New Home sales

New-home sales dropped 45.4 percent year-over-year in September, the California Building Industry Association and Hanley Wood Market Intelligence reported Wednesday, while median prices dropped 9.7 percent.

The median price of all new homes -- including single-family, townhomes, multiplexes and condos -- was $402,900 in September, down from $445,990 in September 2006.
The median price for new single-family homes dropped 12.1 percent, from $452,990 in September 2006 to $398,060 in September 2007. Single-family new-home sales dropped 39.4 percent, from 4,225 in September 2006 to 2,561 in September 2007.

Jonathan Dienhart, director of published research for HWMI, said in a statement, "The problems relating to credit availability don't seem like they will be resolving themselves in the near future. Until we have stabilization in the broader market of real estate-backed securities, access to financing will remain restrictive for many potential home buyers."
He added, "Many would-be home buyers have taken themselves out of the market because they see it as too risky, and until this perception improves, we will continue to experience a degree of paralysis in the new- and existing-home markets."

Among the metro areas with more than 100 new-home sales in September, sales dropped 66.9 percent in the San Diego area, 65.1 percent in the Los Angeles area, 46.1 percent in the Oakland area, 44 percent in the Irvine area and 31.4 percent in the Riverside area, with the slightest decline at 2.3 percent for the Fresno area compared to September 2006.Also among the metro areas with more than 100 new-home sales in September, the Irvine area had the steepest price decline at 16.7 percent, while the Oakland area was the only area to experience a price gain, at 1.1 percent compared to September 2006.

The Zillow Report

Home values nationwide declined for the fourth consecutive quarter, down 5.7 percent year-over-year - the largest year-over-year decline in more than a decade, according to Zillow's Q3 2007 Home Value Report. This brings the U.S. Zindex® home value indicator to $244,000, down 2.8 percent from the second quarter. The Zindex is the median Zestimate® valuation and measures all homes in an area, not just those that have sold during the quarter.

For many homeowners who bought during the last two years when most local markets reached their peak, subsequent declines in value have left them with negative home equity, owing more than the home is currently worth. As of September 30, nearly 16 percent (15.6%) of homeowners nationwide who bought in the last year and 17.5 percent of those who purchased two years ago have current home values that are less than the original mortgage amount. By comparison, less than 2 percent (1.8%) of those who purchased a home five years ago have seen their equity slide into the negative.

Not surprisingly, markets with the greatest proportion of homes with negative equity were those hit hardest by declining values. For example, people who purchased homes in California's Central Valley, parts of Florida and Las Vegas during the past year have seen double-digit depreciation and negative equity rates reach up to five times the national median.

Since homeownership is typically a long-term investment, it's important to keep in mind that short-term value declines mostly affect homeowners who either must sell or want to withdraw equity. The run-up in home values we saw over the last several years had many home buyers counting on continued housing appreciation to drive home equity growth, but the market has proven that this strategy is no longer a safe short-term bet.

Despite decreasing home values and increasing incidence of negative equity scenarios, most U.S. homeowners still have positive equity in their homes. In fact, many homeowners who purchased in the last two years have seen overall equity increase since they made their purchase. The variances and movements in owner equity depend on many factors such as when the home was purchased, how much was put down and net market appreciation.
Americans who bought a home in the last two years placed a median down payment of 10 percent and now have a median of 13 percent equity in their investment. Most homeowners who bought five years ago have the benefit of time and the market on their side. After placing a median down payment of 11 percent, these homeowners watched home values grow at an annualized rate of 9.4 percent over the past five years and now own a median of 41 percent of their home.

Housing prices down

Housing prices have fallen five percent since their peak July 2006, according to the September Standard & Poor's Case/Shiller monthly index, but the damage isn't as bad as the financial press makes it out to be. While Robert Shiller, chief economist for MacroMarkets LLC notes that the 1.7 percent drop in 20 index markets is the biggest single slide ever, the aggregrate 4.5 percent year-over-year slide is nothing compared to the 10 percent bath stockholders took just this month.

Housing prices and stock prices are down for the same reason -- fears about the economy and the ability of borrowers to access credit. Home buyers are being told by the financial press that housing prices haven't dropped enough to qualify as a true correction, and that prices will drop further. Who's going to buy when lower prices are coming? And for many, lower prices is the only way home buyers can afford the homes they want.

Some buyers may get their wish. In a recent study for U.S. mayors by Global Insight on the impact of foreclosures, it was found that weak housing, construction, spending and income will impact the economy, with major cities such as New York, New York ($10.4 billion), Los Angeles ($8.3 billion), Dallas and Washington ($4 billion) and Chicago ($3.9 billion) losing billions of dollars in economic activity in 2008. The report also predicts property values will decline by $1.2 trillion with drops in home prices averaging 7 percent across the U.S.

Most banks have announced heavy losses due to the inability to sell their subprime loans to investors and get fresh cash to loan out to new borrowers. Homebuyers can still get loans, but the market is not as generous for non-conforming or subprime loans. That impacts over 50 percent of homebuyers considering how people bought homes during the boom when credit was easy. Subprime loans were 10 percent of the market and other non-conforming loans such as interest-only or no-doc loans were as much as 40 percent.

The only other thing that can lure buyers back to the market is interest rates so attractive that buyers can't resist. This week, mortgage interest rates for conforming loans dropped below 6 percent for the first time in over a year.

That should be an attractive level to get people to lock in, but that doesn't mean buyers will rise to the bait. Mortgage rates can be refinanced, but the price of a home can't be renegotiated after closing. And consumer confidence, according to the Conference Board, has sunk for the fourth month in a row. Despite an optimistic start to the holiday season, gas prices, home equity losses, and wobbly financial markets are impacting consumer spending.

As usual, the coastal markets are whipsawing the national picture. Home prices are down 11.1 in Tamp, Florida, and 10 percent in Miami. Yet, year-to-year prices are up in Charlotte, North Carolina and Seattle -- a 4.7 percent gain each. Yet the malaise is affecting healthy markets -- prices in Charlotte and Seattle fell by a fraction for the quarter. It remains to be seen if home buyers will take advantage of interest rates below six percent, but we should know more when the Mortgage Bankers Association releases its weekly application survey next Thursday.

Every house has a story

After 30 years of previewing and showing homes, I look at them differently than my clients. My definition of important doesn’t include granite counter tops, walk-in closets or new paint and carpet. Buying a home may be an exciting emotional experience for buyers but their agents need to maintain a degree of objectively. While my clients are visualizing their family gathered together in the great room around the Christmas tree, I am sleuthing for breached window seals, fractured floor tiles and wet stains under the kitchen sink.

Every home has issues and a story to tell. When I know that my clients are seriously interested in a home, I consider it my duty to discover the home’s history. Knowing all I can about the property will aide in the negotiation process and help me protect my clients from regretting a major decision.

Each chapter of a home’s history is revealed in a different place. The county’s offices are a good place to begin. The county’s Tax Assessor’s office contains information about the year the home was built, its size and the outstanding mortgages against the property. The Department of Environmental Quality may have information on the well and septic systems. The Building Department should have the original building plans, survey and any permitted additions. Some of the reports are free, others have a nominal charge. Reviewing the reports will reveal helpful information and may raise other questions that will need to be answered.

The next chapter of a property’s history can be found in third-party inspection reports. Listing agents and their sellers should order all third party inspections early in the listing process. Pest reports, well flow tests and water potability, septic pumping and inspection, roof inspections and certification, and pre-listing whole house inspections, all help in revealing the character of a property. Buyers and their agents feel more comfortable entering into escrow already knowing the issues that existed with the property and their disposition. Obtaining third party inspection reports in advance is money well spent by the seller. Pre-inspected homes will sell easier, for a higher price and are less likely to fall out of escrow. .

The seller furnishes another chapter in the home’s storybook. State law requires sellers of residential properties to furnish buyers with a plethora of written disclosures regarding the current condition and history of the property. Most real estate agencies go even further with their own in-house questionnaires and disclosures. Good agents will obtain these questionnaires early at the time of the listing, reviewing for any red flags. There should be no surprises once escrow is opened.

In addition to the seller’s legally required written disclosures, some sellers will volunteer other information that isn’t found on a standardized disclosure form. Many agents prefer that the seller not be present when showing a home to an interested buyer. I have always thought it to be an advantage. Sellers can be a guarded first-hand source of information about the neighborhood, schools and neighbors. Serious buyers always have additional questions for sellers not found on any disclosure questionnaire.

After reviewing as much information as possible within a reasonable time, a call to the listing agent will usually answer any remaining questions prior to submitting an offer. When asking the seller questions during the showing process, my questions are restricted to polite conversation about the property or neighborhood. When talking with the seller’s agent, prior to writing an offer, I am not hesitant to ask tough intimidating questions such as: “Have you had any offers on the property? What were they? How motivated is your seller? Will they take less than the listed price? If I can close this deal in 30 days, will your sellers pay my clients closing costs? The listing agent should be very careful how they answer those questions but when representing a buyer, I am not prohibited by professional ethics from asking. I consider these preliminary discussions the beginning of the negotiation process. Gaining a competitive advantage early will assist in my client’s offer being accepted and succeeded again if needed during the escrow process.

Once escrow is open, the property investigation continues. The title company will furnish a preliminary title report showing the current legal status of the property. This will include the current owners, liens, assessments, easements, conditions and restrictions that affect the title. The title report will not furnish detailed documents of all “exceptions” unless requested to do so. Exceptions to the title report can be easily overlooked as ordinary. The title company will clear some prior to closing but the missed details of a “deed restriction” or a “special assessment” may prove irreversible.

There are other miscellaneous sources to gain information about a home’s history. Neighbors are a wealth of information. Once a home is in escrow is a good time to introduce myself to the neighbors and ask a few questions about what they like and dislike about the neighborhood. There is a wealth of information about communities on the Internet. Goggling “El Dorado Hills and asbestos” produces 58,000 results. Out of area buyers should always subscribe to the local newspaper or previous copies of the community newsletters.

Buyers today have a distinct advantage not afforded to homebuyers a few years ago. They and their agents have time to conduct a comprehensive investigation of the current condition of a home and discovering its past history.