Realty Bytes August 2009

Realty Bytes August 2009:

Why is the bottom of the market so elusive?


The Rhode Island Real Estate market turned down in late 2005. Yes we have been in this market correction for almost four years. The rest of the country has been in this cycle since late 2006 early 2007. Obviously, all markets are local and there are exceptions to these general observations. Some markets like Detroit have been weak for a longer time, and other markets like North Dakota have not seen any down turn at all. Unfortunately, that is not the case in Rhode Island. From the market price peak of over $275,000 to a mean value below $200,000, the change in the market has been huge. Many people have no equity, or ‘negative equity.’ They owe more than the property is worth.

The most common question that we as Realtors are asked: “Are we at the bottom?” In all candor, we really do not know. We would like to think we are, or are on either side of it. The recent numbers of sales activity suggest that the market is improving with more sales, although the prices have continued to lower. Additionally, we will not know that we have hit bottom until we are beyond it. It is a rear view mirror event. Only after you have passed through it do you really know that you have reached it.

The challenging question is not whether we have seen bottom, but rather why is it so elusive? Why has this cycle been so long and the distance between peak and trough been so great?

The answers to both questions are intertwined. Because we had gone so high, as the result of inexpensive and easy credit, the correction is greater than it might have otherwise been. Anyone could get a mortgage and credit was so free flowing that you really did not need to be able to afford the mortgage. The assumption was that prices would continue to escalate, or your income would go up, or your lender would reduce payments. Rarely was there a conversation of ‘ability to afford to pay for the property long term. If you could not afford the month payment, you would just flip it. Obviously those assumptions were and are not sustainable.

With that as a backdrop, we had market and value exuberance that resulted in very high average sales prices. The peak was really high. When we began correcting the lenders process for underwriting mortgages became so rigorous, the majority of people would not qualify to refinance. Then we have the new appraisal rules, requiring direct comparables within 90 days. Mortgage denials became the norm, not the exceptions.

In Rhode Island almost 40 percent of our sales currently are distressed sales, either foreclosures are short sales. This has further reduced average price. Also short sale is an oxymoron. It should be called a LFS; Long Frustrating Sale. The average conventional transaction closes in 45 to 60 days. It takes, on average 9 and half weeks, to get a simple response to a short sale offer. That response could be a rejection or a counter instead of an acceptance. It takes months longer to close.

If is difficult to have price stabilization with so many short sales in the market that are never resolved. There is conversation within the industry that prices would stabilize more quickly if we have a 7 day response time for all offers. Cut the buyers loose and let them purchase something else. It is a total lack of common sense.

Appraisal issues continue to retard any stabilization. Many transactions are falling apart because the underwriters and credit managers are questioning the appraisals. It is difficult to find perfect matches that are only 90 days old. Then when the transaction falls apart, there is one less closed sale to use in other appraisals. It is a downward spiral.
Another lack of common sense.

Many potential buyers are also on the sidelines, wanting to make sure we hit bottom before they purchase. This is understandable and difficult to accomplish. Where is the bottom? Is this the time to buy? Historically low interests, low prices, huge inventory and the $8000 first time home buyer tax credit are all strong incentives. With all of those elements, some buyers are still waiting.

So far we have discussed the challenges in the real estate market. We cannot ignore the larger economic climate. The unemployment rate is a huge challenge. Over 70000 Rhode Islanders are looking for work. Those people need jobs to stay in their homes, much less buy other homes. Job creation is key to recovery.

It is our observation that MBTA rail service to Green Airport, (and Wickford later), will do a lot to stabilize price. Average price in Boston is approximately $373,000, in Rhode Island it is approximately $200,000. That is a huge difference between markets an hour apart. We are confident the rail service will go a long way to stabilize price.

So there you have it. It is elusive, but on the horizon. We are just not sure how far the horizon actually is.

Bright Lights in the Economic Night: Ron Phipps's February NAR Entry

Bright lights in the Economic Night

This past week was a turning point. This week, Richmond Virginia was my port of call. Virginian Realtors are tenacious and gracious. Challenge does not dissuade them, it emboldens them. And yet, they do not loose any of their grand sense of hospitality. The meeting in Virginia went well for the Association, Realtors, and their legislative Agenda. All ten of their bills were approved by the State Legislature. It was turning out to be a great week.


Then two bright stars lit the night: First, Charles Macmillan NAR President and Dale Stinton, NAR Chief Executive Officer, introduced the Right Tools, Right time initiative. It is brilliant concept: For over 100 years Realtors, with the effective stewardship of our professional staff, have invested in the Association Reservoir. As a result, the Association has significant resources: tangible, fiscal, human, and strategic. The Leadership Team with the concurrence of the Finance Committee approved the NAR plan to put tools back into member and Association hands to provide assistance through these difficult times. Tools will be delivered to Realtors and Associations, (local and State), to provide direct benefit during these times. I was reminded the old Chinese proverb: Give a man a fish and he will eat for a day. Teach a man to fish and he will eat for the rest of his life. We are re-tooling and re-teaching our membership. We are lighting up the darkness with not just hope and compassion, but rather the tools to help our members actually survive. It is as if we are letting water out of the Association reservoir to make the electricity to power our Realtor business and light, heat our homes. It is the right program at the right time. It maybe viewed as one of the most pivot decisions for our Association in the past twenty years.

With star shinning brightly, the Congress finally approved the economic stimulus package to send to President Obama. What is amazing is that we obtained three of our four goals: Rates are 150 basis points below where they were a half year ago. Conforming loan limits have been reset at the higher 2008 numbers. The 7500 credit was increased to 8000, (we had hoped for 15k), and there is NO repayment provision. By every measure we met those three goals. The final element, the prohibition of banks in Real Estate is still being pursued.

It these two stars were not enough to lit the night sky, we are about to hear the next phases of the Administration Housing Recovery plans. We have not had a lot of light in this economic night, but now we have two North stars to help us navigate out of the darkness and into the life.

Real Estate Bytes December 2008

It is December 11 and already after 6 pm. It is cold, rainy and dark. Like many Realtors across the country, I am at my desk putting in a long day to pull some transactions together, keep others together and identify some new business. (Sometimes I feel like a real estate transaction janitor). For almost 30 years, real estate has been my job and my passion. The cyclical economics of real estate remind me of the weather in New England. We have seasons: seasons of planting, harvesting, tending and hibernating. We have seasons of wet springs, warm summers, bountiful autumns, and raw winters. We know this in our bones. Furthermore, this economic winter is chilling us to the bone, but we will as we have get through this.

It has been a challenging year for everyone, with few exceptions. Whether you are a homeowner, a renter, a Realtor, it is a rare person who says this year has been easy. However, there are some rainbows out there if we look up. Interest rates are great. Think about it: You can obtain a 30 year fixed rate, conventional mortgage for less than 5.5%. The average price of a single family home has come down to under 218k, making housing more affordable for more families. Condominium sales were down this year, but average price went up a few thousand dollars. Additionally, the number of pending sales is up and inventory is down. There are some great deals out there and some investors are scooping them up. In short, these are encouraging signs in the middle of the real estate storm.

One important element is becoming apparent. There are fewer full time Realtors working now, but their value is becoming more obvious. Whether pricing, negotiating, staging, positioning, marketing, closing etc, professional experience will make a real difference. This is true with both the buying side and the selling side. Even in so called normal, traditional transactions it has become an exercise of immense patience, and persistence to complete the sale. Selecting a home is easy. Obtaining the financing and getting it closed is very challenging. Sellers are beginning to understand this new real estate reality, too: The interview questions have changed lately when making listing presentation. Pricing is still important, but many sellers are asking more questions: What do you do to stage? What is your marketing plan, specifically? The question of what is your experience has changed to how many houses have you sold this year? It is also strange as a couple of homeowners have asked if this is my full time job. Both buyers and sellers are asking about professional designations and what they suggest.

Finally, in a market with so many foreclosures and short sales, we are reverting back to a caveat emptor, buyer beware. These homes do not have completed seller’s disclosures. Often there is no water, heat or electric. They are very difficult to inspect and research. If those facts were not enough, add the fact that this category of property takes so much longer to negotiate and acquire. While there may be great opportunities, there are great challenges.

It is New England, so we will bundle up and get through the winter.