December Inventory Round Up

Here are some amazing charts. Normally we like to see inventory levels between 4-6 months in a healthy marketplace. Anything over 6 months is a buyers market.

First lets take a look at Davis County:

West Bountiful seems to be the best place to sell a home. It's the only place that isn't a buyers market. Granted, it is a small geographic area and there arn't too many homes for sale there. What is shocking to me is that inventory levels for bread and butter communities like Woods Cross and West Point are over TWO YEARS! This is not good for those communities. I expect these neighborhoods to be shell-shocked with foreclosures as job losses mount for 2009. Keep your eye on buying opportunities there.

Here is Weber County:

Weber County has a lot of small little communities that are incorporated as cities so the list is longer here. There isn't a community in Weber County that is not a buyers market right now. I am surprised here by Riverdale (6 years of inventory) and Farr West (5 years of inventory) being so high in inventory. These cities saw huge developement over the last four years. Most of the developments were large (2800 SQFT+) ramblers with two or three car garages. I guess the people who moved up into these neighborhoods are needing to move down again. Look for more buying opportunity as sellers lose jobs and banks cut prices to move inventory.

Let me again express my shock as these figures. My brain is trying to handle talking about inventory in measures of years instead of months.

Good Landlord Program Spreads to Clearfield

Clearfield city recently announced that it will be instituting a Good Landlord program much like the one in force in Ogden City. Clearfield City now requires all landlords to be licensed and pay a $27 fee per unit annually. If landlords choose to participate in the Good Landlord program, that fee will be reduced to $5.

This is a good move for Clearfield city. Ogden has had a 30% reduction in crime amoung rental units because of heavy participation in the program. Ogden's program was instituted in 2004. Ogden's non-participant fees are much higher than what Clearfield is proposing which probably accounts for the strong participation levels in the city. It will be interesting to see what percentage of landlords choose to participate in the Clearfield area and how that will affect crime statistics there.

Lessons in Owner Finance

I recently closed a transaction that involved owner financing. Given the tumultuous nature of the mortgage market, it is likely that we will see more seller financing soon.

It might be beneficial to give a quick review of how ownership and conventional financing work in order to understand how owner (aka seller financing) works.

Lets review:

CASH PURCHASE TRANSACTION
This is the most strait forward transaction. The black arrows indicate ownership or a participating interest. In this case the buyer paid cash for a home. He then receives title and owns the home. Very straight forward.

FINANCED PURCHASE TRANSACTION
This is the scenario we are most familiar with. Since we don't save enough to buy our homes outright these days, we find a bank willing to give us a loan. In this case, the "Old Mortgage Company" has agreed to give the buyer a loan. The home is collateral for the home and the bank has the right to take possession of the home if the buyer doesn't make monthly principal and interest payments (represented by the green arrow). The bank has an interest in the existing mortgage through an instrument called a Trust Deed. The Trust Deed is what allows them to foreclose on the buyer if there is a default. The Deed is recorded on the title of the property. Therefore we have represented this as black arrows tieing the bank to the mortgage which is tied to the home.

So what happens if a buyer wants to purchase a property and a seller wants to sell a property but no mortgage company can give a loan...even to the highly qualified buyer?

STRAIGHT OWNER FINANCED TRANSACTION
This transaction is a little less familiar but easy to explain. In this case, the seller has paid off the property or owns it out right. This seller may be the original cash buyer from our first chart. Now, the buyer for the property doesn't qualify or doesn't want a conventional mortgage; but, in the seller's eyes, the buyer is a good credit risk. Therefore, the seller agrees to "finance" the transaction. In this case, the buyer might pay a negotiated down payment to the seller and then have the rest of the equity in the home "loaned" to him. The buyer agrees to make monthly payments to an escrow company who in turn makes payments to the seller. The loan amount, interest rate, and payments are all accounted for by the escrow company and the seller now becomes like a bank...making interest. Notice that the seller, like the Old Mortgage company from before, has a Trust Deed on the property and can foreclose if the buyer does not make timely payments. The home is still collateral for the loan from the seller.

Now not everyone has a home that is paid for. In fact, only about a third of American's homes have no mortgage. That leaves a lot of folks out there that may want to sell a property but have an existing mortgage.

How is it possible to sell a home with seller financing if it has an existing mortgage?

ALL-INCLUSIVE OWNER FINANCING TRANSACTION
This is the most complicated form of seller financing but is probably the most necessary in today's marketplace. In this instance, the buyer can't get a loan even though they are a good credit risk. Meanwhile, the seller has an existing mortgage from the Old Mortgage Company that needs to be paid. The All-Inclusive Seller Financing transaction is our work-around to this dilemma. In this scenario, the Old Mortgage company keeps their Trust Deed on the home. They still demand monthly payments. However, the seller creates an All-Inclusive Note and Trust Deed which "wrap" around the existing mortgage. This allows the buyer to have title conveyed to him "subject to" the existing Old Mortgage Company financing. The scenario plays out like this: the buyer makes monthly payments to the escrow company toward the seller's new loan . The escrow company takes that money and makes a payment to the Old Mortgage Company to make sure they are happy. Then, the difference (if there is any) goes to the seller as profit. If the buyer stops making payments, the seller can foreclose through the power of the Trust Deed.

Lets pretend for a moment the escrow company wasn't involved and the buyer made direct payments to the seller. If the seller stops making payments to the Old Mortgage Company, they will foreclose on the seller and in turn on the new buyer. To avoid this possibility, I absolutely recommend using an escrow company as the best way to keep this arrangement clean and properly accounted for. It's good to trust those whom you make business arrangements with. Its even better to hire an impartial third-party to make sure the trusted parties are doing what they are supposed to.

CONTACT ME if you would like to learn more about how these arrangements work.

Ogden City and School District Working Together

News came out this week that Ogden City and the Ogden City School district have entered into an agreement to work together regarding land development and use within the city. Currently, the School District owns some hodge podge lots and obsolescing schools that it wants to make useful. The city also owns some land that is adjacent to many of the school's parcels. The school district needs land to build schools and the city wants land for more possible in-fill development.

The arrangement they have made will be good for the city. It includes some land swaps and also some colusion on development on other areas.

I think the most interesting part of this arrangement is the land swap proposed.

The above photo is of Dee School and the LDS Church Pioneer Ward building. I will let you guess which building is which. (HINT: The church is not the military looking edifice in the right of the photo.) The Dee lot is expansive and consumes the entire center section of the block. It would be an ideal location for new residential construction. This location is only two blocks from The Junction. The school is steel and reinforced concreste with no walls in the classroom areas. The floorplan is circular in design. Think of the USS Enterprise from Star Trek. That's what it feels like inside the school. Its an architectural atrocity.


Here is a photo of the front of the school. Not much different than the back...or the side...or the other side. Dee has been scheduled to close and then unscheduled to close multiple times in the last couple of years.

The proposed land swap is for city land at 20th Street and Jackson Avenue.


This parcel of land happens to sit adjacent to the school district land that runs along 20th Street down to Monroe. It makes sense for the city to exchange this land with the school district. It is close to the school district headquarters campus and large enough for an elementary school.

Another interesting colusion involves land at 24th and Adams. I am unsure what the possibilities are for this land. The large space is owned by the city and the building just to the north is owned by the district.

It will be interesting to watch and see how this partnership helps make better use of the land that each partner has stewardship over.

Buyers Further Fortify Their Bunkers

Bad economic news has taken timid home buyers and sent them running for cover. Although Utah's economic outlook is not rosy for the next year, anxiety-inducing national economic headlines have gripped buyers and kept them in their current homes or renewing leases. November's sales numbers are simply bad.


As you can see in the chart above, November sales are at par with January of this year. January is traditionally the worst month of the year for sales due to weather. In January we had 3 feet of snow on the ground. In contrast, November was particularly warm and balmy. Nevertheless, November's sales mimic those from January. Ominous.

Our running chart still shows a down trend in sales. Since December and January are softer months for sales, this trend will continue. The question in my mind is how much further can the market contract? Financing barriers started the decline, now job losses and economic woes will weigh on it. If I were to place a bet, I believe the moving trend will flatten out in April or May and stay there for a year or two...or three. Time will tell. Let's watch and see.

Historic Re-Development: Quincy and Fowler Avenues

As a compliment to my previous post Path to Better Neighborhoods, I thought I would shed some light on an interesting project underway.


This fine Arts & Crafts style home is part of the city's effort to rejuvinate the 25th block of Quincy and Fowler Avenues. Both streets boast historic grade cottage victorian homes and bungalows. They are very cute neighborhoods. This home happens to be new construction and imitates the style and character of the homes around it. Several of the existing homes in the neighborhood have already been restored.

This particular home excites me because it has so many of the features of a traditional early 20th century home. I am particularly impressed by the wanescoating, mission style light fixtures, wood casings, and doors. The floorplan is also reminiscent of older homes except with modern usability kept in mind.
This particular home is about 2600 SQFT which included an unfinished basement. There is a master suite, 3 bedrooms, 3 baths. Matching detached garage in the back


There is plenty of space in the back yard.


The kitchen is modern with a mud room leading out to the driveway.


Still plenty of room for two more period new construction homes to be built soon.
The best part about this home is that its for sale for only $189,900...well below the $220,000 you would normally pay for a home of this quality. They city is also offering special financing for this home. If you or anyone you know is interested in quality historic style housing, have them give me a call at 801-390-1480.

The Path to Better Neighboroods

There is a debate out there about how local governments can best improve neglected and aging neighborhoods. In fact, as a member of a steering committee for the East Central Neighborhood community plan, we are discussing this very aspect and what government can do to improve the neighborhoods.

There are two approaches, I will call them direct intervention and indirect.

With direct intervention, taxpayer money is used to buy, control, and/or renovate property so that it no longer is a burden on the neighborhood aesthetics and property value. Ogden City participates in direct intervention with the Home Sweet Ogden program. This is basically a HUD sponsored program facilitated through grant money from the federal level. I happen to sit on the advisory committee overseeing this grant. The city has also been involved in other direct intervention projects like the recent post on 2601 Jefferson Ave. The city has certainly taken an assertive approach in cleaning up some very awkward properties that perhaps would have been unfeasible to the private sector. The changes being made to these properties are so dramatic that their value and use will be perpetuated for generations.

The indirect approach is one that I support the most strongly. Although it includes zoning and regulations on development, it also includes a very important focus on infrastructure such as sidewalks, curbs, gutters, and streets. This focus is what we think of when we think of the traditional responsibilities of city government. It is the window dressing for the neighborhoods. However, the city needs to know that before investing in these upgrades, that a neighborhood is willing to add-to or protect and maintain this investment in the infrastructure and neighborhood.

Fortunately for our neighborhood, we have reached that point. Crews began work yesterday on removing old sidewalk and pouring new.


This summer, new curb, gutter, and approaches will be poured. I am glad this is finally happening. My contacts in the city have told me this has been on the docket for almost 2 years.

Finally, I am a big believer in infrastructure improvements because I believe they spur further growth and development in a neighborhood. The Jefferson and Eccles Historic Districts all had new street infrastructure installed. Shortly after that, hoards of buyers shopped the neighborhoods looking for homes to fix up or move into. Demand for property in those areas (and therefore property values) jumped once the infrastructure was done. I believe that the public investment in infrastructure precedes the desired private investment in properties. I have the data and charts to support this idea. City efforts to improve our streetscapes will only bring good things to our neighborhoods.

Midtown Clinic Expansion Means Demolition

Midtown Clinic is growing its parking space. I wrote about this in the previous Midtown Expansion post back in August. It looks like they finally got around to the demolition. Architecturally, I like this home that demolished, however, it was a triplex that had been scabbed together. There was a second home in the backyard as well. Very weird. According to neighbors that have been there forever, the original owner lived in the front house until they decided to retire so they built a home in the backyard for themselves and rented out the front home. I guess that worked well until the guy died a long time ago. Then the property fell into the hands of a slumlord. The rest is history...

BEFORE

AFTER

Interest Rates: The Last Days of the Lows

You have heard the advertisements for the last several years: "Refinance NOW while rates are at historic lows!". Surely, being buffeted with these ads for several years has made us quite comfortable with how low rates are. In fact, I used to ask myself, how can they go any higher? Times are so good, I can't foresee any reason interest rates would increase.

Well, I am a little wiser than I was then. All markets ebb and flow. If low rates are ebb, we are due for some major flow in interest rates.

Lets see what Mr. Nouriel Roubini has to say about it this week:

Desperate times and desperate economic news require desperate policy actions ... The Treasury will be issuing in the next two years about $2 trillion of additional debt ... These policies – however partially necessary – will eventually leads to much higher real interest rates on the public debt and weaken the US dollar once this tsunami of implicit and explicit public liabilities and monetary debt driven by rising twin fiscal and current account deficits will hit a world where the global supply of savings is shrinking – as most countries moves to fiscal deficits thus reducing global savings – and foreign investors start to ponder the long term sustainability of the US domestic and external liabilities.

Mr. Roubini is a highly competent economist and happened to call the subprime mortgage crisis well before it hit the market. In laymen terms he is saying that interest rates MUST increase due to the fact that no one will want to lend money to the U.S. unless the rate of return becomes attractive enough. All these bailout programs instituted by our government are creating inflation problems for us in the future.If you print money to pay for bills you can't afford otherwise, you create inflation. If you don't stop printing money when you have inflation, you get more inflation...and then hyperinflation. Think Weimar Republic. Think $20 for a gallon of milk. Gasoline at $14 a gallon. That is what inflation gets you. It also makes investments in financial insturments (like mortgage debt) very unattractive unless interest rates and rates of return are keeping up with inflation.

I don't know what degree of inflation is coming. The Federal Reserve has pledged bailout funds in an amount over half of the entire economic output of the U.S last year - $7 TRILLION. That kind of infusion into the money base will affect prices. It has to.

So what does this mean to you and real estate?

First, if you have an ARM or any kind of adjustable rate, and you have the ability to refinance right now, DO IT! Don't wait till next year. Do it this week. Why this week? The Fed just purchased $600 billion in agency (read: Fannie Mea/Freddie Mac) debt which has temporarily pushed the the risk for that debt lower and therefore interest rates on mortgage debt have plummeted in the last few days. Once the market adjusts pricing to compensate for future inflation expectations, these low rates of today will be gone for a generation.

You may be asking yourself "Why refinance my ARM when I want to sell my property in a year or two?". Let me answer this for you. First, you need to plan on the buyer getting an interest rate in the future. If the rate is too high, he can't buy your property. You end up being stuck with the home AND a major payment increase when your ARM resets. It will take a couple years worth of rent increases to catch up to that reset payment in a high interest rate environment. Second, if the rate is too high for potential buyers, you may be forced to use seller financing to sell the property. You can't do that if you have a wild and volatile ARM underlying as the foundation for the transaction. Seller financing works best with fixed interest rate mortgages underlying.

These reasons should be enough. Put your financing foundation on a rock of stability.

If you need a competent mortgage professional. I will gladly refer you to someone I work with.

2009 Economic Predictions From State Economist

Looks like 2009 will be the doozer we have been predicting. It will be a great year to buy real estate. Look for lots of REO, HUD, and Short Sale property due to significant job losses.

Click HERE to listen this short but informative podcast from the chief economist for the Department of Workforce Services.