A Broker’s Perspective

Used Car Salesmen, Trial Lawyers, and Real Estate Agents

Just posted this in my second post over at the wildly popular Rain City Guide where I’ve become a guest contributor…check ‘er out here

For all the talk the bubbletalk about renting being a better housing choice than buying, for some segments of the population at least, renting is pretty rare.  I clipped this from Tom Kelly’s column this week which was reprinted in the Daily Journal of Commerce:

According to the U.S. Bureau of the Census and the National Center for Health Statistics, the older population — persons 65 years of age and older — numbered 35 million in 2000. While the years since the last census have altered the numbers, it showed the over-65 group represented 12.4 percent of the population — about one in every eight Americans. The census data showed nearly 80 percent of the nation’s seniors own their own homes, and 73 percent are owned free and clear of any mortgages, amounting to nearly $1.9 trillion in home equity.

Wow.  8 out of 10 “seniors” (although a 65 year old is not quite “senior” anymore in my book) own their homes, and the vast majority of those — 73% — have paid them off — free and clear.  No worries about foreclosure there.

I think renting is clearly the preferred alternative for a certain group — those who are transient, moving soon, or otherwise unsure of their plans.  Probably that 21-35 demographic.  But for me, and I think for most of us (clearly for those 65 and up in America), I can’t imagine not having the stability that comes with owning the roof over my family’s head. 

We’ve had clients who have bought when we counseled them not to — due to being newly arrived in Seattle, unsure of their plans, not able to find a house on the market when they got here that suite them.  Those people who bought, only to sell a year or two later, lost money — even in a strong, appreciating market.  They should have waited.  But everyone else who bought and stayed put, they’re happy as clams — even if it might have made better FINANCIAL sense to rent.

There is a great article today by Liz Ann Sonders, Chief Investment Strategist for Charles Schwab, which you can see here, and from which I’ll excerpt in this post.  The title is “Housing:  Glimmer of Hope.”

With so much bad news and piling on from the media on all fronts, I relish any little tidbit that says “the worst is passed” or something that is positive about the national market.  Mind you, I continue to be relatively unconcerned about Seattle, but clearly things are hurtin’ elsewhere in this fine country.  And Ms. Sonders doesn’t say it’s over, but she does say that there are some good signs.

Some tidbits, but there’s a lot there to read, so link off and check her out…

Comparing the Homebuilder’s Index to the Nasdaq:

From peak to trough during the 2000–2002 bear market, the Nasdaq lost 78% of its value. From peak to trough during the recent housing bubble, homebuilding stocks lost … yes, you guessed it … 78%!

Housing Inventory:

Percentage of listed and sold homes which have been or are in foreclosure:

There’s likely still too much complacency about how bad things are, particularly in what had been highly speculative areas of the country. Those borrowers more severely impacted reside in areas where lending standards were the loosest and/or where the local economies were troubled. Tops on the list remain California and Nevada. For instance, about 60% of properties on the market in Las Vegas are in foreclosure. The same is true in parts of California: 46% of homes sold in Sacramento and 31% in San Diego were foreclosure sales in 2007, up dramatically from about 4% for each city a year earlier.

Interesting counter to the fallacy that this whole RE mess was caused by loans which, in a more prudent era, would never have been originated:

Delinquencies and foreclosures are not just a subprime problem. In fact, the statistics for prime mortgages are alarming. To date, over 36% of foreclosures started in this country are prime mortgages (about evenly divided between fixed- and adjustable-rate). That’s certainly lower than the 55% that are subprime, but disquieting nonetheless. In fact, subprime “serious delinquencies” (loans 90 days or more past due plus loans in foreclosure) have not yet topped their 12% record set in 2001, but seriously delinquent loans overall are at a record of just under 3% of all mortgages outstanding. That’s as a result of pressures up the spectrum to prime that are typically not so elevated during housing downturns.

There’s also a record that needs to be set straight. Many assume that mortgage rate resets are driving the elevated readings among adjustable-rate mortgage (ARM) delinquencies and foreclosures, when in fact the majority remain at their teaser rates. In the meantime, the ARM reset story is only just now really kicking into gear. There was about $300 billion in ARM loans that reset in 2007, while that will jump to an estimated $500 billion in 2008. The heart of the problem here is solvency. The Federal Reserve can lower rates all it wants and Congress can drop dollar bills from the sky … but the “cost” of money is one thing, while the “availability” of money is an entirely different thing. The latter is our bigger problem today.

…Especially if you try and price out the damage that waking your sleeping baby causes… 

This is a neat piece of fiction from an agent in Gig Harbor who tells the story of a couple who waited to buy…

http://gigharborundressed.neighborhoodsundressed.com/2008/02/24/how-can-i-trust-you-mr-realtor-it-cant-always-be-a-good-time-to-buy/

Now I’m sure there are stories, but for those who don’t have to sell…I can’t think of anyone I know who regrets their decision to buy. 

I meant to get this post done a month ago, but as I’ve said here before — there will always be an inverse writing to working ratio; it’s been a busy month, so not much posting.  Sales have picked up quite a bit, which leads me to think that at least some of our dismal fall was just a seasonal thing.

For the record, 2007, our 16th year in business, was a great year in sales volume for our brokerage area.   We closed $167.2m, which is just a shade under our best year of 2005, when we closed 168.7m.  However, for transaction “sides,” we were way down from our best year:  271 sides (representing either buyer or seller; when we act as “dual agent” it counts on my books as two sides), down from 283 in 2006 and 354 in that record year, 2005.  I count every deal that we do, on and off market (for example, when we broker an unlisted deal), in my volume figures.

The gorgeous thing about increasing prices, is that despite the decrease in transaction sides, our gross commissions were nearly the highest they have ever been, due to the highest average sales price we’ve had:  $619,845, up from $519,162 (2006), $476,744 (2005), and $428,186 (2004).   It didn’t hurt the average that we listed and sold Zillow CEO Rich Barton’s former house, which closed in mid 2007 for $2.75m, as well as another half dozen $1.2m+ sales. 

 (Rich’s former house, taken from an RC helicopter which we hired to shoot some marketing photos)

Does anyone else remember when $300,000 bought you just about anything you wanted in Seattle?  Now a $1m sale isn’t that unusual, and the buyer and sellers of those homes aren’t always what you’d call rich by most conventional standards (income, wealth other than property).  It’s just that the $1m home today is the $350,000 home of 1995.  Way back in 1989, when I was a fresh faced 23 year old working at MacPherson’s Realtors in the U-District, one of our agents — Greg Haverfield – listed the first > $200,000 house in Wallingford.  He was teased for his ambitious pricing, but it sold quickly.  If memory serves, this is that house:  4101 Woodlawn Ave. N.  By the way, it wasn’t the nicest house in Wallingford then…just the first one to sell for more than $200k.

Back to our stats.  It’s also interesting to me that the percentage we take on each sale has been going down a bit these past few years (consolation: the real dollars on each commission have gone up).  It’s not unusual to offer a client a discount off the “rack” rate when engaging in multiple deals (e.g. selling them a house then listing their existing home), but as a company we believe that there should be some common sense involved when we negotiate our fees.  That is, when we sell a $5m house, we just maybe can charge a lower percentage than when we sell a $500,000 house.  I know some agents say they “never” discount.  I was talking to one notable broker who runs a team here in Seattle, probably doing about 75 transactions a year.  I asked him if they ever discount.  “No, NEVER!”  Really, I said.  What about when you sell your guy a $800,000 house, and in the same week, list his $550,000 property.  “Well, sure, we’ll give something there.”  What about when a client calls you from an open house, you’ve never seen it, you haven’t shown him a thing, and you write and close the deal?  “Well, sure.”  So you never discount, except almost every time??

Summary:  2007 was a good year.  Dismal last quarter, but overall it was a productive year for our company. 

2008:  I think that we’re in for some big market driven challenges in 2008 and moving forward — things like increased market times, contingent deals, maybe some seller financing.  But for anyone who has done this for more than a few years, or in different markets, you quickly realize that what we’ve had in Seattle between 2002 and 2007 is the exception.  The rule is that we, as agents, have to WORK at our vocation.  The era of just popping a sign in the yard and popping the deal, or managing the de facto auction, is gone.  It’s time to sharpen the axe, put on the tool belt, pick your metaphor, and get to work.

A few years ago I read a great book, “Suburban Nation:  The Rise of Sprawl and the Decline of the American Dream.”   Sounds depressing, doesn’t it?  But it’s not, it’s about the New Urbanism movement (not so new anymore, this book was published in 2001).  I bought ten copies and passed them out to some of our real estate agents and a few builders.

There are a variety of discussions, but one of the authors’ theses is that given intelligent urban redevelopment, much of what was historically attractive about our towns and cities can be recreated.  Things like having walkable neighborhoods, with front porches and amenities that you can get to without driving a car.  The book goes on to talk about moving into the city, getting rid of your rig, and evaluates the savings of having no car — between insurance, gas, maintenance, and depreciation, even a modest car can cost $6,000/year.  If you don’t have to spend that money, you can perhaps afford to move closer into the city — $500/month = $83,000 in mortgage amount (at 6%) — so you can trade your $300,000 Marysville rambler for a $380,000 townhome, saving not only the environment (by not driving), but also 10 hours a week of commute time.   If you need a car, get take one by walking block to Flexcar.

Our sister company, Real Property Development Company LLC, builds these project.  We have townhomes that are built or being built in five Seattle neighborhoods:  Crown Hill (Ballard); Lake City; Queen Anne; the University District; and Fremont.  And it’s one thing to just talk about walkable neighborhoods and “close to everything!”  It’s another to actually rate it.  A website I found today actually helps you to quantify the “close to everything” factor:  WalkScore.com.  It basically does a proximity search for neighborhood amenities, then rates the home from “worst to best” on a scale from 1 to 100.

Here’s the scores for a few of our current listings:

2830 NW 56th St. — $399,950 — Newly converted Condo in the heart of Ballard    Walkscore Score:   92 out of 100 
4814 38th Ave NE – $729,000 — Brick Tudor close to UW in Bryant  Walkscore Score:  82/100
12316 33rd Ave NE – $365,000 — New Zero Lotline Townhome in Lake City  Walkscore Score:  74/100
2500 Dexter Ave N — $799,950 — 1950′ Condo, Big View, Queen Anne  Walkscore Score:  58/100
2211 NE 175th St.  — $428,950 — Shoreline Renovated Rambler  Walkscore Score:  52/100
5601 1st Ave NE — $349,950 — Great contemporary home in Everett  Walkscore Score:  28/100

Maybe someday Zillow can bake this into its Zestimate?  For now, buyers that want to be “in-city” can use this as an easy tool to see how “walkable” their target property really is.

There’s often criticism that rises when multifamily or commercial “in-fill” sites in Seattle get developed — more traffic, a loss of open space, loss of a classic historic home.  As builders, we hear this all the time and I acknowledge that some projects might be ill-advised.  But the majority of the time redevelopment brings higher quality housing stock, attainable housing priced at or below the median prices for the neighborhood, and it replaces something that likely was dilapidated housing stock. 

A couple of thoughts on this topic, and then an example of where redevelopment hast taken place. 

Just north of RPA there is a terrific site that is owned by Camp Fire Girls of America (a non-profit), nearly a full city block in Maple Leaf at 15th NE and NE 85th Street, backing on the west to the reservoir.  CFA wants to sell; their reasons are here.  Some neighbors, who have enjoyed this great open space for decades, would rather keep looking at trees and a quiet, underused office building (formerly Waldo General Hospital).  No traffic, nice trees.  I agree it’s a nice parklike setting and I like looking at it when I drive by it every day.  However, unless it’s sold as a development site, CFA won’t get nearly its market value.  Parks are paid for by public funds; private property get to be developed.  The neighbors’ position on why this private property should remain a public amenity is here.  If the city can pay the market value for the site so that it remains open space, that’s fair (although that’s not proposed here, it has been for other sites, like the mothballed Capeheart military housing in Fort Lawnton - Discovery Park).  But for CFA to get less than what the property is worth, for the benefit of the neighbors who want the site to remain as it is, seems unfair. 

Every owner has the right to develop their property to the full extent allowed by law.  So when you buy a single family home — or even a condo or townhome — next to a vacant site, or a lot that is obviously underdeveloped, DO SOME RESEARCH.  Check what the zoning is next door, or see if there are plans in with the building department for something new.  If that lot sits between you and a big view of Lake Union, which is why you’re buying the condo in the first place, you should know whether you might lose that view.  Remember, view protection and the right to enjoy the neighbors’ lush gardens are not vested property rights in Seattle (although some neighborhoods may have view convenants).

Here’s an example of in-fill redevelopment.  This is a site in a prime Greenlake neighborhood, two blocks from the lake near the “old” Albertsons, just down the block from the Latona Tavern.  The address was 501 NE 65th St on the corner of 5th NE and NE 65th.  This was our first townhome development, completed in 2004.  When we bought this the owner/occupant, he had lived there nearly 80 years — as a child, then after his parents passed away.  The place was as full of stuff as you could imagine, all sorts of collections that a depression era man might retain.  Here it is before we purchased:  
              

The site was overgrown, rodent infested, but had a great old Chevy pickup in the yard that we got as part of the deal.  That’s my business partner, Jay Young, anticipating his restoration of the rig (didn’t happen, we ended up ebaying it): 
 

There was no arguement that this wasn’t an historic site.  And NE 65th is zoned for “low density residential” use — “L-2″ in Seattle’s code language.  There is commercial development on the block as well.  the urban village zoning in Seattle is designed to go from high density (65′ apartments, on major arterials), to lower density (40′ height limit, commercial and residential uses), to lower density residential (townhomes), to single family.

We knew, or hoped, that we could build four zero lotline townhomes here.  We were new at it.  But the market for townhomes was just kicking into high gear, and we sold out pretty quickly in prices that were in the mid to high $300,000’s.  Those units are worth between $450-$550k today, less than a well maintained but smallish bungalow on any block in greater Greenlake.  Here it is right after production:   

It’s interesting the lifespan of “improvements” in this city.  We’re doing a similar project to this, and the archive photos from King County showed a 1930’s house; the 1960’s 10 unit apartment building; and now our 18 townhomes going up in Crown Hill.  I would expect properties to stand longer, with lifespans of 50-100 years, and in some neighborhoods you see houses that are 100 years old still doing fine.  But lots of areas, like View Ridge, the 50’s ramblers are coming down, still servicable, and being replaced by larger, modern homes.

Like it or not, in high demand areas, the development will continue.  As I said above, I think done responsibly, these projects can complement their neighborhoods.

Just 10 days into the new year and the Seahawks have advanced to the second round against Green Bay (my prediction was, sadly, is that they lose this game after advancing last Saturday, but I hope I’m wrong).  And then this headline appears, potentially fulfilling my fourth prediction: 

“Bank of America in talks to buy Countrywide, report says:
By The Associated Press

LOS ANGELES — Bank of America is in advanced talks to acquire struggling Countrywide Financial, The Wall Street Journal reported today on its Web site, citing unidentified people familiar with the situation.”

It’s always fun to try to read the crystal ball as we face the dawning of a new year, especially one where there will undoubtedly be much commotion in our industry.  And it’s a question I get all the time:  “What’s gonna happen in the market?”  Although the question has been laced with much more anxiety since the slowdown started in August, I always try to give an honest answer based on what I see in the trenches each week.  With 60 agents, and an office transaction volume of around $160m each year, going back over 16 years, at least I have history to help me predict. 

 So, without any warranty as to whether our past will give us an idea of what the future holds…

1. Housing Prices: Prices won’t fall much more than they have already. At least for condos and townhomes in north Seattle, we’re down 10-15% from the peak of spring 2007 (e.g. our Ballard projects which may have sold in $470’s early this year are now SELLING — not priced — in the $420’s.) It’s getting to the point where in the lower end townhomes and converted condos, a developer can refinance, rent, and carry the product. In most projects which are SELLING (not sitting, but selling), the builder is selling close to, and in some cases, below cost. For SF homes, we continue to see sales happening for our listings where the homes are priced competitively with the rest of the active inventory. This doesn’t mean that if your neighbors house sold in 2/07 for $700,000 that yours will too. It likely won’t. But search recent sold comps, and check out the available competition. If your home is well priced compared to those properties, and you don’t have any adverse issues (e.g. on an arterial or with a moldy basement), you should sell in < 45 days.

2. Rents: Will continue to rise, 8-12% this year in Greater Seattle. Many landlords are just waking up to the fact that demand has increased for apartments and houses so much in the past two years. Which is only saying that instead of a steady 3-4% gain in rental rates since 1999, we had a jump in 2000, then a decline, then nothing for five years. So that 32% gain in rents is going to be realized in three years instead of eight. And an interesting twist is that for flippers and developers, a strong rental market presents an alternative to selling at a fire sale price. This simply isn’t normally an option for property owners in a generally crappy market, where no one wants to live - like Seattle in 1972, where you couldn’t rent or sell your properties. Judy Nicastro will move back to Seattle and run for City Council on tenants’ rights but won’t get much traction.

3. Interest Rates: Rates are so good for conforming (up to $417k) loans. And they will get a bit better through the first two quarters. Refinancing will become an actual revenue source for the brokers and banks that are still left out there doing loans.

4. Lending: Speaking of loans, there will continue to be lots of news in this industry. Bank of America, which recently cut off its wholesale brokerage relationships to do only “in house” lending (http://www.msnbc.msn.com/id/21477224/), will buy Countrywide in order to control CFC’s best asset: Its excellent retail distribution network. WaMu will recover both its reputation and its stock price. It will trade back in the mid 20’s by Fall. And other strong lenders will be plucking assets from the carnage. Americans still need mortgages, and there are still going to be millions of transactions in 2008, even it volume doesn’t approach the levels of recent years.

5. Foreclosures: While there will be lots of talk about PERCENTAGE increases being HUGE in our region, the real numbers will still be underwhelming. There were 33,000 notices of default issued in L.A. County in 2007, with 8000 of those making it all the way through the process to foreclosure. There were 680 in King County. I know, I know, there’s a population delta there. But still. I just don’t see foreclosures having a big impact in King County. And the builders that are suffering in Pierce, Thurston, and Snohomish County - their land costs are generally very low, and they can likely figure a way out of this and live to fight another day. One property manager that we just hired came from Auburn, where his firm had 50 new homes from a builder that they had just taken into their portfolio to manage as rentals. As longs are there are jobs and positive migration into our area, there will be demand for housing - whether it be to own or to rent. And speaking of foreclosures, the government needs to get out of the business of subsidizing these losses. No income tax for refinance proceeds that don’t need to be paid back? I can see allowing a capital loss when you sell your primary residence at a loss, but please. Let the market reign.

6. Blogging: As much as industry blogs have exploded in the past two years, I think they’ve peaked. One can only read so many of these things and after a while the content seems a bit redundant. So do the comments, as interesting as they can be. So like anything else, there will be blogs - but better ones, and fewer. Sort of like car companies in the 20’s or tech companies in 2001. Plus I think participation in blogs is skewed - relatively few people reading and contributing 95% of the content. Ardell is famous, but only to a relatively small community of readers.

7. Seattle: The economy will continue to boom. Boeing’s 787 delivers this year, and from what I’ve heard and read, it’s going to be a great plane. Paccar is still selling lots of trucks. And of course the other great companies - Microsoft, Costco, Amazon, Starbucks, WaMu, Weyerhaeuser, Nordy’s, Safeco. All have their issues, Starbucks and WaMu notably of late, but it’s been a long time since we were just a Boeing town. And with a booming economy will come continued income/job growth, more net positive migration, and yes, increased demand for housing.

8. UW: I’m not really a big follower anymore, despite being a third generation Seattleite and a big fan as a kid. But I like the Dawgs, and I really like Tyrone. He’ll finally pull it together and will go 7-5; but they’ll lose to Stanford in Palo Alto in September.

9. Seahawks: Will lose in the second round of the playoffs to Brett Favre’s Packers. The Pack will advance to the Super Bowl and will lose in a tight game to New England, which will finish the season undefeated. Favre will retire.

10. Sonics: I hate to say it, but I think they’re gone. Unless, and it’s a long shot, someone steps in and pays Clay Bennett $400m+ to leave the team alone AND the city plays ball with some renovation plans for the Key. Maybe there’s some local ownership that will make this happen. I’d put $100 on it given the right odds. Maybe 100 to one.