Sales decline and prices peak, what now?

The median price paid for a Bay Area home was $627,000 last month. That was down 2.6 percent from June's record $644,000, and up 3.5 percent from $606,000 for July a year ago. Meanwhile, the number of homes sold declined. A total of 7,941 new and resale houses and condos were sold in the nine-county region last month. That was down 19.1 percent from 9,892 for June, and down 30.8 percent from 11,470 for July last year, according to DataQuick Information Systems. Ouch, what does that mean?

There are fewer homes sold this year than last in July, but the prices have increased, just at a lower pace.  This is the textbook definition of a buyer's market and usually indicative of interest rate increases (which we've had our share of lately). But, Sellers need not panic.  Simply opt for more creative options when selling your home with incentives (see what buyers like below).  And Buyers...now is the time to ask for other things instead of low balling.  Here are a few options to use in your negotiation bag of tricks:

1. Don't have a washer/dryer on the premises?  Offer one year's worth of quarters
2. Ask for a new dishwasher or all new appliances
3. Ask for a new coat of paint (you pick the colors) before you move in
4. Ask the Seller to pay for your moving expenses
5. Ask for a credit to pre-pay your first year of HOA fees
6. Ask that the seller pay down your mortgage rate by one percent
7. Ask for home insurance for one year
8. Can I have 2 years of free DSL?  Sure, why not?
9. No garage?  Ask for one year of parking in local garage building!

Sellers offering these as incentives will make Buyers happy, secure your price and heck, close early?  No promises, but in a buyer's market, it's a great start!

Greenspan's Last Dance

Greenspan's last day on the job is today.  There are loads of articles about his leaving and that affect on the market, but I thought I would share some facts about the man, courtesy of one of my favorite mortgage brokers, Bobbi Clemens.

LONG TIME ON THE JOB - Alan Greenspan is the 13th chairman of the Federal Reserve, having taken over for Paul Volcker on 8/11/87.  When Greenspan retires, he will have served as chairman for 222 months, the 2nd longest tenure of any chairman in the 93-year history of the Fed

TIME TO SLOW DOWN - Greenspan will be 80 years old on 3/06/06, or just 6 weeks from today. On the day Greenspan becomes an octogenarian, basketball star Shaquille O'Neal turns 34 years old. Greenspan's father was a stockbroker and his mother worked in retailing in NYC.

INITIATION BY FIRE - Just 10 weeks after Greenspan became chairman on 8/11/87, the US stock market suffered its worst 1-day percentage loss in history.  The 20% decline of the S&P 500 on 10/19/87 forced Greenspan to coordinate the flow of funds needed to maintain liquidity in the financial markets.

CLASSY GUY - Greenspan studied at the Juilliard School of Music in NYC for 2 years in the 1940s.  He played the jazz clarinet and traveled the country for 1 year with the Henry Jerome swing band.

UNDERPAID - Alan Greenspan was paid $174,500 in salary over his last year on the job.

LOVE THOSE MITCHELL GIRLS - Greenspan was married twice in his life and each of the 2 women had the same last name.  He married artist Joan Mitchell in 1952 and then later married NBC news reporter Andrea Mitchell in 1997.  He also dated Barbara Walters in the 70's.

HE SAID WHAT? - 4 famous phrases spoken by Alan Greenspan were 1) his 12/05/96 speech where he used the term "irrational exuberance" to describe the bullish performance of the US stock market; 2) his 2/16/05 description of the behavior of the world bond market as being a "conundrum"; 3) his 7/20/05 speech before a House committee when he acknowledged that there were "signs of froth" in certain real estate markets; and finally 4) an undated speech in which he is quoted as saying "I worry incessantly that I might be too clear" (source: Federal Reserve, Bloomberg News, Barron's).

ON HIS WATCH - During Alan Greenspan's 18 1/2 years as Fed Chairman, the S&P 500 has advanced +492% on a total return basis, equal to +10.1% compounded per year.  The S&P 500 was up 15 of the 19 years (1987-2005) during his time in office.  Additionally, the US economy has grown at an annual rate of +3.1% while inflation has gone up by a nearly equivalent +3.0% per year.

HE RULES - 29 of the last 32 votes taken (2002-05) by the 12-member Federal Open Market Committee have been unanimous votes supporting the position taken by Greenspan (i.e., either to lower, raise or maintain short-term interest rates). The last dissenting vote was cast by Mark Olsen on 9/20/05.

EVALUATING THE ECONOMY - The US suffered 2 recessions in Greenspan's 18 1/2 years as Fed Chairman.  The country also flourished from 3/91 to 3/01, producing a 10-year period of economic expansion, the longest in our country's history

      

Pending Sales Index UPDATE

In response to a comment made in my previous post, I called Walter Molony at Realtor.org and co-writer of the press release, Pending Home Sales Index Slowing.

I wanted to know when the index was created and why.  And how as, consumers, we should read the index. (He spoke very quickly, so next time I will use a recorder then podcast it!)

Basically, the Index was created in March 2005, based on 4 years of data tracking pending sales against existing home sales, or closed transactions. An index of 100 is equal to the average level of contract activity in 2001, which was the first of five consecutive record years for home sales.  In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 closely parallels the level of closed existing-home sales in the following two months. 

This is important because as Realtors we have no idea what the price of a home actually went for until the sale is closed, sometimes 30 days or 60 days after it was listed on MLS. While the PHSI is a leading indicator of future sales activity, and there is not direct relationship between the index and price performance, it can help to tell us what kind of pressure there may be on home prices.

Assuming that housing inventory levels, area employment, mortgage interest rates and other market factors hold stable, what this means for sellers is if the pending sales index is about the same as the previous month, then there is no need to adjust the price.  The market is relatively the same as the period before.

Given that inventory levels have been improving, when the index slips say 2.5 percent to a reading of 120.6 in November from 123.7 in October, then pricing needs to be adjusted to something more reasonable rather than taking the price of the neighbors sold home (data 1-2 months old) and adding 5-10% to it (assuming the same rate of price over asking as the previous period). In other words, sellers and their agents need to price their home realistically, or it will sit on the market until the seller reduces the price, indicative what the market is willing to pay in the current time period.

For buyers a slide in the index means a more normal market.  In San Francisco that translates to offers at list price instead of 10% over asking. Imagine that?!

The important thing to remember about the pending sales index is that it gives those who analyze such numbers a more accurate measure for predicting the future.  Instead of just getting data of closings each month, we can look at the future direction of the market, which is a good thing on either side of the fence.

National Market Update

This just in from REALTOR Magazine - Daily News.

(January 5, 2006) -- Pending home sales, a leading indicator for the housing sector, slowed for the third consecutive month in November, demonstrating that a market transition is firmly in place, according to the NATIONAL ASSOCIATION OF REALTORS.

NAR's Pending Home Sales Index, based on contracts signed in November, slipped 2.5 percent to a reading of 120.6 from 123.7 in October, and is 2.5 percent lower than November 2004.

The index is derived from pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed; pending home sales typically are finalized within one or two months of signing. David Lereah, NAR’s chief economist, says the index remains at a historically high level. “Although pending home sales are trending down from a record in August, the index remains well above a mark that is considered to be historically strong,” he says.

An index of 100 is equal to the average level of contract activity during 2001, the first year to be examined, and was the first of five consecutive record years for existing-home sales.

“We are clearly experiencing a market transition, moving from a prolonged boom to a more balanced period of sustainable sales,” Lereah says. “In other words, home sales have been peaking for the last five years and we will land on a high plateau in 2006—a market that will be healthy for both buyers and sellers. Investment fundamentals for housing remain solid, preserving generally favorable affordability conditions while offering solid returns as well as a place to live.”

A new look at The Bubble

On Smart Money.com today, Lisa Scherzer spoke with Todd Sinai about the state of the housing market and similarities between San Francisco real estate and growth stocks in Don't Buy the Bubble Talk.  It's an interesting take on the Bubble theory.

Sinai says home buyers should look at the annual cost of owning a house, not its price, when considering a purchase. And based on a recent study he did with Chris Mayer of Columbia Business School and Charles Himmelberg of the Federal Reserve Bank of New York, Sinai says homeownership costs are near the long-term average, relative to rents and incomes.

How does he figure? Traditional measures of housing values, such as the rate of appreciation, or the house-price-to-rent ratio, are misleading, Sinai says.

The study by Sinai and his colleagues examined 46 housing markets from 1980 to 2004, estimating the true one-year cost of owning a house and comparing it to rental costs and income levels. Naturally, the low interest rates of recent years have offset high prices by keeping mortgage payments down. Variable and interest-rate-only mortgages have also lowered the annual dues of homeownership.

That's why the most expensive U.S. markets are especially sensitive to changes in interest rates. In any city, the faster prices appreciate, the more they'll drop if mortgage rates rise. "The so-called bubble markets really are more sensitive to changes in interest rates, because they are markets where people are buying the right to live there in future years," says Sinai.

And to make sense of the high prices in San Francisco he continues with the growth stock analogy

Another thing that's been going on, another way you get a low annual cost of housing is if you expect the market to have high capital gains, high future price growth. You'd expect the price of rent to go up. If you have a higher expected capital gain, that total annual cost will be lower. What markets are like that? In San Francisco, over the last 60 years, real annual house price growth was 3.5% per year. The national average is about 1.5%. There are a handful of other places like that: San Diego, New York City, Boston... If you compound that over 60 years, it's huge... In markets like San Francisco, people should be willing to pay a higher initial price [for a house] because they expect to get more of the value back on paper.

As an analogy, San Francisco is like a growth stock because more of the value comes in the future. Whereas Philadelphia is like a value stock: The value is not going to go much higher.

So, the bubble is not really about prices getting to high for it's britches, but the rising cost of ownership, which involves financing. The forecast for mortgage interest rates is to rise slowly over the next year. A general slow down is expected, but because of our persistent inventory shortages, home prices are likely to continue to rise above historic norms.