Federal Bailouts, World Crisis… What About Little Ol’ Me?

Lots of talking heads.  Lots of outrage.  Even a little fear.  Keeping up with economic developments lately is taxing and I mean taxing in its most negative “IRS and April 15th” connotation.  Last night Brian Brady and I were interviewing Matt Padilla for Bloodhound Radio.  It was a great discussion and got me to thinking about what is (or rather should be) important.  I mean, the whole thing can be overwhelming: how did we get here, who’s to blame, what are the macro ramifications of this massive federal bail-out… makes one feel small and even a little lonely in the midst of this big economic world gone ’round the bend.

So I stopped on the way home for a big shot of wheat grass (substitute whatever manly libation you prefer here), calmed down and eventually found myself a little less interested in what it all means and a little more interested in what it all means to the real estate agent on the street.  In other words: What is the next step?

Last week I suggested that Wall Street’s Meltdown may actually help the housing industry.  Consumer debt will dry up in the credit crunch and this bail-out will not have much impact in that arena.  The financial industry is going to come out limping and take some time to lick its wounds.  Consumer debt has always been a risk and will end up on the back burner for a while, but the need for profits is always there; where will it come from?  Where is the supply of money going to be greatest?  Thanks to Uncle Sam it is going to be mortgage money that flows freely.  But flowing freely is not the same as distributed evenly and this is where the real potential lies for homeowners as well as real estate agents.

By the end of the year conforming loan limits are going to drop.  Here in San Diego they should end up around $625,000.  Under that limit there is going to be a large supply of federally backed (and encouraged) cheap money.  Over that limit, however, it is going to be a ghost town in a dust bowl surrounded by desert.  Over $1 million and it opens up a bit because you are generally talking about buyers with large sums of cash.  But between $625,000 and $1 million the ability to finance a purchase is going to tighten up and so too must demand.  As you may recall from Econ 101, when demand drops so does pricing.  On the other hand, back below the magic limit, the supply of money will create demand and here’s the really interesting part: that demand will bump up against a supply limit.  The supply of homes within that range is finite and the demand for homes below $625,000 will remain targeted; it is artificially capped.  What happens when increasing demand (due to cheap money) meets a finite supply?  Appreciation.

We can expect to see demand driven appreciation knockdown the oversupply of inventory in many parts of the nation over the next year (maybe two).  This will drive home prices up to, but not over, the conforming limit.  At the same time it will depreciate homes that are over the limit, possibly even push some below the magic line.  What does this mean to the agent on the street:

• If you are an agent working with move-up buyers within the temporary loan limits – but over the upcoming conforming limit – their window of opportunity is slamming shut.  Get them off the fence quickly and stop taking on new clients in that price range.
• Buyers below the new conforming range will see upward demand on appreciation in direct correlation to their distance from the conforming limit.  In other words, the closer in value your purchase is to the loan limit, the less appreciation you will see.
• Sellers below the conforming range will see greater demand and more price appreciation in direct correlation to their distance from the conforming limit as well.  In other words, the supply near the conforming limit will grow and appreciation slow (or stop) while the supply at the lower ends will decrease and appreciation grow.  If you already have a listing near the conforming limit, time is not your friend.
• As an agent, your marketing should be divided: for listings, your area of focus is the lower end homes where demand is going to increase and market time decrease.  For buyers, you can expect the best deals to be nearer the conforming limit where supply will grow and pricing will stagnate.

For the next couple of years you can envision real estate as a great freeway with virtually no tolls and cheap gas.  But the speed limit is absolutely enforced.  Cars starting out will see rapid acceleration, but as you near the speed limit there will be congestion and a corresponding drop in enjoyment.  Eventually the speed limit will be relaxed; in the mean time… enjoy the ride.

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , bailout, REALTORS, Wall Street

How Wall Street’s Meltdown Helps Main Street’s Housing

Just for fun, let’s imagine a possible silver lining to the complete melt down on Wall Street.  In this scenario, the next big shoe to drop will be access to consumer debt.  No one is going to extend car loans, credit card debt, retail debt and so on.  But this may not be all bad for our industry.

Imagine John & Mary Homeowner talking about their day.  John says gas prices are up and his long commute is killing them.  They need to buy a different car.  “But no one is lending money for new cars,” Mary replies.  John decides that if he can not have a better ride, he will have a better destination.  “Let’s add on a nice deck for me to enjoy after my long commute.”  Mary smiles pleasantly and reminds John that no one will extend an equity line for home improvement.  Exasperated, John suggests they just buy a jacuzzi and settle for some easy relaxation.  But Mary points out that no store is offering credit, so large purchases are largely impossible.

What do you suppose John and Mary do?  What about next Sunday, out for a drive, when they see a nicer home, closer to work, with more square footage – and they realize they can own it for the same payments they are making now.  What happens when the only money available is purchase money? Thanks to Fannie & Freddie (and FHA, VA) home loans will be plentiful while every other kind of debt will disappear for a while.

Supply and demand… the meltdown might be just what we needed.

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , bailout, Real Estate Future, REALTORS, Wall Street

How Do You Move Buyers AND Sellers Off the Fence?

The key to marketing is not so much the how as it is the how often.  The problem though is content: what are you bringing of value each time you touch your client?  We currently have a tremendous opportunity.  The recent rate drops by the Fed have been severe and there are a number of possible outcomes.  I have discussed them before and Option 3 was more fully explored by Dan Green.  But they can be a great source for marketing material that raises your perceived expertise.  More importantly, this information can be used to move buyers AND sellers off the fence.  How is that possible?  Follow the bouncing ball of fiduciary obligation:

Outcome 1: The cost of money drops enough to bring buyers back to the table.  This leads to a window of relative parity in supply and demand.  BENEFIT: both buyer and seller benefit by acting now. 

Outcome 2: People view the rate drop as confirmation that economic problems are worse than originally imagined and pull back.  This decreases demand over time and housing prices continue to fall.  BENEFIT: seller benefits by acting now.

Outcome 3: Rate drop could be too much, setting off an inflationary cycle that the Fed has dreaded for some time.  Affordability drops over time due to the higher cost of money.  BENEFIT: buyer benefits by acting now.

As you can see, each option lends itself to someone acting immediately and here is the key point: we do not have a crystal ball.  The market is going to move (it always does) and it is going to benefit one group over another.  We might hope it moves in a specific way.  We might even expect it to move in a specific way.  But we do not know.  It is this acknowledgement that gives us the edge in helping both our buyers and our sellers act now.

An agent’s fiduciary obligation is to look out for their client’s best interest.  It should go without saying that all options be explained.  But when discussing a clients’ home, their best interest is usually aligned with their safest one and that means minimizing risk is more important than maximizing reward.  Now look at the following two conversations:

Conversation with seller: “Mr. and Mrs. Seller, after reviewing these outcomes, I believe we should focus on #2 and act now.  If we are wrong, the downside is you sold for less than you might have had we waited.  But if we are right and do not act, you may not sell your house at all.  By comparison, the latter is far worse to your financial position.”

Conversation with buyer: “Mr. and Mrs. Buyer, after reviewing these outcomes, I believe we should focus on #3 and act now.  If we are wrong, the downside is you paid a little more for your dream home than you might have had we waited.  But if we are right and do not act, you may never get into your home.  By comparison, the latter is far worse to your financial position.”

Now the clients are impressed with your expertise (which leads to referrals); of much greater importance, however, you looked out for the best interests of both your buyers and your sellers.  Icing on the cake: you are moving twice as many clients off the fence and into action.

Filed under: LIFE THAT POPs, REALTORS , Fed, inflation, REALTORS, recession, Success

60 Minutes Has No Clothes

I ran into a former coach of mine at the gym this morning.  He was a mentor of sorts to me and had a big impact on my life during my formative years.  He knows that I am involved with the real estate and mortgage industry and brought up the 60 Minutes piece that aired last night.  Now I make a dutiful habit of not watching this program, as I find that most of their stories contain what you might call a “slant” to them.  But because this man, whom I respect, had watched it and found it disheartening I thought I would check it out.  Herewith, comments on the king of News Magazines… from the peanut gallery:

The story was called “House of Cards” and it was hosted by Steve Kroft – a nice enough man.  His report was definitely more balanced than I had expected and a lot more balanced than I am used to seeing in the mainstream media.  I do wish, however, I could be there to interject some questions when they create these vignettes.  It starts off with the standard bit about lenders making terrible loans and greedy Wall Street investors buying them up and implies that this whole debacle has been “done to us”, but by now I am used to hearing such pablum.  They introduce the main area of the story’s interest as Stockton, CA, which became extremely popular for people that were priced out of the Bay Area and Silicone Valley.  Of course, this leads me to wonder how much worse it must be in those two areas if Stockton was hit so hard.  This is not addressed and I doubt the answer would have fit neatly with the show’s point.  We then hear that half of the homes in foreclosure received sub-prime loans and this is blamed on the ludicrously lax lending standards at the time.  Again, I am led to ask just how ludicrous they were since the other half of foreclosures were apparently made by the more stringently underwritten lenders rather than the bad, bad sub-prime people.  I guess that is information for another story.  Mr. Kroft went on to cover the same, tired explanations:

• ‘Stated income loans were out of control’. – Yes, stated income may be the leading cause of the problem, but not because lenders just accepted any number you wrote down.  Most lenders independently checked stated income against accepted averages within the borrowers’ industry – using such sites as salary.com – and many stated income loans were denied because the income was not reasonable.  The reason stated income loans are the leading cause of the current mess is because borrowers LIED about their personal income while keeping the numbers within reasonable limits.  You can lie to the lender all you like, but you can only lie to yourself for so long.
• Lenders “didn’t keep their dicey loans” in their own portfolios but rather sold them off to Wall Street. – This implies some type of nefarious intent when in fact this is how the vast majority of loans are made.  If the loan was not sold to Wall St, there would be no further cash to make new loans.
• Best explanation of all: these purchases were predicated on home values going up, which they did for a long time but then the bubble burst. – So in effect the people getting hurt are generally the “last in”.  This is not unique to real estate.  Any investment will eventually drop in its cyclical journey.  On Wall St. there is a saying: “the market moves to hurt the most people.”  Which is the contrarian way of saying that by definition the market must move and it must move away from the most pressure.  So also by definition the last in will be the ones that are hurt.  Many before them, however, made out just fine on their investment.  Is the implication of this line of reasoning that no one should ride the wave when an investment is increasing in value?  Do not jump in because someone has to be the last aboard?  That type of thinking would cost a lot more money in lost potential gains than is being lost to foreclosure in my opinion
• One last note: Mr. Kroft was careful to point out that there are currently 4200 homes in foreclosure in Stockton, but gave us no frame of reference with which to understand this.  To wit: how many homes are there in Stockton?  In San Diego, for instance, the number of foreclosures is .006 of the entire housing stock (that is 6/10 of 1%).  While depressing to those going through it, certainly not a staggering number on the community as a whole.

There were other aspects of the story and it was more balanced than I may be alluding to here, but my point remains the same.  When your clients see this type of report, Realtors have an absolute obligation to question it and look between the lines.  The job of the Realtor is to advise their clients on all aspects of the real estate market and sometimes that means crying out “The emperor has no clothes.”

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS , foreclosures, press, REALTORS

How to Avoid Drowning as a Realtor

adapted from a speech given to Realtors January 17, 2008

Last week I suggested our theme be “A Great 2008“, but we need to remember that more than just attitude is needed.  This is the time to talk about skills and confidence as well.  I often note that being a Realtor is similar to racing a triathlon: it is an endurance event, not a sprint.

To become a better runner is relatively straight forward: run more.  The same can be said for the bike.  While there are techniques and drills that will certainly help, the thing you can do that will have the most impact is bike more.  Swimming, on the other hand, is a bit counter-intuitive.  When you come back to swimming and you want to improve, more is not better.  Water is much denser than air so it magnifies mistakes in technique or mechanics.  If you want to improve your swimming you back down on the yardage and do more technique work, more drills.  If you simply swim more you only become a poor swimmer that can swim for a long time.

The last few years of real estate have been a lot like running.  If you wanted to earn more money you simply worked more hours.  But last year the market began to change.  It became more resistant and problems of technique or mechanics were magnified.  Now is the time to back down some of the hours (I know how counter-intuitive that sounds) and work on your skills: dialogues, drip campaigns, marketing systems and so on.

In a triathlon a good swimmer will do well some of the time, and a good cyclist will do well some of the time and a good runner will do well some of the time.  But those that quickly recognize and react to transitions are the ones who consistantly find their way to the winner’s podium.

Filed under: REALTORS , REALTORS, Success, Triathlon