No Bad Service

Market Commentary – 2014 July

If there was no money to lend, there would be no home sales.  We had a lot of homes sell because there are resources to lend and inventory for sale.  If the resources dry up, then sellers would have no buyers and the market would disappear.  Resources are a funny thing.  There is not a limitless supply of resources.  The lenders of those resources are sometimes of questionable character.  As we learn of the massive fines being paid by the “shady” lenders (which happen to be some of the biggest banks), the resources don’t dry up and, I would wager, some questionable activities still occur.  As Dr. Elliot Eisenberg stated in a recent blog, “These fines, large as they are, have simply become a cost of doing business. Unless future settlements involve jail time, these abuses will continue. “  I’m a proponent of jail time.

Since we are speaking of abuses, we have to include FEMA, EPA, IRS, DOJ, and POTUS to the list, to name but a few (and don’t get me started on FLOTUS).  FEMA just re-maps areas to increase their cash-flow.  The EPA establishes “endangered species” zones to pry money out of citizens and builders ad infinitum.  The IRS just does what it wants and gets to be the bully on the block.  The DOJ runs guns and refuses to investigate the abuses of any executive branch agency.  And POTUS is busy transforming America while thumbing his nose at ALL of us, not just the white people.

But what does this have to do with real estate?  The construction of new and resale of single-family homes has long been an indicator of growth, confidence, and money velocity in our economy.  A large portion of our country’s GDP is derived from real estate activity.  If growth and confidence are being depressed because of government intervention (“corruption”) in the market, we will not see a fair, equitable real estate market.  We will see what the government wants us to see.  We are the audience and the government runs the show.

External forces have a big impact on buyers and sellers.  When the market was inundated with investors and cash last year, prices jumped upward.  The psychology of that market got ingrained into buyer and seller psychologies.  The external force at work is “psychology of the recent past”.  Sellers expected premium prices while buyers got out of the race.  It’s natural that a seller wants more than a buyer is willing to pay.  It’s unnatural that sellers use year-old activity to justify their positions.  A lot can change in a year and when lending rates, confidence, and inventory are artificially manipulated, a person’s psychology can be fooled.  Don’t be a fool. 

While we were not watching in June…

  • almost 1,500 houses sold.  This has been low with only a recent increase in sales and inventory.
  • Sacramento, El Dorado, and Placer County median prices have flattened.  The momentum for each peaked in December and is still coming down toward zero.
  • interest rates are not going up as the Fed keeps monetary policy in limbo.  It’s artificially influenced.
  • inventory is growing at a higher rate than demand. Houses are taking longer to sell and that means an agent must get serious for their sellers. But change in employment is not driving new inventory nor is it resulting in move-up buyers.
  • Swing Indicator has swung although all are still positive.  Curious.  There are only 5 zip codes where the median prompted an Up-Tick in momentum.  Historically, this indicates the start of a buyer’s market.  For sellers, it means “sell now”.  And because of interest rates, buyers should “buy now”.
  • Fair Oaks median was $154K in Sep. 1999 and was $341K last month.
  • Granite Bay median ($700K) is resisting the sluggish sales of highly priced homes.
  • Orangevale median ($326K) was $170K in Mar. 2011.
  • Folsom median ($428K) refuses to go back down below $400K.

The aggregation of activity is what constitutes a “market”.  No single transaction (data point) defines a trend or general market.  When my client asks about offers or asking prices in this market, the sales on which my advice is founded must be numerous or my crystal ball gets cloudy.  Because I’m in the market every day, my feelers are sensitive about the changes in psychology. 

  • Seller psychology — still expecting trends to continue upward; surprised by the wait for an offer.
  • Buyer psychology — don’t want to pay at the current prices; letting sellers sweat.

The Swing Indicator uses an aggregation of each zip code’s median price (the momentum thereof).  The quantity of individual data points helps smooth the curve and still convey the general changes in the overall market.  But your market may be much more specific than your zip code.  Don’t be fooled by the web sites (rhymes with “pillow”) that profit by increasing their visits.  They don’t create the data.  They don’t own the data.  They frequently don’t display accurate data.  And they often impact market psychology with that same bad data.  And they don’t care.

What are your thoughts about low-income loans?  The FHA is tightening standards for borrowers with a low income or small cash reserves.  Before 2008, these loans were hardly a blip on the radar.  Then they ballooned to over 30% of all home loans in a short time.  Cash buyers took the same growth path and the conventional loan numbers tumbled.  Now the market is dependent on these buyers and the FHA loan source.  Sellers, lenders, inspectors, appraisers, and REALTORs are staying employed because of FHA buyers.  But is this a healthy dynamic?  Should buyers have such little “skin in the game”?  Should it matter that FHA [and cash] buyers yield their desired house to a conventional borrower?  Are there enough conventional borrowers to meet the supply and keep us all gainfully employed?

When employment is difficult to find and those with jobs are too anxious to change jobs and move up to a more expensive home, it’s natural to feel uneasy about the prospects of demand meeting supply.  We all want more and better inventory.  As a broker, I understand the benefits in getting new listings; the rule of cardinality alone makes listings the cherished goal (one-to-many rather than many-to-one). 

But as I coach my new sellers, I find they always have to adjust their expectations.  They only need one buyer.  But without more than one buyer viewing the home, the statistical probability of selling [quickly] is very low.  How much marketing can compensate for the loss of FHA and cash buyers in the market?  What happens to the dumps that are rarely, if ever, purchased by conventional borrowers?  (VA borrowers are a different and special breed and shouldn’t be forced to increase their reserves, in my opinion.)

However the media and government spin the numbers, the GDP trend is not favorable for our country let alone individual borrowers.  And how much borrowing is healthy?  Should a borrower have so much mortgage debt relative to the home value that they have no qualms about defaulting on their mortgage?  That is one of the weaknesses which caused the foreclosure crisis:  If they can fog a mirror, give them a loan.  And the government made sure loans were approved and insured regardless of qualifications.  I know this is not where I and my colleagues want to go again.

Tell everyone you have found a source of real estate truth — http://www.JayEmerson.com

The numbers and data points I follow are representative of the market because they cover over 90% of the activity.  When it feels like a flat market AND my charts show it, it can’t be refuted.  But, again, no single transaction will tell the story.  But that one transaction is critical to someone and if it sells quickly or gets multiple offers, then it tells a story within the story.  It is very true that certain price ranges and locations are doing better than others.  While the overall market may be flat and timid, some sellers enjoy a quick and painless experience.  Others wait for 100 days, reduce their price several times, accommodate several Open Houses, hopefully get plenty of visitors only to find they have to wait longer. 

Some issues with a house cannot be changed.  If inventory and market dynamics are leaning toward the buyer, there is no rush and the buyers have a choice.  So the seller who has a road behind their house can only wait or reduce their price to a level that any buyer would like (even with the road noise).

That’s the trick in this market:  Sellers and buyers need a good coach.  The selling experience should NOT be prolonged or dramatic.  My experience should be transferred to my clients in ways that help them adjust their expectations.  But I’m adjusting expectations to decrease the stress and anxiety of selling not to manipulate them or the market. 

There are a lot of forces that affect any market for a product.  Some forces are natural while others are hidden and unnatural.  The hidden forces may not be revealed for many years, if ever.  But I will always reveal what I know.  I can’t reveal what I don’t know.

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