It's a Two-fer

Two interesting articles in the Chron today. The first reports plummeting Bay Area home prices and increased home sales. Regular visitors to this (cyber)space know what's going on here. Bottom feeding on short sales and REOs is pulling the median price lower, while the proliferation of those same types of sales accounts for an increase in total units sold. Some may remember that at the beginning of the market decline, the opposite conditions were present, as still-strong upper-end sales pulled the median price up, as a steep decline in sales at the lower end caused a drop in total units. It appears the lower end has finally gotten low enough to begin a reversal of the trend.

The second article, somewhat apropos of that last point, reports that the number of people who can afford a home in California is up dramatcally. They may not be buying yet, but this trend would seem to bode well for the market's overall recovery.

Twin Markets

There was a classic buried lead in an article in today’s Chronicle real estate section. The article is about challenges currently facing real estate appraisers. About half way down, you’ll see a brief bit about how short sales and foreclosures are affecting appraisals. It isn’t much, but we found this section particularly interesting.

An appraisal, after all, is really only one person’s opinion of value. Nevertheless, lenders rely heavily on appraisals to determine the “market value” of a particular property on which they may loan money. It comes as no surprise then, that in a declining market, the appraisal is the sticky wicket that causes many real estate transactions to fall apart.

A quick overview of this process: Mr. Buyer agrees to buy 123 Main Street from Mr. Seller for $1,000,000. Mr. Buyer plans to borrow 80% of the funds necessarily to buy the property. He goes to a lender and fills out a loan application. Based on his credit score and income verification, the lender agrees to lend Mr. Buyer 80% of the property’s value. The lender sends an appraiser out to the property to determine the market value. Said appraiser reports that the current market value of the property is $900,000. The lender may very well be willing, as promised, to lend Mr. Buyer $720,000, which is 80% of the property’s newly determined market value. The problem, of course, is that Mr. Buyer needs to borrow $800,000 to buy the property at the agreed upon purchase price. Now, if Mr. Buyer was working with us, we would have advised him to have an appraisal contingency, which would allow him to walk away from this transaction right here and now. If not, Mr. Buyer might well have to find $80,000 to make up the difference between what the lender will loan and what he agreed to pay. Without an appraisal contingency, Mr. Buyer could well be in default if he does not buy the property, thereby putting his deposit at risk.

But here’s the thing. The fact that appraisals are coming up short is not exactly shocking to anyone who has been following the real estate market for the past 18 months. Which brings us back to our buried lead.

Drive 45 minutes away from San Francisco in nearly any direction and you will find communities in which upwards of 50% of the homes for sale are either short sales or foreclosures. The other 50% of listings are, of course, owned by ordinary people who have equity in their homes and are selling for “normal” reasons (job transfers, kids moved away, retirement, moving up, downsizing, etc.).

Regular readers know that we often harp on the importance of looking at a specific market to determine what a property is worth or which way its value is moving. Real estate is a local business. Examining national, state, or even regional trends is often a waste of time. But what do we do when two distinct markets emerge within a single location? How do we determine value when, even within the smallest of communities, two marketplaces exist? We’re only just learning the answers.

To help find those answers, it’s worth looking at a textbook definition of market value. Literally. We went back and looked at an old real estate textbook to shed some light on the subject. We must allow for five key elements to determine if a property is selling for market value:
1. Neither buyer nor seller is acting under duress.
2. The real estate has been on the market for a reasonable length of time for a property of its type.
3. Both buyer and seller are acting with full knowledge of the property’s assets and defects.
4. No unusual circumstances exist, such as a sale involving related parties.
5. The price represents the normal consideration for the property sold, unaffected by creative financing or sales concessions granted by anyone associated with the sale.

In a short sale, 1, 4, and 5 are arguably not present. At a minimum, the seller is acting under duress (1) and the lien holder is granting concessions to facilitate the sale (5). In a foreclosure sale, the lender, who is also the seller, has probably never seen the property and has no knowledge of the property’s assets and defects (3).

Clearly, short sales and foreclosures sales do not meet the definition of “fair market value.” So what do you do if you want to sell your house and the house three doors down sold six months ago in a foreclosure sale? It is unlikely that the neighbor’s house sold for fair market value. Nevertheless, that sale will be used to determine the value of your house.

This is the challenge facing everyone in the residential real estate world right now: appraisers, lenders, buyers, sellers, and Realtors. And that’s why it’s essential to work with a Realtor who is aware of these factors and uses them in advising you on your decisions.

Interesting times, these.

Model Home

Pleeeeeeease read the excellent Times article examining various economic models for determining when the housing market will hit bottom. Fascinating stuff. One model, at least, says SF is still 1% undervalued. Perhaps most interestingly, each model the article discusses seems to make good sense, which, to us, means the best advice is, “Anybody who says they know when it’s going to end with confidence is delusional.” But we've got to close, right?

Marin Takes The Rest Of The Country To School

Ever wonder why people pay so much to live in Marin County? There are plenty of reasons. Too many to list here. One of the biggest is the public school system. But are you getting your money's worth? As it turns out, yes! And then some.

A recent article in Forbes examined "per-pupil spending in public schools and weighed it against student performance--college entrance exam scores (SAT or ACT, depending on which is more common in the state), exam participation rates and graduation rates." Guess which schools ranked highest. If you guessed Marin, you're right. (Maybe you went to school there, too, smartypants.)

What's Done Is (Not Quite) Done

Check out this update on the SF Planning Commission's approval the the rezoning of the City's eastern neighborhoods.

The City's Changing Landscape

Have you ever been to Dogpatch? Ever heard of it? It's the super hip neighborhood along San Francisco's Central Waterfront. Due to its relative isolation and not-always-glorious past, this gem of a district is unknown to even many longtime locals. That may be about to change.

The SF Planning Commission today is likely to approval a plan that may forever change the face of the City's eastern coridor. UCSF and Biotech development in the area has shined a spotlight on the area. (And of course yours truly was married there.) But this new plan stands to bring thousands of new residents to neighborhoods that have not always been thought of as residential. Read more about the proposed changes in this Chronicle article.

Welcome Home

We managed to take a brief summer respite at Stinson Beach. Then we came back to this. Welcome home, indeed!

REO Speedwagon

Everyone seems to be interested in forclosures these days. Real Estate Owned (REO) listings are everywhere and everyone wants to cash in. Not surprisingly, it's not as easy to get into this market as it might appear. This article in today's SF Chron spells out some of the pitfalls.

For Better or Worse

After a blogging sabbatical, we're back with an interesting article from today's SF Chron.

One of the reasons it's so difficult to tell where the market is going right now is that lenders don't seem certain what's in their best interest. Many are willing to work with struggling homeowners to keep them in their homes. Others "are really convinced that a repayment or modification is not in their best interest; that a foreclosure may be a better thing."

Stay tuned...

Golden Handcuffs

Today's Prop 13 article in the SF Chron is not to be missed. It's easy to forget the history of this proposition or to underestimate its signifcance. When you read the aritcle, you'll realize or remember that Prop 13 changed not only the way we pay property tax, but also the way Californian's view taxes and government in general. Moreover, ask any veteran educator in the state and they'll tell you that no single event in California history has had more impact on public (and by extension, private) education than the passage or Prop 13.

Upside down

Sales were up in April! The recovery is on! Be the first to buy in to a down market and make a fortune in real estate speculation! Uhm...not so fast.

Actually, we think this is a good time to buy, but don't make too much of the recent month-over-month increase in sales. The recovery may be starting, but it won't be measured month-by-month. We suggest tracking real estate investments year-over-year. Remember, the word is "investment," not "speculation."

If you decide to wade into these still-troubled waters, call us. There are bargains to be found out there, like no other time in the past seven years. We're tracking properties that we think have good investment potential. But you have to be selective. And patient.

"Off to the Principal's Office You Go"

Whether you're genuinely interested in school performance records or just looking for a way to waste time at work, you're bound to enjoy this handy tool. Wondering about your kid's school or maybe about the district you're thinking of moving to? Now you can find out the rate of school suspensions (and the reasons!) for every public school in California. Happy snooping.

Bottom Feeding?

We get asked almost daily whether the market has hit bottom. No one knows for sure, but we've been saying that, barring a major change in mortgage rates or an economic sea change (election year, anyone?), we think our feet will touch the bottom, so to speak, sometime between now and Q4, 2008. Well, one economist thinks we've hit the bottom already. Check out this WSJ article for a very interesting take on the market. Whether he's right, we cannot say for sure, but we definitely agree with his secondary point: the rebound will be slower (and hopefully more sustainable) than the boom.

Talkin' 'bout Mill Valley

A former client and friend sent this our way. We couldn't resist linking to it. For those clients who always look at us funny when we talk about how much things have changed in Marin, here's proof.

Duration, Duration, Duration

A belated post here. Some of you probably saw Kathleen Pender's piece in the Chron last week. We second just about everything she writes in there. Tons of good information. First time home buyers, in particular, would be wise to read and remember.