Interest rates are very low now. 4% is the “normal” conventional mortgage rate. To see what that means for monthly payment, look at the chart below. Things change a bit for mortgages above $400,000, so-called “Jumbo” loans, so I have not included them. You’ll note the difference a change to 5% interest makes: more than enough for a decent restaurant meal each month.
The basic process for buying a short sale is similar to an ordinary sale with one extra step.
As usual, the buyer will make an offer. That offer will be presented to the owner of the house. Once the owner accepts the offer, the extra step happens: the offer will be presented to the bank that owns the mortgage. The bank will accept, decline or make a counter-proposal.
Pretty straight-forward, right? But the reality of “buyer must move quickly while the bank moves ever-so-slowly” frustrates buyers, agents and mortgage brokers. You, as the buyer, need to be prepared for long waits (think three or four months) for a decision by the bank. Once an offer is accepted by the bank, there will be pressure on the buyer to hurry up and close. Why would you put up with this? Just today I was looking at a waterfront condo on the market as a short sale for $390,000. This condo sold nearly six years ago for $530,000. If one were available, a market value transaction would be at about $480,000 based on the offerings in the building. A savings of 20% is a good reason to be patient.
When you look at short sales, you should have your financing lined up and ready to go, and you should take a notebook and a camera with you. These are to document in writing and with photos everything that needs repair so that you can later find out what the costs of the repairs will be. The owner will not pay for any repairs and neither will the bank. So you will want to be sure that you know what to expect in the way of additional costs after you close.
You’ll need your financing letter in hand, whether you make an offer on a short sale or on an ordinary market transaction: a copy of that letter must accompany the offer. In today’s competitive short sale market, supplying proof of ability to buy after an offer is accepted is no longer a viable approach.
Buying short sales is a different experience than buying in a non-distressed situation. Buyer expectations need to be modified accordingly. Sellers are not going to spend any money making the property attractive to buyers nor will they do repairs. Why? Because they have no incentive to do so. They are losing money no matter what, and any money they spend increasing the attractiveness of the house just adds to their losses.
So, as a buyer, if you want to avail yourself of the bargain price that short sales can offer, be ready to take the imperfections as part of the package. If you aren’t ready to do that, stick with voluntary sales, albeit at higher prices.
Buying short sales is a different experience than buying in a non-distressed situation. Buyer expectations need to be modified accordingly. Sellers are not going to spend any money making the property attractive to buyers nor will they do repairs. Why? Because they have no incentive to do so. They are losing money no matter what, and any money they spend increasing the attractiveness of the house just adds to their losses.
So, as a buyer, if you want to avail yourself of the bargain price that short sales can offer, be ready to take the imperfections as part of the package. If you aren’t ready to do that, stick with voluntary sales, albeit at higher prices.
Yesterday, in Seller’s Tips, I wrote about a pair of just-constructed houses nearThompson Rd, and area I choose to refer to as “Bonny-Bauer.” That is basically a combination of Bonny Slope and Bauer Woods, the other “Bauer” subdivisions, and the mostly newer construction in between. Today, I will provide all the numbers.
At the moment, there are 33 homes for sale at an average price of $509,000. The median price is $499,950 which suggests pretty good uniformity of neighborhood or a bell-curve (Normal Distribution) or perhaps both. The low price is $370,000 and the high price $760,000, a multiple of just over 2. That is another indicator of a desirable housing mix. The most expensive house is 4,450 sq. ft. and the least expensive 2,000 sq. ft. However, the largest house is 5,170 sq. ft. and the smallest only 1,150 sq. ft. That discrepancy makes the bells go off in my head.
The smallest house is perched atop 2 acres of dirt. In better times, a developer might be inclined to buy the property to subdivide into five or six lots, perhaps not even tearing down the house. At any rate, we know why the smallest house is not the least expensive, which is what we should expect.
The largest house includes about 400 sq.ft. of unfinished space which makes it a little closer in size to the most expensive. Both sit on large lots. The former is an extensive remodel of a 70s house, while the latter is mid-90’s that now has granite surfaces. It is interesting to me, although not significant, that the tax assessor values the larger home at $200,000 less than the smaller. While I am in agreement that the market is likely to value the smaller house at a higher $$/sq. ft. figure than the larger, the difference between $171/sq.ft. and $126/sq.ft. seems excessive to me. It will be interesting to see what the eventual selling prices are.
Detached single family residences, as they are termed by the appraisal industry, are lovely in Forest Heights. Homes currently on the market range widely in price, as do Forest Heights condos. The range is from $399,000 to a handsome $1,499,000. The average listing price of $688,000 converts to an average price per square foot of $186. As much as make-believe statisticians like to talk about average prices, averages are often misused, especially in real estate.
Forest Heights supports a wide range of views, no small consideration for buyers of up-scale to high end homes. The differences can send price per square foot up or down by 15% or more. The intent of the developers was that each house should be unique and that the variety should contribute to the charm of the neighborhood. Interiors and interior finishes also vary. Consequently, buyers often look at several houses before they find their new homes. Average cost per square foot is a good starting point, but a buyer will want to use an expert to help him or her evaluate the asking price.
Homes in Forest Park that have been correctly priced have remained on the market about three months if brought to market in the past six months. During the entire past year, not the strongest real estate market of the past several years, properly priced homes have taken about four months to sell. One lesson a buyer should take away from these numbers is that if he or she finds a home that is a good fit, and if the hired expert thinks the price is “right,” the best move is to offer at or very near the asking price.
A word of caution: do not think you can buy an appraisal from a mortgage appraiser, which is the same as saying from an appraiser who does large numbers of cheap appraisals to make his living, and come away with a meaningful opinion. Mortgage appraisers, who may charge only $400 for a private appraisal, focus on “How many appraisals per day can I do.” When I was appraising for court, the question was whether I could manage as many as two appraisals per week. When appearing on the witness stand, thoroughness and quality matter more than how many.
Today I’m showing charts of the new housing starts broken down by region. The regions are: Northeast, Midwest, South and West. I should note that the numbers I’m using are US Department of Census numbers.
I was surprised to see how many new homes are being built in the South; and, I was surprised that all four regions have similar chart configurations. This is a bit of a contrast with the ten city analysis of housing prices. While it is hard for me to understand why builders would want to build while prices are falling, they have been. That is good in that it has created or maintained jobs that would otherwise not be there, so hooray for the courageous builders and their bankers (I’ll bet none of them were bailed-out Wall Street banks…). And now the charts:
We looked at sales a bit in prior posts. One of the important things was there seems to be hope on the horizon for home sales to start back up. This is important because home building is one of the largest employers in the US. Sales of existing homes is important; if existing homes are not selling, not many people can afford to buy new homes. Today, let’s look at a chart of new home construction. This chart lumps detached single family homes together with multifamily homes and apartments. I will look at the numbers by region and by sector over the next several days, but for now building is building and jobs are good.
In light of earlier discussion, it will probably be obvious that I am looking for this chart to turn up. How will I know? When new starts have gone up to 150 — that’s 150,000 new starts in a quarter — the chart will tell us that the construction industry is making a serious effort at rekindling growth. When the chart gets above 200, we can feel confident that, absent a sudden and unexpected economic event, our economy is on the road to recovery.
These numbers are not seasonally adjusted. It is pretty much impossible to build in the northern part of our country during winter, and the next two quarters (Q4, 2011 & Q1, 2012) will be winter. Therefore, I expect lower numbers. I just hope they are not a lot lower. Should starts drop to 50 (50,000), I will be truly upset. Such a low number will suggest we are in for a much longer and deeper depression/recession than we have had to date.
Today’s chart is of the five best performing cities along with the average. The average presented here should be taken with several grains of salt because it treats each city as having sold the same number of housing units, a most unlikely scenario. The proper way to do the average is to sum all the prices of the houses sold, then divide by the number of houses sold. I don’t have the data to do that. Actually, the only correct way to compare housing costs over the years is to sum the prices, sum the size in square feet, then divide the prices by the size to get price per square foot. The two data points one would like to create are the average house size in square feet in each city and the average cost per square foot in that city. However, even today no one routinely collects the size of the houses sold along with their price. Of course, it would be far too expensive to go back in time to collect that data simply to have accurate economic data.
Boston was the “best behaved” of the five cities: it did not become nearly so over-heated and it has had a very limited decline from the 2006 price peak. San Diego and DC, both with large chunks of federal money, behaved almost identically. Both became quite over-bought, then declined but look to be stable. The wildest performer was Los Angeles. Its prices ran up 175% in only six years, then gave back about half of those gains in the next three years. New York City prices more than doubled in the first six years of the decade, then gave back about 40% of the 109% gains.
Government presence may be “a” critical factor, but it is not “the” critical factor, or so it seems. I suspect that when we are finished looking at all the data, what we will see is that the critical factor is jobs. In that the government can deliver jobs, it can serve to stabilize the local economy. That stability is reflected in housing price increases. Think of it this way: people tend to move to where jobs exist. The better paying the jobs, the greater the competition for those jobs. In addition, well-paid jobs have what economists call a “multiplier effect,” meaning such jobs create jobs in other sectors of the economy. It is the total universe of jobs that creates economic stability and stable housing prices. Two good examples in today’s chart are Boston and NYC. Both have a broad base of well-paid jobs that, thus far, haven’t been exported. As long as those jobs remain, or are replaced with comparable wealth-generating jobs (See The Wealth of Nations, Adam Smith for perhaps the earliest analysis of which jobs create wealth), the economies of NYC and Boston may be expected to remain vibrant and, relative to the ups and downs of the world’s economies, quite resilient. Expect real estate prices in those cities to show good strength with much less risk, by which I mean “variance”, than in most of the US.
The current Case-Shiller, seasonally adjusted and reflecting activity through September, 2011, holds out hope that the five-year-long down-turn in housing prices is about over. It is not a sure thing, but the 10 City average, the cyan line in the chart below, is poised to start back up. If it does, and if it breaks the little hump between Jan-10 and Jul-10, it will be safe to think prices are climbing again.
Portland and Seattle prices are doing less well than the average, both in absolute terms and in terms of showing a bottom. Compare them, the blue line (PDX) and the orange line (SEA) with the cyan line of the 10 city average. On the other hand, Dallas, the magenta line, never saw much price growth.
The C-S index set the year 2000 as the 100% year, so that’s where I started the chart. Portland and Seattle average prices are both at about 134% or 34% higher than they were in 2000. The 10 city average is 153%, and Dallas about 115%.
The big losers over that time have been Atlanta, 95%, Detroit, 71%, Cleveland, 99%, Las Vegas, 93% and Phoenix, 99%. Big price gains were made in L.A., 165%, San Diego 152%, Boston, 152% & New York City, 168%. The big winner was Washington D.C. at 184%. Is the lesson that the federal government is too costly? Or that lobbyists are paid ridiculous sums? Or is it that where there is a significant government presence, it has a stabilizing effect? The chart below shows DC prices have much the same curve as Miami, Tampa, Seattle and Portland except that DC prices stabilized beginning in 2009. Atlanta and Dallas have had much flatter prices, and Atlanta is in danger of entering an ugly, self-reinforcing deflationary spiral.
