Report from the Field

I've just come back from a meeting of my counterparts at other large independent Realtor firms.  This time, we met in beautiful Hanover, New Hampshire, although we hailed from all parts of the country.  Almost all the firms are seeing fairly large increases in both units sold and average prices, with supply limited to very limited, depending upon region.  The Northeast is clearly lagging behind the rest of the country.  Although we are definitely seeing signs of improvement, we have not gained back the number of jobs that other places have, and that affects real estate sales.  Boston, as it often is, proves the exception to the rule, as it seems to be enjoying robust growth.

Almost everyone present said that the past thirty to sixty days had been slower than the rest of the year, but reported an uptick in sales before that, as interest rates began to rise.  Isn't it amazing that, no matter how often we preach that rates are at unusually low levels, and that buyers should hurry to capture great rates, most people wait until rates have already started to climb before rushing to buy?  Most agreed, however, that mortgages were more difficult to get than they had been, with regulations changing so often that it can be hard to keep track of the rules.  Most locations saw slower growth in the luxury end.  San Francisco, like Boston, marches to the beat of its own drummer, and is wildly popular.  NYC also is seeing increased action at almost every level of the market.

It was striking to see how much like Connecticut Northern New England is, with small offices in every town, and agents spread out over a much greater footprint, versus the big, centrally located mega-offices found in other parts of the country.  As with our Yankee counterparts in New Hampshire, we see older agents, less technology, and more traditional sales tools than our friends in the West are finding.  I guess that's why we are still called The Land of Steady Habits!

Mixed Signals

The latest issue of the Commercial Record illustrates our current problem for sellers and buyers.  If you look at New Haven county for June, the most recent month available, compared to the same month last year, sales are down by 12% and prices for the whole county are up by almost 6%.  If you look just at the shoreline towns and add Woodbridge, to try to capture the higher end of the market, sales are slightly up and prices are down.  Go figure. 

I guess the lesson as a whole is that we can't pay too much attention to what we read in the national press.  Connecticut is following its own, slower, path to recovery.  Our listors at the high end of the market are beginning to accept that there seems to be a ceiling on prices for luxury homes, and that no one can say what a given home is "worth".  We can predict that it won't sell for what the seller thinks it should, given what money is in the house and what the condition is, but we can't find examples that will pinpoint the exact price.  We can't even promise that it will sell at a lower price, nor can we swear that we're not "making a market" by lowering prices, causing low prices to slip lower.  What can we say?  We can tell buyers that it's a great time to buy direct waterfront, or properties over a million dollars.

In other submarkets, the picture is murkier.  The numbers of months of supply in houses has declined, and is now in the range of a balanced market.  That should mean that neither seller or buyer has an advantage.  But, depending upon where you are, and the type of house you have, you could find a bidding war or few showings, with maybe a lowball offer.  However, the only way to test the market is to put the property on at a "fair" price and see. 

There is a bump every fall, when buyers try to close and move before the end of the year, and, this season, it may tell the final tale of 2013.  Let's see what happens.  We do know this--mortgage rates, over the long run, matter much more than a few thousand dollars here or there in the sales price.  So buyers should definitely act, because interest rates have already gone up about 15% from their lowest point, and will likely rise further after the elections.  Time is fleeting--carpe diem!

New Year, No More Fiscal Cliff

The page has turned to 2013, and everything seems to be pointing toward a continuation of the slow recovery that we've been seeing so far.  In other parts of the country, things have moved faster, and the signs are even clearer.  I just came back from Phoenix, and I remember reporting in other years that there were For Sale signs all over the place.  This year, in the same complex, I saw two, and one was sold and came down while we were there.

Connecticut has a bigger supply of properties for sale.  Things never got as bad, prices never went down as far, and therefore they are not popping back up as quickly.  We still have spots where listings are hard to come by, but, by and large, there is a good choice for buyers in most areas.  However, that could change as the year goes on.  Interest rates are still low-very low-and prices are more flexible than usual.  People who are moving here have been able to sell their homes where they came from, and, with the lowest apartment vacancy rate in the country, the New Haven area is a tough place to land a good rental.  All those things cause sales.

In addition, the uncertainty in Washington has not gone away, but the immediate crisis has been averted.  Some nervousness still exists, which makes the stock market dicier than usual, and that also helps real estate as an alternative investment.  We are between two strong markets-Boston and New York-so that should help us as well. 

Spring will tell more of the story.  Will prices start to shoot up?  If you are a buyer, you may not want to wait and see!

More Good News

Paul Krugman just wrote in the New York Times that we may be in a "virtuous cycle" instead of a vicious cycle.  That is, he sees the economy improving, leading housing statistics to improve, leading to a further improvement in the economy.  It's about time, but it's very welcome.

We've always know that FDR was right:  The biggest thing we have to fear is fear itself.  Once people are afraid that they may lose their jobs, their benefits, or their overtime, they cut back on their expenditures, giving their employers less income and leading to cutbacks.  That's where we've been for a few years now.

Krugman makes the point that the Europeans have neglected to deal with the basic problems in their economies, whereas here we did let interest rates go down and we did let our housing bubble deflate.  That leaves the US in a position to improve now, and all the signs are there.  So that's something to cheer about, and hope that the virtuous cycle continues.

Where Retail Goes, Will Real Estate Follow?

Retailers seem very happy with sales so far this holiday season.  Even booksellers, according to today's New York Times, have been seeing big increases.  Given the lackluster sales in the past few seasons, this seems to indicate that consumers have loosened their purse strings.

What does that mean for real estate?  While the fact that someone will buy a book doesn't necessarily mean that they will buy a house, the fact that someone won't buy a book almost certainly means that they will not make a large purchase like a house.  So it's a prerequisite that consumers have to feel more confidence before the real estate market will improve.  Hopefully, we're almost there.  Given the historic low interest rates, it's hard to believe that we haven't gotten there already.  Perhaps the start of a new year will push us over into a seller's market, or at least into a balanced one.

Is the Tide Turning?

Yesterday was the busiest day for property sales that we've had in a long time. I spent the morning today trying to track down the reasons, and there are several possible causes. Two sales came about because the owners brought down their prices. In at least one instance, that produced multiple offers, so clearly buyers are motivated also. They aren't closing before the end of the year, so I don't think it's for tax purposes on the seller's part. It could, however, be due to the cold weather and the arrival of heating bills.

Two of the buyers are coming from Manhattan, so we're wondering whether the bonuses came early this year. There have been some news articles that make that claim, so it could be true. One buyer is about to start a new job, and was in a hurry (although, in the past, those people could have--and probably would have--rented in the short term). One renter turned into a buyer, and that could be an outgrowth of interest rates rising, with the prospect of higher rates next year.

We've had walk-ins as well, which means that people have gotten the message that the time to buy is now. Or maybe it's our Christmas present as agents! Either way, we'll take it.

Rate Rise Alert

We've been talking about this for months, but it's finally happening. Interest rates are going up. The latest rates are almost half a percent higher than they were a couple of months ago. What does this mean?

First of all, the cost of owning a home with a mortgage goes up when the interest rates rise, meaning that fewer people can afford to purchase a home. It also indicates that, in most cases, buyers can afford to pay less for the same home, since they will qualify for a lower mortgage amount. In a buyers' market, which we are in now, that burden falls on the seller in large part. So, if you are selling, you will almost always receive less for your home when interest rates are higher.

In the larger sense, it could also mean that we are past the bottom of the market. Mortgage rates generally start to rise when things are starting to improve. Some of that is a signal from the stock and bond market that inflation could be a worry, and part is that the government will stop holding rates down if demand increases.

So, just as people often try to time buying an airline ticket to wait as long as possible to buy a non-refundable ticket at the lowest price, and frequently hesitate just a little too long (as I recently did....), you may already have waited past the point where you should have bought that property. Just don't wait any longer. Once things start to turn around, prices can move quickly. Consider this your warning!

The Power of Low Rates

I have a real estate friend in Madison, Wisconsin--where the market seems a lot like ours much of the time--who thinks that the real estate market will not recover unless and until the government aims directly at our industry with programs designed to improve sales. Although the tax credits did that, they expired and left us, arguably, in worse shape than ever (however, people don't realize that, because they look at the fact that housing prices haven't declined much, and in some cases, they have edged up slightly--that's because all the first-time homebuyers have left the market, leaving higher-priced homes as the only ones selling). The government has focused on the banks, using first TARP money and then foreclosure actions to regulate activity. We probably haven't been helped at all by the foreclosure stoppage, since it just lengthens the period of time where the whole housing system is backed up. Until all those homes, which--foreclosed or not--the owners can't afford, get transferred somehow, there won't be a "normal" real estate market. Appraisers can't even use those transfers in computing value, since they aren't arm's-length transactions, but they obviously have an effect on values and on regular sales.

This same friend, although thinking that we need Federal intervention to improve our market, also has the most compelling argument for buying right now. He has made charts that show that a 10% drop in prices actually has less of an effect on monthly payments (the gold standard by which most buyers decide how much they can afford) than a 1% rise in interest rates. Therefore, buying a home now, with the current rates, costs you less than buying it later, even if prices drop by another 10%. If rates go up, that savings in the prices will be more than offset. Whether that obviates the need for governmental action on behalf of the housing industry, I'm not sure. But I am sure that it makes a compelling case for buying a home now.

Why Does Consumer Confidence Matter?

I like to read the papers as early as possible in the day. As a morning person, I find that I can absorb bad economic news best before 6 AM. This morning, I was challenged to do just that, as consumer confidence hit a low that was unexpected by analysts. That, of course, will make the real estate market worse.

It's somewhat of a chicken-and-egg situation, because the poor real estate market has a lot to do with what happens to the consumer confidence index. Is it so low because recent news about housing sales has been so negative? Or is low confidence causing the level of real estate sales to drop? Although it's hard to know for sure, it's probably some of each.

If you were making a list of what goes into the strength of the real estate market, apart from local issues and demographic trends, you would probably cite three things: household income; interest rates; and consumer confidence. Income is obvious, because the more you earn, the more you can afford to buy. That can occur because your job pays more over time, or for other reasons, such as the run-up in prices caused by two-income families going up dramatically and allowing housing prices to follow. Interest rates also have a clear effect. Since the only thing that really matters to most people is the amount of their monthly payment, lower rates will let them buy more house for the same monthly nut.

Consumer confidence is really the measurement of people's expectations about the near-term future, both of their own situations and the national economy. To translate that into housing prices and sales, the index reflects what they think will happen to their jobs and wages. Unless they feel positive about their prospects, they are most likely not going to take on additional or increased debt. Unfortunately, there is a multiplier effect as well; when they read that others are not feeling rosy about the future, their own opinions tend to drop as well.

The Federal government is charged with raising confidence about all of our futures. Let's hope, for all our sakes, that they come up with something that works, and sooner rather than later.

Should We Let the Market Fall? Part 2

In my entry yesterday, I blogged about the NYT article talking about what's happening in the current market (very little) and what could or should be done about it. The first issue I discussed was the possibility of a double dip, and whether that would happen. Today I have a suggestion about the type of governmental intervention that might prevent further declines.

All of the efforts to date ($23 billion in tax credits) have been focused on homebuyers, particularly first-time homebuyers. As I have opined before, first-time buyers are the most likely to buy no matter what market conditions might exist at the time they are ready to purchase. Since interest rates are low, and prices have come down somewhat, and since they have nothing to compare those prices to, they should be motivated already. The problem is that there is little well-priced product out there for them to buy, low sales notwithstanding. The inventory lacks homes which are not even being marketed due to current conditions, and many that have been on the market too long and for too much.

Why shouldn't the Federal government consider a one-time tax credit for sellers, maybe as a percentage of the loss in value that they have incurred, or maybe as a credit when they both sell and then buy? Many people would not even qualify, just as many buyers made too much money or bought houses too expensive for the homebuyer credit. Some have lived in their homes for so long that they would never lose money when selling, and some will sell but not purchase again. However, it would be a strong signal from the government that sellers need to lower prices before the market can move again. If that could be accomplished for the same price tag as we incurred giving an incentive to buyers, it might free up the whole sales chain. Buyers who can't buy because they already own a home they can't sell would then trade up or move, and people who just can't stomach not getting what they would have gotten a few years ago might feel that the tax credit made up for that, at least in part. There are many details to be worked out, but something needs to happen, and I don't think that even job creation will change the perception about the current state of real estate without some sort of outside help. Waiting around is costing us all time, money, and sound sleep.

Where Have All the Buyers Gone?

The national news, as well as area papers, are full of stories about the abrupt dropoff in housing sales for May. Everyone knew that this might happen when the tax credits expired, but the amount of the decline is still surprising to people. After all, many families did not qualify for the credits, which decreased as income increased. Also, although the second round of credits applied to repeat buyers, it was always aimed at first-time buyers. They bought, but probably mostly in the first round, from what we could see. Ordinarily, first-time buyers make up about 45% of the total market for sales. With the tax credit, that percentage had increased to 55%. Even though that means that we have moved 10% of the sales from the future into the present (now the past) with the help of tax credits, there is still almost half of the buying population unaccounted for in these numbers.

Where did they go? It seems that consumer confidence, once again, has reared its ugly head. All the news reports about job losses, retail sales, and the stock market have affected homebuyers negatively. While we knew that this could happen--it's some version of the double-dip theory--it still surprises those of us in real estate, to some extent.

Interest rates are very low. Housing prices are back down, in many cases, to where they were several years ago. Everyone knows that, even if you sell low, it doesn't matter, as long as you also buy low. Consumers have stayed out of the fray for most of the tumultuous recent past. So they should be out in force, and they're not.

One theory is that there's too much on the market, and therefore they have paralysis. Another is that they think prices will continue to decline. It is true that mortgages are harder to get. And, of course, it's summer--hot and humid weather tends to keep people from doing all but the essential tasks of life.

However, we're all watching with bated breath. The housing industry cannot afford a long layoff from sales, as we endured at the beginning of last year. Congress, take note!

Markets and Marathons

This posting is a little delayed, since I ran the Boston Marathon on Monday. The relief of having it over, plus the exhaustion, kept me from writing sooner! Every time I run a marathon, I think about how much it is like the real estate business. The basic foundation is the preparation. You have to put in the hours. Some naturally talented people seem exempt, and can run or sell without spending a lot of time getting ready, but the general rule is that you reap what you sow. The long 20-mile runs, or the late nights at the computer, pay off in the future. You can't just wing it.

There's also some amount of luck involved. Performance in a marathon depends greatly on the conditions of the day and the course--temperature, elevation changes, wind, and congestion on the course. It also matters how you feel on a given day, and you won't really know how you will do until you get to 20 miles or even beyond. Success in real estate depends on market conditions--we don't control interest rates, bank policies, political postions, or consumer confidence. Local economic factors, such as unemployment rates or business expansions, are also variables we can't change.

However, in both marathons and real estate markets, we can do the best with what we have. We have the same conditions as everyone else on the course, and we can outperform others with training and perseverance. We can be mentally tougher, and we can dig deeper. As the marathon really starts at 20 miles, salesmanship starts when the client says no.

Finding a way to succeed is crucial in both endeavors, but there's at least one difference: It doesn't hurt to walk when you finish selling a piece of real estate!

Mortgage Rates are Going Up

Newspaper articles over the weekend made it clear what we already knew--mortgage rates are going up. Policies are changing, and banks can only make money by passing some of the charges along. As their ability to make money with fees is curtailed by governmental regulations, it's inevitable that the result will be higher rates.

Banks make money in at least three ways on mortgages. First, they collect fees when the loans are made. This is where the recent oversight by the Feds has led to restrictions on fees of every kind. Secondly, they make income from the servicing of loans; i.e., fees for handling the monthly payments. When a bank sells off loans in the secondary market, either to reduce risk or to preserve capital, it loses those servicing fees. Lastly, they make money from interest on the loan itself. If the first two sources of funds are curtailed in some way, it stands to reason that the banks would need to raise interest rates.

Although we have read a great deal lately about Washington's displeasure with banks and bankers, it does't seem reasonable to expect them to make loans that don't make a profit. After all, they are for-profit entities (and we want them to be, since we don't want to have to keep bailing them out!). In addition, someone has to pay for all the oversight being done; it takes time and employees to answer all the questions and fill out all the forms required by the government. There is a great deal more of that lately, and the costs of compliance have risen.

Therefore, we should all understand that money lost from one source of income must be made up for somewhere else. If we lower credit card rates and fees, or checking account fees, or late fees, something other fee or cost will have to go up. This time, it's mortgage rates.

Lagging Statistics

Now that we're finally seeing some increase in the number of buyers and the resulting sales, the statistics for April are out. They show that prices fell and units fell. Not surprising, since that's reflecting activity from the first quarter. It doesn't measure today's pulse, but rather what was happening 60 to 90 days ago.

If we're lucky, the news will convince sellers not to be greedy, and buyers that it's a good time to get a reasonable price on the real estate they wish to own. It will let the government know that it can't stop trying to help the housing market. If we're lucky, it will not send everyone screaming for the hills, or more accurately, back into the cocoons where they have been hiding since last fall.

All of this does show the importance of the consumer confidence index, which is a measurement the government puts out on a periodic basis, to judge the mood of the buying public. Lately, this number has been at historic lows. The most recent results, however, have shown a sharp uptick in consumer confidence. We consider this number, along with personal income levels and interest rates, to be one of the three most important ways to predict the level of real estate sales. We could have told the press that sales would rise in May, after seeing the rise in consumer confidence. Since it's such a subjective measure, though, almost anything can affect it. That's why I'm hoping that the April sales numbers don't send it plummeting again.

Commercial Real Estate Update

It's worth a mention about what's happening in the commercial real estate arena these days. The answer is: nothing. The nation's banking woes, and the resulting credit crunch, have brought most real estate transactions to a screeching halt. Traditionally, there is a lag between the residential market performance and the commercial market performance of about nine to twelve months. I had an interesting discussion yesterday with an economist running buddy as to why this should be so, but it has been consistent over the past recessions as well. One might think that jobs and business profits would decline before housing sales, but it's usually the other way around. Residential sales can be predicted if you know personal income numbers, interest rates, and the consumer confidence index. Commercial real estate has more to do with credit, GNP, tax structure, and general business cycles, yet they do coincide and overlap this way.

Given the current state of the economy, pundits are not forecasting an improvement in commercial real estate this year. New Haven is lucky that so much of our space is occupied by Yale, but even mighty Yale has seen the effects of this market cycle, so we may not be as protected as we might otherwise have been. Our best protection is coming from a lack of new product, meaning that we don't have the see-through office buildings sitting empty, the way we did in the last recession. One of the worst problems is that there has been a fundamental shift in the way people work, causing companies with the same revenues to need less office space. That may not change back when the economy improves. Other new companies will have to spring up to take that space, and Connecticut's cost and tax structures have caused it to be at or near the bottom of new business creation. In our area, biotech has made our regional results somewhat better, but we should all do what we can to attract corporations and jobs to our region.

Interest Rate Update

Now that the weather has moderated a little, we're starting to see some activity in the real estate market. One question on everyone's mind is the forecast for interest rates over the next few months. It's particularly true for those who are refinancing, since some banks allow you to take one "drop" between commitment and closing. Therefore, people want to know whether rates will go down more.

Of course, the correct answer is: Who knows? But I think most betting people feel that the governmental stimulus and drive to improve the economy will result in incentives of every kind that could possibly help the housing market. That would argue for lower rates to come. I don't think they'll be much lower, or for much longer, since banks are paying 5% for the TARP money. So how long can they really afford to loan it out at less than 5%?

So, if they are going to go down to 4 and 1/2, even for a little while, why not wait? The answer to that lies in the fine print. Fannie Mae, which drives a lot of bank lending policy, has quietly been raising the standards on loans. FICO credit scores to qualify for the best rates are rising, and higher rates are imposed when there is a higher loan-to-value ratio being sought. Translation: The rate might be slightly lower for some amount of time, but it will be harder for most people without excellent credit and enough cash for a substantial downpayment to qualify for that rate. When you take those factors into account, you will almost certainly come down on the side of buying or refinancing as soon as possible.

I should point out, in the nature of a disclaimer, that I do not have Obama's private Blackberry address, so these thoughts are my own, based upon reading public materials! And, given all that's going on, I'm sure there will be more news to follow.

Housing and the Federal TARP money

People all want to refinance or take out a new mortgage at the bottom of the market. Well, I wasn't sure before, but, based on what I've learned about the government's stimulus program, the time to get a mortgage is NOW. It turns out that the TARP money being given to banks isn't free. In the same way that the first-time homebuyer's tax credit sounds as though you don't have to pay it back, the TARP money has been characterized as a bailout, leading us to think that the banks are being granted the funds. But we were wrong--they have to pay it back, with 5% interest for the first number of years, and 7% interest after that.

So, while I previously thought that interest rates would just keep being forced down until people bought real estate, I now think we're at--or even past--the rate bottom. If a bank has to use money that it's paying 5% for, how many loans can it make for less than that, or even for the same amount, without incurring losses? In our WP mortgage joint venture with Webster Bank, we've seen rates, which had been at 5% with no points for a 30-year fixed mortgage, start to creep up. That now makes sense to me, and it's a call to action.

As I've said before, what you pay as a mortgage rate will matter more on the margin than what you pay for the property, so, if you have the money to buy a new home, buy it now! By the time you realize that rates are heading up, they will be higher yet.