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A Real Estate Renaissance Firm

October 17, 2008 • 1:49 pm 0

Point / Counter-Point

Michael Cook wrote a thought provoking post earlier entitled What Happens to the Early Worm.  So thought provoking that I found my comments drifting to post length.  So how about a little point/counter-point?

Michael, a very detailed and thoughtful post. I would not disagree with you that cautiousness is a safe strategy (although not always a profitable one) and I certainly do not disagree with your assessment of the people here on BHB.  But I do have some other questions:

The income / price equation did not get out of whack overnight, so buyers and sellers should not expect it to correct itself overnight either.

All real estate is local and that is never more true than now. In some areas we have seen real estate go through the support level of fundamental value (that value which would allow an investor to purchase a property and cash flow). This is no different than the Dow last week. It was oversold and many companies could be purchased below their fundamental value. So are you suggesting that rents are going to decrease in these areas?  Otherwise, the correction has already occurred in some areas.

You are looking at some of the best real estate agents in the business here. So when they write that their business has not dropped off, it might lead the casual reader to believe that the real estate market is not in a tailspin or even that real estate is close to a bottom. Do not be lulled into a false sense of optimism. This group is adaptable, smart and most of all well above average.

Michael, to whom are are you writing this post?  If it is agents then I suggest the new market has caused an industry-wide house cleaning.  Those that do not belong have seen business disappear and those that do have been rewarded; but this does not necessarily reflect a worsening real estate market.  If, on the other hand, you are writing to consumers then I suggest they read you closely when you say that the top agents have found “their business has not dropped off.”  It has not dropped off for a reason and would behoove those buyers and sellers to search out the agents that remain busy; again, because the market does not seem to be as bad for them.

Consumer spending is down – Much of it fear-based
Manufacturing is down and declining – As the credit crunch alleviates, this should soften
Jobless claims are up and rising – DEFINITELY A STAT TO WATCH
Housing remains weak – This begs the question
Housing inventory remains well above average – But dropping in many areas.  Plus, programs like Hope for Homeowners may put a significant dent in the rate of increase of REOs
Dow Jones has dropped nearly 40% over the past six months – This is significant, as you said. But may be good for real estate. The markets can go to zero but a house is still a place to live

…decline in the stock market. This represents a decline in confidence in the global economy. This level says that investors believe business could be in for sustained economic distress

There are a couple of great articles addressing this over on Coyote Blog.  Don’t Panic discusses what stock pricing represents and how it does not always address company value (especially in the comments). There is also a great graph in Good News, Really along with this summary: “(i)n fact, the current level of the stock market is screaming normalcy.”

housing still has room to decline because the historical ratio of median housing prices to median income is still too high

Past is not always prologue.  I find problems with the affordability index and have discussed them here.

In the end I agree that people should not try to “catch the knife” (I was wondering if you would make use of that colorful term from the equities market).  But neither should people try to time the market.  I have asked this before but I will ask it here:

What do you fear more: buying now at $350,000 and seeing in six months that you could have paid $325,000 OR waiting six months for the price to reach $325,000 and finding interest rates have moved up two points and you can’t afford any home?

Interest rates negatively affect affordability much more than pricing.  If you are making a long term investment (which is what real estate should generally be) then buying now makes great sense in the areas that are fundamentally sound.  Just make sure to work with someone as “adaptable, smart and … above average” as the agents found here.

(This post was first pubished here.)

Filed under: BUYERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , , , ,

October 2, 2008 • 10:22 am 0

A Quick Primer on Liberal & Conservative Economic Theory

We may or may not be in favor of the bailout.  We may or may not fully understand what the bailout will or won’t do.  We may or may not be any smarter than the politicians who (in my humble opinion) don’t have a clue what the bailout will or will not do.  But I am guessing we can all recognize good ideas from bad ideas.  It’s easy: the former stimulates business and the latter stifles it.

Case in point (you can read the full story here):

Congressional leaders scrambled Tuesday to come up with changes to help them sell the failed $700 billion financial bailout to rank-and-file members. One idea gathering support: raise the federal deposit insurance limit to reassure nervous savers and help small businesses…

Republican House aides said the FDIC proposal might attract some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings…

Another possible change to the bill would modify “mark to market” accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years…

Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided…

Liberal Democrats who opposed the bill are suggesting other changes. Their ideas include extending unemployment insurance and banning some forms of “short selling,” in which investors bet that a stock’s value will drop…

The conservatives want to

  • Raise the insured limit on bank deposits.  Of dubious actual benefit in my opinion – but tough times call for paper mache measures.
  • Change the mark-to-market rules.  The mark-to-market rules are onerous to investment companies and do not reflect asset values accurately.  This should have been enacted long ago.  Using the bond concept of yield to average life would make more sense.

The liberals, on the other hand, want to

  • Extend unemployement insurance.  What? To stimulate the economy you want to increase the weight of one of its anchors?  I know this is a liberal favorite but does it have to be trotted out everytime they want to negotiate?
  • Ban aspects of short selling.  Typical of those that neither understand how markets work or how short selling in particular works.  Without short sales we not only lose true price discovery, but more importantly the firms that help insure risk for the creators of debt have no where to lay off that risk.  A two-for-one bad idea.

So we have two camps; one finds ways to increase confidence while improving the bottom line for financial companies, the other looks for ways to stifle business and markets alike.  Is it any wonder big items like the bail out don’t get done?

I am not a big fan of either party, but at times like this the choice is easy.

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY ,

September 19, 2008 • 9:33 am 0

Alex, I’ll Take “Irony” for $600

The government is now in the mortgage business and the insurance business.  I am sure others will expound on the AIG debacle and all of its implications in due course.  I just wanted to point out the something that should make me laugh so hard it brings a tear to me eye… instead it just brings the tear.

Just before each financial giant goes down, there is a final blow.  One last lynchpin pulled that leads to the immediate cessation of breath for a company: the ratings agencies lower the company’s credit rating.  Standard & Poor’s, Moody’s, etc. take a look at the mortgage based assets the company is carrying, look at the write downs still to come and make an assessment on the credit worthiness of that company.  Once their rating drops they cannot borrow money at a cost that allows them to remain solvent and “a-begging they will go.”

Now that is the job of the ratings agencies and I do not begrudge them their responsibility.  Here’s the funny part though.  The failing, mortgage-based assets that are crushing these financial companies (and now an insurance company) were originally purchased, to a large degree, based on the credit worthiness assigned them by… wait for it… wait for it… these self-same ratings agencies!  Imagine the hubris of being so, so wrong in their primary mission of evaluating the creditworthiness of an investment vehicle, then lowering their evaluation of the creditworthiness of those companies that purchased the very investment vehicles they failed to correctly evaluate!  Talk about having your bread buttered on both sides. I know there is a great joke in there somewhere.  I am just too terrified to find it.

Welcome to the other side of the looking glass.

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , , , ,

September 17, 2008 • 9:31 am 0

Programs for the Pessimist

The latest news regarding Lehman and Merrill are not surprising.  Still, expecting an impending disaster and enduring a disaster are not the same thing.  For some, a pessimistic leaning may take hold and for you… I have great news.

In a recent article in the San Diego Union Tribune by syndicated writer Lew Sichelman, we learn about a growing business in refinance lending: the cash out, no interest, no payment, no loan… loan.   That’s right.  There are investment companies out there right now loaning cash against the equity in your home.  There is no interest rate and no payments because it is not a loan.  The company simply gets to share in any equity gain you experience between the time you receive the money and when you sell the home.

There are restrictions, including a kind of pre-pay penalty.  You can not sell the home for an agreed to time period (usually at least five years).  But there is also freedom: no restrictions on how you use the money.  The investment company shares in your appreciation and your depreciation.  Of course, if your home goes up substantially, the cost of the money you received can be exorbitant.  But you get use of frozen assets right now, which can be pretty handy.

Here’s the marketing gem in all of this: There are plenty of clients and prospects on the sideline right now, desperately wishing they could get in the game.  This is one of the best buying cycles I have personally ever seen.  The problem: they are house rich and cash poor.  Here is a solution and it does not add to their monthly budget or future debt-to-income calculations.  Show them how to get that “dead” money out their home and into an income producing property.

HIGHLIGHT: If you think housing is in trouble and things are not going to get better for some time, you can take your equity out now at a cost of: nothing.  When you do eventually sell you will still have to pay back the original amount but you will have gained no equity and so the “loan” will have been at no cost to you.

One last thought.  This is good news for everyone, optimist or pessimist.  Where there is need and the potential for profit, there is innovation.  As dire as the credit crunch appears, new innovation and twists on old innovation will continue… as will the real estate industry.

(This post was first published here.)

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

January 20, 2008 • 10:06 pm 2

Happy New Year

adapted from a speech given to Realtors - January 10, 2008 

Happy New Year.

Katie and I sponsor the Mystery House for various reasons.  But I have only two goals each week when I come up her:

  1. Be passionate
  2. Have every person here leave this room, more fired up for their success than when they came in.

Today… that’s going to require audience participation.  So, repeat after me:

“HAPPY NEW YEAR”!

How many of you are happy to see 2007 in the rear view mirror?

How many of you are looking forward to A Great 2008?  Go ahead and say it, it’s fun: “A Great 2008” again “A Great 2008”!

  • Speculators are fully out of the market, allowing prices and volume to stabilize this year – Giving us: “A GREAT 2008”
  • Lenders will develop new products to address many of the sidelined buyers in our market this year – Giving us: “A GREAT 2008”
  • One or two of the nation’s largest banks may go bankrupt, sending the economy into a recession this year – Giving us: “A GREAT 2008”… just seeing if you were paying attention.
  • The press sold papers telling everyone the sky was falling… until it finally did.  More gloom and doom will not sell more papers and the press will begin reporting on the “hidden” deals this year – Giving us: “A GREAT 2008”
  • Locally, people will recognize the phenomenal opportunity of low prices, low rates and high rents this year – Giving us: “A GREAT 2008”
  • And last but certainly not least… most of the pretend agents – the “I’ll make lots of money in my spare time with no experience, discount service and low commissions” agents – have moved on to the next get-rich-quick scheme; leaving more business for the professionals this year – Giving all of us: “A GREAT 2008”

You know, this year, and this business, are not sprints; they are marathons.  The most important ingredient to success is putting your feet on the floor each morning with a smile and a great attitude.  There are many ways to do that and I am going to leave you with one method; elegant in its simplicity.  I have never met any one with a better demeanor or more even keeled than my father.  When I was around 12 years old I realized this and I went to him.  I said, “Dad, what makes you happy?”  He looked me straight in the eye and answered, “The absence of excruciating pain.”

HAVE A GREAT 2008…

Filed under: LENDERS, LIFE THAT POPs, REALTORS , ,

June 13, 2007 • 12:39 pm 0

A Season in Time

I missed the Brokers’ Open last week while attending a conference on Mortgage Planning in Las Vegas and I came back with great info and lots to tell you about. Today I want to share the most exciting parts:

  • The market is expected to continue its contraction from $3.9 trillion in 2003 to $3.0 trillion this year while inflation (rates) continue to rise… THAT IS GOOD NEWS
  • Over the course of 2007, the number of loan officers should drop from 480,000 to 250,000. That means 230,000 less people dropping rate sheets on you, 230,000 less people attempting to buy your business rather than earn it and 230,000 less people trying to explain yet another convoluted loan program with “assisted this” and “deferred interest that” when they can not get THE PAPERWORK RIGHT ON A BASIC 30YR LOAN, OR EVEN RETURN A PHONE CALL… (and that is very good news).
  • By the end of 2007 the number of Real Estate agents will drop from 2.7 million to 1.4 million… AND THAT MAY BE THE BEST NEWS OF ALL!

Let me share with you one of the most important things I learned last week: there are no bad markets!! There are seasons: times of contraction and expansion, times to sow and times to reap. But for the successful Real Estate agent it is never a bad market; just a change in positioning.

If you do not have a plan for the seasons, if you are not sure how to dial in your success, that is OK. See me after the rally, or see Katie of Lisa. I have strategies and plans to grow your business. Who is going to be successful during this time of transition, this change of season? That is a mystery here at the Mystery House Tour. I will tell you one very good indicator though: people whose professionalism demands that they make time each week to preview properties in their area and know their inventory! I congratulate every one of you that shows up on a regular basis. Enjoy the change of seasons, enjoy the Rally and most importantly: enjoy the Ride.

Filed under: LIFE THAT POPs, REALTORS , ,

January 31, 2007 • 9:36 am 0

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 , ,

October 7, 2006 • 9:29 pm 0

Changing Markets are Not the Problem

In a lot of my discussions with Realtors lately the same theme comes up over and over: “the market has really changed”, “the market is changing”, and “it is difficult to make a living with this market change”. It seems that each person I talk with has a different theory on why the market has changed, how long the changes will last and what it means for the future of the industry. The more I heard though, the more convinced I became that we need better accuracy. As a matter of fact, what we need is truth-in-advertising. Subtle changes in a statement, even one word, can make a big difference in how we define a problem and ultimately in how we solve it. So in my recent seminars and at last week’s Brokers’ Caravan I began introducing many Realtors to a shift in perception. When we say the market is changing we are not saying anything! I do not mean to imply that the market is not changing. Quite the contrary, the market is ALWAYS changing. This is a dynamic business that is forever seeing new innovations, fluid interest rates and varying confidence levels in the customer base. As a matter of fact, think back a year or two ago to when rates were rock bottom and homes were flying off the shelf. That market was rapidly changing as well, but we never heard anyone complain about it. These days, when we say that “the market is changing” what we actually mean is: “this market is getting a lot harder”. Now that is truth in advertising and, more importantly, it leads us to a solution. By acknowledging that the new market requires better strategies, more diligent follow-up and just plain longer hours, we create the solution to the very problem we are defining.

THE POWER OF DARKNESS FLEES
FROM THE LIGHT OF AWARENESS

By defining the difficulties you face in today’s current market, new solutions and programs can be implemented. You might even conclude that this is the ideal time to be in the Real Estate field. This is when all those who got in for the easy ride and do not have the knowledge, integrity and hustle it takes to be good are getting out. They are moving on to the next get-rich-quick scheme. In the mortgage field we are seeing the same thing with all of the quick-buck brokers that steered their clients into ill advised Neg-Ams, striving for greater commissions rather than their client’s best interest. This is the time to be increasing your market share and laying strong foundations. What you sow now you will reap during the next cycle. And there is always a next cycle because this is a market that is always changing. See the market for what it is, practice truth-in-advertising, and realize that no matter what is going on out there, business will always grow for those that practice strong systems and “do the right things right”. There is always a way to get to your destination. Be flexible and remember: If the wind stops blowing, start rowing.

To Your Success,

Sean Purcell

Filed under: INVESTORS, LENDERS, LIFE THAT POPs, REALTORS , , ,

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