Martin Wolf of the Financial Times has put together some hard-hitting analysis of real estate markets, without falling into the common trap of making predictions. It concludes this way:
Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.
I would add one more scenario, that may be peculiar to highly specialized market of New York City: perhaps we have reached a new equilibrium, driven by the growing assets and incomes of those who want to live in New York. I regularly see buyers plopping down all cash for multi-million dollar residences, so I would suggest that another possibility is that as purchasers incomes continue to grow by leaps and bounds (witnessed by this years Wall Street bonuses), many will have “extra” money for downpayments as well as the cash for their lifestyles.
In addition, today’s market has produced a much more savvy buyer than the recent past. They are much more aware of overall market conditions and the economic factors affecting price–including the size of the buyer pool and housing inventory. As the market has softened, buyers are less likely to participate in bidding wars and when “forced” to do so often walk away from the apartment that they may have bid over ask for just a year ago.
It remains to be seen how the softening of our market will ultimately play out, but the stabilization that has already taken place is healthy for a housing market that was speeding out of control. Welcome back to reality where people actually make smart decisions about their sales and purchases. It’s a good thing!
With properties spending more time on the market, many brokers have convinced sellers to increase commissions to as much as 9%. Rather than lower the asking price, they are hoping to increase the number of showings by the brokerage industry and ultimately sell the apartment for an excellent price.
Many of my friends, family and clients have asked me for my thoughts on this subject.
I recently represented a high-end property in which we needed to find a buyer with a vision for the property’s potential. After five months on the market, the seller and I decided that an 8% commission may just rescusitate this apartment and incentivise brokers to bring a new pool of buyers to see the space.
The result was INCREDIBLE. Some brokers who had previously shown the space at a 6% commission and had nothing positive to say were suddenly transformed into the “ultimate salesperson” within only remarkably positive things to say about a property in which NOTHING had changed but the amount of money the broker would procure. I was stunned at this behavior. I must add that most brokers didn’t change their views on the space, but enough did that I became discouraged by their behavior.
Ultimately, the seller and I decided to lower the price and pass savings onto the prospective purchaser. We sold the apartment immediately upon lowering the price. So as convincing as these brokers attempted to be when they stood the reap the rewards of an 8% commission, none of them were able to effect a sale. A reduction in price did the trick.
Moral of the story: “don’t get bitten in the asking price.” Now more than ever, the price at which you begin marketing a property is the most important factor when selling, followed by a solid marketing plan, and savvy negotiations.
The yield on the government’s benchmark note surpassed 5 percent yesterday for the first time in four years. Vikas Bajaj wrote the story that’s on the cover of The New York Times:
“Where you are going to feel the pain the most is on the housing market,” said Brian J. Carlin, a vice president at J. P. Morgan Private Bank.
Mr. Carlin estimated that recent homebuyers with adjustable rate mortgages could experience a jump in interest rates of 3 to 4 percentage points in the next two years, as the typical 3 percent introductory rate is adjusted higher in annual increments. For a family with a $400,000 mortgage, that could translate into an increase of as much as $1,000 in monthly interest payments.
Mortgage delinquencies have already started climbing, although they remain at relatively low levels. In the fourth quarter of last year, 4.7 percent of all home mortgages were delinquent, up from 4.4 percent in the third quarter, according to the Mortgage Bankers Association of America. A delinquent loan is one in which monthly payments are past due for 60 days or more.
Predictably, the Mortgage Bankers Association makes the case that this is not earth-shattering news for mortgages, which are, after all, still low from a historical perspective. (Remember when they went below 8% about five years ago and everyone rushed to refinance?):
The Mortgage Bankers Association estimates that the burden of higher interest costs would fall on about 7 percent to 8 percent of all homeowners. The rest have either paid off their mortgages or face no immediate increase because they took out fixed-rate mortgages or refinanced their earlier loans to mortgages that hold rates steady for 5 to 10 years.
People with investment property financed with adjustable rate mortgages will be forced to make some decisions about financing, which is exactly why my wife and I are selling our vacation home–because the mortgage product is such an unpredictable expense.
Some of the new mortgage products that have given people a lot of buying power will make less sense. At the same time, as there’s talk of stricter government oversight of these mortgages.
The big thing the article doesn’t mention home equity loans and home equity lines of credit, which are very sensitive to interest rates. There are people out there who have been paying around 4% who could be paying 8%. That will force some decisions. Some will rush to pay off their home equity loans and lines of credit. Some will refinance to incorporate their loan or line of credit into their mortgage, because overall mortgage rates are still low.
All these factors will reduce buying power and contribute to the softening of the market.
New York is somewhat insulated, because there is simply a lot of money out there. I see $3 million dollar apartments bought for cash all the time. And there is pent-up demand in New York. There are people sitting on the sidelines waiting for an opportunity to buy. After September 11, there were five or six weeks when people were getting “deals.” But after a few weeks went by, word of the bargains spread, people started looking, and prices quickly shot up beyond what they were before September 11.
It sure seems like there’s limitless demand. And maybe there is.
But you can see some evidence of buyer scarcity in new development projects that came on the market in October and November. Many of them are only about 20% sold, and they’re offering major incentives to brokers. Not long ago those would have been 75% sold by now.
Jonathan Clements of the Wall Street Journal writes about trouble for landlords:
Got caught up in the real-estate fever? Let’s start with the painfully obvious: If you have no choice but to sell, then you ought to sell — and you should probably sell quickly.
To find out if you’re in the “no choice” camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there’s no way you can keep covering the shortfall, you’ve clearly got a problem.
“I’m not selling anything,” says John Schaub, author of “Building Wealth One House at a Time” and a real-estate investor in Sarasota, Fla. “But you have to be able to afford to hold your properties. Most of these people ought to sell, because they don’t have the aptitude to be a landlord and they don’t have the cash flow.”
Kudos to The Real Estate Journal for another excellent and HONEST piece of journalism. Not only do they acknowledge the elephant in the middle of the room: the “softening” market, but what an excellent job of objectivity and choices available to investors in a cooling market.
If you’re an “investor,” this is an excellent story for you to read.
If you are part of the greater population of homeowners who actually live in their home, there is little cause for concern if you have no intention to move. The market is cyclical and many of us can choose to “ride out” any minimal (expected to be) adjustment to prices.
If you have an adjustable rate mortgage that is soon going to “adjust” or you have to move in the next couple of years, you may want to weigh your options much like that of the investor. Some of those options are to sell and rent another home, downsize, refinance your current mortgage, or ride out the squall (I don’t believe it’s a storm).
Many of us will be faced with these decisions in the near future. For the record, this real estate broker isn’t selling his primary residence anytime soon.
I can’t walk one block without overhearing a conversation about apartments–buying, selling, renting, moving, or something else. New York City is fascinated with real estate.
There must be a million reasons: the city is incredibly transient, everyone is always seeking the next “best” apartment, private space here is just precious…
I’m never bored with the stories that come from behind the walls of Manhattan apartments, so I’m looking forward to reading Toni Schlesinger’s new book Five Flights Up.
Every real estate agent thinks they could write a book about the industry but ultimately it takes a colorful, captivating, and creative author to make those stories interesting. It seems as though Schlesinger has done that but stay tuned, I’ll let you know.
The latest housing forecast from the National Association of Realtors.
Home sales should generally level-out and remain at historically high levels, according to the National Association of RealtorsÆ.
David Lereah, NAR’s chief economist, said mortgage interest rates are trending up but will remain favorable. “Economic growth and job creation are providing a favorable backdrop for the housing market, but rising interest rates have an offsetting effect,” Lereah said. “Home sales will move up and down somewhat over the remainder of the year but stay at a high plateau, meaning this will be the third strongest year on record.” He expects the 30-year fixed-rate mortgage to rise to 6.9 percent by the end of the year.
Growth in the U.S. gross domestic product is forecast at 3.7 percent in 2006, while the unemployment rate should average 4.8 percent.
Existing-home sales are projected to drop 6.0 percent to 6.65 million this year from a record 7.08 million in 2005. New-home sales are likely fall 10.9 percent to 1.14 million from the record 1.28 million last year – both sectors would see the third best year following 2005 and 2004. Housing starts are forecast at 2.00 million in 2006, which is 3.2 percent below the 2.07 million in total starts last year.
NAR President Thomas M. Stevens from Vienna, Va., said home prices are expected to cool, but not as much as in earlier projections. “Although housing inventories have been improving, the balance is still a bit more favorable for sellers and annual appreciation remains in double-digit territory,” said Stevens, senior vice president of NRT Inc. “Even so, the market is in a process of normalization – appreciation will return to normal single-digit patterns, providing solid investment returns into the future.”
I find this a little insulting. It is obvious that despite being the “third strongest year on record” we are down from 2005 and 2004. Of course the NAR and other similar entities want to maintain the appearance of a strong housing market, but I’m not sure why everyone is so reluctant to admit that the housing market is softening.
At least the NAR acknowledges a “normalization” of the housing markets which is much more on par with reality.
That said, in NYC the most affected properties are those without “special” characteristics–such as a sought after location, a spectacular view, private outdoor space, pristine renovations, or other factors–that reassure buyers their purchase will hold value.
Kirsten Downey of the Washington Post recently spilled the beans that the government might like to curb some of today’s more creative mortgages:
Speaking to the New York Bankers Association, John M. Reich, director of the Office of Thrift Supervision, warned that some lenders are making it too easy for unsophisticated borrowers to take on risky nontraditional mortgages that they may not fully understand. Reich said regulators are “closely monitoring” the growth of loan types in which the payments can suddenly double, creating a payment shock that could force borrowers into foreclosure if housing values were to fall and could also cause financial losses for the lenders who make the loans.
Reich called the increase in such lending troubling. He noted that regulators are crafting a specific warning to the industry, known as a guidance, that will restrict the use of these loans. It could be issued within the next few months.
But a regulatory crackdown on the loans, known as interest-only and option mortgages, could prove problematic for some pricey real estate markets, such as the Washington area, where buyers have become increasingly dependent on such loans.
(via the Matrix)
I have mixed feelings. First, as a real estate agent, I sometimes see people “over-extending” themselves to purchase homes that put them in finacially precarious situations. The hybrid mortgages that banks have developed have increased buying power and greatly contributed to the rapid escalation to historically record prices.
In an effort to climb aboard the “appreciation train,” many buyers have used interest only products where rates may adjust as frequently as every month.
I myself bought a second home that way. But I’m selling that home ultimately because the mortgage makes me uncomfortable. I couldn’t have purchased that 2nd home with a standard 30 year fixed rate mortgage.
That said, I don’t believe that the government should get involved in telling you or me how we should spend our money or in this case, from who and under what terms we may borrow money. The pressure is on us to be smart consumers.
The Wall Street Journal Online is reporting on the erosion of Realtors’ hold on home listings.
This may come as a surprise: I am excited about the changes that are taking place in my industry and welcome the competition.
Let me explain. There is absolutely no denying that the face of the industry is changing and Google and Craigslist are not pioneers, in fact, many would say that they are a bit late to the party.
That said, I absolutely believe that real estate agents better be prepared to bring a lot more to the table in their attempts to solicit business. The playing field is going to become more even and the marketing savvy and negotiating skills that a broker bring to the transaction will become increasingly important, as will the ability to accurately price a property.
Having access to data is not the ultimate solution for sellers who wish to take on the process on their own. It will help, but nothing can substitute for the experience of a professional who knows how to interpret and what to do with the data available to her/him.
Now for the “sleaze factor…”
Google, Craig’s List and the like will probably mean more people will list their properties themselves, as FSBOs (For Sale By Owners). That trend will almost certainly force a bit of a shakeout among real estate professionals.
From James R. Hagerty’s article in the Journal:
Shoppers can’t rely on agents to tell them about for-sale-by-owner offerings, because agents often don’t earn commissions for introducing buyers to these properties and find such transactions more difficult to complete. Agents also may fail to tell potential buyers about homes being sold through discount brokers.
As disgusting as this may be, it is all too often true! I have personally encountered agents in my industry who are distraught when a buyer that they have worked with finds a FSBO (for sale by owner) property that will result in them losing that commission. They do all that they can to convince clients to avoid such properties, often compromising their integrity.
My take on this is that it is far better to show or make buyers aware of ALL available listings (including FSBO’s) than it is to risk betraying a client’s trust.
Over the last 14 years, I have assisted many buyers with their purchase of FSBO’s–from coaching them on offers to preparing co-op board applications–with only the prospect of their future business as payment. When a lot of good properties are on FSBO listing services, and those that will combine FSBOs with broker listings, brokers who avoid them will be hurt or put out of business… I say BRING IT ON! The industry could use it.
Word behind-the-scenes at Prudential Douglas Elliman is that you better be the lookout for small agencies poaching exclusive listings.
There are reports of listings by competing agencies for properties that are under exclusive listing agreements with Pruduntial Douglas Elliman. In some cases they are said to have even taken the photos from our company website, while even calling their faux listings “exclusive.”
The Department of State should be policing this type of activity, yet we hear of these violations going unpunished all the time.
This is precisely where the “sleazy used car salesman” stereotype comes from.
How can you be sure the property of your dreams isn’t poached from another agency? Google the property. If it turns up as an exclusive on multiple sites, somebody is not telling the truth, and it’s time to ask your broker if it really is their listing.
The Real Estate Journal reports all over the country markets are experiencing unusual springtime behavior. Lauren Baier Kim reports:
Driving to work this morning to Dow Jones’s central New Jersey campus, I spotted many house “For Sale” signs, along with cheery yellow daffodils and forsythia. A real-estate nut, I had to resist the urge to pull over. I frequently eye the housing-construction project across the street from my workplace, where in a few months, there may be model homes to explore. Warmer weather stirs an urge in me to go house-hunting, but buyers across the U.S. apparently aren’t sharing the same enthusiasm. Articles around the Web point to a lukewarm housing market for the spring in many areas of the country.
What’s the deal? Is the real estate market just soft everywhere? The best analogy that I have heard is from the CEO of Prudential Douglas Elliman, Dottie Herman. Dottie recently compared the recent boom and today’s housing market to driving fast on the highway. You may be speeding down the highway at 80mph (the market of the past 7-8 years) and suddenly see a state trooper when you decide to slow down to the “normal” speed limit (today’s market).
Relative to the almost insane appreciation that has been seen over the past several years, the current market is slower. That said, the current market is also healthier, more “normal” and indicative of a much more traditional housing market like those of the past where property takes a bit longer to sell and marketing strategies must be more creative. You can’t simply pick any price anymore and think your home will receive multiple bids. These days, smart pricing is as important as ever and exposure is key.
