Real Estate Bloodlines: Scenes from the Secret Recorder's Vault

I went to do some historical research today at the Weber County building.  I wanted to find out who has owned my home since it was built in 1908.

My quest led me to the Weber County Recorder's Vault.  Located in an inconspicuous hallway on the 2nd floor of the Weber Center, the first thing I noticed was the security coded doorknob and a handwritten note "knock to enter".

Upon knocking, a pleasant elderly woman answers and wisks me into the room.  The room smells of old books.  As I cast my eye around the room, I see rows and rows of disproportionately large books carefully organized.  Their scale is awkward and almost cartoonish.

The clerk asks what I am looking for.  When I respond,  I am handed a note with a handful of letters in the alphabet.  She pulls out a book stamped with a letter on the cover and shows me how to read the cryptic cursive handwriting from the 1800's.  Then I am on my own.

My abstract search reveals some interesting facts about the creation of our home (look for that in a later post).  When I am done, I look at the clock. What I thought was just a few minutes was actually an hour and a half.  I am late for my next appointment...  

Nanny State Real Estate: The Rise of the Ridiculous

It seems that with the increase in bank owned inventory there has been a proportionate increase in ridiculous Federally mandated safety fixes to properties.  Here is today's example:

My, doesn't that look pretty.  I am so grateful that Uncle Sam, in his well-intended way, has mandated these to protect us from ourselves.  Had these shabby railings not been there, I would have flung myself off the terrace and onto the driveway below. 

Upon reflection, it's remarkable that mankind has survived the ages without handrails....

Notice that there is only one person in all of these pictures.  I am sure the rest of them died of neck and back injuries sustained when their governments failed to mandate handrails.

Housing Roulette: Short Sale Odds Against the Buyer

I have some clients I am shopping with who have recently shown an interest in short sale properties due to their apparent attractive price points.  The thought of shopping for short sales with owner-occupants instinctively made me cringe.  It has a reputation as being a notoriously bad experience.  However, I wanted to double check the market to make sure the expectations I established with my clients were correct.

So, let's say you are a buyer and want to play the short sale roulette.  Here are some things you need to know:

1.  Short sales constitute 18% of all active listings but only make up 10% of the sales.
2.  832 short sales were listed for sale in the past 12 months.  Only 270 (or a measly 32%) sold.

So what does this mean to you?

For starters, it means that if you find the perfect home that meets your every need and it's a short sale and you place an offer on it, you have a roughly 1-in-3 chance of closing on the sale (assuming you are the only person putting an offer on the property).  Why only 1-in-3?  Well there are many variables at play in short sales that do not affect traditional listings. Here are a few:

1.  Bank Stubbornness - By definition, a short sale is the "shorting" of the debt owed on the property that allows it to be sold at a more agreeable market price.  Since the bank has to approve what kind of haircut they will take, many times they will keep that point too high to make a transaction work.  There are many behind the scenes reasons for this counter-intuitive behavior but the fact is that it still happens.  If the bank won't play ball, the home goes to foreclosure and comes back as an REO listing.

2.  Bank Bureaucracy - Many times, particularly if the seller is participating in HAFA, the process can take a very long time to complete.  I had this happen on a listing and the it took so long to get the sale approved that the market had changed significantly to the downside.  Thus, it rendered our sale price unattractive relative to contemporary market pricing.  In this case, a buyer will usually excuse themselves from the transaction and the home will go to foreclosure.  It will come back later as an REO listing.

3.  Seller Absconding - Because of the large length of time involved, many times sellers will lose patience and move on with their life out of frustration. One time, I had a short sale I negotiated for six months only to have the seller disappear and change his phone numbers.  This happens more often than you think.  Because short sales become extremely time sensitive once approval is gained, absent sellers can ruin a short sale pretty quick.  When sellers abscond, the home will go to foreclosure and come back later as an REO listing. 

These are just a few of the pitfalls associated with closing short sales.  From a buyers perspective you have a 1-in-3 chance of getting the home if you are the only one making the offer.  What happens if you are one of multiple offers?  Well your odds get worse with each additional offer you are competing against.  If you were competing against 5 offers, your chances would be about 1-in-15.

Of course, on a case-by-case perspective the market isn't as perfectly predictable as these numbers.  Knowing the listing agent, their negotiation style, and trustworthiness goes a long way to helping you understand your odds.  However, in the broad picture, there is still a lot of uncertainty in the business of buying short sales.

Most of the owner-occupant buyers (as opposed to investor-buyers) I have worked with prefer to avoid short sales altogether and stick with the more reliable and less frustrating realm of REO and bank owned properties.  They can be just as much of a bargain as short sales but without the hassle.

Photo of the Day: Mt. Ogden Views

I was driving about today and was fortunate enough to have my camera handy:

This was take from about 23rd Street and Taylor Ave. in Ogden. Enjoy!

REO Worst Home Improvement Gallery

I had the opportunity to preview a few REO homes with a client recently.  We stumbled upon a home that had some "improvements" that were too funny to pass up.  I came back with my camera to document the do-it-yourself comedy.

 

On first impression, this home seems like a cute brick bungalow from the 1920's.  However, upon closer inspection some interesting surprises await...

First up is the swamp cooler support structure.  It's made out of landscaping border lumber and scraps.  It appears that the level and square were unavailable the day it was made.  

On the interior we find that the swamp cooler was ill fitted for the window woodwork.  However, that is an easy fix with a hammer and brute force.  

Something is amiss with the fireplace.  It turns out the fireplace is electric.  Notice the wire and plug sticking out of the bookshelf...then notice the outlet on the floor.  

 

Yellow foam is a cure-all for any home improvement problem.  It's also handy for making your bathroom look like something from a horror movie. 

Sometimes basements can be scary.  What better to make you feel safe and keep you company while you shower than this friendly vent register....  

 

...of course, assuming you can get to the shower without electrocuting yourself first.

Make sure while you are on the loo taking care of business, that the business from upstairs doesn't drip on your head.  

 

 

Plumbing is expensive.  Best to just avoid installing it when possible.

 And to close the sale, this home comes with a 2-year home warranty!

There you have it folks.  Some of the "best" improvements I have seen in quite a while.  I hope you grinned like I did.

The Rent Price Penalty

As with all things in life, risk is tied to compensation.  Consumers see this relationship particularly in borrowing money.  The payday loan office charges over 300% interest because so many of their loans go to collections.  The risk of lending is very high.  Banks will increase the interest rates on car loans made to individuals with bad credit.  Since most people operate on a fixed budget, the higher interest rate translates into a higher payment for a smaller amount of money.  That smaller amount of money translates into a dumpy car.

This same dynamic typically plays out in the housing market.  Folks with great credit present a low risk.  They can borrow inexpensively.  Since their interest rate is low, their budgeted payment allows them to borrow more for the same payment than someone with bad credit and a high interest rate.  Thus, those with good credit can afford to live more lavishly than their bad credit friends.

So why do I bring this up?  Well, risk runs in many directions.  Tenants typically pay more for a rental space than they would if they owned something.  However, sometimes the spread is not that great.  In fact, during the housing boom, rents were LESS than mortgage payments.  That is normally a good indicator of an overheated market.

Today though we have just the opposite situation.  Good credit buyers are shunning ownership right now and running to rentals instead.  This pushes up demand and rents on the best rental units.  How much does it push up the rents?  Lets look at a recent example:
 
459 20th Street (which you may recognize) has been for sale at $89,900.   Let's assume that a purchase is based on a 4% interest rate with a $3,150 down payment.  The monthly payment for a buyer comes out to $527 (principal, interest, taxes and insurance).

Yet, despite this very low payment, buyers have not been forthcoming.  However, we just leased the property to the second tenants to look at the place for $695 a month net.

As you can see in this case, the tenants are willing to pay 32% MORE to rent the property than to own it.  That is a remarkable thing.

Even more remarkable is that this is not a rare situation.  Demand for rentals is high while demand for ownership is low.  That leaves an abundance of bargain homes in the marketplace that need investors to own and rent to tenants for much more than the mortgage payment. 

It makes sense to be one of those owners.

Video: Market Seer Explains How World Works

A colleague of mine passed this video along in an email today.  I thought I would share this most insightful exchange between an antagonistic British hostess and a hedge fund manager who understands economics.  He explains how the housing market works at the very first.  (Note: The reasons he cites for the market bust are the exact same reasons real estate is such a great investment right now.):



I hope you found this video as enlightening as much as I did.

Enforcement: Ogden City Boots Dishonest Landlords From Discount Program

As a member of the Utah Apartment Association, I get a regular trade publication called the Landlord Times.  In today's edition was an article entitled Ogden City Disqualifies Dozens from Good Landlord Program.  Here is a excerpt:

Ogden City recently revoked the Good Landlord status of dozens of Ogden Property Owners who violated their agreements with the city, forcing them to pay thousands of dollars in extra fees to the city.

Participants in the Good Landlord program in Ogden agree to run background checks on all applicants, deny applicants with certain high risk factors, evict tenants who commit crimes, and comply with city ordinances and codes.  In return, the city reduces the per unit license fee as much as $143 per unit. 

Although I hear a lot of old timer landlords complain about this program, I have had nothing but good experiences following the guidelines in my business practice.  In fact, the class that the UAA puts on to train participants in the program has been a valuable business education tool.  It teaches landlords how to run their business like a business instead of a hobby.  It empowers owners to make their rental respectable instead of flophouses.

If you own rentals in Ogden, take heed to honor your agreement with the City if you are participating in this program.  Everyone benefits when you do what you say you will do.   

Affordable: House Payments 40% Below 2006 Levels

An interesting headline courtesy of Housingwire this week in Monthly mortgage payment almost 40% cheaper than 2006. Here is an excerpt:

Housing affordability improved dramatically because of declines in both prices and mortgage interest rates, according to David Stiff, chief economist at Fiserv.

"The monthly mortgage payment for a median-priced single-family home is now $700, compared to $1,140 in 2006 — a decline of nearly 40%," he said in comments on the latest release from Fiserv.

Even more interesting is this snippet:

Stiff said national purchase mortgage payments now account for only 13% of monthly median family income, down from 23% in the first quarter of 2006, and the lowest percentage since 1971.

That should give us some historical perspective.  How low can house payments go?  Not much more in my opinion.  The only scenarios that I foresee pushing house prices meaningfully lower would be a pandemic or a Zombie Apocalypse.  

We're On The Cusp: Charts Show Prices to Rise or Massive Overcorrection

I had a conversation on Friday with a client about house prices and how the market "feels" like such a good value.  My client remarked: "Houses are a better value than they were in 1999 when I got in the business!"

This comment caused me to reflect on market dynamics for a moment.  The housing market in Utah peaked in 1999 but the peak we experienced in 2007 was leaps and bounds better.  Time has a way of distorting perceptions because of economic changes and inflation. So, to verify if my client's gut feeling was correct, I decided to do some heavy analysis and compare sticker prices with Consumer Price Index "Inflation-Adjusted" prices.

The findings are shocking in my opinion:

First, lets review the above market history since 1979.  Let's follow the brown line for a moment. If you purchased a home in 1979 worth $100,000, that home today would be worth approximately $340,000.  Between then and now, your home would have declined in value five separate times from five separate market peaks.  However, each successive market peak exceeds the previous one which brings you to today's price point. 

Now lets look at the blue line.  In real "inflation-adjusted" terms, your home would have declined in value for 12 years even though its sticker price was increasing during that same time. Your home's value lagged abnormally behind inflation quite a bit from 1979 to 1992.  Then, in the early nineties, this distortion corrected and there was a tectonic increase (both real and nominal) in the value of your home.  After peaking in 1999, the real price plateaued and stabilized again until our most recent housing bubble . 

The lesson to take away from this is that, when adjusted for inflation, housing is a fairly stable and predictable store of value.  Is it any wonder then that it has been such an excellent tool for creating and maintaining wealth?

Now lets look at the latest housing bubble to measure the local market's progress in finding equilibrium. 

This chart is the same as the first except we zoom in on the years 1997-2011.  Again, here we are looking at inflation adjusted prices.  A quick glance at the chart confirms my client's assertion that homes today are indeed a better bargain than they were in 1999.  In fact, we are very close to the market trough of 2004.  Keep in mind that this data is six months old.  Today we may already be at parity with the previous inflation adjusted market trough.  We won't know until a few months when today's data is finally released.

Regardless, what we are seeing is that we are at or very near the natural equilibrium point for housing.  There are a couple questions now that need answering:

1.  Will the market over-correct?

If it does, that will set up the market for another scenario like the early 1990's when real and sticker price values vaulted after lagging behind inflation.  I don't know anyone who bought real estate in the early nineties who is doing poorly.  It may be wise to watch this metric.  An over-correction is a boon for investors and new home owners. 

2.  If the market does not over-correct, what's next?

Once the market hits its natural equilibrium point, which on this inflation adjusted chart is around the $100,000 mark, will it hit bottom and plod sideways again?  If it does, with inflation increasing, that means that house prices will have to increase with it to maintain that equilibrium.  This very well might be the case.    

Either way, we are at an important junction.  We will either enter a super-bargain phase of the market. Prices hold.  And it becomes nearly impossible to go wrong purchasing investment real estate because of its relative value to the dollar. Or, the market will start to see rising sticker prices as nominal values try to keep up with inflation.

Whatever happens, it appears that brighter days are just around the corner.

Financing Mortgages In the Days of Old

653 21st St. Ogden, UT c.1900

I had the opportunity to review some very old title work at the Weber County building last month.  One of the curious things I discovered while I was there was an absence of trust deeds and mortgage company names in the register.

The books I reviewed dated back to the mid and late1800's during Ogden's growth and maturing into a major population and economic center.  I watched the registers witnessed as land was subdivided, sold, improved and sold again.

The most captivating part came as I saw what happened when new homes were constructed.  Here is an example:

In 1907, 459 20th Street was a vacant lot owned by Albert Richter of Ogden.  It appears that Mr. Richter constructed a home on the lot and then, on September 10, 1908, sold it to James and Charles Moore, brothers, for the princely sum of $3,300.  However, rather than going to the bank and getting a loan, inscribed in the book was this note: "$3,000 payable at 8% in 10 years" with Mr. Richter being the Grantor.  What we find out is that the Moore Brothers purchased the property with $300 down payment and seller financing the rest after Mr. Richter built the home with his own cash.

Some fast work with our mortgage calculator reveals that the house payment was $36.40 a month.  But wait...adjust that for inflation over the past 103 years and that would be paying about $850 today. The home's sale price of $3,300 would be about $79,000 today...about what you would expect to pay for the home as it was originally when it did not have a bathroom, laundry, or electrical like it does now.

Anyway,  the early 20th century was an interesting time to be in the land and housing market.  Most of the transactions were done with cash or through seller financing.   Bank mortgages like we know today didn't come onto the scene until the Great Depression and FDR's New Deal.

So, what does this all mean?  If the mortgage market lacks Federal support through Fannie and Freddie Mac and other government contrivances, the private mortgage market will tend to gravitate back to a shorter termed mortgages and they will be less available.  Is this a bad thing?  Well, it depends on your perspective. But, it is the natural course of action in the absence of a fluid and confident marketplace for mortgage bonds.

Fannie and Freddie Mac are on their way out.  If new market mechanisms can take their place, we may still see 30-year mortgages continue; however, the proof is in the pudding.  Let's watch and see how things play out.  These changes to the way we do financing are so significant that they may take place over the course of a decade or more.