Keeping you updated on the market! - Palo Alto Area Real Estate

For the week of May 4, 2009
________________________________________
MARKET RECAP
Sometimes bad news isn't as bad as it seems. For instance, gross domestic product dropped at a 6.1% annual pace in the first quarter of 2009, easily blowing past predictions for a 5% annualized drop. The decrease marked the weakest posting since 1958. Bad news, right?
Not so fast. It's tempting to cite the grim first-quarter GDP decline to squelch talk of any recovery in the U.S. economy, but the numbers actually contain flickers of hope. Nearly half of the GDP contraction was due to businesses slashing production in order to bring inventories in line with sales. The process, although perhaps incomplete, is well advanced, which means businesses may soon have production levels where they want them. That, in turn, could set the stage for increased business spending in the second half of the year as consumer demand increases.
In fact, consumer demand is already picking up. The monthly data on home, car, and retail sales confirm that consumption has broadly stabilized. Although home construction has tumbled, the worst is probably over: in any case, the sector is now so small that further declines mean little to overall output. The recent rise in stocks prices – arguably the most reliable economic indicator – and in consumer confidence also bodes well for businesses and consumers alike
More good news can be found in seemingly bad news on the housing front. Home prices continued to decline in 20 major U.S. cities in February, according to the S&P/Case-Shiller Home Price Index, but the rate of decrease slowed for the first time since 2007. Average prices are now down 30.7% from the housing market's mid-2006 peak. Phoenix has fallen the furthest, dropping 50.8% from its high, while Dallas has been one of the better performers, slipping a relatively modest 11.1% from its peak. Odds at this juncture favor long-term home-price appreciation over long-term depreciation.
Meanwhile, mortgage rates continue to hold steady, with 30-year fixed-rate mortgages still available in the 5% range. But again, we need to warn that rates could be approaching a low, if they haven't already reached one. Treasury yields are starting to rise, a sign of a strengthening economy and a sign that inflation could be lurking on the horizon. At this point, we think holding out for lower mortgage rates is becoming a riskier bet.

Confusing Averages
Averages are an intricate part of data aggregation and dissemination. We reference averages, such as national average mortgage rates or average existing new or existing home prices, in the newsletter. These averages are useful, because they project a large macroeconomic picture quickly.
But averages can also misinform. Picture a room with Bill Gates, Warren Buffett, and eight other people, each of whom earn $100,000 annually. If a statistician were to average the annual incomes of the 10 inhabitants, the average annual income would be several million dollars a year, even though eight of the 10 inhabitants make nowhere near that amount. It would be impossible to implement a successful sales strategy based on that average income. In other words, averages can be irrelevant.
Such is often the case with real estate. We noted that home prices in Phoenix tumbled an average of 51% from 2006 highs, while Dallas prices tumbled an average of 11%. Average these two numbers and you get an average decline of 31%, which makes the Phoenix market look more robust than it is and the Dallas market less robust. What's more, that average is even more misleading because it is based on an average of an average.
Point is, don't let national averages influence your opinion of the economy too much. Most business is local, and what's happening in one part of the country can be completely different from what is happening in another part of the country. What's happening in your part of the country is what's most relevant.

Options for buying now and selling later

You don’t have to be made of money to own two homes for a short period of time. Ideally a buyer would be in a position to take advantage of this current market weakness by buying their new home without having to first sell their current home. There are a few reasons why this is beneficial. First, I believe we are somewhere close to a local real estate market bottom and by June of next year we should see things perk up. Why do I think this? Because I believe mortgage rates will come down and mortgage loans will be easier to obtain. For more of my thoughts on this subject see my blog post titled “Why I believe mortgage rates will fall during the coming year”. Below I have outlined one of many possible strategies for buying into the current weakness and selling into whatever strength we have after the first of the year or even the spring.
Buy now with a long escrow period and sell later this spring: Some sellers do not have to actually move, rather they need the money. In these instances, sellers will sometimes be willing to give you a multi-month escrow but will require that some of your down payment flow through escrow directly to the seller to help them with their immediate financial needs. These funds are non-refundable but do become part of the down payment. If for some reason you do not follow through with the transaction, you may be liable for actual damages to the seller in the event he ends up selling his home for less than he was going to sell it to you. This holds true for all real estate transactions but in normal transactions you have to work with the title company (not the seller) to get your money back. You need not fear, there are lots of protections built into this process. In the end, if you find a home you love and are 100% you want it, there is no risk to a long escrow with a premature release of funds to the seller. This long escrow period also gives you more time to prepare your current home for sale not to mention you avoid the unpleasantness of having to sell your home in this slow-moving market.

Find out more about Menlo Atherton Realty and our commission rebate program here.
Have any of you tried any of these tips? If so let me know how it worked out.

Why I believe mortgage rates will fall during the coming year

For one, the Fed Funds rate continues to decline and this is normally a precursor for a drop in the rates for treasury securities on which mortgage rates are loosely based. The spreads between the Fed Funds rate, treasury securities and mortgage rates typically fluctuate around their means but right now they are grossly out of sync with their statistical averages. In time, these spreads will narrow and move toward their means. What does this mean for home buyers? Well, the narrowing of these spreads can take shape in a variety of ways. All of which point to lower mortgage rates. There exists a phrase which is warmly embraced by Wall Street. It goes like this: “never bet against the Fed”. What they are saying is that it is unwise to invest in a direction contrary to what the Federal Reserve is trying to achieve. At this point in the cycle it is clear that the Fed is trying to bring down retail borrowing rates. They have mentioned the possibility of reducing the Fed Funds rate to zero and if that does not exert enough downward pressure on retail rates they have mentioned the possibility of buying up U.S. treasury securities. These government purchases would drive up the price of U.S. bonds which reduces the net interest rate the bonds are yielding. In time, reducing the yield of U.S. treasury securities will invariably enforce its gravitational downward pull on mortgage rates.
Secondly, the government is pumping hundreds of billions of dollars into the financial system. These actions make more money available to financial institutions to lend with. More importantly this flood of money helps ease the widespread fear which has caused large financial institutions to hoard their cash and refuse to lend it. As this fear ebbs, firms will begin to lend once again. As more firms feel comfortable lending their once precious cash we will see competition for customers drive rates down. I welcome any thoughts on this matter? How do you think the coming year will go?

Find out more about Menlo Atherton Realty and our commission rebate program here.

Why I believe right now is a great time to sell your home

Right now is a great time to sell your current home if you are also ready and willing to move up to that bigger and better home you have been wanting. The reason I say this is that the market is very slow right now and properties stay on the market longer and receive fewer offers. Surely you are asking yourself “How can this be good for me if I am selling my home?” Let me explain. Right now prices are flat or declining. This will surely result in a sales price much lower than you could have gotten a few months ago. It will also take much longer to sell your home. But on the other side of the transaction you will be buying your new home for a corresponding percentage less and perhaps more if you play your cards right. Assuming you will be buying a more expensive home, you will be saving more money on the buy side than you will be losing on the sell side. Let’s look at a possible scenario: your current home would have sold for $1.2 just a few months ago but today you might only be able to get $1.0. On paper it is quite clear you just lost $200,000. Let’s also assume you are planning to upgrade to a home in the $2.0m range. That same home would have sold for perhaps $2.4 just a few months ago so you are picking up $200k in net equity on the pair of transactions.

There are two more huge advantages to moving up in a down or sideways market. 1) The available inventory of homes is generally higher so you will have many more choices and perhaps find a bargain. The other biggie is the fact you will not get into a bidding war and emotionally pay too much for a home. In the end, the whole process will take longer than in a hot market but both transactions will be more orderly and well thought out. This is why I like this type of market best for moving up.


Strategies for moving up in today’s market.
Ideally you would be able to buy now and sell later. Right now we are at a market high as far as fear goes. You may see average prices move lower but your ability to pick up a great deal will not be any better than it is right now. With each passing day we distance ourselves mentally from the financial turmoil which has gripped the world. At some point buyers and sellers will resume their normal buying and selling patterns which completely preclude the possibility of picking up a smoking deal.

How many of you have recently sold your home? What are your thoughts on this?

Find out more about Menlo Atherton Realty and our commission rebate program here.

Is right now a good time to buy a home? I say yes!

Right now home buyers are in an unprecedented situation where fear has gripped much of the nation and has even taken a bit of a foothold here in the valley as well. This is causing both buyers and seller alike to step back and take a careful look at their situation and pause a bit. This pause has resulted in fewer buyers in the market as well as fewer sellers willing to sell their home in such a climate. Mostly what we have left in the marketplace is sellers who have to sell and savvy, well-qualified buyers who are not afraid of a down market. These buyers are in the driver’s seat and are expecting to get a great deal. Sellers have already felt this change and have only a few choices, all of them unsavory. 1) Reduce their price to meet the demands of these newly-emboldened buyers 2) Keep their price high and hope for the best 3) Pull their home off the market and wait for better times. Gone are the days of multiple offers on every home which comes to market. Inventories, while not bloated, are still relatively high and represent much more of a slow-moving target for diligent buyers. The average number of days a home sits on the market has risen substantially in the past two months making the home search process a much more orderly affair.
Considering the protected nature of the peninsula real estate market, it is surprising to see fear creep into the minds of some sellers. Rarely do we see a market where some sellers are thrilled just to have a real buyer at the table even if they are coming in with an offer substantially below asking.
This fear is surely a temporary thing and will never be fully reflected in any statistic because most sellers are not willing to sell at any price just to move the property. That said, some sellers are in fact willing to sell at just about any price due to either fear that the market will worsen or perhaps because they must sell for one reason or another. The actions of this small percentage of sellers are not sufficient to significantly impact the sales price averages and this is why you will never see or feel this fear fully reflected in any statistics. However, the further in time we get from the events causing this fear, the more immune both buyers and sellers will become. The recent financial market events causing this fear have thus far not economically impacted most people in the area. Unless things deteriorate further, people will begin to feel more at ease and will get back to the business of buying and selling real estate.
While I believe our local real estate market has deteriorated for just cause, I also believe the fear currently being felt by some home sellers is not based on fundamentals and will evaporate as quickly as it came. This is not to say I believe the market is going to bounce right back. But I do believe the fear will continue to dissipate as we get farther away from the events which caused the fear. Once this fear is gone, the opportunity to find a fearful or needy seller will disappear and take with it any chance of finding a really great deal. Right now there are GREAT deals to be had by buyers willing and able to brave the storm.
Typically, the middle of January sees a substantial rise in new listings. Sellers waiting for the holidays to be over start bringing their homes to market. Buyers see this flurry of activity and snap out of their winter doldrums. This quickly results in an increase in the number of transactions getting done. This is why I believe the mid-January flurry of activity will mark the official end of the fear. I am not saying the market is going to take off like gangbusters. Quite contrary, I think the market will still be quite soft. We just won’t have the doldrums and despair we are currently experiencing.

How many of you have worries or concerns about buying a new home? Let me know what you think.

Find out more about Menlo Atherton Realty and our commission rebate program here.