Where is the Real Estate Market Headed

It is a challenging thing to try and predict just exactly where the Real Estate market is heading. The chart above reflects the California median home price for detached homes from its peak in May 2007, its low point in Feb. 2009, and the fairly steady recovery to date (at least through December 2013). We have a long way to go before we make up the full loss (59%) in home values (some local markets fared slightly better,) but I am still confident that there is a light at the end of the tunnel and it’s not a train!

A recent California Association of Realtors (C.A.R.) report (released on February 26, 2014) that provides data on January home sales, shows a slight increase in housing inventory and a reversal of a two month decline in pending sales as we prepare to enter the spring home buying season. This is good news since there was a considerable amount of concern that the market had stalled toward the end of 2013 because of the slowdown in pending sales coming in to the New Year. With a slight drop in the 30 year fixed mortgage rate to 4.28% (15 year fixed rate is currently 3.32%) and stabilized home prices, the signs of a good robust spring/summer home selling market appears now to be heading in the right direction for both buyers and sellers.

The huge upward price swing in home values during the first 3 quarters of 2013 was the result of investors, move up buyers and first time homebuyers all competing over the same slice of pie. This caused a rather abrupt increase in home values but with an economy that didn’t produce the jobs and or salaries to match that upswing, things just tapered a bit. In addition new housing construction has yet to provide additional inventory choices to the consumer. Once those homes start coming on the market then it should open up several more options as well.

I believe that things should start to improve in the spring/summer months of this year and we are already seeing signs of increased active listings and new pending sales toward the end of February. With interest rates remaining low and sellers considering their options, things could heat up rather fast and whether you are buying or selling you should be tracking these changes with your Realtor.

Some of the other statistics that California Association of Realtor researchers found out in their recent Home Buyer and Home Seller Surveys are that home sellers are more optimistic about the market and expect it to improve in this next year. Many of those homeowners said they plan to take advantage of their home equity by selling and moving up to another home. In addition buyers are of the opinion that the Real Estate market is a very sound investment. This is very good news for all!

Written by Mike Southwick – use by permission only

 

Another Satisfied Homebuyer

Let us introduce you to Nick and Christina who recently purchased this beautiful 5 bedroom, 3 bathroom, 2771 square foot home for $415,000. What makes this story worth sharing is that Nick and Christine were able to use Nick’s VA benefits since he had served overseas in Kuwait just after the conclusion of Desert Storm. The process for a military veteran to purchase a home using their VA benefits can sometimes be a challenge but the challenge often doesn’t come from the lack of qualifications from the buyer themselves. What often makes these transactions hard is the perception by the seller and or the sellers’ real estate agent that a VA buyer is somehow less qualified than a cash buyer or a buyer using some other form of financing. This is often the farthest from the truth and certainly not the case with our clients Nick and Christina. So let us encourage you to give our veteran’s a chance when they come knocking on your door to purchase a home. Congratulations Nick and Christina on your new home and we wish you all the best!

 

A Housing Market Correction

It would appear from all major market indicators that our Real Estate market has entered into a slight market correction. This is in no way bad news at all. What we need to realize is that real estate values actually peaked in most major markets in California around August 2006. We then witnessed a real estate value decline of approximately 20% by January 2008 and real estate values in most markets continued to decline and reached a low point in February 2011 which was a total loss of approximately 50% from the peak of the market. The government then stepped in and provided a tax credit incentive that helped boost the purchase market and also helped increase values slightly but the heavily loaded distressed inventory (REO – Bank Owned and Short Sales) caused that increase to diminish and the market stalled once again. By February 2012 the decline in home values adjusted to its lowest point bringing the total loss of equity in most major real estate markets to just a little under 55% from its peak in August 2006.

The good news is that the decline in home values is over. What began to happen toward the end of 2012 is that, investors, first time buyers, move up buyers, and those who re-entered the market after losing their homes, started creating a home buying bonanza. With the rules of supply and demand being the guide, home values increased rather quickly by conservative estimates of 25-30%. This means we still have 20-25% of the overall loss to make up before we reach the peak values of mid-2006. We are all keenly aware that the job market is moving slower than we would like and the economy remains fragile but home values remain stable and poised for future growth.

The rules of supply and demand continue to rule the day and with a shortage of new construction, it won’t take the consumer long to figure out that prices are not dropping and the wheels are not falling off the bus as they were in 2008. In addition, normal buying patterns (job transfers, school year influence, and seasonal shifts) are allowing for a normal real estate cycle of buying and selling to occur. Sellers must face the facts that what a willing buyer will pay based on comparable sales prices are (in most cases) what will dictate or determine the value of their home as we move forward. Buyers on the other hand should not sit back and be idle as interest rates are probably not going to go down anytime soon and more potential homeowners are entering the market at a pretty quick pace.

One additional item to remember is that new home construction is on the rise in California and this means more jobs which in turn will drive up the need for more infrastructure and even more housing. All of this is good for the overall economy and good news for current homeowners and future homebuyers. There are always other factors (i.e. increased taxes, regulations and inflation) that can damper any economic and or housing recovery but the housing engine remains strong and even with this market correction it remains healthy and vibrant. From my perspective, this housing market correction is simply allowing for a balance in home values as it relates to the overall economic cycle and we are simply returning to a normal real estate market.

Written by Mike Southwick

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The Real Estate Ride

In my last article entitled The Housing Revolution; I spoke about the shortage of available homes for sale which continues to remain a major factor in most local real estate markets throughout California. This shortage of the supply of homes, and the continued demand from buyers wanting to get in or back into the market, is causing home prices to dramatically increase (5%+ per month in some areas), as well as fueling a significant wave of growth in the overall real estate market that we haven’t seen for some time. When I was thinking about a title for this article and some sort of iconic image to reflect what I believe captures what the real estate market has faced these past 7 years, I thought of the book entitled; The Little Engine That Could. As the markets began to stall in 2007 and the subsequent fall of home prices by as much as 50-60%, it has been an uphill climb to where we are today, but nearly all historic indicators are hinting at a positive growth pattern. There remains a sense of cautious optimism in the air and the overall economy remains a little fragile, but the housing market is clearly the engine that is driving us forward. Here are a four important indicators that evidence this:

We have seen a significant decline in distressed real estate transactions (REO and Short Sales) which once dominated our market by as much as 65%. In May of 2012 for instance; bank owned sales and short sales (where the owner owed more than they could sell their house for) made up 44% of the sales and by May of 2013 that number changed to 22%. This means that equity sale (where the seller sold and received a profit) transactions made up 78% of the closings in May 2013. This is trending in a positive direction.

Home prices across all major markets in California are up anywhere from 12-15% year over year. According to the S&P Case-Shiller report “the recovery is definitely broad based” and we are finding that in some of our local markets the month to month change from there is anywhere from 5-10%.

Mortgage rates (though still low) are witnessing a significant jump and although some might see this as a negative influence on the housing market, it is actually spurring buyers to move rapidly to secure a home and close escrow before rates climb even higher. Very few consumers, if any, like higher interest rates but this increase was expected and already built in to most financial forecasts. Rising interest rates and unemployment are two significant components that have a direct impact on long term sustainable growth in not just the real estate market but also in the overall economic picture so those factors will continue to be a large influence and necessitate wise choices by our economic decision makers as well as consumers.

New home construction is the final component that I would like to show as evidence of an upward trending real estate market. A recent article from Bloomberg Businessweek (June 17, 2013) mentions that “confidence among U.S. homebuilders surged in June to the highest levels in seven years”. In Bay Area markets, such as Sunnyvale, California, some builders like O’Brien Homes have had to implement a lottery system to handle the huge demand for new construction and other builders like Shea Homes and Shapell Homes have followed suit with similar lottery systems to sell their new homes. These types of lottery models for selling homes are driven by the pent up demand by the consumer to obtain a quality home and builders are preparing themselves to meet that need. In areas where there is a fair amount of open land, the builders are beginning to break ground for both small scale and large subdivisions. In El Dorado County, for instance, there are at least 5 major building projects or subdivisions that are in process and could bring anywhere from 5000 to 7000 residential units to that area. These type of new construction projects when properly planned bring construction jobs, commercial business, schools, parks, and other forms of supporting employment to those regions.

The buzz in the air is that Real Estate is back and all indications are that this Little Engine That Could is gaining steam and heading in a positive direction.

Written by Mike Southwick
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The Housing Revolution

I was speaking to one of my past clients this week who asked me if could help her friend find a home. This particular buyer was initially looking in an area in a different county and I chose to refer that buyer to another Realtor who could better service them. I had initially found about 5 properties that met the basic criteria that were important to this buyer and I shared that with the agent I referred them to. The agent called me back in about 30 minutes and told me that all five of those properties were either in contract (pending) or they had 5+ offers on them already. To my Real Estate colleagues this scenario is no big surprise as we have been dealing with this shortage of available housing in some areas for over 6 months.

This shortage of available homes is a real issue and it is very good news for existing homeowners who are seeing the value of their homes increase rapidly. The driving factors are an abundance of qualified buyers eager to capitalize on upward trending home values, low interest rates, and a lack of new home construction. I have agent friends in the East Bay Area who tell me that buyers are offering $40,000 to $50,000 over the list price on their properties. Some people may think that this seems insane but the reality is even with the over bidding that is taking place we are still well under the peak (especially if you factor in inflation) of the Real Estate market of 2005.

Most Real Estate professionals will tell you that from the peak of the Real Estate market to its lowest point we witnessed a loss of home values somewhere between 50-60% in most areas of California. This caused an abundance of housing inventory which brought on one of the largest and longest blow out sales on homes that I think any of us has ever seen. In the words of Daniel Jacuzzi, President of Select Group Real Estate Services, “that sale is now over”! In the past 6-9 months we have regained a portion of that loss which has allowed some homeowners who have been in a negative equity position to sell their home and move up or even downsize because of the increase in home values. The increase in home values has also allowed others to refinance and even leverage themselves to buy investment and or vacation properties. The current assessment by the most conservative forecasters tell us that until we surpass the home value peak that was achieved in 2005 there is little fear of a down turn in home values. In my opinion we may surpass those peak values because new housing construction is a little slow in getting going which means demand will continue to outpace supply until new housing constructions gains more traction.

The conversation that I had with the past client that I referred to at the beginning of this article continued with this question; “so are we back to that same market of 2005”? I think there are a few things that are different. The interest rates are lower than they were in 2005, financing requirements are tighter especially when trying to obtain a favorable interest rate, appraisal regulations are tougher, and the lessons learned from such a dramatic loss of capital seems to be keeping things from getting out of control. This doesn’t mean that we won’t repeat some of the mistakes made that led to the Real Estate down turn, but what remains true is that housing has rebounded and the blow out sale is over!

What really excites me and the reason I titled this article “The Housing Revolution” is what a robust Real Estate market means to our overall economy. The Real Estate market is going to be the engine that will drive our U.S. economy and it will create and bring back jobs to a strong and intelligent work force. Even the Industrial Revolution had several starts and stops but once it took off, the sustained growth was phenomenal. Our history as Americans tell us that when we have an abundance of jobs, the cycle of increased opportunity perpetuates and sustains itself, which when fueled by American ingenuity and creativity, we always exceed our previous achievements.

I think we could all do ourselves a great big favor and spread the word that housing is back, prices are up, and the light at the end of the tunnel is not a train! I would like to think that we are not experiencing a housing bubble but actually a housing revolution!

Written by Mike Southwick

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Conventional Financing Verses Government Financing

After the real estate bubble burst in 2007 we saw a significant shift in the type of loans that most people chose to pursue. Prior to 2007 there were all sorts of options available from zero down, interest only , adjustable rate mortgages and even negative amortization type loans. After 2007 and going forward the most popular non-conventional loan (especially for first time buyers) was the government backed FHA loan which only required 3.5% down and allowed for marginal credit scores. These types of loans were probably the go to loans for most people trying to get into or back into the market for the last 6-7 years. It could be argued that this type of loan helped jump start the home buying wave that has turned into quite a current feeding frenzy. The down side or unintended consequences from this large investment by our U.S. Government  is they have created a rather large mortgage portfolio that has huge risks that come with such extreme leverage and this is resulting in them needing to increase their mortgage insurance premiums. As of April 1, 2013 the FHA mortgage insurance will increase again, and then after June 3, 2013 the mortgage insurance will remain for the life of the loan as opposed to dropping off at a certain point on loans issued prior to June 3^rd.

What does all of this mean? If you are in the hunt for a home and need a mortgage you should really evaluate the cost of an FHA loan over a 30 year period especially in relation to the mortgage insurance question. Currently there are some 5% down payment conventional programs where the overall cost might be less than an FHA backed mortgage, making the conventional route now a little more appealing. This is not for everyone but you should have a good mortgage advisor/coach along with a good Realtor that knows their stuff to properly advise you and protect your interests. Each person’s interests are different and you should use caution before getting caught up in the frenzy of making a bad decision when it comes to obtaining a loan. Some rural areas located in El Dorado County, Amador, Sacramento County, Placer County and others have USDA funds available for 100% financing and a good mortgage advisor can help you with that.

As we see conventional financing make a comeback it may be wise to evaluate a 15 year mortgage, especially in light of the potential changes that may be coming in relation to the Mortgage Interest Deduction (aka MID) that is currently being discussed in Congress. The old rule of thumb might have been to carry a high mortgage balance for 30 years that in turn provided a large write off for tax purposes and for some this may still be a good strategy. As the political debate over the MID continues, I believe that we should have a contingency plan in the event that it is modified or eliminated and this is something you should discuss with a tax or financial professional.

We have someone on our team Christi Shea (Stanford Mortgage) who can help with all types of mortgage scenarios and she can be reached at (916) 941-3429. For all of your Real Estate needs remember; “The Southwick Team will always point you in the right direction”.

 

Where Real Estate and Taxes Meet – Be Informed

I have been involved in the Real Estate field long enough to know where my boundaries are in relationship to what I know and what I think I know. After 25 years in the business I would like to think that I know a lot about the ins and outs of real estate but I can tell you that when it comes to taxes I like to defer to tax professionals because they are the ones in the know.

With that said, there have been a number of recent changes to tax laws, tax codes, tax loopholes and the ongoing discussions in Congress regarding tax increases, sequestration, spending cuts, government shut down, and quantitative easing has me convinced that unless we stay informed, the one thing we can count on is less money in our pockets. It was Will Rogers who said; “The only difference between death and taxes is death doesn’t get worse every time Congress meets”. In 1986, Ronald Reagan said in his talk during a White House conference on small business; “Governments view of the economy could be summed up in a few short phrases: if it moves tax it. If it keeps moving regulate it. And if it stops moving subsidize it”. So as you can see, even our 40^th President of the United States was concerned about taxes and protecting our assets and so should we.

If you own a home and have a mortgage you should be eligible to receive a Mortgage Interest Deduction (aka MID) on your taxes if you itemize. For some people this has enormous advantages as the deduction often exceeds the standard deduction allowed by the IRS. The MID is currently being debated by Congress and is at risk of modification or even possibly elimination. For some people this has huge benefits and if this deduction is eliminated it could have enormous consequences if you are counting on this for your overall tax strategy. No one knows what the results will be on the short or long term debate over this issue but you should be talking with your tax advisor to have a contingency plan. I personally am in favor of the MID and depending on your position on the MID’s overall benefit you should also consider getting involved in the political process to protect your interests.

Some of the recent tax changes have also impacted or may impact long term capital gains and this is an area that you should definitely consult your tax advisor about as you plan for your future and the future of your children and grandchildren. If you own rental property or properties that do not qualify as your primary residence as defined by the IRS and you plan to liquidate them now or in the future, you should also consult your tax advisor to evaluate that decision in light of the changes and upcoming changes to the tax code. The benefit of deferring a tax consequence from the sale of a property (sometimes called a 1031 tax deferred exchange) remains a viable solution to your overall tax strategy but that decision should involve the advice of professionals such as  a tax advisor, tax attorney, an asset preservation or exchange company, and a Realtor who are experienced in these matters. If you own property you should have both a short term plan and a long term plan when considering liquidating such an important asset and obtaining professional advice is really in your best interests. Often these types of consultations are very reasonably priced or in some cases there is no charge associated with the initial consultation.

Since there appears to be more changes in the works as Congress debates a number of important issues it would be in our interests to guard and protect those interests, especially as it relates to such an important asset like our homes.

There are a number of other property tax benefits that you should be aware of but for the sake of time that will need to come in a future publication. I usually post a more detailed explanation of these and other topics on my blog – http://placervillerealestateguy.com/ or http://rosevillerealestateguy.com/ and feel free to follow me.

Best regards,

Mike Southwick

 

Tales of the Fiscal Cliff

The words “fiscal cliff” has become a household phrase as we march toward the conclusion of 2012 and the beginning of 2013. The reason that these words have even become such a frequent topic and permeated almost all news reports is that our economy is still considered very fragile.

The fiscal cliff in general is rooted in the decision by our political leaders to extend a number of tax cuts initially introduced during President George W. Bush’s first Presidential term, extended and enhanced during his second term and further extended during President Barack Obama’s first term in office. These tax cuts were designed to keep the economy from getting worse and to also try to boost investment in our country through increased business ventures and opportunities. The hope was that these types of tax cuts would help to increase jobs. The extension of these tax cuts in 2008 came with an automatic sunset clause built in and as such they will expire at the end of 2012. This will happen unless the Legislative and Executive Branches of Government come to an agreement on how best to attack the deficit and keep the U.S. Government from facing what some claim will be disastrous consequences. Those decisions remain undecided as I pen this article and the outcome whether good or bad will be determined by either a compromised solution or a stale mate. These are tough and challenging days that await and I suppose we will all soon see just how far of a drop this “fiscal cliff” will actually bring.

Some areas of our economy remain weak and that is evidenced by a high unemployment rate which continues to drain federal, state, and local financial resources in order to support those who remain unemployed. There also seems to be a fair amount of unreported data related to under-employment as well as qualified information on those people who have just stopped looking for employment. If all of that data were to be totaled it is possible that our economy would seem a little more fragile than we think. It is this kind of information that a lot of politicians and even business people would probably prefer not to discuss openly because it is really the giant elephant in the room and such discussion can sometimes put a damper on moving us toward the robust economic recovery that we want. There are signs of improved job reports and I personally think that our employment numbers will improve quite well in 2013 but it will require a lot of hard work, tough decisions, cooperation, and vision by not just our politicians, but also our business leaders, visionaries, and even ourselves, in order to bring real sustainable recovery to our nation.

The bright spot in the economy is housing and currently we have a shortage of homes to sell. I have personally seen competitive bidding for homes in all price points and in most all markets that I currently service. This activity is causing house prices to increase across the board in most all major markets. I believe that 2013 will begin a housing boom that should help to bring our stifled economy out of recession and help to spur an economic recovery that is so desperately needed. There remain remnants of distressed properties (Short Sale, Bank Owned –REO, and Auction) throughout all markets, but the traditional equity sale is now the dominant leader in current home sales. This should continue into the New Year and hopefully will begin to create an interest among builders and developers to take risks and create more housing inventory. I believe that it will be the housing market that will make the landing from going over the fiscal cliff a little softer and less bruising. I guess we will just have to wait and see.

Written by Mike Southwick

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Just Listed – 6520 Marva Lane – Placerville

Don’t miss this fabulous one level ranch style home located near the Cold Spring Golf and Country Club. This 1428 square foot home features 3 bedrooms 2 bathroom, living room with a fireplace insert, a separate bonus room, plus a spacious kitchen and dining room combination. New carpets, tile and some recent upgrades to the interior make this home ready for occupancy. There is also a new roof and a new garage door and a very large backyard. Priced at $185,000 MLS #12051027

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Just Listed – 13799 Torrey Pines Dr – Lake of the Pines

Very nice home located in Lake of the Pines! This 1012 square foot home which is situated on a corner lot has a 2 car garage, 2 bedrooms, 2 bathrooms, a large living room with plenty of natural light, a nice kitchen and dining area which opens up to a spacious deck for entertaining. Plus who wouldn’t enjoy being just minutes from the Lake! This is an equity sale – no delays here. List Price at $139,000. Please click here for more details – Flyer

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