March 2010

Hits: 8

If you are reading this, then you probably pay attention to the news. In real estate, all the talk is of the thousands of homes going into default and how many homes are “underwater”. Interest rates are wonderfully low, but when an adjustable rate loan hits the rate reset date, the rate goes up because the original was artificially low. Some homeowners cannot refinance and grab the low rates available for new loans because the value of their home is lower than their outstanding loan balance. And there is a very wide range of guesstimates of what percent of homes are underwater (not because of broken levees, but the monetary meaning of underwater) where the debt against the home is larger than the value of the home. Home values are just a guess until you sell the place. Then reality hits as you get a serious offer that might be below what you think it is worth. So let’s agree on one thing: a home’s value is what someone will pay for it. If you are not moving and are happy living where you are, the dollar value of your home is of less importance to you than if you are trying to sell.

The range I have heard, defining the percent of homes that are actually underwater, is between 14 & 33. If one could figure out how many of those homes have no (or almost no) debt against them and eliminate them from this analysis, is the true percentage of homes underwater closer to 50%? Who knows? I am afraid whatever the number is; it is a very large number. And as a real estate professional, or at least someone that knows someone that pretends to be, what do you tell a seller that wants to sell or needs to sell? What can they expect to happen once their home is listed for sale? To start, you could study and share the attached Absorption Rate spreadsheet. Look for more information with more price categories in the near future.

The length of time to sell current inventory (stated as # of months on the attachment) got shorter beginning last fall, as some homes sold and others were taken off the market. Now with February behind us, we see the beginning of another rush to list property, to capture the buying spirit of warmer weather. Forget the summer vacation to the Grand Canyon!  Let’s do a deal instead! The following chart shows the work that lies ahead of us. I had previously sent similar spreadsheets for other price ranges.

   Residential Inventory   All Price Ranges   

Santa Fe City & County, single family, townhome & condo only           Units shown as of last day of month

Inventory of homes listed has climbed steadily since the early part of this decade. But the steepness of the growth increased because the number of sales started declining in late 2006. Look at the jump from 2006 to 2007, knowing that the numbers take time to become clear. The attached Absorption Rate chart reflects the comparison of inventory to sales.

Over the last 10 plus years, we’ve had many occasions to grow and prosper and to reset our priorities. The real estate bubble of this past decade was a blessing for many (not for all) and most voiced their opinion about it, but almost no one took action to guard against falling home values. Now we have a chance to learn a few lessons. Number one: do not bet on constantly rising home values. Homes do not always go up in value. Be prepared for possible difficult times, if and when they come along. Most people did not study the details of the real estate phenomenon of this decade, plus heard many an expert pushing the idea of buying a home with no money down. Almost all the noise pumped the bubble bigger rather than fair warnings about how to prepare if (when) the bubble burst. And it did. Next: get it in writing, and actually read the fine print. Ask questions. How many people that borrowed to buy a home earlier this decade actually understood the “worst case” possibilities? Would they have purchased using an adjustable rate program if they knew what was going to happen; with a rising interest rate, falling values and unemployment threatening around every corner? Well, they might not have been able to purchase any other way. And that begs the question if they should have been allowed or encouraged to purchase using programs that were fraught with problems. Very very few predicted the state we are now in. And common sense may have been on holiday. A recent public interest story told of a person that purchased a home in the early 1980s for under $80,000, then refinanced 7 times since, and now owes over $240,000 and cannot keep payments current. What happened there? Where did the money go?

Now it’s time to cheer up and see the bright side. There have been numerous reports of improving conditions, hopeful signs, actual deals happening and money being spent; beyond the change of seasons, that is. As Elton John sang years ago, “I’m Still Standing! Yeah, Yeah, Yeah!” We are all prepared for things to improve and are here to put our shoulders to the wheel. Consider phrases I have heard recently: “Survival is the new success!” or “Flat is the new up”. It feels as if we are stable now; our industry is poised to grow again. And our industry is a large part of our area economy. A local high-quality builder told me just last week that he just signed two deals in one day. Fantastic! Let’s hope they hold firm so he can hire back his crews, do the blueprints and start ordering materials. Do you realize how many times one dollar spent on a local building project gets circulated in our community? Just one deal (he said he signed two!) will have a huge and lasting positive effect. It’s not that difficult to envision, but it does need to happen before we can measure it. Until then, I am going back to work. You too?