Central Valley Real Estate

California Association of Realtors 2009 Real Estate Forecast

Every October, the California Association of Realtors (C.A.R.) publishes their annual real estate forecast. It is really a wealth of information, containing all sorts of general economic data as well as every conceivable data point related to real estate. In addition to state-level detail, they also have regional and county-level data that is particularly helpful. They really should charge for this kind of thing!

The 134-page PDF presentation can be viewed/downloaded here: Download car_2009_real_estate_forecast.pdf

If you want to watch a 52-minute streaming video of the actual live presentation, you can view it on the C.A.R. website homepage, at www.car.org.

If You're Gonna Be Angry, Be Angry At Everyone

I read a community editorial in our local paper, The Modesto Bee, on Jan. 23 that was very insightful. Rather than blame mortgage loan brokers for this whole mess (as I am sometimes prone to do), or blame loan brokers AND real estate agents (as many others do), the reality is that we all sowed the seeds of our own real estate implosion.

I would have just provided the link to the article, but some of my Bee links are requiring a username and password to see the article, and I think the author Dick Hagerty would want to be heard. I couldn't have said it better myself.

Who's to blame for subprime mortgage crisis? Everybody

by Dick Hagerty

The subprime crisis in the real estate market has been especially harsh in our Central Valley region. Many pundits have quickly jumped on the bandwagon, assigning blame to different players in the home building industry.

Having spent more than 30 years immersed in this industry, in this market, I have a special vantage point to assess just who and what might be to blame for our current sad state of affairs.

My conclusion: Everyone in the entire loop was greedy, and the blame spreads across the spectrum.

The land seller (generally a farmer) was greedy and ran land costs up, in some cases more than $500,000 per acre. That same land today would be hard-pressed to fetch $50,000.

The developer (that's me, folks) was greedy, and marked up the price of finished lots to incredible numbers -- which the greedy builder was more than willing to pay, much to his later regret.

Cities, counties and schools -- they all got greedy and jacked up development fees to levels that simply boggle the mind, given today's values.

Subcontractors and material suppliers got on the bandwagon and raised prices and profit margins to record proportions.

Real estate brokers and sales staffs aggressively oversold the promise of never-ending upward price spirals to buyers who often could not afford the homes being hyped.

The mortgage and money industry is especially culpable. Mortgage brokers pushed hard to sell inappropriate and misleading products that eventually would ratchet up to very high monthly charges.

And Wall Street, an industry that hates real estate because it sucks capital from the investment world, fell right into the trap and started marketing packages of loans as a new investment vehicle. They did this seemingly with blinders on, because due diligence in evaluating the underlying quality of the loans just flew out of the window. Blocks of mortgages became the new hot item on the stock exchanges, regardless of the integrity of the product.

All of the above has been noted and pilloried by the press and by other observers.

But I believe that equal blame lies in the lap of the buyers. Yes, I, too, agonize over the number of unfortunate homeowners who are losing their dwellings; it truly is a tragedy.

However, many of those same homeowners bought houses well beyond their means on the belief (or perhaps the hope) that prices would continue to skyrocket. When they did not, the buyers found themselves hopelessly buried.

Easy money terms in the adjustable rate mortgages made this game just too easy to enter, and in the meltdown, values simply vaporized before the buyers' eyes.

The sad reality is that a home is not an investment; it should be viewed as a place to live. Nor is it a piggy bank which may be regularly raided through creative refinancing, which provides easy cash for all the consumer desires of Mr. and Mrs. Homeowner.

Sad to say, we were all in this together, and to ascribe guilt and blame to any single player is not appropriate. In the end, greed prevailed, and we are all losers for it.

Where To Start If You're Afraid To Lose Your Home

You're either behind on your mortgage already, or your rate (and payment) are about to jump significantly, or perhaps you're current on your mortgage but you owe more than it's worth and now you need to move. What do you do?

There are an over-abundance of people and companies who will try to tell you what you should do. But who can you trust?

The Homeownership Preservation Foundation (HOPE) is a non-profit organization funded by the financial services industry and Fannie Mae that operates a hotline to help homeowners understand the options available to them and how to work through them. Each HOPE counselor is HUD-approved and has a credit counseling certification. As a non-profit, the services are provided free of charge and without bias of any kind.

HOPE is probably one of, if not the best place to start. The number is 1-888-995-HOPE. It is open 24/7 and has operators that speak English and Spanish. HOPE can also be found on the web at http://www.995hope.org

If you are looking for a local non-profit credit counseling agency, you can also check out http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm and search for local HUD-approved counseling agencies located throughout the country.

If you are in a pickle, do something about it. If you're not sure where to start, and want good quality, unbiased information, this is the best way for you to start.

The Effectiveness of Newspaper Advertising

I went to a seminar about blogging recently and picked up a great tip: some of the best content for a blog post is buried in your email outbox. With that in mind, I am posting a email exchange I recently had with someone regarding the value of newspaper advertising for home listings.

Question: What kind of newspaper advertising should I expect from you?

My response:
As it relates to newspaper advertising, your home would run on a rotating schedule automatically in the Modesto Bee and the Turlock Journal, wherein a text ad appears in each paper's weekend real estate section every third weekend on average. In addition, a $135 photo insertion is purchased for your home when it was first listed (according to our services commitment). In all honesty, I can't remember the last time I had a phone call from a newspaper ad.

You see, newspaper advertising is becoming increasingly ineffective year after year, as people migrate to the internet for all things real estate. It has been shown that the #1 audience of real estate sections of the paper are sellers. Not surprisingly, the #2 audience are real estate agents. It's kind of like the story of the emperor's new clothes, if you know what I mean. 81% of buyers begin their home search online. More telling is this quotation taken from The National Association of Realtors 2006 Survey of Home Buyers and Sellers:

"When asked where they first learned about the home purchased, 36 percent of buyers identified a real estate agent; 24 percent the Internet; 15 percent from yard signs; 8 percent from a friend, neighbor or relative; 8 percent home builders; 5 percent a print or newspaper ad; 3 percent directly from the seller; and 1 percent a home book or magazine."

In other words, you are almost as likely to know the person yourself as you are to find your buyer via the newspaper. In short, it’s a big expense that experience and statistics show just doesn't work. And that survey is nationwide; in California, where adoption of technology is higher than many states the numbers are likely to be even more disproportionate. In fact, I'd go so far to say that even the 5% nationwide average are those who probably just don't have internet access, since it's about the same percentage, though I could be wrong. That’s why other than the 2-week photo ad in the paper in the beginning we don’t really advertise in the paper. Because it doesn’t work. Still, you do have the rotating print ad.

Readers, what do you think? Is newspaper advertising effective or worth the expense?

90% Of Appraisers Feel Pressured To 'Hit The Number'

A newly-released survey of the national appraisal industry found that 90% of appraisers have felt pressure from someone in the transaction (mortgage loan broker, real estate agent, seller, etc) to raise property valuations to allow the contract to go through with approval.

The full article comes to us from Kenneth R. Harney, who writes a syndicated column, "The Nation's Housing," at the Washington Post.

Kenneth writes that "that percentage is up sharply from a parallel survey conducted in 2003, when 55 percent of appraisers reported attempts to influence their findings and 45 percent reported "never." Now the latter category is down to just 10 percent."

Here are my thoughts: I personally don't doubt that 90% of appraisers have felt such pressure from someone, at some point. I mean, come on. The longer you are in this business, the more appraisals you do, the more likely it is you will eventually run across someone that's "dirty." It's like that in any business.

Still, it is sad that it is still up sharply from 2003. It is sometimes a problem, and there is no clear solution. My feeling on the situation is:

(1) Appraisers, just like everybody in real estate and any other industry, need to hold firm on their principles. In general, moral dilemmas occur in nearly every profession, and people just need to hold firm on their ground or risk being written up in the paper one day as part of a scandal.

(2) In my local market area (Central Valley) right now (early 2007) it can be extremely difficult to determine just what market value is. I know, it's a straightforward enough process: you just find the most comparable homes and then make adjustments for the differences. However, right now there are data points all over the place. Some homes sell for a surprisingly high price, others are dumped for a real discount. Sellers are looking at past comps (the highest ones, no doubt) while buyers are looking at other actively-listed properties and the news (don't get me started on that one...). There are often multiple legitimate comparables that point to more than one plausible conclusion on a value. What's hard about an appraisal is they have to come up with a specific number, as if a home's value can be pinpointed to the dollar, when in reality the most accurate definition of the value is more appropriately expressed in a small range, say $10,000 to $15,000. So if "the number" (the contract price) is within that plausible range, then I don't consider it undue influence for the mortgage loan broker to want it to work. And I would think any honest-to-goodness professional appraiser would agree with me on that.

(3) There are legitimate abuses in the process, and this is sometimes one of them. If a "dirty" appraiser is conspiring with others to grossly inflate value, that is a clear violation of appraisal standards and a violation of the law (mortgage fraud) already. One of the co-sponsors of the study is quoted as saying that "Congress needs to enact legislation making pressuring appraisers to distort their valuations, or interfering with appraisals in any way, a federal offense, subject to criminal penalties. And state regulators need to step up enforcement against fraudulent appraisals, pressure tactics and appraisers who give in." While I am not a big fan of further government involvement & regulation, I think that even having a law like this on the books would by itself correct most of this problem. But how do you determine what constitutes "pressuring an appraiser"? If I offer to bring comparables I have found in my research to assist the appraiser, am I pressuring an appraiser?

(4) The industry already self-regulates fairly well. One could say that this problem has at least as much to do with lenders as anyone else. What I mean by this is that many of the people doing the pressuring likely worked at many of the sub-prime mortgage companies that are folding up right and left these days. The big, serious banks who are concerned about their balance sheets and risk profiles have a short list of approved appraisers. Responsible banks don't want to have to foreclose on a home because of an inflated appraisal. That is why they will ONLY work with their list of approved appraisers, because they can be trusted. Appraisers who compromise their standards for a $400 appraisal job will never be on these approved lists with the big boys anyway. In all reality, appraisers shouldn't really feel they are limiting their business prospects if they do things right. The big boys (the big responsible banks) will reward you for it.

In my humble opinion, I think that any appraiser in it for the long haul knows how to handle the situation. There are always going to be moral dilemmas, and one just needs to know where they stand. Not that it's right to try to pressure the appraiser to do something wrong--that's clearly wrong in itself--but appraisers also need to have the guts to do what's right. When I meet with clients, common unethical (sometimes illegal) practices are discussed, and I will pre-emptively say "and those things are wrong, so please don't even ask me to do them. If that's what you want, you'll need to find another agent to represent you."

I don't say this because I have bad clients, but because I just want everyone to know up front how I stand on things. That way it is never an issue for me. And I therefore am not pressured to do inappropriate things, because people already know how I feel about it.

In my mind, that's the best approach for appraisers to take regarding this situation. And I think in the long-term they'll have a more sucessful career too, because I believe that in the end the good guys still always win.

So Just How Accurate Is Zillow.com?

You've heard of Zillow.com, right?

It's the enormously-popular website that provides easy access to an estimate (Zillow calls it their "Zestimate") of a home's value. You type in the address, and presto, Zillow claims to have the home's current value pinpointed right down to the dollar, in real time.

One of the scary features, in fact, is the value trend graph, which shows its' read on how the value of the selected home has changed over time. It's kind of scary if you see the graph going down like a dismal stock chart.

Anyway, the important question here is: how accurate is it?

Here's the answer, in a nutshell: sometimes it is quite accurate, but it can also be WAY, WAY off. So if you read no further, at least know that it should not under any circumstances be entirely relied upon.

Moral of the story: Zillow can be an OK place to start, but you really need to check it against the opinion of a trusted local real estate expert who knows the area and knows the market.

I've inserted a few excerpted paragraphs from a very helpful Wall Street Journal article printed today (I'd give you the link, but you have to be a subscriber to view it)...

"...A Wall Street Journal analysis of 1,000 recent home sales shows that Zillow's "Zestimates" often are very good, frequently within a few percentage points of the actual price paid. But when Zillow is bad, it can be terrible -- off the mark by more than 25% on one in 10 homes. In one case it was off by $2 million..

A four-bedroom, five-bath house in Fall City, Wash. Zillow estimate: $661,756 Sold for: $2,690,000

"...The Journal looked at transaction prices recorded for 1,000 recent home sales in seven states, using data from First American Real Estate Solutions, a data provider in Santa Ana, Calif., and compared those prices with Zillow estimates, which didn't yet reflect the sales. The median difference between the Zillow estimate and the actual price was 7.8%. (That was close to the 7.2% median "margin of error" reported by Zillow itself on all transactions involving homes whose value it has estimated.)"

"The estimates were about equally split between ones that were too high and those below the mark."

"Zillow came within 5% of the price in a third of the transactions studied by The Journal. It was more than 25% off target on 11% of them. In 34 of the 1,000 transactions, Zillow was off by more than 50%."

"Zillow had estimated that a four-bedroom, 7,600-square-foot home in Fall City, Wash., was valued at $661,756. The home, built last year, sold in early January for $2.7 million. "If you don't visit the property, you're never going to know that it's in an exclusive, gated part of the neighborhood," says Maria Danieli, who represented the sellers. Ms. Danieli says Zillow may be fine for "cookie-cutter" neighborhoods but "they can't compute" the values of the luxury homes she sells."

"Zillow executives acknowledge that the estimates can be way off in some cases. The estimate "is a starting point" for people trying to figure out how much a home should cost, says Amy Bohutinsky, a spokeswoman for the company. "We don't recommend it as the final word."

El Cerrito, Calif. Zillow estimate: $544,361 Sold for: $80,000

"...Zillow tends to work best for midrange homes in areas where there are a lot of comparable houses, he says. It is less accurate for low- and high-end homes because there are fewer of those and thus less data available from comparable sales, known as "comps." Values of rural homes are hard to gauge for the same reason. Partly for that reason, none of the Web sites can offer 100% coverage of U.S. homes; Zillow says it has estimates on about 57% of all homes."

"Even where there are numerous apparent "comps," computer programs like Zillow's can stumble when vital information is missing. Data fed into the computer, for instance, may not reflect the fact that a house has just been remodeled, destroyed by fire or put into foreclosure. Reported prices can be misleading, too. Sometimes homes are sold between family members for a token price, or sellers offer incentives to buyers, such as help with closing costs, that aren't reflected in the recorded price."

"Zillow isn't the only site offering such free estimates. Others include RealEstate.com, RealEstateABC.com and Reply.com. But Zillow's site gets more traffic than those rivals. All of these sites appear to have overestimated the value of a house on Olivant Street in a tough area of Pittsburgh that sold for $700 last year in an auction of foreclosed homes. As of early this month, Zillow estimated the value at about $33,000, RealEstate.com at $57,000, Reply.com at $69,000 and RealEstateABC.com at $86,000. Several nearby houses are abandoned or boarded up, blighting the block -- something computer models don't take into account..."

"...Real-estate agents and appraisers tend to sneer at Web site valuations and insist that consumers still need their local expertise to get a true idea of values. Masood Samereie, an agent at Century 21 Hartford Properties in San Francisco, says one of his clients last year lost his chance to buy an attractive home because, relying on Zillow, he made an unrealistically low offer."

What has your Zillow experience been? Have you used it before? Did it end up giving you accurate results? If not, how much was it off by? (Please leave your comments to make this a meaningful community discussion). Thanks!

If Stockton isn't the worst market in 2007, what will be?

My latest post addressed why I think Stockton, CA will not be the worst real estate market for 2007 in terms of median price change. But that begs the question, if not Stockton, then who will?

I don't know for sure. But I can describe it to you. It's the kind of place that is just about now starting to hit it's peak. You see, I believe the Central Valley has already taken most, if not all, of its hit already. That was the story of 2006. But there are other markets out there that are just starting to reach their tipping point from a seller's to a buyer's market. Those are the markets to watch out for in 2007. But here? We already took most of our hit in 2006. And that's why I think now is a great time to snatch up that bargain you've been waiting for.

10 Most Common Problems Found During Home Inspections

This list is of the most common problems that occur with homes in the Central Valley, and may not be the same as elsewhere:

1. Negative Grading/Drainage - Negative grading & drainage problems create a variety of problems for the home.

2. Electrical System - Undersized wires, overloaded circuits, and outlets not protected by GFI's are commonly found during a home inspection.

3. Roof - Damaged shingles or tiles, lifting roof jacks, and missing flashings are often found. These problems can often cause the roof to leak.

4. Heating and Cooling System - The heating and cooling problems found most often during a home inspection are disconnected heat vents, leaking and dirty duct systems, and malfunctioning operational controls.

5. Poor Maintenance - This includes weathered trim and siding.

6. Plumbing Systems - Leaking pipes can cause water damage to floors and can be found in the crawlspace or attic during a home inspection.

7. Exteriors - Broken or drafting windows, doors, and siding are common issues that can compromise the comfort of the home.

8. Structural - Some homes have had structural movement that has caused damage to the foundation walls or to the floor joists.

9. Poor Ventilation - A home that is under-ventilated can cause a wide variety of other problems.

10. Interiors - These problems include smoke detectors that don't operate, missing water heater straps, holes in the firewall, and cosmetic damage.

Closing Costs, part I: Introduction

While buyers and sellers tend to focus primarily on the sales price of the home being bought or sold, closing costs also have a significant impact on both parties. Unfortunately, because of loose terminology and incorrect use of terms, the idea of closing costs and whom pays for what is commonly misunderstood.

What Are Closing Costs?
In the broadest sense of the term, “closing costs” is defined as any and all costs paid by either side in order to complete the transaction (outside of the actual sales price).

Typical Buyer Closing Costs
Under this definition, a buyer’s typical closing costs may include such things as loan origination fees, administration fees, processing fees, document preparation fee, application fee, credit report fee, appraisal, underwriting fee, homeowner’s (hazard) insurance, flood certification fee, prepaid mortgage interest, prepaid property taxes, courier/overnight delivery fees, recording fees, wiring fees, lender’s title insurance, notary fee, loan tie-in fee, transaction coordinator fee, initial “earnest money” deposit, and (depending on your contract) county transfer tax, one year home warranty, escrow fee, owner’s title insurance, HOA fees, and any inspections/reports and any repairs. Sounds like a lot, doesn’t it? That’s why a buyer’s closing costs can range from about $6,000 up to $15,000 or more.

Typical Seller Closing Costs
The single biggest seller closing cost is going will be the real estate commission agreed to in the listing agreement. Other typical seller closing costs include prorated property taxes, escrow fee, document preparation fee, recording fee, lender’s reconveyance fee, prorated mortgage interest, payoff quote fee, notary fee, courier/overnight delivery fee, transaction coordinator fee, and (depending on your contract) county transfer tax, one year home warranty, escrow fee, owner’s title insurance, HOA document fees, HOA transfer fees, and any inspections/reports and repairs. These fees end up totaling anywhere from about 6% to 8% of the sales price.

Who Should Pay For What?
It depends. Normally, the costs associated with the buyer getting a loan are the buyer’s responsibility, while the seller is responsible for the real estate commission, fees to the existing mortgage holder associated with paying off the existing loan, prorated property taxes and mortgage interest up to the closing date. The title/escrow company will often charge both buyer and seller separately for such things as document preparation fee, notary fee, and recording fees. Then there is a slew of costs determined in the negotiation between the buyer and the seller, in which case the custom here in the Central Valley is for the seller to pay for most inspections/reports/certifications and any repairs, HOA fees, county transfer tax, and home warranty. The owner’s title insurance and escrow fee are usually shared somehow, depending on the specific community.

Closing Cost Credits
As the market has slowed, more and more buyers have begun to ask sellers to pay not only for the buyer’s closing costs as well. In other words, a buyer may either (1) not have the money for their closing costs or (2) just not want to pay for it. In the offer, they can then ask for the seller to provide a credit towards the buyer’s closing costs. In fact, in many cases a buyer may offer an initial up front deposit of as little as $1,000, ask for the seller to pay for all buyer closing costs as well, use a 100% financing package for the purchase and then get the $1,000 deposit back at the close of the transaction, which means they would have purchased the home for no money down.

I address more about how closing cost credits work for both buyers and sellers, as well as their pros and cons for both parties in another post.

8 Real Estate moves before year-end to save taxes

The end of 2006 is almost here, but it’s not too late to cut taxes by putting money in real estate. Here are 8 tax-saving opportunities:

1. Sell a principal residence before the end of the year. If it was owner occupied for at least 24 of the last 60 months before its sale, the sellers can claim up to $250,000 tax-free and $500,000 if they are a married couple filing a joint return.
2. Buy a principal residence before year-end. A typical home acquisition loan fee of 1 or 2 percent of the mortgage amount is tax-deductible as itemized interest. Mortgage interest paid in 2006 is also tax deductible.
3. Refinance a home mortgage and deduct previously nondeductible loan fees. In the year of paying off a mortgage, whether by refinancing or selling, those fees become fully tax-deductible as itemized interest.
4. Get a home equity loan, whose interest is usually fully deductible, and use the money to pay off nondeductible interest from credit card debt or a personal loan.
5. Prepay the January 2007 mortgage payment in 2006.
6. If the local tax collector will allow it, prepay 2007 property taxes and deduct them in 2006.
7. If you moved more than 50 miles and changed jobs, deduct those moving costs.
8. Deduct uninsured casualty or theft loss. Only losses that are more than 10 percent of your 2006 adjusted gross income qualify.