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Buyers and Sellers Getting Closer

Mark Buergin

It seems as if time and the real estate markets are beginning to get more in sync with each other. As the general decrease in sales volume is recognized by the sellers, they are beginning to realize that the market is “officially” off its peak. With that information confirmed and a motivation to sell at a realistic price, we are seeing sellers price their homes at much more attractive figures than previous quarters. Just like a stock does not satay at it’s peak price for very long, sellers are now admitting and following through that the real estate market is truly going through a cycle that cannot be ignored. This is a very healthy occurance for any economic cycle that lets all the excesses out of overheated markets and will eventually get back on track when buyers and sellers are closer in their buy/ sell prices. Since there has not been a correction of this nature on a nation wide basis since World War II, this notable drop in home sales is reported by the media with a hint of panic and pandemonium. New construction has all but halted and inventory is slowly being absorbed. The need for housing with the growing population will resume very quickly and right the markets back to a normal pace.

Real Estate balances itself

All we hear about today is the real estate and mortgage crisis with bailout pleas from the fed. In Reno Nevada there is currently a 25% vacancy rate in commercial office space as a direct result of all the major homebuilders cutting staff and pulling back on any new homebuilding as sales stagnate and buyers become scared. As time passes, the lack of home building as well as building of new commercial space will be absorbed until there is actually a shortage of homes and office space. Then as historical economics plays out will create a swing to the other side of the demand curve reversing the trend and righting itself. It seems to be that the contrarians or those trailblazing individuals who see the opportunity in this imbalance will start buying these “opportunities”. they will be the ones who will not only lead the way buy make a tremendous gain on these overreacting markets. The laws have been changed in Nevada to prevent loose lending policies and watchdogs have been set up to prevent this type of reckless debacle from ever happening again. If you are a person who will be looking to buy property with a 5 year horizon this may very well be the best opportunity that has come your way .

Incline Village Property Inventory

With the media forcasting a further decline in housing prices and large numbers of listings saturating some markets, Incline Village stands apart. In the past 30 days, fewer new listings have entered the market and prices are holding firm. With these two elements in place, sales may slow, but the Incline market will not be subject to an oversupply scenerio. Many homeowners in Incline Village and around Lake Tahoe are not in the position that they have to sell. In turn, their reaction to adverse news about the housing market is to take their home off the market, rather than taking a lower price. This firm stance helps stabilize the market, and as we are witnessing, average and median home sales figures are increasing.This has been the historical case for many years in this area due to the high net worth of homeowners and a very limited supply of homes for sale.

The amount of remodeling at Incline Village is further proof that the affluent vote with their pocketbooks on real estate in these times of  mixed economic news. With the fed actively involved in the interest rate and tax structuring of real estate, I believe that Incline Village property owners actions portend a turnaround in the broader market. Excess inventories will be absorbed and increase in demand will follow. Interest rates for a fixed 30 year mortgage are hovering around 6.5%, which is a very attractive, which will add further incentive to buyers currently waiting on the sidelines.

Bottom In? Wealthy Are Indicators

High-end properties are garnering more interest in Incline Village this past week. Many agents are reporting a brisk interest in their higher priced listings. So called “low ball offers” have been followed with much more realistic offers. This may portend a renewed interest in luxury properties at Incline Village.  This all seems to follow the feds pro-active role in getting the lending market back on track with a half point cut in interest rates last week, in combination with recent gains in the stock market. If we see a follow-through in more luxury home purchases in the coming months along with further rate cuts by the fed, renewed confidence could spark more home sales in our local market. Historically, down cycles are very short lived when the rest of the economy is faring well with unemployment and other economic indicators pointing to expansion. Quarterly home sales statistics will be coming out in a week, indicating whether Incline Village continues to hold strong defying the downward trend in other areas around the Lake, Reno and Truckee.

Good News- Weekly Economic Update Sept. 19

Yes, the Fed took a serious chunk out of the fed funds rate and I finally have good news–something happy–to write about. I am grateful. More to the point, though a rate reduction is certainly not a panacea that will solve every problem out there, it will help…at least, for now.
 
What’s left to be concerned about? For a reasoned introduction to that subject, listen to a recent interview with Alan Greenspan. He’s speaking far more plainly now than when he was the obscure delphic oracle at the Fed.

30-yr Fixed-rate Mortgage 6.86%15-yr Fixed-rate Mortgage 6.551-yr ARM 6.34%[HSH average rates: 30-yr up 11 bps, 15-yr up 14 bps; ARM up 4 bps]Thumbnail Sketch: A growing number of economists are watching today’s economy with increasing concern, fearful that a drop in personal consumption (retail purchases by the likes of you and me) could lead to recession. As Mark Zandi, chief economist at Moody’s Economy.com, states it: “The U.S. expansion is hanging by the thread of business and consumer confidence.” As a result, the decision of the Federal Open Market Committee [FOMC] as to how much of a slice to take out of the fed funds rate had the more sober economists hoping for a 50 basis point reduction (which would give us a 4.75% target rate and reduce the prime rate at most banks by the same amount)…but most, having watched the Fed move very slowly toward a rate reduction, were actually expecting a 25 basis point rate reduction. What were the arguments for and against a 50 basis point rate reduction?  It is reasonable to assume that the members of the FOMC were weighing two opposing problems. First, there was the possibility that, without an adequate shot in the arm, the economy might slide perilously downward, as consumers and business leaders lost confidence in its faltering path of growth. On the other hand, there was a genuine concern that, with a rate reduction larger than the usual 25 basis points, markets might react to what they saw as greater negativity and fear in the Fed’s response than they had expected. (Those who have observed the Fed over the years, too, have come to understand that our central bank carefully avoids surprises. Markets tend to overreact to them. So there was good reason to expect a 25 basis point reduction.) That was the backdrop. What we got, though, was a 50 basis point rate reduction. The Fed also cut the discount rate (the rate at which banks borrow short-term from the Federal Reserve) by 50 basis points to 5.25%, clearly signaling a readiness to provide necessary funds to banks. Further, there are less than subtle signals that the Fed will consider future rate cuts. Lastly, it’s notable that the vote yesterday for the rate cuts was unanimous. 

As far as the Fed is concerned, therefore, we have moved from an economy in which rising inflation is our predominant concern to an economy in which recession has become our primary worry, and we can reasonably expect that a series of rate cuts is in the offing. The effect of these rate cuts is difficult to predict but, for the short to medium term, at least, it cannot be a bad thing. We receive this decision, therefore, with a degree of gratitude and hope—though we remain concerned about the longer-term future of this economy.

Incline Village “Bucks the Trend”

A recent article was submitted to the local Tahoe Bonanza newspaper on the resilience of the local real estate market. I believe that a strong stock market coupled with a healthy technology sector adds tremendous demand for a rare “lifestyle” type property such as Incline Village at Lake Tahoe. As more and more baby boomers are reaching retirement with some of the biggest inheritances in history in addition to stock options, bonuses etc., the demand for luxury resort living homes increases with a very restricted supply. The price of single family homes in Incline Village is actually going up this year and remains on that same trajectory due to all the supply demand factors. We have witnessed the high end of the market jump as much as 20% this last quarter with an equally disproportionate amount of those sales being all cash transactions. We also see many people inquiring as to when we think the bottom is in our local housing market. With less competition from other buyers and a media that constantly forecasts doom and gloom makes for a “perfect storm” paralyzing many potential buyers. Usually by the time the markets begin to turn up, the bottom has come and gone before anyone can pinpoint it. We believe the time to buy is now while all of these factors are still relevant. Incline Village is truly one of these rare markets that never seems to fall out of favor and with the quality of life and tax advantages put this North shore village into a class of it’s own.

Stand in Line or Stand Alone

The home sales market began to slow down almost a year ago, causing  many potential buyers to postpone buying and anticipate that prices would drop. In some regions prices did in fact drop but in the western areas of Seattle, San Francisco, and Austin, prices actually increased due to robust technology centers (high paying jobs) and favorable interest rates. Waiting to purchase resulted in higher prices with marginally lower interest rates. This herd mentality tends to depress prices when everyone is negative on the market, but when things pick up (and they will), everyone wants to buy before the run-up in prices creating a supply shortage and driving prices higher. This is the time to be a contrarian- take advantage of an opportunity during a slow market. What better time to buy when there is no competition from other buyers and the market is in a down cycle? But people often think “I’ll wait until the market bottoms, then I will buy”. The problem with this is you only see a market bottom in hindsight, when it has hit a low, and begins to climb. At that point, buyers waiting on the sideline begin to rush in, and the run-up in prices accelerates faster than the preceeding decline. Then you wish you had bought when the market was down.

People seem to feel much more comfortable buying when there are other people out buying and their decision is validated by other buyers’ actions, as well. Everyone knows by now that home markets are cyclical with up, down and balanced markets. We have just come off one of the most robust boom cycles in residential real estate since records have been kept. Builders have all built up excessive inventories on speculation and investors have all bought homes as rentals and for “flipping”. Obviously this overheated and speculative market must go  through a correction phase, which is currently under way. Inventories will be absorbed as time goes forward and before the media announces it, there will be a n”up” market. It is impossible to time the market and buy at the absolute bottom. The only confirmation of a bottom is when the markets begin to recover and then we are buying on the uptrend. That is why the homebuyer who is buying on this side of the cycle tends to do better on the long term purchase. The term “The money is made in the buy” was coined years ago and appears to be as revelant as ever.

Mortgages are not unattainable, and those with cash should see a great opportunity here. The key is the selection- choose the most home you can afford, something that may have been out of reach two years ago may now be attainable.

Technology, Real Estate and Insiders Information

The home computer is playing a very important role in the home search process. It is estimated that 80% plus of all real estate searches begin online with buyers and sellers using sites such as Realtor.com, Trulia, and Zillow to educate themselves about inventories. They will then contact a realtor to negotiate, advise and close tranactions. This only enhances the consumers education with the many tools that these online services provide. The buyer can readily see all pricing and inventories in most markets that they can take with them when they decide to visit the local markets. The agent still has a very important role in listing and marketing these properties. Local advice to area pros and cons as well as negotiations are critical for the buyer to use local agents expertise on.

In our Tahoe market, we often get inquiries from people that have visited here and want to buy, but aren’t sure where. There is a large selection of homes to choose from on the west shore, and the Nevada side has it’s tax advantages. Incline Village is often the area of choice for those who can afford the higher prices, as this town is the only area around the lake to buck the trend of declining prices, and ammenities like the golf courses, ski mountain, recreation center and beaches are hard to come by. The local knowledge is essential to home buyers, who really don’t get a feel for it until they drive around with someone who knows the town well. This online process gives the potential buyer a huge advantage in time savings and educates them prior to going into areas they would previosly have no knowledge of. Then once they arrive, a good agent with local knowledge can give them the insight to choose the best location for them.

Sept. 12 Economic Update- Every down turn is followed by an upturn

As we go through these challenging times, I have to reflect on the difficult real estate market of 1994 and 1995.

Every down turn is followed by and upturn.

In a few years when home sales and home prices are increasing, many a procrastinator will think to them selves “I should have bought in 2007.”

30-yr Fixed-rate Mortgage 6.75%
15-yr Fixed-rate Mortgage 6.41
1-yr ARM 6.30%
[HSH average rates: 30-yr down 23 bp, 15-yr down 24 bps; ARM up 14 bps]

Weekly Commentary

Thumbnail Sketch: At this point, a consensus has been reached that the Fed will lower the fed funds rate at the September 18 meeting of the Federal Open Market Committee Meeting. Indeed, Mark Zandi, chief economist at Moody’s Economy.com, suggests that the possibility of a recession has risen from 15% in the last quarter to 40%.

The argument today, therefore, is over the size of the Fed’s rate reduction. This observer feels it will be a standard quarter of a percent. Some suggest it may be a stronger half-percent drop. As Zandi notes, “A 50 basis point cut would probably buoy sentiment more than a conventional 25 bp reduction, as it would send a convincing signal that policymakers will cut rates as needed to avert a downturn. A larger cut would also help alleviate the ongoing stress in global money markets.” The distance between American and European short-term securities has widened dangerously.

Zandi further suggests that economic growth will prove lower overall for the next year, with GDP growth hovering at about 2%, unemployment rising to 5%, and core inflation remaining near or below 2%. This means interest rates may come down in a more significant way that most analysts had been predicting over the past several months, taking ARM rates attractively lower. 30- and 15- year fixed rates should also fall as well.

This would take rates—which are already quite attractive—to near-irresistible levels for many potential homebuyers. That’s great…but it won’t provide a very convincing benefit to today’s housing market’s problems unless it is accompanied by an increased willingness among investors to funnel the needed funds into more mortgage originations.

“The lack of credit is undermining home sales and precipitating delinquencies and foreclosures,” Zandi observes, “as subprime borrowers who took on loans in the midst of the housing boom are unable to refinance before their mortgage payment resets higher. Homeowners with adjustable rate mortgages facing their first payment reset will crest this fall, but remain elevated well into next year. According to the Mortgage Bankers Association, the percentage of homeowners entering foreclosure has never been higher since they began keeping records.”

Don’t sit up into the night waiting for the next real estate boom to make its appearance, therefore. But do find every possible way to put another lowering of rates to your clients (and your own) benefit.