- The Bay Area’s housing market during the first quarter could best be described as hyperactive and intensely competitive as high demand and low supply once again drove up prices. Inventory is at 20 year lows in some areas of the county, according to Steve Murray of Real Trends, and the Bay Area is no exception. After years of sitting on the sidelines, buyers are back, feeling confident that the real estate market is once again golden. The low inventory and abundance of buyers has led to an unbalanced market, tipped solidly in favor of sellers.What does this mean? It means that prices are rising, homes are selling faster and we’re seeing multiple and, in some cases an increasing number of, all-cash offers. Across the eight Bay Area counties in which we are active, we saw the average price of a single family home jump 29 percent to $664,187 compared with the same period a year earlier. With little supply, buyers are being forced to act fast. The average number of days on market declined to 45 across the eight markets, a drop of 32 percent from the first quarter 2012. Although prices have returned to pre-2007 levels, volume has not as the rising prices are not enough to draw sellers into the market.Another significant trend that we saw was a significant uptick in all-cash offers. During the first quarter 35 percent of McGuire transactions were all-cash. In some areas that number was much greater – cash deals accounted for half of all transactions in Marin County first quarter, for example. In many cases, buyers are paying in cash to make their offer more attractive to sellers. These buyers are then turning around after the deal closes and financing their homes.Finally, we are beginning to see interest rates climb. Freddie Mac data shows the average 30-year fixed loan rate was 3.63 percent in early April, the highest in more than six months. Experts say this is not necessarily bad news for the housing market in a recent Fortune magazine article. First, it’s a sign of that the U.S. economy is strengthening, which is clearly good news for the housing market. Second, it may spur even more buyers into action as they hurry to buy before rates rise more significantly.The busiest season of the year for real estate is now upon us and we have not seen any significant increase in listings. I expect the low levels of inventory will continue to drive prices upward, at least in the short-term. Looking to the second half of the year, I expect much of the same as low supply continues to drive a sellers’ market. In order to return to a more normalized market, we must see a balance of power between buyers and sellers, which won’t happen until supply and demand are on more equal footing. Ultimately, the key to a healthy, sustainable real estate market is job creation. While we feel “blessed” for our local market successes, we can really only feel confident when U.S. wealth production per capita expands.
To view the complete report, visit mcguire.com/quarterly_report
Charles E. Moore, CEO
Around the Bay Area, prices were up in the third quarter, the pace of sales quickened and volume increased. This is, without question, good news. The worst of this down cycle is behind us and prices are beginning to rise again. This mirrors an overall economic trend: The Conference Board’s Consumer Confidence Index rose to 72.2 in October, its highest level since 2008. However, while I expect to see continued stable and steady growth, I also expect that growth to be slow. The recovery that we’re seeing is fragile and is destined to take much longer than what we’ve seen in past cycles. Whereas real estate has lead us out of past recessions, this time a sustainable real estate recovery will follow private sector job creation.
One particular trend that we’ve seen in each of the Bay Area markets this quarter is a shortage of inventory. There are more buyers than sellers in the marketplace right now and this is a major driver of the price increases we’re seeing across all our markets: San Francisco, the Peninsula, the North Bay and the East Bay. So what is limiting our supply? Although home prices have risen from the lows of the last couple of years, they remain well below the high water mark set in 2006-2007. Many discretionary sellers are unwilling to consider putting their homes on the market when they know they are going to get significantly less than they would have five years ago and, in some cases, less than they paid. This is limiting supply and creating an imbalance between buyers and sellers that is driving up home prices.
Another significant trend during the quarter is rising prices for luxury homes (the top 10 percent of homes) in the Peninsula and San Francisco markets. This is exactly what I’d expect as these markets have the strongest ties to the biotech and tech industries, the two industries that are fueling job growth in our region. Confidence in the tech industry is again on the rise. The University of San Francisco’s School of Management, which uses its Silicon Valley Venture Capitalist Confidence Index to assess the health of the region’s tech industry, found an increase in confidence in the third quarter. The index measured 3.53 out of 5 in the quarter, up from its low of 2.7 in 2008. The real estate market is also benefiting from strength in the biotech sector. Hiring at biotech companies in and around the industry’s South San Francisco hub has increased demand for Peninsula homes at all price points, driving up the average price of a single family home in San Mateo County 18 percent to $1.12 million compared with the third quarter 2011. San Francisco’s luxury home market also saw significant appreciation in the quarter, particularly in the city’s southernmost neighborhoods from which the commute to Silicon Valley is the easiest.
As we look toward the end of 2012, I am optimistic that we are on our way toward a recovery. Prices are again rising and the worst is in the past. Yet as we begin climbing out of this down cycle, it is important to remember that it just as took many years of frenzied bidding and bad habits to push the market to the record high, it is going to take some time to recover from the subsequent lows.
To view the complete report, visit mcguire.com/quarterly_report
Charles E. Moore, CEO
The calendar says that summer is officially over. Fall brought with it record temperatures and the SF Giants moved on to the post-season — winning the NL West Championship for the first time in six years. And while the National Bureau of Economic Research declared that the recession, which began in 2007, had in fact ended this summer in June of ’09, the fall did not follow suit: high unemployment rates and low consumer confidence still plague the economy.
While the housing market may be fragile in the Bay Area, it is certainly not obsolete. If you’re realistic and understand the local market, there’s still a good amount of opportunity for both buyers and sellers in the Bay Area. Last month, a 3 bedroom, 2 bath condo in Cow Hollow sold for $218,500 over its asking price. After two weeks on the market, it received over 10 offers and closed for $1,097,500 with an all-cash buyer. In Berkeley’s Claremont neighborhood, 2808 Woolsey Street recently sold for $1,270,000, which was $105,000 more than the seller’s asking price. In both cases the properties were located in highly-desired neighborhoods and were priced attractively.
On average, homes in Berkeley, Piedmont and Oakland are selling for about 97 percent of asking price. While there are plenty of deals out there, not every seller is willing to negotiate, especially those without financial burdens. Most seemingly low deals right now involve motivated sellers who are hoping to avoid foreclosure with a short sale. A client recently made a $700,000 all-cash offer on a home in Walnut Creek listed for $849,000. Although it had been on the market for over 150 days, the owners were insulted by the bid and didn’t even respond. Unwilling to compromise, the house came off the market and both parties walked away empty-handed. Agents on each side agreed that, if the home had been priced at $800,000, it would have received multiple offers and sold within weeks.
Another agent helped clients sell their 4 bedroom, 3 bath home in Burlingame’s Ray Park neighborhood. It stepped on the market in July just under $1.5 million and was quickly reduced to $1,398,000. The owners were certain that a $100,000 drop in price would attract multiple offers. Yet, in the end it received one offer and closed for even less at $1,330,000. Having lived in the home for 40 years, the couple walked away with more than they had paid, but were surprised to see it sell for the price of a smaller lot down the street. The agent explained that buyers are willing to pay more, but only if they perceive value to be true. For example, places like Burlingame’s Eastern Addition — which has always been in popular demand — is being seen as “too expensive.” People are choosing to go around the corner and pay less for a home in the same school district with the same amenities.
As expected, more than 200 homes appeared on San Francisco’s multiple listing service (MLS) the day after Labor Day. There’s an influx of inventory but also pent up demand from summer. While buyers have their pick, attractive properties in great locations and are reasonably priced are sure to go fast.
I continued to tell agents, “if this market feels like wading through molasses for you, imagine how it feels to your clients.” With such economic uncertainty right now, it’s our job to provide clients with the knowledge they need to make informed decisions. That will never change. But what will change — for the better — are Bay Area real estate prices. It’s just a matter of time. Perhaps a long time: First Tuesday Journal.
Using baseball vernacular, homes sales are indeed in a slump. Yep, there’s no getting around it: home sales took a nation-wide beating during the month of July. You can be hopeful or deeply concerned about the health of our economy, but either way, last month’s numbers were a tough pill to swallow.
On a national level, sales were off 27.2 percent versus the previous year, nearly double what analysts predicted. Bay Area sales fell similarly, down 23 percent.
While a double-digit drop in sales is a sobering experience for any industry, these averages paint a very broad picture. The data vary largely by county, city, and price range. For example, homes in the $100,000 to $250,000 price range were hit hardest, but the $1 million plus category remained steady.
But it was not a complete shock. A stream of homebuyer tax credits has kept the market artificially buoyed over the past year. The last round of California incentives ended on June 30, so a noticeable drop in existing home sales was expected for July.
A recent article in the Wall Street Journal declared the Bay Area rebound as “uneven” and I’d have to agree. The ending of the tax credit certainly stalled some markets, but summer vacations may be to blame for others. Last year buyers took “staycations;” this year traveling expenditures increased.
Here is a recap of Bay Area real estate activity by county.
In Alameda County, July transactions fell more than other counties – 26.5 percent – while inventory increased by 10.2 percent. But this doesn’t tell the whole story. Certain parts of the region are impressively competitive. In fact, in ZipRealty’s Q2 Home Hunter report, Berkeley’s 94703 zip code is the country’s “hottest” zip code, with homes selling on average for almost eight percent above the asking price. And Oakland’s 94621 and 94603 made the top five. What’s more, the median home prices in Oakland were actually 37 percent higher than the year before.
Marin escaped the grim headlines as the number of homes sold actually increased 1.2 percent from July ‘09.
- Of the 1,313 properties for sale, there were 172 purchases and 163 homes under contract by the month’s end.
- The county also experienced a rise in the median price of homes sold. Where $758,000 marked the average selling price a year ago, that number increased 4.8 percent for a new median of $800,000.
Overall, Marin activity remains positive, but there has been a noticeable shift in what’s attracting offers. Product and price point are the driving forces behind our market right now. We’re seeing an influx in fickle shoppers who are concerned that the market will continue to decline, and don’t want to buy too early. They are passing up homes that are priced unreasonably high because they believe more bang for their buck exists elsewhere — and in some cases elsewhere is less than two miles away.
Take, for example, the cities of Greenbrae and Kentfield. They offer similar amenities and even share the same school district. But last month Greenbrae saw 53 percent of its listings sold or under contract, while the neighboring Kentfield were half that at 28 percent. So what gives? About a million dollar difference in median home price. Heidi Pay, who manages McGuire’s Corte Madera, Mill Valley and Tiburon offices, describes the Marin market as extremely school-driven. Therefore buyers have incentive to spend $1 million versus $1.9 million if it means they’re still reaping the same rewards.
The same can be said for Corte Madera and Larkspur, where the average home in Corte Madera sold for approximately $325,000 less than one in Larkspur. Corte Madera had 73 percent of its market under purchase contract last month while the activity in Larkspur was much lower at 31 percent.
Home sales in San Francisco dropped from the previous year. This fall was larger than expected, with July sales down 17.4 percent – but less than the national and regional averages.
- Month-to-month activity began slowing in May and has yet to pick up again.
- There were fewer homes on the market in July than June, but purchases still slumped 16 percent over the course of the month.
Yet it’s worth noting that if priced correctly, a seller’s San Francisco home is likely to sell as quick as it came on the market. This is common in markets like the Outer Sunset where buyers and sellers are educated about home values in their area. Last month an attractively-priced four-bedroom, two-bath home in the Outer Sunset received 15 offers and 500 viewers in the first week. “It’s a unique market, and if you’re so much as a dollar off, you’re headed for trouble,” said Mike Riordan who handled the sale at 2467 22nd Ave. The contract is currently pending, but this single family home is projected to close far over the asking price.
San Mateo County
San Mateo County had a 4.6 percent drop in home sales, but the number of homes under contract increased by 9.5 percent from 2009. Median prices in San Mateo have increased steadily over the past three months. In July, the average home sold for $30,000 more than in June and $90,000 more than it did in May.
Overall the Bay Area’s housing markets performance was much weaker than we had hoped for. We expected the June 30 tax credit cut-off date to cause a drop in sales but by much lower margins. August seems to have made up for July’s disappointment, but high unemployment rates and low consumer confidence remain serious roadblocks. September now faces a lot of pressure. That’s when we’ll see inventory levels rise and a surge of purchase activity before trickling off for the rest of the year.
I was recently asked to speak on this topic at the Inman Agent Reboot Conference on July 12. Intero Real Estate Services CEO, Gino Blefari, Pacific Union International CEO, Mark Mclaughlin and I discussed navigating through the Bay Area’s changing landscape and steps to ensure future success. I have condensed my presentation into the following blog post. I hope you find it helpful.
“We can’t wait for the storm to blow over; we’ve got to learn to work in the rain.”
-Pete Silas, Former Chairman of Philips
I find great wisdom in Silas’ words when thinking about today’s real estate market. Amidst this recent structural recession, we’ve had to navigate through an age of instability. Economic woes have rattled us to our very foundation.
Change is inevitable. In fact, if you haven’t experienced any change around you, then something is wrong. So the looming question is: what do you need to do as agents to adapt in order to survive this chaotic market?
For decades, the real estate office was simply a place for desks, phones, e-mail and leads — a place to hang your hat, if you will. However, our future looks vastly different. Two types of companies will emerge:
- The Comfort Company: Similar to the historical model, peaceful coexistence is the main measure. This company does not challenge its agents or invest in future technologies. While it may look stable today, its very survival is in doubt. It will be slow to change, if at all.
- The Alpha Company: This is the company that does the “change” work necessary to remain relevant, viable and profitable. They take the necessary steps to morph into customer-serving knowledge centers. These companies are equipped with the tools, services and servers. And these companies will do better in attracting the Alpha Agent, as well – the agent also willing to adapt, grow and thrive.
The Alpha Company and its agents remain aligned and share the same corporate philosophies, goals and purposes. These survivors have adapted to market forces with complete system overhauls and revamped corporate cultures. The result is improved services and technologies, which include the “Alpha Tool Box.” This keeps Alpha Agents and companies in constant contact with their customers.
Alpha Company Tool Box:
- Strategic customer connected websites. They are in perpetual motion and are driven by consumer needs.
- Automated distribution of listings to all critical listing syndication sites like Realtor.com, Trulia, Zillow, etc. The more distribution points the better.
- CleanOffer gives the client full access and control to search the entire multiple listing service (MLS). The application notifies the agent of the client’s searches, likes, trends and new activity.
- Robust statistical research program (Altos Research) that packages statistical market information into easy to use marketing vehicles (online charts, customs graphs) for e-newsletters, blogs and websites.
- Online transaction management for both the agent and the client (SureClose), allowing them to view real- time transaction documents online, making information transparent.
- DocuSign grants the ability to electronically sign documents of all sizes at any time. It’s a great way to facilitate transactions as quickly and smoothly as possible.
- Disciplined training for social network sites and blogs such as Facebook, Twitter, LinkedIn and more.
- Develop unique content which generates leads via Facebook, personal and corporate blogs, Trulia Voices (discussion groups) – whatever is most appealing to you as an individual.
- Customer Relationship Management (CRM) software like Top Producer, BatchBook and eTacts.
In recent years, new technologically-savvy agents have experienced great success at Alpha Companies (often at the expense of seasoned veterans) by adding value through technology. Customer longevity, old relationships and loyalty are all at risk because the consumer is seeking value above everything else. There are important traits the Alpha Agent needs to thrive:
- Market knowledge expert
- Heighten communication skills
- Committed, available and timely
- Works in harmony with management and aligned with company culture
- Team player
- Inspires trust and is credible
- Makes smart decisions (price, price, price)
- Behaves like an owner
- Copes with change without breaking stride; remains upbeat and always in control of individual moods
- Strong ethical muscle
- Interesting and fun
When one combines the Alpha Company with the Alpha Agent, you create a culture and community of “we.” It is an association by “affirmation,” where all join in calling it “My Company.”
So, ladies and gentlemen, agents and companies, this is the life we’ve chosen. The question remains: through the rain, are you ready to work? And when opportunity knocks, be prepared to answer the call.
In the wake of the financial disaster of 2008, many of us are still trying to understand what went wrong. Why did the bubble burst? Who is responsible? What could have we done to stop it? Can the problems be traced to real estate and toxic mortgages, as many of the talking heads would have us believe?
The real estate industry is not the only contributing factor to the recession. Investment banking, consumer/mortgage lending, commercial debt, and the Government Sponsored Enterprises (GSEs) Fanny Mae and Freddie Mac all played their parts. There is clearly enough blame to go around; auditions for the principal scapegoat are now in progress and are likely to continue for some time.
Currently a groundswell of opinion has emerged linking bad mortgages to the root cause of the real estate meltdown. This position is understandable since the development of mortgages and mortgage-backed securities (MBS) has paralleled the expansion of the residential real estate market over the past 20 to 30 years. The man or woman on the street views MBS as the proverbial mysterious black box that can be tolerated or ignored when times are good and discarded when not.
WALL STREET’S ALCHEMY
What exactly is a mortgage-backed security? In its simplest form, it is the pooling of mortgage loans with similar yield and maturity where all investors receive a share of principle and interest received (less fees associated with the administration/servicing). Over time we have witnessed increased complexity in both the structure of the security and type of loan collateral used to create the pool. Today the typical pool is divided into a variety of traunches representing a variety of risk vs. return options for investors.
A colleague once related a revealing story: he met the owner of a large mortgage brokerage who waxed poetic about the growth of his business and praised Wall Street for its role in simplifying loan underwriting. Later, he felt compelled to ask the gentleman, “Would you use your own money to write an adjustable no income verification 90% LTV jumbo loan?” He looked stunned, “Not a chance! We underwrite the loan to investor specifications whether I agree with the decision or not!” He went on to say that although the underwriting on an individual loan basis was weaker than he would accept for his portfolio, the Wall Street models adjust for this by making the loan statistically insignificant due to the size of the pool.
In reflection, it is impressive that Wall Street, through some form of wizardry, was apparently able to make bad loans better. I believe this is the core of the issue.
WHAT WENT WRONG?
First of all, let me state that the mortgage-backed security in itself is not the problem. It is effectively the greatest financial innovation in real estate lending since the mortgage. However, it was the financial system that failed to protect its customers, employees, investors and the markets it served. There were 4 primary causes for this failure:
- Unappreciated Risk. Few of those involved in the process had sufficient knowledge of the structure of the mortgage security and/or an appreciation for the associated risk. Those responsible for the structuring of the security did not understand the underwriting and relied on reps and warranties provided by the originator/aggregator. Although originators questioned underwriting standards openly, many truly believed that Wall Street and the GSEs knew what they were doing. Besides, with profit at record highs, why complain?
- Operating in a Vacuum. Part of the problem with MBS was that each player who helped build and sell them operated in somewhat of a vacuum, comforted by the representation and warranties provided to the investors. In this environment the originators wrote the loans using established underwriting and forwarded their work on to the wholesale lender/aggregator, who forwarded the loan to the issuer/investment banker, who packaged the security for sale to the investor. This workflow permitted the actors to delude themselves with the belief that the other guy was doing what they were supposed to and that ultimately Wall Street’s “black box” would make it all work.
- Unscrupulous Players. Whenever there is a lack of understanding in a market there is an opportunity for some to take advantage of those with less knowledge. The mortgage market has suffered from more than its share of malfeasance. There is widespread evidence of mortgage brokers who used the no income verification loans as a license to steal, and fraudulently sold misrepresented loans into the secondary market. Sadly, many of these individuals appear to be ethically challenged and do not view their actions as wrong or illegal. Other evidence has surfaced indicating that as the enormity of the problems began to surface, investment bankers, lenders, and others used whatever means at their disposal to pass the exposure on to some other unsuspecting party.
- Incompetence. Finally, can there be an excuse for incompetence? Who came up with the no income, 100% loan to value mortgage? Can underwriters, investment bankers, Congress, GSEs, lenders and last but not least the rating agencies be excused for being stupid and not protecting their clients and investors because “they knew not what they were doing?” You may want to forgive, but accountability and incompetence cannot be forgiven in the financial markets. Too many people suffer.
The sad truth is that the great achievement of MBS is not the reason for the current state of affairs. Rather it is the mismanagement and complacency by those entrusted to realize its promise who has failed.
In order for real estate and economy to rebound, I believe a strong MBS market is critical. For this to occur we must do what we need to regain the trust of the investor. The triple A security must be rated correctly, and checks and balance must be introduced to eliminate the mistakes of the past. Borrowers must have a stake in the game and be motivated to protect their equity. Home ownership cannot be forced.
It seems only fitting to conclude with the words of former President Reagan: “Trust but verify.” Each of us must be personally accountable to one another, and we must hold others accountable for the jobs they are entrusted to do. After all, we are a great people and a great nation. We can get out of this mess, but it will take time, trust, intelligence, and a willingness to take responsibility for our actions.
“When will things get back to normal?”
It’s a question I’ve heard a lot over the past 18 months. As business and commerce continue to run at a slower pace, it’s important that we challenge and inspire ourselves to find resurgence. It can be difficult to adapt to our financial circumstances. Listening to the current trends, opinions, and solutions can be both confusing and misleading. Yet, understanding certain information right now has the power to protect our personal and professional lives in the future. So where are we now?
First, let’s roll back the clock to September of 2008 – all of our lives changed. Unaware at the time but inescapable now, we were hit by a perfect storm. Early on, many failed to recognize the severity of this “great recession.” We mistakenly categorized these changes to be another cyclical market adjustment, when in reality a major structural meltdown had occurred to the nation’s financial system. The dispute is over and it’s clear: the tides rose and pushed us back from what we believed to be solid ground. Weathering this storm has required us to rethink our habits, needs, and choices.
It’s been 18 months since Lehman Brothers collapsed. Turbulent real estate waters still remain. A blanket of indecision now hangs over consumer’s heads, filling the void that once housed artificial strength and minimal oversight. The seven-member committee of economists recently met and identified signs of recovery but hesitated to declare an official end to the recession. They concluded that “consumers are still saving and not spending, as if they think this thing is not completely over.”
Hell in the Hallway
So where do you go for answers? Current trends and fundamentals are great indicators for future market activity. Be aware of your circumstances:
- Last month California’s jobless rate stood at 12.5 percent, but factor in those currently underemployed for a combined total of 20 percent. Until more jobs are created and foreclosed properties are absorbed, the housing market will remain unstable.
- Through its mortgage-backed securities purchase program the U.S. Treasury kept interest rates artificially low for the past two years. With the $1.25 trillion in funds allocated now gone, interest rates have already jumped.
Elements at this magnitude will indeed prolong the recovery process. “When one door closes another door opens.” As true as this may be, there’s an important step missing and it’s what comes in between doors — hell in the hallway. Flick on the lights and that’s exactly where you’ll find our current housing market, in its very own purgatory.
To survive this storm you must embrace the change. As the economy slogs along at an anemic pace, caution and opportunity are the words to live by. When the next door opens, we must be ready.
“We can’t wait for the storm to blow over; we’ve got to learn to work in the rain.”
–Peter Silas, former Chairman of Phillips Petroleum