Archive for December, 2010

Why are people who traditionally should buy at this point in their life, renting? I came across this article recently and I think it hits home.  http://www.washingtonpost.com/wp-dyn/content/article/2010/12/20/AR2010122006525.html?referrer=emailarticle There has indeed been a structural shift in thinking in the six years since the market dramatically changed.  When I entered the business in 2001 real estate was beginning to be an investment where you could “do no wrong” and for the next several years that is exactly what people came to believe as double digit appreciation became standard.  Unfortunately, the pendulum has swung back the other way and too many people feel that when you invest in real estate (I’m talking about buying a primary residence) you can do no “right”. 

The psychology of the buyer is based on certainty and the more “certain” the buyer feels about his or her life, the more likely he or she is to make a long term purchase decision like buying a house.  The problem (and opportunity) is certainty is a state of mind.  We know this because similar circumstances can make one person feel a great deal of certainty about the future, and the exact same circumstances can make someone else feel completely uncertain about the prospects for the future.  What’s the difference?  Mindset.

Frankly, as a country we need to man up and take responsibility for our financial future as individuals and create our own certainty in life.  There is no such thing as guaranteed employment, or a future with no financial surprises.  We need to be more confident in our own ability to handle the twists and turns of life and make decisions for our future without fearing what “might” happen. 

It is late Sunday evening and I’m in New York City watching CNN discuss war on the Korean Peninsula.  It got me thinking, what would happen to US real estate prices should this situation erupt into full blown war?  Of course that’s a difficult question to answer, yet we could look to some indicators directly related to real estate and extrapolate. 
 
The European debt crisis is teetering on the edge and will be something we need to watch carefully in 2011. A Korean war would undoubtedly destabilize that situation further creating more pressure on our global financial markets.  In the short term that would likely drive mortgage interest rates down sharply, and possibly drive more buyers into the market.  A cautious note however, already low interest rates haven’t had a significant effect on the buyer’s motivation to date so this might not help much. 
 
Another war would increase the level of uncertainty people have about the overall health of the US economy and their own financial situation (their job) which would likely lead to fewer buying decisions and a decrease in demand overall.  There might however be a few markets across the country that would benefit from another war - for example Washington DC with an influx of people and money - but that would be temporary.
 
Long story short, at best a Korean War might stall our overall recovery, with pockets that traditionally benefit from military activity seeing positive gains.  At worst, it could be an economic domino that will push our long term real estate recovery further down the road. 

Happy Holidays from us to you!

2010 Holiday Newletter

After several requests, I’ve dusted off my crystal ball and have decided to see what it says for 2011.  So what’s really going to happen in 2011?  In a longer blog than usual, here are my predictions for 5 very likely trends in 2011.  I’ll review this list in 12 months to see if my crystal ball is worth the cost of storage…

Number 1 – interest rates will go down (yes, down further)
Brace yourselves – we could see interest rates for 30 year fixed mortgages in the 3% range in 2011.  The Fed’s QE2 initiative is flooding the market with capital with the intention of moving money to the people who need it most. (whether that works or not is a point of later debate)  One of the effects of the 1st attempt to do this was a dramatic decrease in interest rates.  I anticipate we’ll see this happen again.  This will not help ease lending criteria however as there will be very little monetary incentives for the bank to risk money on Harry homeowner at 3% when it can invest in treasury bonds (debatably safer than Harry) for a similar return.  Interest rates will actually need to climb significantly to see lending criteria ease.  750 credit scores and 20% down people – celebrate!  Everyone else, good luck.

Number 2 – 2011 statistics will show that Washington DC Metro home prices declined in 3rd and 4th qt of 2010 and will remain flat for all of 2011
Long before market stats come out, we track buyer traffic and feedback and buyer traffic has been low and motivation very sluggish in 3rd and 4th qt 2010.  We’re still recovering from the tax credit hangover and like any good hangover, it takes longer than you’d like to recover fully.  This unfortunately has meant large price drops for the highly motivated (and sometimes distressed) sellers in order to move the buyer off his/her rock.  Cumulatively, this is going to reflect in price declines as we analyze the stats next year.
 

Number 3 – fewer short sales and loan modifications will succeed
Stop reading if you think the bank is your best friend.  Here is what you need to understand.  Your mortgage is likely held by investors (Fannie/Freddie are big ones, but not the only ones) and the entity on your statement is only the servicer of the loan.  The servicer is responsible for interacting with you and managing the process, yet the servicer is only one of multiple parties that must decide whether or not to short sale or modify.  Even if the servicer agrees, and the investor agrees, you still need to deal with a 2nd lien holder.  Even if all of those parties are in agreement, the mortgage insurance company must agree.  There are many structural and legal issues here, one of which is the servicing agreement between the servicer and the investor may say that the servicer takes the loss in a short sale or modification, but the investor takes the loss in a foreclosure.  Why then would  the servicer agree to modify or short sale when they can kick the bucket to the investor in the foreclosure?  They won’t which is why you get caught in an endless loop of paperwork with no results.  Not to mention the insurance company who would rather pay out a claim in the event of a default (or short sale) later, rather than now. 

Many institutions which in the past halted the foreclosure process during the modification or short sale process are no longer doing this.  The foreclosure process is relatively efficient and will run its course before a short sale in most cases. 

Confused?  That’s also part of the problem, the process is a disaster and very difficult for anyone to understand!

Number 4 – the rental market will continue to strengthen and rents will increase
All those uncertain buyers we keep talking about have to live somewhere, and right now they are renting.  More people that traditionally should be homeowners at this point in their life, or people who were homeowners before are now adding to the frenzy which is pushing rents up.  This trend will continue in 2011.

Number 5 – there will be a very low level of “sellable” inventory come mid 2011 which will cause bidding wars and price escalations for the best opportunities giving buyers more confidence in the market as they lose opportunities they could have had with no competition in fall 2010
“Sellable” inventory is the key here.  A sellable listing is one with a truly motivated seller at the door who has the equity to sell.  A large sector of our market is not sellable right now because the loan on the property is greater than the actual value.  And many owners in that situation are not willing to short sale and are not going to go into foreclosure.  Instead, they have chosen to hold the asset until the time comes when they can sell at the price they want or need.  This translates into large blocks of properties that normally would cycle on to the market but will not do so for some time to come.  2011 will continue to be the story of two markets – well priced inventory that moves quickly and everyone else.

There are my predictions as we close out 2010 and enter 2011.  Email or call me if you’d like to discuss the particulars of your situation.