A Broker’s Perspective

In the ongoing discussion that seems to rage daily on the Seattle RE blogs between the “industry experts” (like http://blog.seattlepi.nwsource.com/realestate/) and the “bubbleheads” (for example http://seattlebubble.com/blog/) over whether to rent or buy in Seattle’s market, there’s (amazingly) one point that hasn’t been pounded upon, which struck me today as I caught up on the weekend’s reading.  

In Friday’s Wall Street Journal (November 23rd, 2007), there was an article entitled: “Tenants Pay as Landlords Default,” by reporter Kelly Evans.  I think it’s a subscription only feature online, but here’s an excerpt (someone please tell me if it’s a copyright violation to give credited excerpts!):

As U.S. foreclosures soar, renters — especially in small apartment buildings and single-family homes — are paying a high price for their landlords’ financial troubles. Across the U.S., thousands of people are being evicted.

Renters are particularly vulnerable now for a couple of reasons. As lending standards were relaxed in recent years, more people snapped up properties that they rented out, or partly rented out. When they couldn’t make their mortgage payments — sometimes because their adjustable-rate mortgages reset to higher rates — the properties ended up in foreclosure. In most places in the U.S., that voids tenants’ leases.

There’s much to be said about the non-economic benefit of owning — pride of ownership, roots in a community, the ability to paint your walls pink or to have a cat without asking permission.  With the U.S. homeownership rate at an historic high, close to 70%, there must be something attractive to the idea, beyond just the hope for appreciation and the desire to grab hold of the interest deduction.  (And it’s not just the fast money of the recent ill-advised loans that has driven this — back in ‘96, when you still had to qualify for your mortgage, the rate was still high at 65%).  After owning my own home since ’91, I can’t imagine NOT owning — and the economics have little to do with it.  

But maybe one of the best reasons for owning is under the heading of “control your own destiny.”  What’s the benefit of not having your rent increased at the whim of your landlord?  Of being able to do with your home what you want to do?  Or as this WSJ article points out, of simply being assured of a place to live in exchange for the rent you pay?  Imagine moving into a house or apartment, signing a year’s lease, paying first and last month’s rent plus a damage deposit, unpacking, hanging your pictures, ordering cable, enrolling your kids in school, then getting an eviction notice posted to your front door.  And the foreclosing lender, your new landlord, has no obligation to honor your lease because the foreclosure, over which you had NO CONTROL, voided that lease?

Sure, this might be a rare thing.  As a small sampling, our company manages 1800 small rental units in and near Seattle — the type of homes in which the WSJ cites there may be a higher risk of foreclosure/eviction, as they’re owned by individual, small investors.  And in 16 years, we’ve never had an tenant get displaced due to foreclosure.  But the topic did make the Journal.  So clearly, it is happening, and it’s an interesting and tragic side effect of this changed market.  

Which begs another question:  Maybe it’s the TENANTS who should be asking for the credit reports?

There have been lots of dumb moves, so it’s hard to pick just one.  But this was a biggie, and it was my first:

It was spring of 1990, and Seattle’s real estate market was HOT-HOT-HOT!  Everyone from Emmett Watson (notorious Seattle Times columnist) to my grandmother was bemoaning the “Californication” of Seattle which had caused real estate prices to hop upwards in double digit increments for several straight years. 

I was a new real estate agent, into my second year of selling, and was working for MacPherson’s Real Estate in the U-District — a very productive office, at a time when MacPherson’s and their 18 area offices had tremendous market share and a great reputation.  So for a 24-year-old recent college graduate, the business was going fairly well. 

But I figured I needed not only to sell real estate, but I needed to own some too.  Inspired by Trammell Crow and his statement that “you can get rich selling real estate, but grow wealthy owning it,” my future business partner and I had bought a triplex in Ballard earlier that spring, and we were gunning for more. 

So when I saw a little fsbo ad in the Times for ”Well-Built Triplex, Capitol Hill, Owner Terms:  $170,000,” I hopped into my ‘79 Saab and sped south.   To 1231 East Spruce.

For you Seattlelites, you know Cap Hill.  How could we go wrong?  Big mansions, two universities, lots of action, right next to downtown.  And they’re not exactly building more property there.  We’d make a freakin’ fortune! 

So we pulled up, not noticing the graffiti on the boarded up businesses along 12th.  Didn’t quite cruise a block south to the low income housing on Yesler.  The gunfire coming up from what was then a tough Central District was well muffled.  And when the owner, this kindly gentleman who had lovingly owned and maintained the property for years walked us through, pointing out the massive and ancient Douglas Fir Beams in this 1906 triplex, we just needed to be shown where to sign.  He was also careful to point out that the block directly across the street to the north, which was currently vacant and being graded, was going to be this fantastic city park.  So we plunked 10% down ($17k), signed a note for 9% interest to the gentleman, and owned ourselves another winner. 

Or so we thought.  Turns out the “park” became the county’s juvenile detention center, complete with 25′ high concrete walls with slit windows.  And this wasn’t Capitol Hill.  Not by a long shot.  It was First Hill/CD/I-District, and still tough as nails.  And the market, which hit its peak in May of ‘90, started to quake and continued shaking for about two years. 

When we had to kick out our first tenant, a full physical drag-the-stuff-to-the-curb ordeal, with the crack dealing former occupant screaming at us the whole time, we knew we had a problem.  We started drawing straws and taking turns going to the property to show units to a revolving door of tenants, to meet the pest guy (lots of rodents), the painter, the roofer.  And so it went for several years.  When interest rates when down to 7%, we tried to get the former owner to drop his rate — no thanks, he said.  And our equity was gone — in ‘92 it would have been hard to sell that triplex for $140,000 (the market hadn’t slid that much; we had just bought that badly and there weren’t any greater fools handy to bail us out).  So refinancing wasn’t an option.

We toughed it out.  Our loss was about $5,000/year, year in, year out, for ten years.  But the market did improve, and that neighborhood, once downtrodden, improved.  Seattle U bought the UPS law school and built a shiny new building three blocks north.  Urban renewal hit the CD and all points around.  In 2000, ten years after the purchase, we decided to sell.  The market was better, and we thought maybe we had finally been rewarded for our patience with some appreciation.  So we sold:  $285,000.  Minus our $170,000 purchase, minus our $50k carry loss…about a 400% return on our $17,000 investment…it’s a good ending to a really bad story. 

Our lesson, which has served us well these intervening 17 years:  Know your market.  The neighborhood, the rentals, the land use and plans of property which could affect your building.  With all of the resources online it’s so much easier to do this today than in 1990, but that’s not a great excuse.  The info was there then, too.  A trip to Seattle’s DPD, maybe talking to some more experienced owners and real estate agents, a run to the county to look at sales comps.  It doesn’t require a ton of due diligence.

Gordon Gekko: “The most valuable commodity I know of is information.”

That movie came out in ‘87; maybe I should have been paying more attention to Mike Douglas than to Daryl Hannah…

Shelley Smith is an attorney and co-owner of Ballard Escrow (http://www.ballardescrow.com/), located in — you guessed it — the Ballard neighborhood of North Seattle.  As the director of an escrow operation that closes hundreds of transactions each month, Shelley is in an excellent position to provide insight into Seattle’s real estate market.  This is reprinted with her permission from her newsletter, which published today.   

MARKET MESSAGE 

As we’ve watched the media fill our lives with stories of foreclosure and banking disasters, we hoped and truly believed that our Emerald City would be spared from the problems created by sub prime lending and Wall Street investment failures.  We have seen splashy headlines drilled into our psyche 24 hours a day.  These reports have, unfortunately, affected consumer confidence.  What we should keep in mind, however, is that these negative reports fail to distinguish the Pacific Northwest region, in general, and Seattle, in particular, from the rest of the country.  In truth, in areas such as California, Las Vegas, Arizona, Florida and parts of the Midwest, we have seen deep cuts into real estate values.  This economic downturn is a result of over exaggerated real estate valuations and predatory lending practices.  In the areas most affected, home values have risen to levels of 200% or even 400% over a very short period of time.  By comparison, Seattle shares little in common with the most devastated market regions around the country.  We have seen significant increases in real estate values, but the levels of escalation are closer to 100% to 150%.  The Puget Sound region is not overvalued today and the foreclosure rates are low.  It is true that real estate values have dropped some, but the levels of decline are minimal.  Our market is suffering more as a result of the slippage in consumer confidence than from truly adverse market factors. 

Buyers in Seattle have been waiting the better part of a decade for the market to shift away from a seller dominated market toward a buyer’s market.  Buyers can finally achieve some level of concessions from sellers and it is safe to say, at least for now, that we are in a buyer’s market.  The levels of inventory in the residential sector have risen sharply in the last few months.  Homes are remaining on the market in excess of 60 days.  Bidding wars are few and far between and pricing is softer.  This is without a doubt a shift in our local real estate economy.  But, this downturn may be short lived.  The regions in our country most affected by this crisis have little to offer their home buying public in comparison to our Puget Sound region.  As a result, those markets lack buyers.  We enjoy unsurpassed natural beauty, a strong job market, a growing economy and a diverse cultural environment.  These uniquely Seattle features make our region one of the most sought after regions for living in the country.  All predictions indicate that the Northwest region will continue to grow over the next decade.  When growth occurs, prices continue to climb.  We may have slowed to take a breath, but we should not expect drastic downturns in pricing.  With recent decline in the federal reserve interest rate, borrowers will again find low interest rate financing with rates expected to return to the high 5% to low 6% levels for owner occupied homes.  100% financing is now available on owner occupied properties, and 95% financing is available on investment properties so long as full loan documentation is provided.

The key to our resurgence is based on consumer confidence.  Talk with your clients and your neighbors about the true facts causing the secondary market scandal.  Differentiate our region from those regions around the country that are truly in trouble. 

We need to educate and encourage our buyers to take advantage of the market and buy now while inventory is higher, bidding wars are few, and it is possible to obtain reasonable seller concessions.  At the same time, counsel your sellers to expect values to steady and increases to diminish to single digit levels.  Buyers who are undaunted and unafraid to look at our market with a longer term perspective will truly be rewarded by buying now.   

As an agent, you can’t get past your login page on Zillow without getting the pitch:  “Advertise with Zillow™ EZ Ads!”  So — have you ever actually tried it? 

As an early user of Zillow’s most basic ad product, I’ve run these ads for everything from individual listings, to corporate branding, and for our agents for their personal marketing.  I even helped my Farmer’s insurance agent upload his logo into an EZ ad which linked off to his website.  During the first month after Zillow launched this feature I told each of our 50 agents that we’d pay for their first $100 in EZ’s if they would actually take the time to create and run some ads.  Not counting those reimbursements, I’ve spent $5,551 on EZ ads since they lauched in May, 2007.  It’s simple to track the cost because on my Zillow homepage it tells me:  “Views of my EZ Ads: 551,108.”  The ads cost a penny per impression (view), $10/1000, $100/10,000, in any $10 increment.  You get the picture. 

It’s always been hard to quantify what we get for our real estate ad dollar, what’s the ROR for those Homes and Lands ads and the Sunday Seattle Times display ads?  When a phone call comes in off a listing, did they call off the sign?  The Times ad?  A magazine?  It’s never been a priority for me to find out how they got my number; rather I’m focused on what the prospect is calling about and how I can help them.  And with the internet our listings are in so many places that when we get an email or call, it could have come from almost anywhere.  And the cost for the print ads?  A typical Sunday Times ad is about $80, even with our contract discount.  That’s a small ad, maybe six lines, no color, no picture.  A display ad in the Puget Sound Business Journal is about $300 per week.  And those print ads run all over the region.  Do I really care if someone in Covington sees the ad for my rambler in Mountlake Terrace?  But we still run those ads (though less and less), as we have since the beginning of time – the seller likes it (in some cases, demands it) even if it’s proven time and again to not be a potent arrow in the quiver.  

EZ ads solve these problems for me in a few ways: 

1.  The seller sees the ad and loves it.  I can quickly email them the ad to be sure they see the copy.  If I run with high frequency (lots of impressions crammed into a short timeframe), chances are they’ll see it live when they’re looking at the site.  It’s unique way to advertise (for now), so as a bulletpoint on the marketing plan it’s effective and serves as a point of differentiation. 
2.  I can track the effectiveness of the ad — by click-throughs to the destination URL which is embedded into the ad; by emails generated from the site through my profile page; and by calls off the ad itself.
3.  I can choose the zip codes that I want to have the ad displayed.  For my Ballard townhome, I can run Ballard, north Ballard, Shoreline, Greenlake…but I can also toss in Capitol Hill and Queen Anne.  Maybe that Cap Hill buyer cringing at a $500,000 unit at 18th and Fir might love what is essentially the identical unit four miles away in Ballard for $400,000.

I’m told the measure of a good online ad is the rate at which people actually click through on the ad to the target URL.  Once there, it’s my own site’s job to capture these prospects by giving enough interesting information for them to want to make contact with us.  But if they don’t click through, I’ve still got the benefit of the impression — the equivalent of a bus or billboard ad (which is still valuable, it’s just hard to calculate a ROR on that sort of branding).  For my half million impressions, I’ve had 2827 click-throughs.  Not a great overall average CTR.  My response on general branding ads is fairly low.  But the response on specific listings is relatively high — about 1 click for every 100 impressions.  For the ad below (sorry if the image is fuzzy, it’s my first attempt to include a screen shot in a post), which had as its hook a photo of the great view from this Lake Forest Park listing, I had 76 clicks for 5036 impressions (those last 36 were Zillow’s overrun, I only paid $50 for that ad).  That’s well over my 1% ”goal” rate.  On average for specific listing ads, I’m at about 1%, which is a terrific rate. 

But the proof is in the pudding, right?  Am I getting calls?  Prospects? Sales?  Well — part of what inspired this post is the answer — yes.  In the past month, we’ve had three deals get written off EZ ad leads. 

One was an inexpensive, $200,000 condo in Shoreline.  Our listing agent, Stefan Hadfield, took the call — showed the prospect.  Showed the prospect again.  And then..prospect disappeared for a few days.  Resurfaced with their Buyer’s agent, offer in hand.  Deal signed around, closing this week.  So we didn’t actually get paid on the buy side, but our listing got sold — which is the point of it! – and the buyer saw it first in this little $50 EZ ad.  His agent didn’t have the property on this radar at all (actually, the buyer wasn’t on the agent’s radar, but that’s another story). 

The next good tug was on a bit of a rental house we were selling for a longtime client near Greenlake.  Same story.  Ad runs, prospect pings.  But this time our agent, Wendy Morales, took the lead and put the deal together with the buyer on this $500,000 house.  

And the last was another Seattle listing — posted here:  http://www.zillow.com/HomeDetails.htm?zprop=48759687.  Call came in from the prospect in Detroit, interested in buying this with his son who lives in Seattle and is starting grad school at the UW, a few blocks away from the subject.  Our agent — Arielle Thurik — showed the son the house, dad made an offer…Seller countered…and this one didn’t come together…hasn’t yet, anyway.  But the prospect is now Arielle’s buyer, and she’s busy showing them other opportunities in the marketplace (love this market when it comes to working with buyers, actually having other opps in the marketplace). 

This product is ideal for our industry — cheap, easy (of course), simple to track ROR, sellers love it.  But it’s also got lots of potential for any neighborhood business due to that zip code based search — LC’s Kitchen, the little restaurant down the street from RPA where one of our staff can be seen nearly every noon hour, is a fantastic lunch and dinner spot…but as you go by at 35 mph on Lake City Way, you might miss it.  As an EZ ad, maybe it would catch your eye.  (or look here: http://www.urbanspoon.com/r/1/2574/Seattle/Maple-Leaf/LCs-Kitchen.html)

Whew.  1171 words.  Someone needs to tell me to shut up.  Thanks to all who made it this far.  If you haven’t tried this Zillow feature — give it a shot!

And as full disclosure, although it was in my first post here  – I’m a director at Zillow, and have been involved with the company as an advisor pre-launch.  But I’d like to believe as a forward thinking broker that without that relationship I’d be beating this drum just as loudly. 

One of the benefits of being involved with Zillow (as an advisor and director) is that their PR folks occasionally pass my name onto reporters as a potential source for an article about Zillow, or about real estate in general. 

So it came to pass about six months ago, when Zillow was launching their “EZ ad” product, that I spent about an hour with Michael Cate, of King 5, a local tv station, tomorrow.  Mike produces a weekly segment called “Up Front with Robert Mak”   (http://www.king5.com/upfront/).   That interview boiled down to about three seconds on screen. 

Wanting to use up the 14:57 that I have left, Mike called me last week for my perspective on “the market.”  It’s a question I get regularly from friends and clients during the best and the worst of times — “how’s the market?”  It’s a generic question that really demands more than a generic response (sort of like “how you doin’?”), but I doubt the asker typically wants my full blown treatise on what’s going on.  Except Mike, who probably needs to get as many angles on what is clearly a changed real estate  market in Seattle.  But thinking about the interview got me thinking about the market.

So what the heck is going on? 

The short answer is that since early August, when the credit markets blew up with the sub prime mortgage news, we’ve seen more balanced interaction between buyers and sellers.  This is a result of longer market times, which has created more inventory.  There’s simply more time for a buyer to make a reasoned decision about what to buy, without having to jump into the fray and compete with other bidders for a limited choice of homes.  Unfortunately, we haven’t seen a balanced market for nearly eight years — it’s been a seller’s market, with record low market times, record high list price/sales price ratios, and a lot of frustration for buyers in all price ranges. 

If you’ve been around long enough to remember the “Californication” of Seattle in ‘88-90, you probably remember the major slowdown in late ‘90 through about ‘92.  Then from ‘92-’99, it was a market where multiple offers were the rare exception; where buyers could actually shop, preview, offer, negotiate, and then work through inspection and financing contingencies.  To say this current market is a bad market is missing the point that it’s only not as good as it’s been for sellers; it’s MUCH BETTER for buyers, and I think it’s much more typical of what a balanced market should be.  What it was for much of the ’90’s.

In King County, the market time for the 2004 condos and houses that closed in October was, on average, 59 days; average sales price of the houses was $547,205.  These are homes that probably had offers, and went pending, in August and September.  There have been 28,374 residential units (houses and condos) that have closed through 10/31/07.  This rate of sales, at 2831/month, was 44% higher than the October figure.  So the Fall slowdown in sales has slowed much more than normal. 

For the sake of comparison, last October (2006) there were 3023 closed sales (over 50% more than 10/07), with an average SP of the houses = $537,922 ($10k < than 2007).  Market time for those 3023 sales was 40 days, 17 days less than last month.  And the seasonal slowing of sales was less marked:  October was just 6% slower than the average month in 2006.  More sales, lower market times.   But 2006 didn’t have the August Mortgage Meltdown which we’re just starting to work through in terms of jumbo and other conventional mortgage availability (the subprime mortgages are gone forever — or at least until we forget about this fiasco).

The interesting thing is that in terms of peaks, 2005 was the top of the mountain.  35763 closed sales through 10/31/05, 3576 sales/month (October had 3384).  Average market time for the October closings was 35 days, with average sales price of houses = $473,921 (about 10% < 2006).

So sales are slowing (in terms of unit volume and time on market); average sales prices are still stable in King County (up 2% or so year over year).  There are segments of the market where I think prices have fallen — I’ve seen some condo projects that have same unit sales as much as 10% below their 2005 or 2006 prices, and some converters have reduced prices to the point where they are taking losses to close out their projects.  And of course there are lots of price reductions on these long suffering unsold listings.

But if you’re a seller, don’t fret.  Sales ARE happening.  42% of those 10/07 sales had market times < 30 days; the average was 57 but the median was 39 days…so there are some BIG market times that bring that average up.  If you’ve been on the market for 60 days, you’re still below the average of 74 days for active listings.  Above all, gather information.  Know the recent sales and how they compare to your home; don’t assume you can price on par with last March’s sales — you need to be priced to compete with all of this current inventory.  If you’re able to and you get a contingent offer, consider it (lots to evaluate here, but we’ve seen more CONT’s in the past three months than in the prior 10 years combined).  Be open to input from reliable, experienced sources. 

Buyers — enjoy the relative peace of being able to make an informed decision.  Maybe take one, two trips to a given house before making an offer.  But don’t assume that because the market is slower than it was that the seller is desperate, or that there’s a “deal” to be had.  Seller and Buyer still get to negotiate that mutually agreeable market clearing price, and the seller may not be as flexible as you think he should be.  But enjoy the choices available.  Especially in the lower end of the market: A year ago if you wanted to buy a home for < $350,000 in north Seattle…well, good luck.  Now there are 440 houses and condos available in Seattle north of the Ship Canal in that range.  With a median King County household income of $60,700 (in 2005, last year for which I found data), and putting together a 5% downpayment, these homes are yours. 

So it’s slowed down.  And while acknowledging that any encouragement to buy sounds like a self-serving pitch from an industry spokesperson…well, it’s nice for our buyers to have some options and if you’re thinking Seattle’s your home for the next 3+ years, it might not be a brilliant move to wait for a general depression or burst bubble.  Interest rates are terrific, including the jumbo loans now that those programs have settled back down (when I started selling real estate out of college in 1989, as a fresh faced econ grad, rates were JUST dropping into single digits.  9% was cause célèbre.  Now anything over 6.5% seems usurious.)  Job growth, local economy — good, good.  Weak dollar = stronger exports…good for a port city.  Net positive migration.  Except for the effect of the mortgage thing, I’m surprised the change in the market conditions has been as dramatic as it’s been. 

Of course last Fall it felt slow.  And in February, it was back to the races.  It will be fun to see what the new year brings. 

I’ve always tried to keep up with the times when it comes to technology and how it relates to our business..  Back in ‘91 or so, when we were dialing up with a 14.4 modem (big upgrade from the 2400 bps unit), I had one of those numeric emails that Compuserve issued and was trying to communicate with our three clients that also had emails.  When we upgraded to a 56k modem, and launched our website, I tried to grab RPA.com, which would have made sense for Real Property Associates.  Alas, some guy in LA beat me to it by a month.  We’ve settled for rpaseattle, rentseattle, rpa-re, and seattlehouses.com as our some of our domains (little did I know that briefer would be better…I would have taken RPA1 or maybe tried to buy out the rpa.com guy back before he knew what he had with those three little letters).  And when my eight year old daughter asked me how old I WAS when I got my first cellphone, and I told her “twenty two,” she was dismayed that it might actually be fourteen more years before she gets mobile.  I didn’t tell her that back in 1988 the Motorola 950 brick phone, which cost me $800, plus about a buck a minute, was the first cell phone that was widely available.    

So I’m a little ashamed that it’s now November of 2007 and I’m putting up my first blog.  Sure, I’ve thought about it over the past few years, especially since my first Inman where people were all about getting their words out there (January 2006).  I will proudly chalk the delay not up to lazy procrastination, but to the “other things” that get in the way of doing what you know you should be doing, but never get around to.  It’s been a busy few years with Seattle’s real estate market, a growing family, and lots of other things going on. 

So better late than never.  Here’s my blog — I hope you enjoy it!