Consolidate and Conquer: The War to Win the Victorians

Jefferson Avenue has been the flagship for Ogden City's efforts to rejuvinate the urban residential center of town. The most dramatic changes are recognizable along the two blocks spanning Historic Jefferson Ave.

In the last 9 years, six giant victorian period homes have been consolidated from multi-unit housing and made back into homes. The effort continues.

This is latest project.

BEFORE

As you can see, this home had a nasty box built to the front of the home sometime in the 50's or 60's. Some how back then, the owner was convinced that the addition was a really good idea. Hmmm...

AFTER

With the box freshly removed, the home looks like it landed face first in the road, but in my opinion it is already starting to look better. You can see the potential that the home has now. And finally...



This is the one last victorian left to consolidate on the block. It is gorgeous on the interior. Just needs some TLC. The home is currently configured as a 7-plex. If you are interested in participating in the restoration of Downtown Ogden, let me know. This home is now for sale and is one of the last opportunities on the 25th Block of Jefferson Ave.

Whats In It For Me?

With every shift in market dynamics, a new mentality seems to emerge from buyers and sellers. When the market was surging two years ago, sellers would say "Lets list it for $20,000 more than its worth and if we wait a while, somebody will pay that much." If they listed the property in 2006 they might have been right. If it was in 2007 they were dead wrong. Now that the market has clearly fallen into the buyer's favor I hear buyers say "Lets low-ball them at half of what they are asking...heck we ain't got nothin' to lose".

I think both of these comments reflect a fundamental misunderstanding of the realities of how our real estate market functions. Hence, today's chart:



This is your basic supply and demand chart. However it really shows the dynamics of what is going on. When negotiating real estate, its important to go into a negotiation or "offer" with the most amount of knowledge possible. We need to probe what IS possible in a given scenario.

From a sellers standpoint we need to know if a buyer can afford to purchase the home. Do they make enough money? Are buyers as a whole making more money? Do lender require larger down payments? How much money does the buyer have available for earnest money? These are very important factors to know when determining how to price a property and also what to demand of a buyer in order to conclude a transaction.

From a buyers standpoint we need to know just as much. What does the seller owe on the property? Could they (or would they) come to the closing table with cash of my offer is less than what they owe? How motivated is the seller? Do they want to sell or do they HAVE to sell? What are the circumstances?

I think the chart above explains the dynamics pretty clearly. I make it my goal to educate each of my clients so that we spend much more time in The Sweet Spot than we do wandering around in Fantasy Land.

The Broad Perspective: Looking Ahead 10 Years

Frontline (one of my favorite PBS shows) has an excellent program on the government debt. The video is an hour long but extremely informative.

Now, you might be asking: What does government debt have to do with real estate?

Since real estate is affected by the actions of people, and the people are responsible to ultimately pay for the government's debts, the way in which the debt is handled will affect real estate markets across the U.S.

I read a book a couple years ago called The Coming Generational Storm. It was a very dry economics book but dovetails nicely with Frontline's presentation. Here are some thoughts about the next 10 years that will have a significant impact on real estate:

1. Baby Boomers began retiring early in 2008. There are 74 Million baby boomers. This supersized demographic segment of the population will live longer than any generation that has preceeded them. They will draw on government entitlement programs while not working to contribute to the tax base, thus enlarging the national debt.
   
2. Aging people also tend to downsize as they get older. Baby Boomers built most of the McMansions (read: Ivory Homes) that sprouted up in this last housing boom. They will want to shift to smaller housing in the next 10 years.
3. By 2017, our national debt will exceed 100% of our GDP! That hasn't happened since just after World War II...and we aren't in an epic world war right now. Heaven forbid that we find ourselves in one. We couldn't afford to throw dishpans at the opposing army.
   

There are two ways the government pays for its debts:

1. It raises taxes
2. It prints money

Raising taxes is a wet blanket on the economy and that isn't going to happen right now. Printing money is likely how things will get paid in the near term. That creates inflation, and that increases property values. Nevertheless, greatly increased taxes are still inevitable though without butchering popular government spending.

Besides a major tax revolt from my generation in the next 10 years, expect to see substantial property value increases as inflation blows out to pay for all our government spending. Oh, besides your house being worth more, a gallon of milk will cost $20.

Here is a toast to preparing for an eventful decade ahead...clink!

Housing vs. Unemployment

Mark Knoll, chief economist with the Utah Department of Workforce Services, has another podcast with some very interesting information. Its a good listen if you have a spare 10 minutes.

There were some particular points I wanted to mention.

First, the rise in unemployment, now at 5.2% in Utah, is slowly increasing as has been anticipated. Mark expects the increase to slow down later this year and possibly start improving early into next year. I recently heard another analysis that expects our unemployment "peak" to be in April of 2010.

Second, the unemployment is hitting the lowest ends of the skilled work force the hardest. Here are the numbers of new unemployment claims based on the highest level of attained education:

So almost 75% of those being laid off are high school drop outs or simply a graduate of high school.

What does mean to the housing market? For starters, it is putting big pressure on the rental market. Folks who dropped out of school are very likely to be renters. However, if they are out of work, they can't afford to live in a place on their own. They move in with friends or their parent's basement. They effectively withdraw from the market, therefore reducing demand, and that increases vacancy rates and puts pressure on landlords to lower rents. High School graduates are also part of the renter camp but not as much so. Still, the large number being laid off affects rents as well. As far as they are home owners, they will likely end up selling or foreclosing on their home if a job loss occurs.

Look for downward pressure on rents for the next 12 months as unemployment increases. Landlords would be wise to get leases that will keep tenants in their property through April 2010.

WAVE 2: More Foreclosure Pain Coming

Foreclosures have been mentioned in the national news recently but not as often as they were last year. Lets look at today's chart from Credit Suisse and find out why:


This nationwide reset schedule starts in January 2007. As you can see, we went through a massive wave of resets in 2007 and 2008. The subprime piper was paid.

Currently we are sitting in a lull between waves. The next wave coming is not subprime but the rest of segments of loans. Namely Alt-A, Prime, and (hold your nose) Option ARM loans. Notice that the resets don't end until 2012. That is quite a ways away. Also keep in mind that the foreclosures that occurred heavily in in 2007/2008 happened while people still had jobs. The next wave of resets is going to occur in an adverse employment environment. Uh-Oh!

Think of the housing marketplace as your digestive tract. You were at a party and ate a yummy fruit salad (easy money loans) somebody made. It was so good, you couldn't stop eating. As the party winds down you ask the person who made the salad what was in it. They tell you it was made mostly of prunes....you know how this story ends. There is that ominous hour or two while you comtemplate the uncomfortable future that awaits you for indulging in your fruit salad binge.

Right now we are just finishing purging the worst of the bad loans from the market through the foreclosure process. We are now poised for Wave 2 which starts next month. Hold on tight!

Blast From My Past

While rummaging through some old boxes and personal items, my wife and I stumbled across a funny artifact from my freshman year in high school.

My English teacher had asked us to do a presentation on early Indian communities in the southwest. Looking back on it, the topic seemed more fitting for History than English. Anyway, we were supposed to choose an aspect of their life (food, culture, rituals, ect.) to discuss. In some weird flash of inspiration, I chose to talk about housing. I put together a flashy presentation and made business cards to distribute to everyone to support my presenting persona. Here is the card:


For the record: When I started high school, I wanted to grow up to be a mechanical engineer. My third day in Calculus 101 and AutoCAD 101 at USU proved I was pointed in the way wrong direction. Yet, during all my childhood I never thought: "I want to be a Realtor when I grow up." It's funny how life turns out.

Weber and Davis Inventory Round-Up

Its important to keep an eye on inventory levels to get a feel for what is happening in the marketplace. High inventory has a tendency to push prices down as people compete to sell their homes. Inventory levels above 4-6 months indicates a buyer's market.

Today's charts compare the last inventory update in December 2008 with today's figures:

Davis County has seen some significant improvements in a couple cities. One of the reasons you see such crazy high numbers (West Point in December for example) is that you just don't have sales occurring to bring the numbers down. If you have 20 homes for sale and you only sell 1 in two months, that means you have a 40 month inventory. This was happening in quite a few cities in December. Clinton is still the best place to sell a home right now. However, Farmington, Fruit Heights, and Bountiful are bad and festering with outrageously high inventory.


Weber County's numbers are a similar to Davis County's. There has been dramatic improvements in a few cities but the overall numbers are increasing.

This increase in inventory means that prices may soften a bit more than they have already. We may expect to see a "price trough" this year as unemployment peaks and inventories don't start declining soon.

The Starv-O-Meter: Realtors Tough it Out

Ever wondered how easy it is to be a Realtor?


This first chart , The Starv-O-Meter, shows that the "average" Weber county Realtor sold 4.5 to 5.5 homes per year from 1996 to 2004. That is the normal range for the market place. Its been a tough road ever since. From 2004-2006, the ranks of the profession swelled as people hoped to make easy money from the market boom. Agents continued to rush in even up until the mortgage market shock in 2007. All these agents competed, and still compete, with each other for listings, buyers, and income. Many are not surviving. Today, there are almost twice as many Realtors as there are transactions to properly feed them all.

I called the board today to get the stats on total membership. Here are the numbers they reported:


These numbers were very surprising. It costs about $1500/year just to be a Realtor. I thought that many more Realtor's would have been flushed out in 2008. I guess not. Let's look forward to a proper flushing in 2009. Over time, market forces will push our average transaction-to-agent numbers back to the 4.5-5.5 equilibrium range. If we go back to 2003 agent levels we should be almost there.

Video of the Day: Ameriquest Funnies

My mother sent these clips to me this morning. They really are hilarious. They are also amusing for another reason: Ameriquest went out of business because of the exact message they are promoting in these ads. They were one of the first lenders to go belly up when the subprime mortgage party ended.










Enjoy!

Weber and Davis County Sales Data

Many of you have requested that Davis county be included with the market data that I share. I have assembled the charts for your enlightenment.

Here are Davis County's set of charts:


Davis County has had a choppy ride since the downturn began. Since it is a major bedroom community to Salt Lake City, it has higher demand and commands higher prices than Weber County further north. Nevertheless, the recent down leg can only be described as spastic. March sales are up which is expected as part of the seasonal cycle.

Here are Weber County's charts:


Sales are up and following a nice orderly seasonal trend.

Now, despite this, sales volumes in both Weber and Davis are still way down from last year, which was way down from the year before. What does this mean?

A couple insights:

1) This will be the year that nearly all the part-time, unmotivated, or unprofessional Realtors get out of the market. The Exodus will begin again when board dues are payable.
2) We seem to be stabilizing as a marketplace. Our sales are now way below where they should be based on our population growth. See chart below. Economic conditions are scaring most buyers and keeping them in the rental market. That means there is pent up demand for housing that will unleash itself once this economic storm passes over. I imagine that will happen in the next two or three years.


The market isn't dead, it's just sitting in a lazyboy eating a bag of cheetos watching re-runs of Design on a Dime. Eventually it will get up again and be more active.

Photo of the Day: Chapel Design Disaster

If you live in Utah, you can count on finding an LDS chapel somewhere close by in your neighborhood. The church seems to have recently nailed down a highly efficient and aesthetically pleasing chapel design. The church recently built one at the corner of 27th Street and Jefferson Ave. in downtown Ogden. Here is a photo:


This is what a chapel should look like.

While driving around Sunset today I cruised past this embarrassing edifice on 1800 N.


At first I thought it was something else besides a church. That is, until I saw that anemic little steeple hiding there. It seems to me that the church architects were on strike so they called in the state prison architects to throw something together in the meantime. EEK! This building seems to invoke bewilderment rather than the intended sense of reverence.

It's good to see that the church has a contemporary design that works well now.

Making a Great Fence

I promised you some information on how to make a fence that will last and look great. Here is the handy work from last Saturday:


This fence is made from cedar posts, redwood crossbeams, and cedar slats. All the parts can be found at Home Depot. The hardest part is setting the posts. I mistakenly took the effort to hand mix the concrete for each post in this section of the fence. It took me an hour and a half per post to set. No fun. In contrast, installing the cross beams and slats took me just 3 hours. I have since learned that you can just dump the concrete mix in the hole and run the hose on it to set the posts. I tried that and set two posts in 30 minutes. The rest of the fence in our yard should go up fast as soon as I finish wrestling the Chinese Elms and Tree of Paradise root balls out of the fence line.


One last picture. I really like the contrast of the nice fence against the bombed out porch behind it.