The Election’s Over – So What’s Next for Real Estate?

fortune-tellerNovember 11 2008  JetSetRnv8r has donned his turban and dusted-off his cyrstal ball for a look-see into the future. He knows exactly what’s going to happen and when, but he’s only going to share a little bit at a time to avoid causing a stampede.

As Vice President-elect Joe Biden famously said in one of the debates, “the past is prologue” so let’s take a look back at recent history to put the future into perspective.

Remember 2006? The country was bracing for mid-term elections. The House and Senate had both been under Republican control for twelve years. With an increasingly unpopular Republican president in the oval office, all eyes were on the elections to see if Democrats would make a come-back. There was a lot of anxiety through the summer and fall as these elections were seen as an important indicator to the future direction of the country, the economy, and the conduct of the war.

We didn’t know it then, but in retrospect 2006 was also the start of the leveling-off of the real estate bubble. House prices were reaching a plateau and sales activity was waning. JetSetRnv8r had a newly-completed house on the market. The house had garnered a lot of attention having been widely published, featured on HGTV and on a high-profile design tour. Now that it was on the market, it attracted lots of lookers, including its fair share of coveted celebrity shoppers, but there were no offers as we crossed the dreaded 60-day threshold.

Then came Election Day. Democrats swept both the House and the Senate achieving a clear majority. By 10:00AM the next morning, JetSetRnv8r had three offers on his house. By the end of the week, the house went out in trampoline-bounce3multiples at over asking price to a high-profile television and film star. JetSetRnv8r was not alone. The real estate market throughout Los Angeles experienced a very noticable election bounce that restored the market and pumped a little air back into the slowly deflating bubble, at least for a little while.

The lesson here is that elections do matter. Politics has a powerful effect on consumer confidence, and that directly affects every business including real estate.

So now that we’ve gotten through the most highly anticipated election in American history and elected a wildly popular new President who is expected to take the country in a radically (and welcomed) new direction, will we see an election bounce in the real estate market again? As of this writing, it’s been exactly one week since the election and it’s too soon to tell for sure. But anecdotal evidence collected by JetSetRnv8r among his circle of real estate agent contacts is that there has definitely been a surge in activity.

200187506-001Every realtor surveyed this weekend reported an increased number of calls on long-moribund listings and a frenzy of showing appointments. Attendance at this past Sunday’s open houses was definitely up, at least at those throughout the Hollywood Hills and Beverly Hills visited by JetSetRnv8r. For many months, JetSetRnv8r had been the only person on sign-in sheets and greeted by lonely, over-eager agents who jump up from their quiet reading on the couch. This past Sunday, sign-in sheets were overflowing and houses were comfortably full with the vibe of happy cocktail parties.

Pending Home SalesAs of this writing, JetSetRnv8r knows of no significant offers on long-time listings, but the post-election showings are definitely under way. Thirty to forty days from now will be the time to check the MLS for sales over the previous 30 days – the typical escrow period. Then JetSetRnv8r will reveal a little more of his prediction for the real estate recovery.

If you’re a real estate agent, let us know what you’re experiencing.

Read JetSetRnv8r’s posts on real estate sales trends in Beverly Hills here, the impact of the Wall Street bail-out here, how the real estate market brought down the entire economy here and here, and how to profit in a down market here.

How Did the Falling Real Estate Market Lead to a Global Economic Crisis?

October 27 2008   Real estate has always been cyclical and we’ve been in what looked like a routine down cycle since mid-2006. Real estate has also been the engine of the greater economy with new homeowners buying appliances, furniture, building materials and more – boosting production and creating jobs. So it’s never been surprising when a slow real estate market slows everything down. But how in the world did this real estate bust ever bring down the biggest Wall Street firms and lead to the global economic disaster we’re in today? And why hasn’t this ever happened before? And what are all these new terms we’re hearing like “sub-prime mortgages”, “mortgage-backed securities” and “credit default swaps”? It can all seem mind-boggling, but it’s really quite simple.

In the good ol’ days, your local bank gave you a mortgage for your home and you paid that very same bank back over the next 30-odd years. You may have done all your banking with this particular bank and you and your wife may have even played bridge or tennis with your banker and his wife. Beaver and Opie lived down the street, Donna Reed greeted you at the door in a crisp shirtdress and pearls, Hazel cooked and cleaned while doling-out sassy back-talk, and Father always Knew Best.

For better or worse, those days are long gone. The Republican revolution of the 1980s led by Ronald Reagan followed by Newt Gingrich’s “Contract With America” ushered in a new wave of “small government” and pro-business thinking in Washington. Deregulation became the magic elixir and Wall Street embraced the mantra of “greed is good”. One of the things this new deregulation did was allow banks to sell their mortgages to larger banks, who in turn packaged them together and sold portfolios of these mortgages to investors in financial instruments called “mortgage backed securities”. Some of these portfolios were made up of better quality mortgages, and some of lower quality mortgages and they were rated according to risk. This new packaging of bad loans with good loans made it easier for banks to issue riskier loans to less qualified consumers – and with more people flooding into the housing market, house prices shot up like a rocket. Throughout the 1990s, people who had previously been shut out of the American Dream of home ownership were now welcomed with open arms. Those who wondered how they would ever make the payments when their adjustable rate mortgages actually adjusted were reassured that rising home values would enable them to refinance before their payments increased. Why, they could even take money out of a refi and still lower their payments! Houses became giant ATMs – never mind you were simply giving up equity. There were actually financial experts advising people to never pay off a mortgage – that that was “old-fashioned”, “unsophisticated” thinking!

Before I go any further, let’s take a step back further in time – back to the turn of the last century. The “gilded age” of the 1890s was a decade of rising affluence as cities and municipalities grew rapidly to absorb the mushrooming population of immigrants from the previous 20 years, many of whom were now beginning to prosper. As the industrial revolution took hold, a new wave of manufacturing and service industries grew, and so did the stock market. Investing in stocks became available to the working classes for the first time and with the increase in investors, new investment vehicles sprouted like weeds in a garden. One of these popular new investments was side bets made on the performance of a stock. Without actually buying a stock, you could place a bet that that stock would go up or down. These side bets became known as “derivatives” and they were bought, sold and traded in betting parlors all over the city called “bucket shops”. Since these bucket shops fell outside the scope of federal regulators, nobody was checking to see if the so-called “banks” selling these derivatives had the cash reserves needed to pay off these bets. As the stock market reached a fever pitch in 1907, these derivatives added to the hysteria that led to panic resulting in a stock market crash. So in 1908, this kind of gambling on stocks was made illegal and the bucket shops disappeared. During the depression, even tighter regulation was established by the Securities Exchange Act of 1934.

Now fast-forward to the year 2000. Bill Clinton is a lame-duck President with a Republican-dominated congress. Deregulation is still the mantra and Clinton, a centrist Democrat eager to co-opt the Republican agenda whenever he could, along with his Chairman of the Federal Reserve, Alan Greenspan, enthusiastically signed into law the Commodities Futures Modernization Act of 2000. This not only overturned the 1908 law, but most significantly it removed the trading of derivatives around these new mortgage-backed securities from Federal oversight. Savvy investors could bet that some of these mortgage backed securities would fail as homeowners defaulted on their mortgages. These bets, called “credit default swaps”, were invented by JPMorgan in 1994 as a sort of insurance against outstanding corporate loans and to free-up cash to offset the huge cash reserves they were required to keep against those loans. Hedge fund managers trading them had become the new Masters of the Universe. Now credit default swaps could be traded against mortgage backed securities with no federal oversight – meaning no requirement to keep cash reserves to pay them off, unlike credit default swaps against corporate loans and other investments. Real estate was the new lawless wild west town. This further stimulated a market for ever more risky mortgages, throwing more gasoline on the bonfire. By 2006, the housing bubble began to plateau as prices simply became unsustainable. Homeowners who were counting on refinancing before their mortgages became unaffordable suddenly found themselves “upside-down” (owing more on their house than it was worth). Foreclosures started to mount, swelling to a tidal wave that crashed on the beach in September 2008, wiping out everything in its path, including the giant Wall Street firms who had taken to mortgage-backed securities like a junkie on smack. Without the cash reserves they would have been required to hold had they not been deregulated, they were wiped out.

The problem, as Alan Greenspan now points out, is that he and the others in charge had too much faith in the executives running the banking industry. They believed bankers would be responsible to their shareholders and self-regulate. Instead, these executives paid little attention to the details and took delight in paying themselves enormous bonuses – often in excess of $100 million. Now that a conservative Republican, pro-business/small government administration has (ironically) federalized the banking system, we, the taxpayers, will all be paying for that party for decades to come. Will the bailout work? It’s too soon to tell, but the fact that it’s being administered by the very same Wall Street executives who created the mess doesn’t give JetSetRnv8r much faith. 

Update:  Days after writing this post, it was revealed that the first thing the Wall Street firms did with their federal bail-out money was set aside billions of dollars for executive bonuses. Surprised?

How to Buy Foreclosed Properties

Up till now, I’ve been a flipper of high-end properties.  That may change given the upheavals in our economy and it’s possible I may move into the foreclosure market.  These properties are also called “bank owned property” or “REO” for “real estate owned”.  You’ve probably been hearing a lot about “short sales” too, but that’s something different and I’ll get into that in a separate posting.

In the interest of full disclosure, I have not yet bought a foreclosed property but it’s not for lack of trying.  I’ve been shut out of six offers in recent months because I didn’t know the nuances of the game.  Here’s what I’ve since learned:

 

Banks are dispassionate

When buying from an owner, there is lots of emotion that guides the strategy of the offer and the subsequent negotiations.  When buying from a bank, the property is just a number on a very long list and the bank has no emotional ties to the house whatsoever.  Your offer is reviewed by a bank employee who is following strict policies and procedures.  Your offer either falls within their acceptable parameters and the deal kicks into gear, or it doesn’t and your offer is ignored.  There’s no negotiation so any efforts to try to outsmart the bank are wasted.

 

Understand how the price was determined

Banks are overwhelmed with properties and it’s getting worse by the day.  They do not have the wherewithal to inspect each property or the money to spend $400 or more for a proper appraisal on each and every one.  Instead, they often outsource to a real estate broker for what’s called a “BPO” – a Broker’s Pricing Opinion.  This broker may or may not visit the property – they may establish the price merely by doing some quick desk research and going by gut feel.  (As a former appraiser, I can tell you they also called me for an opinion.)  Since the property is one in a very large portfolio, nobody cares enough to re-think or second-guess the BPO.  I know from having worked with real estate agents and brokers, they will do everything they can to prop up the prices so they will generally come in high – higher than a certified appraiser would.  Even though the banks know this, they’d still rather start on the high side than leave money on the table, so the high estimate is accepted.

 

Know when the price starts to move downward

I made a lowball offer on a foreclosed house while it was within 30 days on market and my offer was ignored.  About 90 days later, it sold for much less than my offer.  What happened?  I was aggressive too soon.  When a foreclosed house is first listed, the bank will be the least flexible on the price.  Once the listing hits 30 to 60 days on market, the bank may start accepting offers that are within 10-15% of the asking price.  At 90 days, they may lower the price and accept offers within a wider margin.  So pay attention to how many days the house has been listed by watching the “Days On Market” or “DOM” on the MLS listing.  And be sure to check the listing price daily – if it drops, it’s time to make your move.

 

Know your market to spot the bargains

Frequent readers of JetSetRnv8r know that my Golden Rule is to buy where you know – know the prices, know the buyers, know the trends, etc.  If you’re an expert on the area, you’ll know if the price on a new listing is high, reasonable or low.  In their rush to get the house listed, the bank may have accepted a BPO which is too low and that should set-off alarm bells in your head.

 

If at first you don’t succeed, try, try again

If the bank doesn’t respond to your first offer within a week at most, don’t wait, they are not going to respond.  Like I said earlier, they do not negotiate so no response is a clear “no thanks”.  Raise your offer a few points and repeat every four to five days until you have a deal.

 

Look for more postings to follow as I wade deeper into the foreclosure pool.  And I invite my readers to contribute their experiences in this burgeoning new market.