San Diego Economic Forecast

I was fortunate enough to attend the 2007 San Diego Economic Forecast, hosted by Stewart Title and featuring Ted Jones, PhD. Dr. Jones was the Chief Economist for Texas A&M University’s Real Estate Center, the nation’s largest publicly funded real estate research group. He currently serves at the Senior Vice President and Chief Economist for Stewart Title Guaranty.

PART 1 – THE FORECAST
Dr. Jones began his forecast by pointing out that the current difference between short term rates and the 30 year mortgage is only 76 basis points! This is the smallest margin in years. He then suggested that a client staying in a loan for three years or more would derive the most financial benefit from a fixed rate loan. The rule of thumb has generally been 8-10 years before a fixed rate loan made sense, so this is quite a change and further underscores our need as originators to truly consult for our clients.

Over all Dr. Jones sees fixed rates climbing 60-80 basis points by the fall, putting 30 year rates at 6.625% – 6.750% in September and 7.000% by year end. Commercial rates should run approximately 1% higher. These numbers are historically very low and depending on the type of press the housing market receives, I expect to see strong buying throughout the year. As a matter of fact, Dr. Jones commented that three years from now anyone looking back at the market will wish they had bought two years previous (i.e. RIGHT NOW).

Economically, San Diego has done well and will continue to do well. We added 9800 net jobs last year and our net job growth is 12% higher than our ten year average. Average pay in San Diego went up 3.94%! The only number going down was new construction permits, which dropped from 14,306 to 9,000. For many this is seen as a positive, however, because San Diego was slightly over building in comparison to what is generally considered healthy for the local economy.

Existing home sales dropped 24% year over year in San Diego. This may seem drastic at first glance, but in actuality the speculators made up almost 30% of recent purchases. What does this mean? It means the speculators have left us and we are back to a normal and sustainable level of purchase activity. One last thought: to put this in perspective, Florida (where the speculation game went wild) is having a real problem. Their sales have dropped 40% or worse and in some areas there is a 47 month supply of inventory. In those areas the standard listing now is for TWO YEARS!

PART 2 – TICKING TIME BOMBS
The biggest concern of the night was the exotic loan products that have flourished over the last few years. According to USA Today, in 2005 the median down payment on a purchase was 2%. In fact, 43% of all homebuyers put 0% down and nearly 1/3 of all loans were interest only or option arms. Dr. Jones broke that down further for San Diego and reported that 37% of all loans were regular ARMS (defined as 3/1 and longer with or without an interest only option), 10% were fixed rate loans… and the remaining 53% were exotic loans or “time bombs” waiting to go off. These time bombs include all negative amortization loans (a loan type so abused that I refuse to do them for clients and in fact have never originated on ethical grounds) and loans with short lock periods: 6 month Libors, 1 year Treasuries and so on (this is not to be confused with the 2/28s offered by most sub-prime lenders).

These loans are out there and we are only beginning to see the problems they will cause as their payments reset and, for many, their principle amounts increase beyond the value of their homes. A very disturbing development comes to us from the Midwest where a court case was decided just ten days ago. A couple bought their home using an option arm (neg-am) and did not make their payments. The loan requires that the actual interest rate (as opposed to the made up interest rate initially quoted) and the actual payment (as opposed to the made up payment initially quoted) kick in after six missed payments. Once that happened the required payment skyrocketed and the loan amount grew rapidly. It was at this point that the couple sued the lender because they had been promised that the payment on this loan was fixed for five years. Now one might think that after not making payments for six months this is an open and shut case. It was… the court ordered the lender to pay back all of the costs, the commissions, the fees AND to pay off the loan! This case is being appealed, but you get the idea of what is coming.

From my own observation, a great many of the brokers out there that focused on this particular loan product – and happily maxed out the margin in order to scalp 2-4 points in YSP off of their “clients” – are out of business now or will be soon. As we all know, you can not make a career out of taking clients for everything you can before moving on to the next one. Advising your clients on their best interest and garnering referrals is the key to long term success. I am happy to see those brokers move on to the next “get rich quick” scheme, but I am not looking forward to cleaning up their mess.

PART 3 – THE FUTURE OF OUR BUSINESS
Interestingly enough, Dr. Jones named his presentation this year:

You’re Nobody Till You’re Somebody@Somewhere.com.

The revolution in our industry due to the internet is moving ahead and anyone caught napping is likely to lose market share. This is evidenced by the fact that 79% of all homebuyers start their search on the internet (82% start their loan search there). Here are some more interesting facts:

Where Homebuyers 1st Saw the Home They Eventually Purchased:

• 35% by Realtor (down from 50% in 1997)
• 29% on the internet
• 5% in a newspaper

Where Realtors Spend Their Advertising Dollars:

• 39% newspapers
• 17% direct mail
• 11% online
• 8% signs
• 4% yellow pages
• 1% telemarketing
• 20% other

There are two ways to make more money in our business. Either you can increase your sales (or profits per sale) which is costly and difficult OR you can decrease your cost per sale. The future of advertising is online and the great news is that you can spend less money to attract more clients; more clients that are a match for you and your style.

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS , Economy, San Diego

Full Disclosure Lending: Do You Get Dollars or Donuts?

Success in Real Estate is proportional to your reputation as the expert in your community. An integral part of your expertise flows from the team of affiliates you “partner” with on your transactions. A key partner is your mortgage originator. What should you look for and, more importantly, expect from him or her? The answer may depend on which side of the transaction you represent. Let’s take a look at the general services you should expect and then the specific services that your originator should provide to listing and selling agents:
GENERAL SERVICES
These are the basic skills and services that your originator should provide in an ongoing manner:

• News and information on new programs and how these new programs can assist you in building your business
• Economic updates that summarize the movement of interest rates and the economy. If your originator is handing you rate sheets but cannot tell you what the economy is doing on a macro scale and explain in one or two sentences what is driving those interest rates, find someone new immediately. You can look rates up anywhere; your originator should provide context and meaning to economic numbers so that you can present an informed opinion to your buyer or seller.
• Marketing assistance. RESPA laws limit the financial contribution and good health limits the “donut” contribution, but all of your affiliates should share marketing ideas with you and your loan originator is no different.

LISTING AGENT

What’s that, you don’t think the L/A has much interaction with the mortgage originator? Think again; a listing agent has a vested interest in the originator. Here is the minimum you should expect from the Loan Officer qualifying the buyer on your client’s home:

• Approval Letter – the approval letter should be just that: an approval. There are 3 basic types of loans: A-paper, alt-A and sub-prime. A-paper should be run through DO or DU. Alt-A and sub-prime lenders almost universally have online Underwriting programs and sub-prime lenders will often review the actual documentation and issue an approval prior to the property being found. You should receive a copy of the appropriate approval with the purchase offer or soon thereafter: have your originator review it. (Just remember, when it comes to online approval engines: “garbage in, garbage out”.)
• Good Faith Estimate – many lenders will not release the particulars of the loan to the seller, but they should be willing to release the GFE. Run it through the “smell test”: if it looks too good (or too bad), odds are the buyer will come to the same conclusion and your closing will, at the very least, be delayed.  Your originator should be able to provide you with valuable insight after reviewing the buyers’ GFE.
• Loan Parameters – get the particulars on the buyer (credit score, stated vs. full doc, assets) and run them by your loan originator. Make sure the proposed transaction sounds reasonable.

SELLING AGENT – you have the greatest stake in the expertise and service of your originator. When you send your client to someone, you want it to lead to referrals, not finger pointing.

• Approval Letter – no different here than for the L/A. Your originator should provide you with one before you ever begin to show properties to your clients. A pre-qual letter and to a lesser extent a pre-approval letter are worth little more than the paper they are written on.
• Good Faith Estimate – here your expectations should differ a little from the L/A; you should expect more. Your originator should provide a GFE that not only passes the smell test, but that they GUARANTEE. The lender should know their own fees to within a couple of hundred dollars and they should guarantee that they will pay the difference if they are wrong. For that matter they should be able to guarantee third party fees to within a 5% margin. If they cannot, you are working with someone that does not do their homework and this will come back to bite you eventually.
• Rate Lock – you should ask for and see a copy of the rate lock guaranteeing the rate they are promising. If they do not have the rate locked there may be a legitimate reason, but you AND your buyer should be able to articulate that reason. That is to say, the reason should be client driven and not because the originator is gambling on the market (with your client’s home and your income).
• Full Disclosure – your originator should disclose exactly how much they are making on the front end and the back end. The back end is commonly called rebate or YSP. This is defined when the rate is locked (another good reason to see that rate lock) and is in direct relation to the rate your client is being charged. If you want referrals from your client, start with assisting them in knowing the truth about the cost of their loan.

Finally, and in my opinion most importantly, is attitude. Your originator should view you as a client too. They should be willing to work at least as hard as you do to get the deal done while maintaining an almost brutal honesty. It goes without saying that you should not have to wait for return phone calls but this is still the #1 complaint I hear when holding training classes for agents. In a very real sense, the loan originator has your commission in their hands… do they understand that?

This list is by no means exhaustive. Receiving donuts, magnets and other gifts might be nice, but the information and expertise your originator provides is the measure of their true value.

Filed under: LENDERS, REALTORS , listing agents, loan officers, selling agents

Planning Over Instinct

I was talking to a fellow athlete this morning after our workouts. She commented on how different my training has been lately. I told her I was in a building phase right now so I could endure more intensity later. She said she never follows a detailed plan because it would take a lot of the fun out of it. She told me she listens to her body and makes workout decisions based on her “gut”.

Later I got to thinking about this conversation and how universal her message. I have met a great many people who follow the same “I listen to my instincts” plan. Likewise, I have coached a great many clients for whom a mortgage was a “gut” decision rather than an integral part of their long term financial health. Like her – she is a top competitive athlete in her own right – they have achieved some success due to hard work, natural ability and, lately, low rates. But just how far can one go without a solid, logical plan in place?

Building a career is no different than building your finances; you need a plan with at least the basic steps if you wish to attain a lofty goal. First and foremost is having the goal itself. Once that is selected and made S.M.A.R.T. you must create a plan that builds toward the goal. The first step is always to build your base. That base should be strong enough to support the project you are going to build. Once you have built your base you can work on closely related strength building exercises that extend your reach and solidify your upward movement. Finally, you “peak” with a few short, specific steps designed to put you over the top. If you try working on the related strength steps before you have a base, you are likely to injure yourself or your business. Without the base and strength in place it is almost impossible to line yourself up for the final, high intensity steps that put you over the top.

Whether you are striving to make the Olympic team or working on a gold medal in your own financial games, you need to make sure you have a plan in place. Otherwise, you may enjoy the spontaneity of listening to your instinct but you are likely to enjoy the championship from the sidelines.

To Your Success,

Sean Purcell

Filed under: LIFE THAT POPs , Success

Lies, Damn Lies and Affordability Indexes

My apologies to Mark Twain. There has been a lot of comment recently on the dreadful numbers that come out with each affordability index report and I would like to take the opportunity to play devil’s advocate. Sometimes, when I look at a new report or statistical anylysis, I run the report’s conclusion through my “common sense meter” before I even begin to read the data. The same way they used to teach us in math class: guestimate the answer so you can readily see if your calculations are severly flawed when you are finished. In the case of housing affordability here in Southern California, the reality seems to differ from the reports. As a matter of fact, the reality is we can’t build enough homes to satisfy the demand. The CAR leadership council recently released these projections: by 2008-2010 California is expected to be 15,000,000 homes short of demand! Yes, that is 15 MILLION homes. The US Census bureau projects massive influxes of people to the sun belt and California will remain the most populous state by a landslide. It is difficult to see how this continues to happen when only 1% – 24% (depending on the report you read) can afford to live here.

What would make sense is that the reports themselves are flawed. Most of these studies use very outdated lender paradigms (e.g. money spent on housing can not exceed 28% of gross income) which will certainly skew the results as well as the free market. After all, if a buyer is willing to pass up a new car or eating out in order to pay 50% of their gross income to live in San Diego, should we be judging that? Many people would make sacrifices to live someplace they find especially appealing, whether it be the weather of San Diego or the historic roots of Boston. How about the amazing arts & culture of New York City? Many people give up their cars altogether to live in Manhattan – another area with a terrible affordability index.

I am not, by the way, advocating blanket acceptance of the many exotic loans out there that allow people on wieners and beans income to buy champange and caviar homes. I have never in over twenty years put a client into a “neg-am” for ethical reasons alone. And I am not discounting the fact that an affordability gap exists in many major cities as a whole; I am only discounting the severity of the problem. A fluid and open market place will hurt some of the people some of the time. But in the end it provides the most good to the most people by virtue of its self-correcting mechanism. If specific areas were truly unaffordable, people would stop buying homes there and prices would stablize or come down. On the other hand, if the demand far outstrips the supply… you may incur many problems, but a lack of affordability, by definition, is not one of them.

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , affordability, San Diego, statistics, The Press

Brave New World?

In Aldous Huxley’s novel Brave New World, a dismal future is foreshadowed by the loss of individuality deemed imminent by the Industrial Revolution underway at the time. Seventy years later and we are in the midst of another revolution, this one brought on by the computer age. In the spirit of all things Hollywood, maybe it is time for Brave New World II – Even Braver.

There is little doubt that the coming revolution in communication and marketing will greatly increase our ability to put products and services in front of more targeted and (one hopes) more appreciative audiences. With the advent of blogging, pod casting, interlinking and viral marketing (my personal new favorite) we will all share our message in a much more profound way. The question I ask is: will the messages vary much? In Aldous Huxley’s time it was thought that the low cost of communication and travel would create an undesirable homogenization of people. Are we now entering the industrial revolution on steroids? If we remove the uniqueness and individuality of meeting one another face to face do we lose the essence of what it means to be human?

Please do not confuse my being a neophyte with being a Luddite. I am embracing new technology as quickly as my late 20th Century brain can manage. I will preach my message of loan transparency and fiduciary responsibility to a much larger audience. But as I learn these new methods of communication I continue to wonder at how I will communicate the spirit that is me. How will my clients and co-workers know who I really am? It is a brave new world out there and I hope I don’t get lost in the noise.

To Your Success,

Sean Purcell

Filed under: WORLD OF 2.0

Grim Future for Wells Fargo?

In my position as liability coach, I meet with a great many Real Estate agents as well as clients. Because of this I am privileged to hear a broad spectrum of opinions and perceptions on the housing market. Lately the topic of conversation has been the short sale. I have listened to seasoned veterans – those that have been through the entire real estate cycle at least once and have seen this before – discuss tactics for helping their clients: everything from the honest assessment required to creative marketing solutions. I have also heard from a great many newer agents – those that have been in the business less than five years – for whom the short sale is a trickier pony to saddle and ride. A common thread throughout, however, has been the short sighted response to a short sale market by residential lender Wells Fargo.

I am hearing from more and more agents about the absolute stonewalling and lack of urgency by anyone they talk to at Wells, whether the agent be on the listing or selling side. If you have not had the misfortune of dealing with Wells Fargo on one of these, one example should suffice: I spoke with a buyer’s agent that has represented an offer on a short sale property with minimal loss to the lender. Her buyer is solid (20% down, lender approved and so on) and the seller has agreed to all terms. It has been in front of a loss mitigation “specialist” at Wells Fargo for SIXTEEN WEEKS! The only thing more surprising than Wells Fargo’s negligent response is the dedication of the buyer to purchase this particular property. I spoke with a listing agent whom I hold in especially high regard that can not even get the loss mitigation “specialist” at Wells Fargo to return his calls. He has added this lesson to his client screening process. If the listing looks like a short sale, he now makes a point of ascertaining who the owners’ current lender is and if the answer is Wells Fargo, he walks away.

In my examples above I put the title of specialist in quotes in relation to Wells Fargo because it seems to me the only thing they are specializing in is the portfolio risk to Wells Fargo. My background is in Securities: I was a Series 7 licensed broker and Equity Options trader on the floor of the CBOE in Chicago. My first thought when I hear these stories is to start selling Wells Fargo stock. If their actions are making the short sale of property practically impossible, their REOs are going to climb and their books are going to reflect some very real losses. Not to mention the federal banking regulations regarding what percentage of REOs a bank can keep on the books as a percentage of their deposits. All that aside, the real danger to Wells Fargo is the virtual “freezing” of their position in regards to their ability to negotiate with the professionals in the field (that is to say: the Real Estate agents). If agents begin to walk away from anyone with a Wells Fargo loan the damage is threefold: first, Wells Fargo ends up foreclosing on all of their properties which is a cost nightmare that trickles down to all of us; second, homeowners that are upside down will not only lose access to the experienced agents they so badly need while navigating the winding trails of a short sale, but worse yet will find themselves relegated to using agents too new and/or uninformed to know better than take on a Wells Fargo situation; and last but certainly not least, when no agents are willing to waste time showing a short sale home with a Wells Fargo loan, prices are depressed and buyers view a skewed segment of the housing stock.

Has the experience of others out there been similar to the stories I am hearing? I must admit as a matter of full disclosure that while my lending knowledge and experience extends from shore to shore, my interactions with Real Estate agents is primarily parochial in nature. Are there other lenders acting with such short sightedness that your fellow Real Estate agents should beware?

To Your Success,

Sean Purcell

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS , San Diego, short sales, Wells Fargo

Can You Fly?

As you begin the New Year, take a moment to reflect on your goals and your expectations. Those first days following the holiday celebrations are a great time to review your plan for the coming year and make any final adjustments. Pay particular attention, as you fine-tune your objectives and your strategies, to that little voice in your head. You know the one: the voice that pops up and tells you some of your goals may be a little too lofty. That slight feeling of negativity that creeps up and quietly suggests you should perhaps… think about… maybe considering… possibly… revising that weight loss target – or that promotion. It is the voice of doubt that tells you a promotion would be a better goal for next year; after all, this year is going to be a tough year. As a matter of fact, this voice inside suggests, just getting through the next twelve months without weight gain will be accomplishment enough. Spend more time with family? Earn a promotion? Lose weight? “Why don’t we save the truly aggressive goals for next year, when we are more prepared” is the very logical compromise often proffered by the little ‘helper’ inside us all.

The thing to remember as you review your plan is this: the little voice is not real and the only limitation you have is the limitation you put on yourself. Earlier this year the imaginary nature of limitation was laid bare for me by my 4 year old son. I was taking him to school on a fine, crisp morning and it was too beautiful to drive. As we walked along, holding hands, we watched a large, black bird make lazy circles in the sky. My son looked up at me and asked: “Wouldn’t it be fun to fly Daddy?” I told him that I thought it would be great fun to soar high above the houses and all the people. Then he asked me if we could fly. Here it is I thought to myself: the beginning of the end of childhood. With a twinge of melancholy I looked once more at his innocent face, let go his hand and set in to explain that we can not always do the things we would most like in this life. I struggled to put into words the limitations that we all face as individuals and how we should endeavor to accept them while not losing sight of our goals. I looked down to gauge his reaction and was surprised to discover I had been talking to myself. You see, he was already half way down the street; arms stretched to their limit as mighty wings, legs turning over at breakneck speed, wind hitting him in the face and the wonderful giggling sounds of a four year old trailing behind him. He was flying. And as I began to sprint after him, arms stretched wide, the wind in my face and laughter erupting from somewhere deep inside, I realized how wrong I had been. We can fly… we can do anything we put our minds and our imaginations to if only we mix in a little belief and a lot of persistence.

This year, as you review your goals and take those first, tentative steps toward their achievement, remember that you can indeed fly. You can achieve more than you think possible if only you heed the wisdom of these great words from Jonathon Livingston Seagull: “They can, because they think they can.”

I wish you happiness and prosperity this year, but most of all I wish for you to soar.

To Your Success,

Sean

Filed under: LIFE THAT POPs , Success