Sell It In The Slow Season

Story from HeraldNet.com, November 26, 2006

Summer, the prime time for selling a home, was approaching and Jeanne and Eric Mehan wanted to sell fast.

In the rush to sell before fall, the Woodinville couple acted on some bad advice.

Put it on the market, full of clutter, not cleaned, at top price, even if it's not ready, advised their real estate agent. Let's market your home to a flipper, someone who wants to buy it, fix it and resell. Let's see if we get a nibble and you can work on it in the meantime, the agent told them.

Wow, that was some bad advice. Weren't the flippers mostly gone by fall?

The agent took marketing photos of the laundry room with the toilet seat up and dirty clothes piled on the floor - with his cell phone camera.

The Mehans' house got some foot traffic and a few offers for half the $475,000 asking price. Meanwhile, the precious summer season faded. The agent suggested pulling the property off the market and re-listing.

Half of the asking price! Now we're talking...

"At that point I wanted nothing more to do with him. I fired him," Jeanne Mehan said.

Now it was fall and the holidays were around the corner. Could they sell their home quickly during a traditionally soft market?

The months before Christmas are often considered a difficult time to sell a home. Potential buyers are hunkered down for the holidays and sellers don't want to mess with listing a home during those busy months, the thinking goes.

Fewer people are buying single-family homes and condominiums in November, December and January, according to statistics kept by the Northwest Multiple Listing Service.

Pending sales were at their highest last year in June, with 8,896 recorded in King, Snohomish, Pierce and Kitsap counties. By December, sales had dipped to almost half of that, with 4,837 recorded.

That doesn't mean selling is going to be a cakewalk. Houses need to be priced what they're worth, agents need to market homes aggressively and sellers need to be willing to clean and fix problems, Deptuch said.

Buyers are pickier than ever, she said. Buyers expect the walls to be painted and the carpet to be in good shape. They want homes clean and free of clutter. Buyers want to walk into a home and feel like it could be theirs, she said.

The Mehans moved extra belongings into storage and hired professional cleaners. They painted the house in and out, replaced dated garage doors and put in a new lawn. The house got new light fixtures, doors and carpets.

The result: the couple put their house on the market for $429,999. Within a dozen days they received three offers and a sale is pending.

Don't you just love a happy ending?

(Debra Smith, HeraldNet.com, 11.26.2006)

Trend: More Price Reductions for Seattle

From Bubble Markets Inventory Tracking:

Percentage of Reduced Listings Per Market.

Ventura County:
10/22: 51.3%---> 11/18: 50.3%

Sacramento Metro:
1/30: 30.5%---> 10/20: 49.0%---> 11/18: 49.0%

Orange County:
1/30: 22.8%---> 10/20: 45.8%---> 11/18: 45.0%

San Diego County:
1/30: 26.3%---> 10/20: 43.9%---> 11/18: 42.9%

Phoenix Metro:
1/30: 28.0%---> 10/20: 43.2%---> 11/18: 42.2%

Riverside County:
1/30: 27.3%---> 10/20: 40.2%---> 11/18: 39.5%

Las Vegas Metro:
1/30: 21.0%---> 10/20: 40.0%---> 11/18: 39.9%

Los Angeles County:
1/30: 21.8%---> 10/20: 39.6%---> 11/18: 38.8%

Seattle Metro:
1/30: 17.1%---> 10/20: 33.0%---> 11/18: 33.9%

Santa Clara County:
1/30: 13.6%---> 10/20: 30.8%---> 11/18: 32.7%

2006 Price Reduction history in Seattle, showing the clear trend.

11/18: 33.9%
10/20: 33.0%
09/14: 28.1%
08/13: 25.2%
07/13: 24.0%
06/13: 21.8%
05/13: 20.3%
01/30: 17.1%

(data courtesy of ziprealty.com)

WCRER: Affordability Continues To Drop

The Washington Center for Real Estate Research (WCRER)has released their latest affordability statistics. Unsurprisingly, home affordability in King County dropped yet again, reaching a new low of 69.2. Here's your latest graph of WCRER's index since 1994:

Click to enlarge

The decline in affordability from Q2 to Q3 was relatively minor, due to lower interest rates in Q3, combined with a smaller increase in the price of homes than previous quarters.

WCRER Director Glen Crellin is quoted in the Associated Press article about these latest figures as saying "home ownership depends on the ability to purchase the first home, and too often that is more a dream than a reality." First time buyer affordability in King County also reached a new low, coming in at 38.8 for the quarter. In a "normal" market in King County, first time buyer affordability tends to be in the 60's. If first-time buyers really do get priced out forever, who will existing homeowners sell their homes to when they want to upgrade?

I don't see how this trend can possibly continue for much longer.

(Nicholas K. Geranios, AP via Seattle P-I, 11.22.2006)

Congratulations, You're A Homeowner... Psych!

King 5 News reports on a home-buying scheme that has ensnared at least a few unsuspecting victims:

Imagine buying a home and moving in, only to find out later that the house was never yours at all.

It's a mortgage scheme that's caused financial pain and heartache for many families in Western Washington.

It's a scam so bizarre it's hard to believe anyone could pull it off.
...
How can you possibly buy a house and find out later it's not yours? After studying hundreds of pages of real estate records, e-mails, and phone logs, the KING 5 Investigators have figured it out.

Liza Bautista, a polished mortgage broker, who routinely touts her churchgoing ways, is at the center of it all.

Bautista often tells clients she's a Christian who likes to help people with rocky credit buy their first home.

Mary Pelayo is one of those people.

She saw an ad for Bautista's business that sounded perfect: "Want to buy a house, credit problems? We can help."

"It was awesome," Pelayo said, "until it all started falling apart."

The bombshell that showed something was wrong was name on the mortgage bill, not Pelayo, but Lydia Pagdilao.

Lydia Pagdilao says someone must have forged her signature. The documents show she owns the Pelayo's house, but she says she's never heard of it.
...
Every person whose signature was forged, like Lydia Pagdilao, had given their financial information to Liza Bautista in the past for deals that were legitimate.

Later, when Bautista couldn't get loans for families with credit problems, like the Pelayos, she secretly replaced their paperwork with information she took from clients with good credit.

With the deals pushed through, she collected her commissions.
...
"Shame on them, how can you do this to innocent hard working people?" Pelayo asked. "I mean, it's everybody's dream to own their own home."

Although the article says "it's hard to believe anyone could pull it off," I don't find it hard to believe at all. It's really just a small step beyond the risky (but legal) financial situations that a large number of people are willing to put themselves in so they can "own" a home. I wonder what percentage of people actually read and (mostly) understand the mountains of paperwork that they're required to sign during the home buying process, versus the number of people that just sign whatever the mortgage broker puts in front of them.

I think that as long as people are blindly enthusiastic about getting into a home (whether or not it's the right decision for them at the time), there will be ample opportunity for shysters to pull this kind of garbage.

As an aside, it really pisses me off when people like this call themselves Christian and yet have no qualms with taking advantage of their fellow man. That's about the furthest thing from Jesus' message that I can think of. However, that's a subject for another blog.

(Susannah Frame, King 5 News, 11.20.2006)

An Anecdotal Update (Or Two)

I noticed on my drive home from work one day last week that the for sale signs had come down from in front of the million-dollar new construction on Avondale. Recall that just under a month ago, the price was dropped (again) to $1,275,000.

So did the house sell, or are they just taking it off the market, hoping to re-list with greater success in the spring? As it turns out, the answer is neither one. After getting no bites for six months, despite knocking $450,000 (28%) off the original asking price, the seller decided to fire their agent. The Coldwell Banker signs came down, and over the weekend, shiny new RE/MAX signs were erected.

And just like that, the property now shows up as "New on Market!" Although the asking price is holding steady at $1,275,000, at least they made an effort to make the listing appear new, with all new pictures and an amusing new description.

Old 'n Busted:

Remarkable new construction on 3+ private acres close into redmond. Easy 520 & 405 commute. Soaring ceilings, arches, granite, tile & hdwds. Craftsman wood details throughout. Massive north & south wings. Private master wing w/library, office/workout room, 2 large walk-in closets, w/d hookup. Oversized 990+/- sf garage w/office & full bath. Spectacular waterfall cascading 30' into pond. Gorgeously landscaped w/abundant parking. Property in 2 large tiers. Upper tier could be cleared for horses.

New Hotness:

A warm & elegant tribute to the distinctive northwest craftsman lifestyle! New majestic custom home on over 3 peaceful, close-in acres w/equestrian opp. Featuring glistening hardwoods in sun-filled rooms, arched doorways, library, slab granite, state of the art stainless steel gourmet kitchen-6 burner viking. Open & flowing w/soaring ceilings, greatroom, dining, family~bonus designed for entertaining. Showcase master suite retreat w/fplc, spa bath, dual closets. Caretaker-nanny-ext. Family wing.

Maybe a glistening new description is just what's needed to finally unload this beast.

Also, in case anyone was wondering, apparently home staging isn't enough to move a property that's simply overpriced. The Olympia property that was featured in an article on home staging a month ago is still active on the MLS. So much for that open house bringing "similar results."

Seattle Bubble Stats: Where are the Condos?

The question was asked on my number-crunching post last week of why I do not include condos in most of the statistics that I post here. Since that is a valid question that other people may be wondering as well, I thought I would post the answer where it will gain more visibility.

I choose to present this particular dataset for the following reasons:

1) SFH prices tend to be less volatile than condo prices.

Since 2001, the YOY change in SFH median price has ranged from 0.35% (Mar-01) to 20.00% (Oct-05), a total spread of just under 20 points. Condos: -5.21% (Aug-02) to 22.08% (Jul-06), a total spread of over 27 points. The maximum month-to-month change in the SFH YOY figure was a 6.32 point drop (April to May '01), with 10 months experiencing a greater than 5 point change from the previous month. Condos: a 21.54 point jump (Dec-01 to Jan-02), with 19 months experiencing a greater than 5 point change.

2) Consistently quoting SFH figures provides an easy comparison.

The monthly reports in the newspaper often seem to cherry-pick whatever statistic supports the "angle" that they chose to take for the story. By picking one dataset and sticking with it, I feel that I provide the readers with a better baseline for what's really going on.

3) Frankly, I'm just more interested in SFH's.

I make no value judgments regarding any person's choice of whether to buy a condo or a SFH, but for me personally, I'm just not all that interested in condos. That is not to say that a condo buyer and a SFH buyer are "not equal in [my] eyes," or that condo purchases aren't "worthy," just that what goes on in the condo market doesn't interest me as much. That being said, I do have a number of charts of the condo numbers in the Seattle Bubble Spreadsheet, which is always available to anyone who bothers to click the link on the sidebar.

New Number Crunching: Price Breakdowns

With great thanks to Alan (aka PugetHouse), I have added a new weapon to Seattle Bubble's statistical war chest: price breakdowns.* It is fairly common knowledge that although it is the most convenient indicator to discuss, the median sales price does not give a very complete picture of the changing housing market. Price breakdowns, i.e. how many homes sold each month in a given price range, will hopefully give us some additional understanding about what is really going on with home prices.

All the numbers below refer to closed "residential" sales in King County only. As usual, all the data and charts found in this post have been added to the Seattle Bubble Spreadsheet for your number-crunching pleasure.

The NWMLS breaks the data down into 29 different price brackets, but for ease of viewing, I have lumped the figures into the following five price brackets: 0 - <$250k, $250k - <$350k, $350k - <$500k, $500k - <$750k, & $750k & Up. To start off, here's a chart showing the percentage of total monthly sales that each bracket accounted for from 2005 through last month.

Click to enlarge

A particular point of interest is March of this year, when the percentage of homes sold in the $250k - $350k range took a 3.5 point nose-dive (30.5% to 27.0%), while the $500k - $750k range jumped 2.4 points (19.6% to 22.0%) and the $750k & Up range jumped 3.4 points (9.5% to 12.9%).

The most dramatic change was in the up to $250k price range, which plummeted from 22.2% of sales in January 2005 (median: $330,000) to a mere 3.8% in October 2006 (median: $440,000). Also worth noting is the approximate doubling of both the $500k - $750k range (from 12.7% to 25.4%) and the $750k & Up range (from 6.3% to 13.8%).

Here is another way of looking at the data:

Click to enlarge

In this chart, I have plotted the percent change of each category's monthly share from its average share over the previous six months. For example, in the six months prior to January 2006, sales of homes in the 0 - $250k range made up 10.7% of all sales, while in January that range accounted for just 7.9% of sales, so the total share of sales for the 0 - $250k range was 25.8% lower in January 2006 than the previous six months. Since theoretically there should be little to no seasonal affects on the price breakdown percentages, I believe that a six-month average is a good way to look at the trend.

As you can see, the $250k - $350k and $350k - $500k price ranges tend to hold relatively steady, not deviating much more than +/- 10% most months. However, the low end (0 - $250k) has been consistently dropping, most months by over 20% of the previous six-month total. Also interesting is the surge in sales of $500k - $750k and $750k & Up during the spring and summer of this year, with the high end breaking the +20% barrier three times.

What does this all mean? Good question. Obviously if all homes were appreciating equally, we would expect to see the percentage of sales in the lower price ranges steadily decline, and the higher price ranges steadily increase. To some degree, that's what we are seeing here. On the other hand, the theory that an unusually large amount of high-end sales might be skewing the median upward certainly seems defensible, given the sustained spike in the upper two brackets since March.

I don't think this particular piece of the puzzle is enough data to draw any strong conclusions, but I definitely find it interesting.

* Although these statistics were gathered via searches of the NWMLS database, I should include the following disclaimer: Statistics not compiled or published by NWMLS.

The Monthly Payment Buyer

The excellent personal finance blog Get Rich Slowly (highly recommended—one of my daily reads) posted a link yesterday that reminded me of a topic that I've been meaning to post on. As I read the story, titled "Cars affordability: Cheapest since 1980" I couldn't help but think about the stark contrast between the price trends of cars versus real estate. Granted, land does not "wear out" in the way that cars do, so you wouldn't expect real estate today to cost less than in 1980, but there is a similarity in the buying process of each that I've been thinking about lately.

Cars and real estate are similar in that the purchase price is negotiable. Think about the negotiation process that you go through when you buy a car. If you're a smart buyer, you come to the table with a pretty good idea of what the car is worth, and negotiate the price based on that bottom-line. The monthly payment, taxes, fees, dealer extras, and trade-in value are important factors in your total out-of-pocket cost for the car, but they are all secondary to the purchase price of the vehicle. Consider this quote from the Edmunds.com article Confessions of a Car Salesman:

From my commission check it was clear that the minivan couple could have made a better deal and saved several thousand dollars. So where did they go wrong? Well, first of all, they negotiated as monthly payment buyers, rather than bargaining on the purchase price of the vehicle. When you agree to be a "monthly payment buyer" several variables are introduced that are harder to keep track of: the term of the loan can be extended up to 72 months (six years!) without your awareness and the interest rate can be raised. When you bargain on purchase price, it is a cleaner, simpler way of negotiating.

If you think about it, this is exactly what has happened with real estate. The combined forces of super-low interest rates and loose lending practices have turned the vast majority of home buyers into "monthly payment buyers." A recent post by Ardell at RCG titled Beginning the Home Buying Process illustrates this phenomenon (emphasis hers—as usual):

STEP 1: The first step is the most extensive one, as it combines many factors. Home Price, which is determined by monthly payment affordability, cash needed to close, and commission to be paid to the Buyer's Agent.

The first step is to base your home price on your "monthly payment affordability"—exactly the mistake mentioned above by the undercover car salesman that led to overpaying by thousands of dollars on a new car. In my opinion, it's no wonder that home prices have gotten so out of whack with true fundamentals, when the first question someone asks in the home buying process is not "Is this house worth $XXX,000?" but rather "Can I afford $X,000 per month (no matter what kind of financing it takes)?" Obviously a monthly payment must be affordable, but should that really be the sole determining factor in whether a house is worth buying?

The longer this kind of mindset goes on, the more detached the price of real estate becomes from where it "should" be. In a way it pisses me off, because I know that for every person like me that thinks "there's no way that house is worth $500,000!" there are hundreds (probably even thousands) of people that say "if we stretch our budget, we can afford $2,500 per month," and thus the lunacy continues.

At least I know that the madness will end eventually, one way or another.

(Chandler Phillips, Edmunds.com)
(Ardell DellaLoggia, Rain City Real Estate Guide, 09.08.2006)

The Puget Sound "economic" levee: will it hold?

From Business Week:

"St. Louis Fed president William Poole said, according to Bloomberg News. ‘As long as the housing problem remains confined to housing, there’s really nothing the Federal Reserve can or should do.’”

Realistically, I don't think this will be the case. From a business perspective, I'm watching cash flow more intensely than ever. Will it trickle down to my Holiday spending? No question.

Another comment:

"I don't think we've seen the bottom yet, and I don't see anything that says it's going to get significantly better in 2007," said Bob Nardelli, Home Depot's chairman and chief executive officer.

Mr. Nardelli said job losses in the home construction market are the worst he's seen in 35 years, and the pain is starting to spread to the home renovation market.

"The loss of jobs . . . in the home construction market is at unprecedented levels," Mr. Nardelli told analysts on a conference call yesterday. "Home builders [are] basically writing off earnest money and liquidating land. We're starting to see a lot of that unemployment find its way over to the small repair and remodel contractors."

Problems in the housing sector have also begun to affect how consumers spend their money. In October, U.S. retail sales fell at an annual rate of 0.2 per cent -- the third consecutive monthly decline, according to a U.S. Commerce Department report yesterday.

My east coast bureau chief (brother & family from Massachusetts) is coming home for the Thanksgiving break next week. I'll get his housing report.

Is there an "economic" levee built around Puget Sound & vicinity strong enough to withstand the clear real estate correction going on outside our state lines? Or, are there leaks showing up locally? Speaking of leaks... anyone else experience the Snohomish river flooding and shutting down HWY 9 last week? Unbelievable traffic. Took me 1 hour 50 minutes to get my kids to school in Everett.

Spotlight: Condo Flipper in Greenwood

Found on Ziprealty.com: 633 NW 8th St, Ballard/Loyal Heights (98117)

A developer from California has purchased a 1978 six unit apartment complex and began converting to condos in June. They've been working on a unit by unit basis and appear to be close to finishing unit #201, listed 3 days ago.

There's no image posted on ziprealty, but I've posted a satellite shot here. Note the green barn-like pattern on the North face of the structure.

From Ziprealty.com:

Newbury north in greenwood is nearly complete & now selling! Beautifully appointed 2 bed 1.75 bath unit in a cozy 6 unit bldg in a great location near hip 85th & greenwood ave intersection. Stainless appliances, granite countertops, hardwood floors, fireplace, balcony, and designer paint. 10 minute commute to seattle via i-5, or take aurora ave or 15th ave. Walking distance to greenlake; a bike ride away from ballard and u.W. Don't miss out-quality at this price doesn't come along very often!

Records indicate the property was purchased on 06/23/06 for $800,000. Five of the Six units are 2 bed/1.75bt with 950 sq ft, while one unit is a 1/1 and 650 sq ft.

I drove by this unit a few weeks ago and noticed that they were installing cheap vinyl siding over the original 3-story rectangular 1978 concrete stucco. Property Shark lists the property in "average" condition and judging by what I saw, it requires a total overhaul. In addition, the building is 2 doors down from a self car wash and the overall area looks to be in general disrepair.

Let's be generous and say it'll cost $65,000 per unit, not including holding costs or realtor commissions. That would bring the cost of the project to about $1,190,000.

If the developer is able to sell all 5 units at $275,500, and the 1 bedroom unit for $229,000, that would be $1,606,500 - or a profit of $416,500. Not too shabby.

Comparable units for sale in the area:

8354 11TH Ave NW #2, 98117
$ 284,950 (reduced 10/19/06)
939 SqFt, 2bd/1bt
59 Days on Market
MLS# 26156431

8721 2ND Ave NW, 98117
$ 289,900 (reduced 10/19 - Bank Owned)
1370 SqFt, 3bd/2bt
37 Days on Market
MLS# 26169242

4102 Stone Way N, 98117
$ 229,500 (has been relisted)
Condo Conversion 1bd/1bt
Sq Footage not Shown
MLS# 26177048

On the surface it would appear that the pricing is considerably less (under $300,000) than other condos in the area. However, we're talking a conversion here and as the market tightens one could easily assume that buyers are becoming increasingly picky in their decisions. Still, I think he's got a good shot at turning a profit since these units are priced near the KC Median of $259,700. (down slightly from a high of $269,500 in August)

Questions for readers:

How much do you think the actual cost of a full renovation of this unit would be? Is NW 85th/8th Ave in Greenwood a desirable area? Are people willing to purchase a quickly thrown together conversion at these prices? Where can I find comparable units that have already sold in this area? (I'll add them to this post)

It's hip, cozy and has granite countertops! What more could anyone want?