Grateful and respectful

We may be thankful for many things; positive bank balances, excellent health, warmth and security at home, real friends that actually listen… and unconditional love from family. You have your own list that goes beyond this one, I am certain. For the consistent focus of Santa Fe residential real estate, this thankful note goes out to all of the home buyers and sellers that gave us the opportunity to say we have continued to improve our real estate market by a slight but measurable increase in sales over last year.

The numbers are a little bit better, and how can that be a bad thing? One can wish for more, for bigger faster better stronger, but lets be thankful for a positive number instead of a negative number right now. Over the last 7 years, we have been on the trend line from hell; falling into a deep dark hole and slowly  climbing out of it. Virtually none of the criminals that planned, designed and created this hole we found ourselves in have been contrite, much less brought to justice. And mostly they got to keep their money. Remember statistics that said the average American family lost 65% of their net worth when the housing market crashed. Much of that was paper money; an actual number if you sold your home at the moment it was at its peak value, but not a real number you could use to buy a college education or a new motor home. Consumers did take equity in their homes to pay off debt, so one cannot say they did not benefit from the fast and strong appreciation of the run up to the crash. Lucky were those that knew to spend that equity, although now they have reason to wonder if their home will ever be worth enough to pay off their mortgage balance. This is not mathematics. I would say it is more of a moral for our times.

Through much of 2014, our last 12 months rolling count of million plus dollar sales has been at or above 100 homes. See Absorption Rate chart showing same information. Inventory has been decreasing the last couple months which helps the Rate calculation. But then it always does decrease this time of year.

What is concerning to the writer is the shopworn and picked over inventory of homes that have been on and off the market over the last 5 years. We have too much inventory, but much of it is “hard to sell”. Some finally sold while others are still clogging the pipelines with outdated finishes and the burden of seller’s high expectations of final sales price. In the last 12 months, there were 1820 total residential sales in Santa Fe city and county. In the vast majority of cases, the original asking price was substantially higher than the final agreed upon sales price. A typical percentage might be say 95% of asking (list versus sold price), but further digging reveals much larger spreads when historical data is gathered. Some of those homes started out in 2011 and have been through several agents and several listing agreements before finally hitting the “sold” column. A sample of the numbers might show an $850,000 asking in 2011; $750,000 asking in 2012; $699,000 asking in 2013 and now in 2014 the home sold for $655,000 (or something like that). The price of 655K divided by the 699K ask shows it sold for 93.7 % of ask. But what is the number when you use the 850K starting point – finally selling at 655K? How about 77 % of asking price? Is that possible?

Time and again we have seen a home sell for 20 to 30 (or more) % below the high value of years ago. That high value might have been established by an appraisal connected to a purchase or a refinance. The known fact of a sale at a certain price does set a value that cannot be considered speculative. But what can feel disappointing right now is that there are still some homes selling for 77 % (or near that level) of the apparent high value mark that was established years ago. Until the last dog dies and every home that went through foreclosure has resold and until every home that has a mortgage is worth at least a dollar more than the mortgage, there will continue to be short sales and homes selling for less than the sellers expect to sell for. And that means home appreciation is still a long ways off.

How do you get a home to sell for more than you paid for it? First, by investing in improvements and/or updates that change the look and feel of the home. An automatic way is to increase the size of the home by adding heated square footage, just as adding high quality finishes and improvements will raise the price of a home. The simple passage of time, from say 2006 to 2014, will not often translate to a higher sales price. Where it really gets interesting is when a homeowner that wants to sell plans to buy a different home after the first one sells AND plans to take out a mortgage loan on the new purchase.

Where are mortgage rates today? Amazingly they are still quite low. The pundits predicted low 5s for fixed 30 year rates by now, but they are well below that. An economist’s blog might show the interest rate of mortgages directly connected to the bond market, but that is someone else. I am not an economist.

So this fictional owner that wants to sell and then buy something else can look at interest rates and think about the possibility of getting a fixed rate of around  4 % right now. This might, in a prediction of the next 5 years, result in the older home selling for a little bit more than it would today, but the replacement home would also be selling for more than it could be purchased for today. The real kicker is that the interest rate in 3 to 5 years might be 5.5 % instead of 4 %. What does that mean for a debt of $400,000? Over the life of a loan, using amortization schedules, the additional interest paid over the life of the loan would amount to as much as $130,000 of additional interest paid. Would it be logical to lower the price of the older home right now by say $32,500? That would be 1/4 of the $130,000 of interest. Give that away now by lowering the price to get the older home sold and save the difference in future interest cost. Plus you will be living in your new home sooner and making it the comfortable and warm place you want to live instead of existing in the old place that needs repairs and lots of updating.

This last paragraph is just an example of how the numbers might evolve in a sample transaction. If you find yourself in similar straits, please contact me to discuss a successful plan for you to achieve your personal financial goals. And when you work your plan, you get to live in your new home now instead of later! Ask me how this can work for you.  505-470-7153  –  Alan Ball

 

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