Utah's Crash-Proof Fundamentals

The Harvard Joint Center for Housing Studies just released its 2008 report yesterday. Its very insightful but depressing because it speaks on a national level...not a Utah level. You can read the whole report for yourself here.

One of the main fundamentals driving home prices is personal income. How can a 3 Bedroom home in the Avenues of Salt Lake sell for $380,000 and the same home sell for $110,000 in Rose Park? The answer is income.

People are naturally self segregating. Like attracts like. Higher income earners tend to mingle among themselves as do middle income and low income earners. We all seek the company of those we identify with (usually). This self segregation process ultimately produces "neighborhoods" with reputations for one thing or another. When you say "The Avenues" of Salt Lake, what do you think? When you say "West Valley", what is your first impression? The point is that the reputation each neighborhood has has been created by the inhabitants of that neighborhood. The price of housing is guided by the income produced by those inhabitants.

But, sometimes, housing prices become distorted in relation to personal income. What if so many people wanted to buy a home that they found loan officers who where wizards and they could get their borrowers qualified for these amazingly large mortgages with these incredibly small payments?

There is a natural relationship between house price to personal income. The nerdy title for this is the median house price-to-median income ratio. Looking back at time, we can tell if house prices are too high, and therefore due for a correction, if the ratio is higher than historical averages.

Hence our chart for the day:


For the Salt Lake area people have tended to spend 3 times their income on a home on average. As of 2006 (the hottest year of our boom market) people were spending 3.2 times their income. Lets compare this to LA where in 2006 they were spending 10 times their income! LA has a historical norm of about 4.5-5. That means that housing prices in LA are double what they should be in relation to income. That is amazing. Its also terrifying if you own property in that marketplace. Vegas is much the same. Both Vegas and LA are experiencing severe price declines right now.

So is Salt Lake in for a big price correction? From this chart, I would say no. It is consistent with previous boom-bust cycles in Utah that show that prices accelerate dramatically for a a brief period and then stabilize for a few years before repeating again and again. I expect that our prices stay where they are for a few years before another wave of appreciation comes our way.

Utah Resort Gridlock

Attention all market data junkies:

Here is inventory levels for a grab bag of Utah cities and neighborhoods. The Months of Inventory represents how many months it would take to sell all homes currently for sale at last months rate of sales if no other homes were to come onto the market. This gives you a rough estimate of whether you are in a buyer's or seller's market.


First off, notice that the suburban and urban areas are doing just fine. Higher levels of inventory than last year but nothing worrisome. Sales are chugging along normally.

Now, do you see anything shocking on this list (Hint: I made it BOLD and in RED)? I like Ogden Valley's 138 Months of Inventory! How outrageous is that?!

I can see the listing presentation now: "Mr. and Mrs. Seller, according to today's market, average sales time in your neighborhood is 11.5 years. Of course, if you are willing to pay the sellers closing costs and make a couple of repairs I can get your home sold in 11.3 years or less even. Now why don't you just go ahead and sign here at the bottom of this listing agreement and we will start marketing your home first thing tomorrow."

- s m i l e -

Ogden Valley is the Resort counterpart to urban Weber County. Just as Park City is to SLC and Wasatch County is to Utah County. It appears from this table that the resort markets are in a major bind. Due to the jumbo loans in these markets and second home status of most of the properties, the resort market has ground to a halt as lenders have eliminated many of these products for the time being.

Again, this is a buyer's fantasy! Nobody could have foreseen this type of opportunity last year. If you are looking for a bargain in the resort market, now is your time to shop. Some of these homes are in foreclosure and great bargains are to be had. Banks right now are ready to negotiate and I have recently seen some take .40 cents on the dollar for distressed sales. If you are a buyer in this market, its time to start hunting for a bargain.

Let me know your thoughts about this and other topics.

Market Volume vs. Agent Volume: The Shakedown Continues...

So how is the market out there? Is it good? Bad? Ugly?

I guess it depends on who you are as to how you answer this question.

As for myself things are going well. I have recently closed several large transactions after tweaking my niches a bit to compensate for market changes.

As for many other agents, I do hear a lot of whining. Sometimes I have to avoid folks in the office who have found themselves in a hole and want to pull me in with them to keep company. Oh, how Misery loves company.

As I have discussed in previous posts, we are in a shakedown of the mortgage/title/realtor services market. Transaction volume is down from record highs last year while the number of people and entities in these industries is soon to follow suit.

Here is sales volume for 2002-2003 as compared to 2008.


As you can see, there isn't a whole lot of difference between yesteryears sales and 2008's. In fact, we are selling more this year than we did back then. However, I would attribute this to population growth rather than a difference in actual demand for housing. Other than this factor, I would say that they are pretty darn close to each other. Since this is a Winter-Spring illustration, many of the individual differences may represent weather related issues. But in general, you can see that they follow an upward trend typical of this time of year.

In my opinion 2008 is a good market. Its just as healthy as 2002 or 2003 which were considered "Normal" markets. The only difference is that there are twice as many people in the RE industry than there were in 2002-2003. That means that the Not-So-Serious and the I-Sell-A-Home-Once-In-A-While Realtors out there are about to get a healthy dose of market correction. As franchise fees and board dues start adding up, I expect a major exodus to occur from the industry. In fact, I believe it has already begun.

This is and will continue be a good thing. For the Realtors associated with the Exit Realty franchise, fees are due within the week. I expect this to be a make or break moment for much of our office. Three months ago our office had 80 agents. Today it has 65. Statistically speaking, we should hit 40 and be at equilibrium. If the number settles higher than this, then it represents some changes in management, incentives, and recruiting efforts. Lets watch and see what happens.

Where Will They Go?

One of the biggest questions people ask related to Downtown Ogden's renovation and rejuvenation is where will all the low-rent/no-rent tenants go when Ogden is fixed up. This seems to be a logical question since everyone needs a place to live. Also, quality of a neighborhood is not directly correlated to quality of homes but rather quality of its inhabitants. If Ogden is to get better neighborhoods, some bad neighbors will need to move out.

DISCLAIMER: I am not talking about "poor people" here. I know many folks who live on meager income in my neighborhood who are the salt of the earth. I am talking about the idle, unwilling to work, won't contribute to society crowd when I speak of low-rent/no-rent.

Moving on...

So lets think on this for a moment. Why are they in Ogden? What factors contribute to attractive living for these folks? Where else would be the next best place to live if you fell into this group of people?

Ogden for the last 30 years has had some interesting economic things going for it that has made it a haven for the low-rent/no-rent individual. First, the economic decline associated with the withdrawal of the railroad took housing from large demand to little demand. Population actually decreased in Ogden over this 30 year period ending in 2000. This decline put pressure on landlords to fill their property and therefore rents stayed low. In addition, to compensate for the high demand railroad era, many landlords also subdivided their larger homes to make way for smaller 1 bedroom units. This also added to supply while demand was falling. The smaller units also highly limited the types of persons who would be interested in these types of housing. Secondly, Ogden has up until recently had an old-school brand of property owners. They did rental agreements with handshakes. They certainly didn't do background checks. If you didn't pay rent you probably could stay there a few months while the owner figured out how to get you out of the property.

Now in Downtown, we are seeing a lot of unit consolidation and restoration going on for these classy Historic homes. The supply of rental units is declining while at the same time the quality is increasing. Property managers like myself are screening people heavily in order to protect their investment from damage. This has put pressure on the low-rent/no-rent crowd who still needs housing but is having a hard time finding it in the traditional locations. So where else looks appealing if you are in this group?


Old Roy, Sunset, and Clearfield are the answer. They have tract housing that was build in the 50's and 60's that has seen serious decline over the last 10 years. The quality of construction in these neighborhoods was less that stellar and that tends (due to affordability) to attract itself to a lower income demographic with weak credit which then often leads to foreclosures and other problems that canker a neighborhood over time. These neighborhoods start to increase in the number of rentals as their original owners move or die off. These suburban neighborhoods are ripe for further decline and the lowest end of the Former-Ogden tenant base will likely help that happen.

I had dinner with somebody that works in Ogden City a couple months ago who confirmed this migration of the low-rent/no-rent crowd into Roy. His counterparts is Roy told him that they have seen a huge influx of low-income tenants from Ogden move into their neighborhoods. It happens to be that Roy is the place of least resistance for this crowd. Roy has an old-school brand of property managers who often make leases with handshakes. The condition of the housing is deteriorating which puts pressure on landlords to fill the space. Basically, all the ingredients needed for this move are present in old Roy. I suspect the Roy City folks will wake up one day here in the next few years and wonder what happened to their quiet city.

Here is a chart showing the life cycle of a neighborhood. Normally, new subdivisions reach the peak of this chart in about 7-10 years. Old Roy is in the Filtering Stage of this chart below while Ogden is on the uptake in the Land Use Succession phase.

FHA May Nix DAP

In an article online today the head of the FHA, Brian Montgomery, stated that FHA may soon do away with its Downpayment Assistance Programs. Apparently they are suffering a glut of defaults right now and loans with DAP are defaulting at a rate three times higher than non-DAP loans.

Right now FHA requires 3% down in order to make a loan. However, there are rules in the books that say that the seller of a home can "gift" some of the equity in a sale to the buyer as a downpayment.

For instance, Joe and Jane want to buy a home. They are just getting out of school and don't have much in savings. Joe doesn't even have much credit to his name. His professional mortgage officer is able to qualify him for an FHA loan. They go shopping and find a home listed for $100K. The catch: FHA wants $3K from Joe and Jane to make the loan. Joe just put $3K down on a new car and doesn't have the funds. He explains this to his Realtor. His Realtor suggests they put an offer in of $100K and ask the seller to contribute $3K toward a down payment assistance program and $3k toward closing costs. In this case the seller is motivated and accepts the offer. The home appraises for $100k and the transaction closes.

The way these programs work are not as straight forward as I described above. What happens to make this 3% downpayment assistance work is this: The seller signs an agreement to give 3% of the purchase price (plus a $500 fee in this instance) to XYZ Company at closing. In return, XYZ company agrees to provide 3% of the purchase price to the Buyers at closing. XYZ puts up the money in advance at closing for the buyers and collects its money back plus its fee the following day when the transaction funds. Its a brilliant strategy. The only problem is that, as FHA has reported, buyers who use these programs are 3 times more likely to foreclose in the future. That is very unfortunate. Hopefully, buyers can act more responsibly in the future so that these kinds of programs are around to help them. Otherwise, they will need to be much more prepared when purchasing a home.

Anatomy of a Bargain: 22 W 2450 N. Layton

Today's post will illustrate how I helped one of my clients find equity (read: money) in property in the current marketplace.

For most folks, making money in the real estate market is easy to understand. The rule is to buy any property when the market is real hot and then just let it appreciate. Sounds easy when you put it that way. So then, how do you know that you aren't buying at the top of the market? Hmmmm? I beg an answer from the easy money crowd. (I have dubbed this type of investment model the Pay-And-Pray Model - pay full price and pray for appreciation.)

The point I am trying to make is that yes you can make money when the market goes up but you can also make money when the market is flat or down even.

Here is our case study:

I have a client who needed to get into a home. They had been living at home with their folks while they transitioned from a move from Las Vegas. They were eager to get into another place of their own but were skeptical of the marketplace due to their experience with the Las Vegas housing market. They wanted to make sure they didn't get in over their heads with the home here.

After visiting at my office I convinced them that we could find a home that would meet their needs and in fact find a great bargain. So the search began....

22 W 2450 N was our first offer. It was a short sale listed at $220K. At 3000 SQFT that was a great value. However, since it was a short sale and listed at such a low price, we expected several offers to be in play. I suggested we offer $225K just to be competitive. Sure enough, when confirming the receipt of our offer, the listing agent told me that there were 6 other offers on this same property.

This news was discouraging so we went shopping for other property. We placed additional offers but couldn't come to terms with the other sellers. Then, about three weeks after our initial offer, the listing agent for 22 W 2450 N calls me and says the bank has approved the sale but at $240K. That was quite a bit higher than our original $225K offer. However, due to the higher approval price, all 6 other offers had jumped ship. My clients decided to counteroffer back at $230K. 10 minutes later we got a call back saying, since there were no other contenders, the bank would accept our offer.

Here is the first page of a 3 page CMA for this home.


As you can see, my clients are now the proud owners of a $280K home that they purchased for $230K. The home needed $10K in carpet and paint. Not a bad deal at all!

If you are in the market for a bargain, give me a call.