Careful what you wish for

You had plenty to be worried about over the last 10 years including ‘will my home ever sell’ or ‘will I ever see my 401-K regain the level it was at before the storm’. You didn’t know if you’d ever get what you paid for when you finally sold that house. You would have loved to have sold in 2011. Or 2009 or 2012 or last year. And now in 2018 you may be able to sell it fairly quickly, but for enough to get back what you lost to the economic recession that wiped out your life savings and stock portfolio?

We have always wished for a full recovery from the real estate crash and we might finally be able to say with utmost confidence that we have achieved that. And you might also be thinking this sure doesn’t feel as good as you wanted it to feel. Now that you cannot blame impossible mortgage loan requirements and scarce money, plus the plethora of foreclosures clogging up the market, what is the problem exactly?

In a textbook example to illustrate, M/M HomeOwner paid $475,000 for their dream home in 2006, with the help of an 85% mortgage. The payments were pretty high, more than double their rent costs, but they had a bright outlook for the future and wanted the big and rambling home. After several years it turned out not to be their dream home for a list of reasons. So they tried to sell it in 2009 and their Realtor told them they MIGHT be able to get $350,000. Something had gone horribly wrong in the real estate market, and in fact the entire economy was flatlining. Well, their mortgage balance back then was $405,000 which scared the bejesus out of them and they “held on” to the home, making payments to stay out of foreclosure and the ruin of their credit. They did not replace the carpet or upgrade the master bath as funds were tight with payments and all.

Gradually things got a little better and in 2012 their favorite Realtor told them the home MIGHT sell for $400,000 and their balance by then had dropped to the same amount $400,000. But they knew the home was not going to show well with that heavily worn carpet and broken down fridge and dishwasher and stained countertops plus all the stucco cracks. They were told the cost of sale would represent about seven percent of the final sales price. They were not ready to take that hit and sell it on terms that would require them to bring so much money to closing. They barely had two months of living expenses saved up what with college for the kids and his car that he needed to commute in. So they stayed and kept making payments. They were not happy but they had a roof over their heads.

And then, the magical year of 2015 arrived and they finally started to think this was going to be their year to sell. The economy was much better and economic pundits told them the real estate crisis was over. Appreciation had started to become a reality again (in the lowest price ranges) and they were very optimistic about selling and walking away with a little cash. So that Realtor, who had moved to a new virtual brokerage by then, was asked to do another market analysis. The conclusion was a selling price range of $450,000 to $470,000, almost as much as what they paid in 2006. But homes were still taking almost a year to sell and the homes in great condition usually sold first. They had to figure out how much they could put into their home to bring it up to date and make it show so well that a buyer could not ignore it. By this time, since they had neglected almost everything about the upkeep of the home in their nine years of living there. They got some bids together and found out they would have to spend some $50,000 to make it shine and hopefully be irresistible to a buyer. It could actually run up to $80,000 if they went crazy and did everything. With their mortgage payoff at $390,000 plus the $50,000, their sales price would have to be north of $475,000 to close without having to bring cash to closing. That was above the range their trusty Realtor provided, but they were ready and hoped they could find the right buyer at $475,000.

IF THEY COULD find a buyer at $475,000 with minimal further reduction in price for items found in the inspections (remember they were going to spend $50,000 to upgrade), their seven percent cost of sale would drop the net, prior to payoff, to a bit over $440,000. They also had to payoff those credit cards for $50,000 from spending to upgrade the home. Payoff of $390,000…? Yes it could actually work. So they listed the home at $495,000 hoping to get a buyer to buy for at least $475,000. Professional photos were posted online after they decluttered and made the home look as close to a “model” home as possible. It did show well, but that effort and expense just put them in the middle of the pack of existing and new inventory. The absorption rate hit a plateau and many others in similar situations also had put their homes on the market. Since there were only so many buyers, their home did not sell right away. It was only shown six times in the first month and after 60 days they met with their Realtor to discuss lowering the price.

So they lowered it to $479,500, still hoping to get really close to $475,000. But after it was passed over by buyers looking to spend about $450,000, they had lost out on a good portion of the peak season and were still a bit overpriced. They thought if someone wants our home they can make an offer. That kind of thinking can lead one into belief that their home is priced to sell. But it did not sell. They had one buyer on the hook, but his mortgage was declined so another 30 plus days were wasted. Desperation was looming as they had really wanted to sell six years earlier and now they had planned to move out this very year. But they gave up trying (living in a home listed for sale can be stressful and restrictive) and they terminated their listing and fired their Realtor, blaming everyone in the process. It was almost Thanksgiving and they assumed home sales stopped in the wintertime.

AND NOW a new day has come. 2018 has arrived and they are damned sure going to sell this time for the amount they want and finally get beyond this ugly chapter in their lives. Their marriage has been severely strained, they have had to deal with illness and career goal disappointments, but there was finally a way out. The new Realtor they contacted, who had been in the business about 12 months, but was best friends with his mother, took the listing at a price of $540,000. This would be great, finally, they thought. The mortgage was lower, they owed less on those credit cards and the market was heating up to the point their new Realtor said they could sell it in 90 days with some good fortune and the right buyer.

And they did sell it in 90 days this year, getting a net bottom line enough to pay the mortgage and credit card balances in full and walk away with some cash. They celebrated by taking a trip to Italy and Greece and renewed their marriage vows in the process. They held off buying another home while the burn scars of owning the prior home were still healing. Renting was fine with them. Their credit was just good and they had an empty nest situation as the kids were grown and gone. They never spoke to the first Realtor, but that old veteran was used to failure and rejection. She could always find a way to put on a smile and speak positively, even with the down side of her business.

Is this a happy ending? Would they have ever chosen to write this script to live out in real-time with the goal of having a happy ending? How much did they worry and stress during the 12 years they owned that last home? Their kids saw them arguing and fighting on a regular basis. They did not take vacations and did not take good care of themselves during that time of worry and despair. His mother-in-law scolded him incessantly. Her father-in-law, after a serious stroke, seemed to not have the same fondness for her as before when they were younger and happy.

What else could have happened? They could have decided to walk away from the home in 2009 or 2010, when they owed more than it was worth. They could have mailed in the keys and likely been stuck for a deficiency balance for the amount between what the bank sold it for a year later versus their outstanding debt. That or all of the other burdens and mistakes could have placed them in bankruptcy anywhere along the timeline. As it turns out they did not ever declare bankruptcy and these days are wondering why they thought it was the wrong thing to do back then.

They might have sold it in 2013 with an agreement from their lender for a carry over debt to cover the short sale net amount that their did not get at closing. They might even have been able to negotiate a complete forgiveness of the short fall on the payoff.

Maybe they should have just stopped making payments and lived in the home for free (except utilities) while they fought foreclosure. This might have stretched on for 2 years or so. Of course if they were going to do that, they really should have put aside at least $3000 a month toward their future lives and a future home for themselves, but most people are not that disciplined.

What does it mean to have a foreclosure on your credit record? And a bankruptcy on top of that? After enough years have passed it might mean nothing. But back in 2009, they never imagined it would be nine more years before they would see a sale. Very few people predicted the long and painful recovery process that took basically ten years (in the Santa Fe area anyway).

Sometimes I go back and read the archives of what real estate counsel I was sharing from ten years ago and it was not pretty then. It was honest and negative; mostly gloom and doom. I was critical of most every part of the process of doing real estate business. Mostly I feel the largest mistake made by us all (and it would have been almost a miracle for it to turn out differently) was to not take the problem of millions of homes in foreclosure and millions more underwater and make federal laws that mandated a faster and equitable recovery for all of the people involved and all of the banks holding the notes. What did happen cost the federal government (and all of us taxpayers) a great deal of money, but they paid it to the banks that made the “bad” mortgages instead of actually paying down the mortgages allowing people to stay in their homes. The upheaval make a mess of many lives of Middle Class Americans. This subject has been the focus of many a book and article. What did we do wrong? And what did we not do right?

Do you want to pass judgment on the last 10-12 years of Santa Fe residential real estate? Feel free. My take on the single largest factor in our local scene is the thousands of mortgages made to borrowers who were not even close to qualifying for a mortgage, using conventional underwriting standards. Even allowing for payment of MPI and the VA/FHA programs that OK a small down payment, far too many loans were made to people who did not qualify. And then values plummeted and stayed down for years making certain that anyone who was vulnerable to that reality got a chance to suffer financially.

Hindsight is wonderful, si? no?

Praying for rain in Santa Fe…

A moment of balance

Librans like to focus on balance and harmony. There is a time when balance in the real estate market can be found and its right about now. This is the time we change over from cool to warm when taking the temperature of our market. We’ve had enough of tepid. What happened in June is quickly washed away by the increase in activity and showings in July and after. It would be easy to be pessimistic in early and mid June because that wave of buyers has not returned quite yet.

You know the ones I am talking about. Buyers who have looked at homes off and on for several years might be coming back for real this year. Buyers who have waited to time the market (good luck on that one) might figure out that this year it is finally time to buy, while we see the creep up of higher interest rates and the shrinking of quality inventory. At any time, such as 2 months or 2 years ago, one could make the case that now (I mean then) was not quite the time to buy. If that even entered your thoughts or affected your actions or planning, allow me tell you that time has passed. There is no better time than now (or in the next 120 days) to buy a home in Santa Fe. Not yesterday or 2010, but now.

Why would I say that? Think of the past 8 or 9 years with not only zero appreciation of home values, but actual documented lower prices and values. That might finally have run its course. MAYBE we will start to see appreciation later this year and next. Interest rates? Yes, that is a direct factor for about half of home buyers in our market. Every quarter point increase in rates will knock out a percentage of buyers, or at least force them to buy a less expensive home based on their qualifications. The inventory of homes available is smaller than at any time in recent memory and almost no new homes are being built that are not already pre-sold to a buyer. The exceptions are worth a look. So the new inventory is coming from where, exactly? From homeowners that are ready to pull out and ready to sell, whether the home pays off all of their debt or not. There still are short sales coming up and there is a mini wave of defaults also coming, as a large number of HELOC loans convert to amortization from interest only terms. An example: an old friend’s HELOC (home equity line of credit, usually a 2nd mortgage) payment went from $180 a month to $650. He is not sure he can afford that and may have to default. It is not news that many people, even owners of homes, live paycheck to paycheck and a change throws off their ability to have that tooth crowned or set up that family doctor appointment. Never mind the trip to Alaska…thats out of the question.

To balance your checkbook is one thing, but its another thing entirely to achieve balance in a real estate market. As we shift to more of a seller’s market (we are not there yet, but steadily moving that direction) that tipping point when sellers and buyers are on level ground will exist, if only for a month or two. I have no idea how long we will be in balance, but lets enjoy it while we can. Librans really know how to talk about balance. I hope I have come close.

Another example of viewing balance in a real estate market is comparing new listings to sold listings. There are always more listings than there are solds. Some go on the market and never sell. Other listings expire after 6 or 12 months and then a new listing might take its place. That’s at least two listings for one sold, if it does in fact sell during the 2nd listing term. Over the last 15 days, per our MLS database, there have been 245 new listings and 175 sold listings. Thats about as close to balance as we could design and invent. Compare to early spring when new listings outnumbered solds by 5 to 1 or even more at times.

So where exactly are we? Of sold homes reported to our MLS, something like 90+ percent, had at least one price reduction since first listed. Clever and sly Realtors and homeowners can scheme to hide the truth of how long a home was on the market. Ask if it matters to you. There is a magic number/price for listing a property. Most all listings start above that number and then settle for the true market price. That true price is literally what someone will pay, and does pay for it. Santa Fe residential real estate buyers expect to get a price below the asking price, while the market is still favoring buyers. Once the shift kicks in and we enter the seller’s market we are heading into, that might eventually change. Except maybe not. By then, sellers will expect to get a higher price instead of putting it out there at a price that will bring immediate offers. So who can blame a buyer for making a low offer? A seller has the right to be insulted by a low offer. But insults don’t write checks and show up at closing, so bully for your right to feel that way. Get over it and counter with a number you like and start the negotiations.

Buyers almost never start with their best offer. A most recent example: the first offer came in at about 12% below asking price. During the back and forth of negotiations, another buyer stepped up and made a strong offer. The seller decided to ask both buyers for their best new offer and both responded. The first buyer ended up paying a price about 1% above asking price. What will that 13% additional net proceeds mean to that seller? Why did that happen? The seller not only did not have to lower the price; the seller got more than asking price. The starting price was such that immediate interest and offers within a day or two showed up. Every home has its magic price. If timing is everything and you don’t want to be sitting on that home in November, unsold and shopworn, find that number and run with it. What is the advantage of having your home on the market for 6 or 12 months when you likely will not get your asking price anyway? Remember the situation we are in today; over 90% of homes that sell had at least one price reduction during the listing period. One might say that price reduction is why it finally sold.

Does any of this make sense? I try to write in a conversational manner that I hope makes it easy to follow and comes across as logical. We can make this complicated or we can keep it simple. As we move into balance, be prepared to take action accordingly. A buyer maybe should act soon. A seller maybe should rethink their asking price if they want success this summer. Now that wasn’t too complicated, was it?

I am always ready to discuss your own real estate situation and goals with you. Knowing what is going on is of great importance. My strength is getting you through the negotiations and to the closing table feeling good about the process. Anyone can crunch numbers. Making sense of them can be a challenge.

At the first quarter pole

Three months in the books and we can say the year looks promising, although best ever or wonderful do not need to be said. No predictions here, yet March this year was a busy month with more sales recorded (from the Santa Fe Association of Realtors database known as MLS) than all but 4 of the last 95 months!

And inventory of homes listed for sale is in a range that we have not seen in over 12 years. Lower inventory means more urgency on the part of buyers; at least that is conventional wisdom. But since we have not seen lower inventory here in so long, will the now strong fixation buyers have with price prevent them from seeing the market shift to a balanced or even a seller’s market? A buyer trying to time the market shifts is often unable to lock in real savings when you consider the escrow process and the time it takes to complete a purchase.

There continue to be pockets of price and location that are not exactly the same as the rest of our market. I believe that homes between say $600K and $800K are in short supply because there have been very few new homes built in this range in the last 8 years. Some areas have good activity and proven success for sellers that price their homes to sell. Some would describe Nava Ade and Eldorado as warm to hot segments of our market. Homes and ranchitos that are some 30 minutes out are not in demand, by comparison. And lot sales are still creeping along slowly, although renewed interest is noted as some future homeowners cannot find the right home and decide they will maybe hire a contractor and build. The numbers on that are still weighted heavily toward buying resale as labor and materials make buying new an expensive approach. Also, materials and systems within homes are advanced beyond the quality and integrity of 20 plus years ago so a new home might be worth the cost to those that want the latest and best.

It is fun, with pleasing results, to compare sales for any 12 month period between 2008 thru 2013 with today’s most recent 12 months. We are so much better off now its hard to fathom how we stayed strong back when 100 sales a month was the norm. Now averaging around 150 a month, there is a larger pie for everyone to have a slice. Will we get to 200 a month levels anytime in this lifetime? We were there in 2004 and 2005 and 2006 so yes, it is possible. But it is not promised. Many sales then were to buyers mostly unqualified to buy, without sufficient income and lacking reserves to weather the changing payments as rates fluctuated. There was also a large-scale recession that wiped out substantial middle class net worth and crushed many jobs. Do mortgage lenders that were in business 10 years ago do things the same way now? Absolutely not. They could not get approval on maybe as many as half of the buyers and borrowers that they placed 10 years ago. Ask them to confirm. That is just my ‘oldtimer’ guess.

It’s not a simple math problem to calculate where our market is today when comparing with the past. That darned real estate bubble created some space between reality and dreams that seemed to make those dreams possible. But many were not sustainable and our slog through the mud of foreclosures and short sales has kept us humble and working harder than ever to stay even. If one were to guesstimate what sales would have looked like 10 years ago if the same loan qualification standards were in place then as they exist now, home sales numbers would have been much lower. There is no exact way to know how much, but I do appreciate the comparison of then versus now because the improvement in our market is actually better than it looks at first glance. We still have some foreclosures, of course. Just not as many showing up as we saw just a couple of years ago.

Keep reading and keep learning if you want to be in a position to make the correct decision about your own real estate transactions. Ask lots of questions and ask for proof of statements that seem too good to be true. You already know how that works.

The foreclosure lessons

A couple of days ago, a daily Santa Fe New Mexican issue included legal notices of three foreclosure actions in progress. It’s public notice to publish the foreclosure action by a note holder against a borrower. Mostly the note holder will end up with ownership and possession of the property after a costly and long process. And the borrowers will be out, sometimes with serious damage to their credit scores and maybe a ruined marriage and/or careers. Kids will be transferred to new schools since the former owners had to move. Yes, they did not pay the mortgage payment and went into default. A narrow and cold opinion is that it was probably their own fault. At other times we have raised the spectre of greedy lenders making loans that were of such high risk that default was almost a promise; yet they made the loans anyway. OR rather, the loan officers and underwriters made the loans, usually with direction from ownership and management of the company they worked for.

Is it okay to say “we were just following orders”? You are welcome to comment on whether the people who profited from the liar loans and no doc loans in the recent past should have spoken up and stopped many of the unqualified borrowers from going ahead and buying a home or confronted their bosses about the large picture effect of so many unqualified buyers borrowing money they could never repay. They could only continue to pay if the home went up 10% or more every year and the borrowers constantly refinanced to roll the newly gained equity into a new and higher balance, with a new payment structure. Were crimes committed? Fraud is a crime, last time I checked, though difficult to prove.

So just this week the newspaper named above had three legal notices for three properties in foreclosure: one in Los Alamos, one in the Eldorado subdivision and one near Edgewood, NM. ( I just looked; none published in today’s issue)  I don’t follow other counties such as Bernalillo, San Juan, etc. I guess I should mention that 3 legal proceedings with published notices compares to the peak day from several years back when 31, count’em, 31 notices were published in one day. I recall a phone call I received from a fellow Broker asking me what was going on and was the market completely crashing? They were obviously concerned seeing so many legal notices in one day’s newspaper. I suggested the note holders were likely processing a large batch at one time and that’s how the publishing happened in such large numbers on one day. But back then, almost every day had some legal notices of foreclosure published. Foreclosures have slowed. They had to slow down. How many more homes and borrowers could still be out there and still in trouble? It seems as if we have survived the worst, and that is likely true. But as long as foreclosures continue, those homes will continue to put a damper on sales in the neighborhoods where they stand.

The lender will eventually gain title to the property and will place it on the market for sale. That home will likely be the lowest priced home of its size and shape in the neighborhood. So the family 4 doors down the street that is trying to sell a similar home will likely not be able to sell until the foreclosed home is gone from the list of available inventory. Note everyone wants to buy a foreclosed home; many have serious problems and defects. But a savvy buyer seeing a home at maybe 15% below the price of another home on the same street will probably want to pay less.

What is the lesson here? More than one lesson to be sure. Back in 2007 or 2008 or 2009, whichever year you might claim to have understood the problems we were facing with the bursting of the real estate financing bubble, our national government and the big lenders (also known as big banks) made a strategic decision not to force financial ruin on the big lenders (by forcing them to write down mortgage balances, lower interest rates or recast the payments into something the homeowners could afford). After all, we needed those big banks in our lives and many people had bank stocks in their personal retirement portfolios. The road not taken would have spread the pain among almost everyone one instead of just twisting the life out of a small percentage of families and homeowners that were unable to survive the storm. And we know what happened to the properties, too. They started to fall apart and deteriorate, but not enough to salvage the builders and contractors that went out of business when the housing market took a nosedive. So I guess you could claim that the neighbors of the foreclosed properties ended up taking a hit because of their proximity to those problems. Ask them if they would have rather lost 3% of their retirement portfolio value by virtue of some large banks failing without government support back then, versus the maybe 10% of value they cannot realize as they tried to sell their home while surrounded by uncertainty and vacant homes going through the legal system.

Back in October 2008, a famous time that almost saw the crash of the world’s economy, decisions were made to save the large companies that made those loans to the borrowers that actually did not qualify to borrow under normal lending approval criteria. What many do not realize is that the big lenders continued to make liar loans and no doc loans for a long time after it was clear that the housing market was tumbling into a huge ditch that would take 5 to 10 years to climb out of. Even in 2010, at a time when you would think everyone knew better, loans were still being made that were not properly underwritten to allow for the long-term recovery we were facing. Banks still wanted the fast profit and damn the future results. Some of those 3 year ARMs were not resetting until just a couple of years ago.

Three versus 31? I like the smaller figure much better. It seems easier to digest. And digest we must to finally move past the great recession that has strangled us without mercy for almost eight years now. Let the constipation end! Someday really soon our market will get into balance and both buyers and sellers will be able to do business over a title company settlement table without having to account for other’s mistakes and crimes. Lessons learned are sometimes necessary for us to truly move forward.

Maybe we shouldn’t dwell on past mistakes. I agree with that and will gladly report the good news as it develops. Let me assure you I have been striving to report the good news along with any other facts that are relevant. The bright spots in our little real estate market in Santa Fe, NM are not to be ignored. We just need to create more of them. Is this going to be the year?

How do you rate? and some News

Interest rates are published at least daily on many websites. Mortgage interest rates are a major factor – likely the most important variable – in a home buyer’s choice of loan programs and lending sources. A real estate professional like me should have a good working knowledge of mortgage products and a mortgage calculator or device app can come in quite handy when standing in the kitchen of a home for sale discussing what a buyer can afford.

More to the point, a buyer standing in a kitchen of a home for sale should already have a pre-qualification letter in hand from a reputable mortgage lender. Any written purchase offer from a buyer prospect that is not accompanied by a pre-qual letter will not be taken seriously by the owner of the listed property.

So yes, get a pre-qual letter  before you start looking, by all means. And it’s very easy to do. I know a number of mortgage loan officers, brokers and bankers that would love to visit with interested buyers and discuss what loan program and rate might be available.

And now for the NEWS: mortgage rates are going up. On any given day or week, they are slightly up or down from the last time you looked, but over the long haul, they and heading upwards. That is the opinion of almost all of the money and mortgage experts out there.

We will see about one percent in rate increases over this new year (2014) as we saw about a one percent increase last year.

By the end of 2014 and into early 2015, most expect rates two percent above what they were at the historical low of 12-18 months ago. Still, even a full percent increase from todays levels (around 4.2 to 4.5%) will still be below average rates from the last 25 years.

Would you like to read more about this? Try the “interest.com” site for a clear explanation –  http://www.interest.com/mortgage/news/

The National Association of Realtors chief economist has been saying the same thing for months. Forbes, CNN Money writers, probably even Donald Trump are all predicting the uptick in rates.

This matters to buyers because it has a direct effect on how much home they can buy. Every fraction of a percent in rate increases lowers the amount of available mortgage money for the vast majority of home buyers.

Contact me if you would like to know who the best lenders are that know the Santa Fe market. And if your present home is not a joy to come home to, let me know when we can start looking for a new nest for you and your family.

There are some good deals out there and I know how to find them.  Alan  505-470-7153 or just comment on this blog post… and I will be in touch.