Short Sales

Will there be more short sales in 2010, or will the market end the glut? I'm betting on the former, as there will still be many, many people who have negative equity in their homes. Our President, and the banks, are hoping that moral suasion will cause owners to continue to pay on mortgages that are underwater. The banks may not be thinking about the fact that they themselves have walked away from bad investments, and therefore it makes sense that homeowners and building owners might do the same. While there is still a degree of stigma in not honoring the debt, that's often weighed against extra money in one's pocket every month.

Now, not every owner is a candidate for a short sale, as banks do have the right to go after the extra amount from other assets. However, the government is leaning on them not to foreclose, which limits their options. Plus, they know that it costs about 15% of the value of a property to foreclose on it, and they don't want to lose more than necessary.

We have begun a joint venture with New Haven Asset Management to get those short sales approved and closed. One of the chief problems with doing one is that it can take up to a year, and buyers often won't, or can't, wait around until the lender or lenders agree. It makes a lot of sense to have somebody specialize in getting those approvals, and using them to make sure that the properties close. We have been doing that for a few months now, and the results are impressive. It's also common for lawyers to tell us, during a short sale handled by NHAM, that they plan to send future short sales to it, rather than reinventing the wheel themselves each time.

Every era in our country has led to new lines of business, and short sale management is one whose time has come. While we'd rather do business the old-fashioned way, where there is enough money to go around, the main thing is that we'd rather do business. Adaptation is often the key to success, and we're doing that.

Snowing Again

It's snowing tonight in Guilford, and it seems to have been snowing quite a lot lately. When our kids were little, they used to get excited by snow, and hope for a day off from school. The phone would ring, and I would tell them that it was the sound of people cancelling their real estate appointments. No school, no showings. Although that was a decade ago, things haven't changed. When the weather is bad enough, no one looks at real estate.

We're lucky that we aren't in a business where a day like today means that those sales can never be made up at another time. If a plane takes off with empty seats, or a theater has no patrons, that's money down the drain. At least most people looking for property will look again on a nicer day. Generally, it's not an impulse purchase, or a date-specific one.

There are also the issues of showings and open houses. Unless everything is perfectly plowed, it can be tricky to have buyers coming in on icy sidewalks. It's often hard to park with snow piled on the sides of streets. And few places look their best with wintry boots and shoes tracking the outside slush onto rugs and floors.

I wonder if the Internet has changed all this for us. When you're home due to cancellations, as I am this evening, do you go online and shop for your dream home? Or a vacation place? Or the new location your business needs? We hope so!

Commercial Update

The national news about the state of commercial real estate really could not be much worse. I've heard it described as the "first or second inning of a long game", meaning that the decline in prices and activity is only going to get worse over the next couple of years. Financing is probably the biggest issue; many people are on loans referred to as "extend and pretend", meaning that they are not loans that would be made today. Owners are paying fees to keep those loans in place, in the hopes that they can make it through this period with bank financing in place. Some cities have lots of foreclosures. Others have lots of empty space--Phoenix alone has 80 million square feet of empty space.

Surprisingly, however, what we're seeing in our two offices, in North Haven and in Rocky Hill, is an increase in calls and potential clients. Our listings have more showings than they've had in a long time. Our ads are bringing in inquiries. Agents are busier.

This doesn't translate right away into sales and leases, and certainly not into commissions. We have two very large transactions where the deals are done, but we have not been paid, or paid in full. There are lots of other incidences of agreements in the pipeline, but not signed. It's very common for a tenant or buyer to find exactly the space they want, yet not make up their minds to pull the trigger. Other deals fall through on financing snags, so the picture is not all rosy.

Even still, there are some types of property that we could sell much more of, if we had the inventory. That includes first and foremost small free-standing buildings of 6 to 12,000 square feet. We have one such listing that just went under contract after a furious bidding war, and will sell for over the asking price. There is also significant interest in medical space. Doctors, and it seems most other professions, all want to own rather than rent. So we're hopeful about 2010, and that seemed highly unlikely even a couple of months ago.

Get off the Sidelines

If you've been waiting for the economy to straighten itself out, and for the real estate market to be clearly on the way up, you're waiting too long. History has shown over and over again that those who act before there is certainty are the ones who make the most money. Since most purchases and sales are, in reality, driven by family issues and not by national ones, that's not so hard to prove.

We bought a condo in 1981, when the economy was bad. We got a great price on it, and we moved in. We were getting ready to have kids, and there were no children allowed, so we put it on the market and bought a house. As soon as we moved into the house (the day we closed, in fact), we found out I was pregnant, and we'd bought a one-bedroom house. Although we planned to renovate, another, bigger one came on the market up the street, so we bought that too. What were we thinking? Anyway, the two houses were both bought in 1983, and the first was sold that year, as well as the condo. We made money on the condo, since we'd been the first to move in. We made no money on the little house. The value of the second house doubled in the the first couple of years, as the market went wild in the mid-80s.

What's the lesson here? You could reasonably say that it is to think ahead before you buy, but that's not my point today. My point is that we made almost all the appreciation on the house that we owned when the market started to rise. We also made money on the condo on that theory. The little house we only owned for a few months, and we would have made money there if we had been willing to own three homes for longer. It's a version of timing is everything, but it requires buying early in a cycle. People who waited until later in the 80s got caught in a declining market after 1988, and weren't able to get out for what they had paid.

The parallel to today's market is: If you wait until everything is rosy, the money will have already been made by those who bought sooner. Buy now.

Market Statistics

I just gave an interview to a reporter about last year's numbers for the state of Connecticut. The Commercial Record showed that sales were about even with 2008, while prices were down about 10% from 2008 to 2009. She wanted to know whether that surprised me. It did not.

The above results are typical for markets that are in moderate recovery. When they decline, they decline first in units and then in prices. On the way back up, we see units increasing before we see prices returning. This is also because, when the economy is not strong, it's people at the lower end of the price spectrum who are most likely to buy or sell property, either because they are first-time homebuyers, or because they are forced to sell. These reasons account for the decline caused by a change in the mix of units changing hands.

The other piece of the decline is caused by the value of the same house going down in this market. Most houses, especially when they are competing with foreclosure sales, are selling for less than they would have a year ago. That's the part of the decline I would call same-sale price loss.

If you add those two explanations together, you can see that the 1% a month loss in value that I've been blogging about is not going to go away any time soon. On the other hand, we should see unit sales beginning to rise faster than they did in 2009, particularly as long as the government continues to give incentives to homebuyers. And that's good news.

The Phones are Ringing!

A new year and a new decade have started, and I've never heard so many people say that they were happy to put the old year behind them. We can tell that they've moved on, because our phones, even in Commercial, have taken a big leap from December. It will be a few weeks before we see the results, but, in the meantime, we're busy.

What does that mean for sellers and buyers? It means that people are coming off the sidelines. They've put their lives on hold for long enough. Even in commercial real estate, where there are dire predictions for the next couple of years, business goes on. The leases may be shorter and smaller, but space needs will prevail at some point.

Therefore, there will be competition for well-priced listings. Well-priced is the key here. There are still plenty of listings getting no play, but others go right away. The latter ones are perceived to be good deals. There are also a lot of short sales in the market; i.e., houses where there the proceeds will not cover the debt. Banks are required to get within a certain percentage of fair market value, so don't look for big bargains in that department.

If you're a serious buyer, buy now. You need to leave time to get through the whole sales process, and you don't want to miss out on the tax credits available. And please, don't assume that you can take 10 or 20% off the listed price (see paragraph above!).

If you're a serious seller, be realistic about the price. And list now, to get a jump on the competition.

New Year, New Attitudes

Happy New Year! It is clear from watching the stock market that investors in that area have confidence about the future. In our business, we are looking forward to the same sort of sustained rise during 2010. I just returned from Arizona, where the number of sales has gone up quite a bit from the year before, although prices continue to lag and short sales are still very common. Since we are behind Arizona on the real estate curve, we can look there to see what's down the road for us.

What they are worried about is the glut of homes that could come up for sale if owners lose interest in trying to hold on to them while values are low. Moral suasion may not be enough to convince people to continue paying on mortgages that are underwater. There have recently been a number of articles about just that--homeowners moving into rentals and spending the difference in their monthly payments on trips and consumer goods. That's not good for real estate.

We will be somewhat protected from that phenomenon in Connecticut, I believe, since whatever happens on the West Coast and in Florida will most likely cause the government to take steps to prevent the spread of anything that might impede a general economic recovery, and before it gets to us. They took prompt action in the banking crisis, and the recent extension and expansion of the tax credit for homeowners is a good indication that real estate will be treated in much the same way. In addition, since we had nowhere near the amount of speculation and building as the South and Southwest, we are not in the position of having lots of empty houses and condos to fill. Sometimes it's not bad to suffer from slower growth!

In the meantime, we should take heart in the surge of interest in real estate in Arizona and other similar markets. Investors are buying, and there is activity. I talked to one agent who said that her experience there is bearing out what I've been preaching in this blog: Those properties that are priced correctly and are in good condition are hard to get, since they receive multiple bids early on. Although there is a great deal on the market, only homes and buildings considered to be good values are moving. So, if you want to sell, be sure that you are in that category. If you want to buy, get a jump on that trend and buy before the spring market and before the tax credit expires on April 30th.