)

If your state licenses home inspectors, be sure to go online to the agency that regulates them to make sure the one you choose has a valid license to do business. Phipps adds that you should avoid inspectors who are also contractors.

A cleaning crew: This is a must if you’re a smoker or you have animals. And it’s not a bad idea if you have a busy family life, either.

Phipps says that one of his recent clients had a beautiful home that was also very messy. But the residents were so accustomed to it that they didn’t notice it anymore. So he hired a team of cleaning pros (for about $250), held an open house—and got an offer that day.

Want to take it a step further? You can hire a professional organizer to come in and declutter your home or a designer or stager to make it look more appealing to buyers. (A good real estate agent should be able to recommend pros in your area.)

A contractor or building professional: Depending on the home, you might also need a contractor to fix major or minor problems. Ask for referrals from your agent or from friends who’ve had recent work done. When you talk to the contractor, make sure he or she is licensed, bonded and insured. Get several references—and call all of them. (Basically, you want to verify that the work was first-rate and completed on time and on budget, and there weren’t any problems.)

“No team can make it to the Super Bowl without collaborating brilliantly,” says Phipps. “Effective home sales are very similar. If you want a great outcome, not an okay outcome, engage the support of a team.”


Discover EDGE contributor Dana Dratch is a freelance writer from Atlanta, GA.