Enacted in early 2009 by Fannie Mae and Freddie Mac, the Home Valuation Code of Conduct (HVCC) was intended to reduce mortgage fraud and collusion. However, instead the HVCC generally caused chaos, as well as increased costs and delays in the closing process.

The new law eliminates the HVCC and creates a new Bureau of Consumer Financial Protection that takes over and that is charged with carrying out the first modernization of real estate appraisal regulations in more than 20 years.  Critics have stated that the 2009 regulations forced lenders to use appraisal management companies that charged less and lacked the manpower to provide timely appra isals, often using appraisers from outside the local marketplace who were unfamiliar with market conditions.

As I write this post, I now find myself in the middle of a situation which the new legislation intends to correct.  Unfortunately, the bill wasn’t enacted soon enough for my clients.  The buyer’s lender, on a Lafayette, CA real estate property represented by me, sent out an appraiser who represented herself as being a “local, Lafayette appraiser”. She spoke and apparently understood little of the English language, and it turned out that she was sent from outside the county with little or no experience in Lafayette real estate.  Her description of the subject property was inaccurate and incomplete, and her selection of “comparable” properties poor.  Worse yet were her valuation adjustments to the “comparable” properties, which clearly demonstrated her lack of knowledge and familiarity with the Lafayette market areas, as well as inaccuracies in the comps.  Bottom line, her appraisal came in  below the agreed upon purchase price, and I find myself consumed with having to write a lengthly rebuttal and appeal letter.

The buyer has the option of coming up with the difference in value in cash; attempting to renegotiate the purchase price; taking the loan to another lender; or simply terminating the purchase via his financing contingency.  The person most affected by the appraiser’s incompetence is the Seller.  IF the purchase price is renegotiated, the incompetence of the appraiser and a flawed system will be responsible for lowering property values.  In the end, we’ve all been hurt by this process.

The inspiration for this post comes from today’s Wall Street Journal article, “Awful Real Estate Listing Photos:  How Not To Take Them.” The headline, alone, made me chuckle. This has been a bit of a pet peeve of mine for years.  Perhaps a bit of background is in order.

I’m probably a bit more sensitive to this subject since I grew up around photography. My father was once a professional photographer, and I owned my first camera at about age six.  A full professional darkroom was located adjacent to our garage, and I learned to develop and print by about age 12.  I purchased my first Nikon 35mm camera at age 17 with money I had earned working part-time at a photography store for professionals in San Francisco, and I’ve had the good fortune to shoot alongside some very well known photographers.  Although I didn’t understand the significance of it at the time, I even attended a weekend workshop in Yosemite with the late Ansel Adams as a teenager.   Exiting my teenage years, I moved into doing portraiture and fashion shoots, learning how to “paint with light” and work with the varying personalities and egos involved in the creation of these types of images. Bottom line, if it hadn’t been for my parents pushing me down the academic route, I would have probably opted to try my hand in the world of commercial photography.  Today, it’s still a passion for me… something that occupies a fair amount of my limited “leisure” time, and a significant amount of my discretionary “toys” budget!

Back to the Wall St. Journal article… I am often amazed at how poor the quality of photography is in many online listing presentations… poorly lit dark rooms, “blown out” windows, heavy shadows, extraordinarily poor compositions, etc.  Perhaps agents can “get away” with it in some markets, but not in the Lafayette real estate market.  We live in a world where people make judgments about things based upon first impressions. Poorly photographed and presented properties get less buyer attention and invariably will take longer to sell — at a lower price.

Ninety percent of the time, I use a world-class real estate/architectural photographer to shoot our listings.  His work is superb… rich even lighting, proper light balancing so that you can see the views from inside the house, and compositions that properly showcase our listings.  He has even taught his craft internationally.  If he’s not available, I’ll shoot the home myself.  I’ve got all of the professional lighting gear, professional camera bodies & lenses to do the job right, but I usually prefer to pay someone else to labor over the photography, and spend my time on the core aspects of real estate.  Either way, it will be done right.

I had a well-respected local agent pay me the ultimate real estate photography compliment about a year ago with a home that I shot myself.  He told me that the home looked “amazing” online, but was “extremely disappointing” when he arrived with his client. “Bravo!” I mumbled to myself, cracking a wry smile.  I had successfully made the home look MUCH better than it really was in-person.  There was no photographic, digital “trickery” involved… just the use of the proper lenses, lighting and shot angles. Mission accomplished!

Another related consideration is what I’ll refer to as the “Zillow Problem”.  This popular website simply doesn’t work in 95+% of Lamorinda because of the non-conformity of the properties.  Our communities aren’t built as homogeneous subdivisions with similar homes.  One of the reasons that we cherish this community is because of the unique characteristics and beauty of the land, and also because that uniqueness is reflected in the homes.  It’s not uncommon for a $3M home to be next door to a $2M home, and around the corner from a $1M home.  It’s what makes this community special and it’s what also causes the use of simple price/sq. ft. mathematical algorithms to be inherently problematic.  In simple terms, that’s why Zillow doesn’t work in this community.  It is also why it is very difficult to use statistics on a “thin” market to draw conclusions on price trends.  This is where statistical analysis doesn’t “fit”.

Let’s look at the upper end of the market where there have been the fewest transactions and the homes arguably have the highest level of differences in style, construction quality, aesthetics, amenities, etc.  Using $/sq. ft. analysis to determine pricing of one home vis a vis another is almost impossible.  Ultimately, it comes down to a MUCH more subjective analysis driven from one’s interpretation of the relative merits of the factors noted above.  Just because one of the rare upper end foreclosure properties closes escrow at a hypothetical $2.5M for 6500 sq. ft. doesn’t mean that suddenly a 5000 sq. ft. home may only be worth about $2M.  You MUST look at the relative characteristics of each home, and ultimately ask yourself whether YOU would have bought that “other” property for $2.5M.   In more cases than not, the answer will probably be “NO”, since you place a higher inherent value on the home that you are considering for purchase.  You have to ask yourself, over the long term, which property will be the better investment… the foreclosure property with a suboptimal location that a spec builder never finished, or the one with a coveted location, high quality finishes and emotionally compelling aesthetics?

Will a small number of financially-driven sales put pressure on the upper end market for about another 18 months?  The national trends suggest this will be the case, however that doesn’t mean that any given upper end property is over-priced because it hasn’t sold in a month or even two months.  That’s more reflective of the nature of a segment with fewer buyers than in lower price ranges.

Simple supply and demand relationships have had their impact all across the Lafayette real estate market and the surrounding communities of Lamorinda… just as they have across the US.  Unlike most other markets, the supply of NEW inventory is constrained in our geography.  Over the long term, almost no new inventory can be built due to lack of land availability, and it is for this reason that we have not been impacted as substantially in the market downturn as other areas.  Once the overall economy improves, that supply/demand relationship will work in our favor and our area will see a faster, steeper rebound.  Additionally, our local economy is “fed” by a very diverse set of industries… from technology, to healthcare, to biotech and financial services.  The diversity of our economy should help us to continue to outperform most other areas of the country.  Lastly, Lamorinda real estate is still undervalued relative to comparable areas in the SF peninsula and in Marin County.  Over time, I expect to see these price differentials tighten to the benefit of our Lafayette real estate and surrounding area valuations.

The Joint Center for Housing Studies at Harvard University released a study showing that while mobility has slowed across all age groups during the real estate bust, “mobility rates among seniors have posted the sharpest drop.” Trade-downs in March comprised about 8% of total home sales.  That is down from 12% in October 2008, which was the first year when historical data was tracked for this type of transaction.

The reason for this trend is due to the disparate rates of price decompression in the real estate marketplace, and readily apparent in the Lafayette real estate market, as well as our surrounding communities.  The upper end of the market is where many 50-60+ year olds have “graduated” over the long ride up in real estate valuations, yet it is the the hardest hit in the present market.  Federal and State housing supports have helped the “lower end”, sub-$1M segment of our market.  As a result, demand has been stronger and therefore prices firmer in this segment.  Also, it is generally a more affordable price range with greater inherent demand characteristics.  It is the segment that many “empty nesters” target for downsizing, yet the price gap has compressed so much that it sometimes does not make sense to make the move without moving out of the market area.

Compounding the issue, people took an enormous amount of money out of their homes during the bubble—$358 billion in the peak year of 2005 alone, according to Goldman Sachs. The “cash-out” refinancings raised mortgage obligations sharply. In combination with the upper-end price decline, literally trillions of dollars in home equity has disintegrated, making it more challenging for empty nesters to downsize.

We have observed this issue with “empty-nesters”, and have often recommended that they consider a move to one of the many nearby communities where there is a much more profound differential to Lafayette or Orinda real estate market valuations.  Our clients have found wonderful alternatives to these two communities in Walnut Creek and even by extending their search slightly south to Alamo where there has been more supply than demand, and therefore lower prices.  For those who are more adventurous and willing to move to “second home” communities such as Grass Valley, Palm Desert, or even out-of-state to communities such as Bend, OR or Scottsdale, AZ — the differentials to our market are enormous and the values are MUCH more compelling. There are many viable options available for those seeking to trade down.

The #1 question that most agents are being asked is “What will the market look like next year… should I wait to sell?”  As one of my biz school professors once said, “If you take all of the world’s economists and line them up, they’ll all be pointing in different directions.” If I had the answer to this question, I’d also understand what impact the European economic meltdown will have on the US economy, how high interest rates will rise, and a plethora of other unknowns that even Warren Buffet might struggle to know.  All we can do is try to draw from the wisdom of much more learned and credible sources… read their opinions, weigh their analysis, and ultimately form our own opinions.

So, back to the question at hand.  Facing longer market times than they would like and facing a market that has been less than hospitable in the upper price ranges, many sellers are wondering what to do.  Should they “wait out” the market, lease their home, take what the present market will yield, etc?  Over the last several months, I’ve told clients and prospective clients that I believe we are bouncing along the bottom of the market, and that it may take several years for us to see renewed appreciation at “normal” levels of 3-5% annually.  At the upper end of the market, I’ve been more cautious, fearing that there is still some downside risk as foreclosures impact the segment and increased inventories affect the supply demand relationship — softening prices.

Regardless of what you think about Goldman Sachs, they are still a formidable presence in the financial markets, and their market opinions are still worth considering.  In today’s Goldman Sach’s “US Daily” newsletter, the following prediction was articulated, “As discussed more fully in last Friday’s US Economics Analyst, we expect further declines in house prices during the next two years. With the support from government housing policies expiring, we expect the overhang of existing houses and the rise in mortgage delinquencies to take their toll. Specifically, we estimate that the 20-city Case-Shiller index will fall by 3% over the next year and another 1% over the following year.”

So, let’s assume you are the potential seller of a $2M home and Goldman is correct.  If the home is worth approximately $100k less in two years, it will need to appreciate roughly 5% in year three to get back to where the value is today.  If you factor in the cost of home ownership, market risks, cost of capital, etc., I think it makes a fairly compelling case for being realistic about today’s market and selling in 2010.  If Goldman is wrong and the market turns up next year, then it’s clearly better to wait.

I think that it all depends upon where your home lies along the value spectrum.  The higher above the $1M price point, the greater the risk and the more likely it is that Goldman will be right.  Personally, I’m hoping they are wrong, but my gut tells me that they aren’t.

First of all, the highest velocity in the market is in the sub-$1M price range.  We’ve talked about this before.  It’s more affordable, homes previously unseen in the price range are hitting the market, and our state and federal governments have provided financial incentives to first time buyers.  And yes… our bankrupt state is still providing a tax credit to these buyers without regard to the buyer’s income.   It’s expected that the state of CA funds will dry up by mid-June.

As we move up-market, the story begins to change.  The segments of $1M – $1.5M and $1.5M – $2M both are performing about the same with about 5 months of inventory based upon the leading edge of the market — the “pending” sales.  These are properties in escrow that have not yet closed.

The upper end market is dominated by Lafayette real estate and Orinda real estate, and there are very few rays of sunshine penetrating the dark clouds overhead.  In the $2M – $2.5M price range, there are 7.5 months of inventory, but in the $2.5M – $3M range, there are 11 homes on the market and there hasn’t been a single sale since May 1st!  In the $3M+ range, there are a whopping 16 homes on the market, with 1 home pending in escrow in the same time frame.

What lies ahead in Lafayette and Orinda’s upper end real estate market?  It’s pretty clear that April’s splash of activity was isolated, and caused a lot of people to jump into the market thinking that we were going to see a robust return to the days of old.  Most of the homes in $2.5M+ price range are significantly over-priced, even assuming that there are a sufficient number of buyers to absorb the inventory.  We know this is not the case.  There are very few buyers in this range, and they are well-educated, financially savvy people who are generally seeking homes that represent a sound economic investment.

Concurrently, we are seeing financial distress properties hitting the market.  At least two bank-owned upper end Lafayette homes hit the market in the last couple of weeks, and there are others that involve short-sales or financial hardship situations within the Lafayette and Orinda real estate markets.  I expect to see further compression in this market segment as the distressed inventory sells and becomes the benchmark for pricing over the coming year.  Bottom line… there will be increasing downward pressure on our upper end market that will easily extend through the 2010 selling season, and most likely influence next year’s, as well.

]]> http://blog.teamrothenberg.com/2010/05/28/the-sun-has-emerged-but-not-in-lamorindas-upper-end-real-estate-market/feed/ 0 teamrothenberg http://blog.teamrothenberg.com/2010/05/15/home-inspections-be-honest-be-accountable-and-be-real/ http://blog.teamrothenberg.com/2010/05/15/home-inspections-be-honest-be-accountable-and-be-real/#comments Sat, 15 May 2010 17:28:14 +0000 teamrothenberg http://blog.teamrothenberg.com/?p=284 ]]> We live in a litigious business environment where people are often afraid of their own shadows and personal accountability is, at times, almost non-existent.  A recent article about the downfall of a well-respected local contractor brought this issue to light, coupled with a series of experiences that I’ve had with home inspectors over the last couple of weeks.  In combination, they compelled me to write this post.

Recently, a high profile contractor in the county was driven to bankruptcy by a series of lawsuits  – someone who was often utilized within the Lamorinda real estate market for evaluations of drainage and foundation issues.  A recent article in the CC Times reports on the “questionable home inspections” conducted by Brockman Engineering Contractors, his violation of a rarely enforced section of the California Business and Professions Code, and the law suits that wrecked financial disaster upon his business. In an environment where home owners, buyers, sellers, and members of the real estate community often find it extremely difficult to obtain honest and objective evaluations of drainage, retaining walls, and foundation issues, Brockman’s company was often utilized.   This post has nothing to do with the merits of the law suit that brought down his business, rather the inherent hypocrisy and lack of regulation surrounding “home inspections”.

The California Business and Professions Code states that no matter what it is called, any evaluation of a property during its sale is an “inspection” and the person or firm may not bid on repair work within 12 months.  This code section is rarely enforced and there are a multitude of licensed engineers with owned or affiliated construction firms who are in violation of this code on a daily basis.  In fact, several of them send engineers out to do “inspections” while they are on an incentive compensation plan tied to the amount of construction business they bring into the firm.  So much for the “objective, expert” home evaluation or for their consult being an “inspection”.

About 2 years ago we had a listing where the buyer’s agent brought in a local engineering construction company.  They were retained to evaluate a small amount of dampness under a very limited area of a hillside home that showed no objective evidence of foundation degradation, rot, or any other issues in the “damp” area during its 20+ years since construction.  The company’s engineer wrote up a “report” stating that the home needed approximately $60K in drainage work and foundation reinforcement.  In most cases, that report would have caused the buyer to back out of the sale, and the “report” would have become a disclosure document that the seller would have needed to make available to future buyers.

Fortunately, I was able to convince the other agent to allow an independent, highly regarded geotechnical engineer to evaluate the situation and render a report without any economic incentive to find “problems”.  The engineer found that the first “report” was riddled with errors.  The recommended drainage work was poorly designed and didn’t address surface water; the home had a foundation consistent with the design from the time period when built, and there was no evidence of any performance issues; and even the foundation retrofit work recommended by the first firm was found to be improperly designed, incomplete, and at best, an optional consideration for the buyer.  A second engineering and foundation contractor was brought in to bid the work recommended by the independent engineer, including the optional foundation retrofitting.  The bid came in at LESS than half of the original firm’s bid and included a much larger scope of work!  Unfortunately, the type of situation with the first firm happens all of the time to unsuspecting homeowners who are at the mercy of the inherent conflict of interest with contractors or their engineers doing “home inspections”.

We often hear of issues with licensed pest control companies who do the required “termite inspections” for home sellers, with an inherent conflict of interest built into the process.  These companies get to bid the work that they are recommending, prior to their final evaluation and “certification” of the property being free of “Section 1″ issues — active rot or pest infestation.  Differing from the situation described above, these companies are licensed by the state to do inspections, construction work, and certification.  So… how did this happen when the situations above violate the Business and Professions Code?  Ask the lobbyests for the pest control industry, or perhaps ask your elected state representatives.

Finally, this takes me to the “general home inspection” industry.  These people range from extremely competent inspectors with general contracting and sometimes engineering experience, to those who essentially take an online test and receive some sort of industry “certification”.  I just closed escrow on a purchase transaction where the listing agent had a “pre-inspection” done by a “certified” general home inspector.  When the inspector representing my buyer client went under the house, he found a portion of the home’s front being held up by several “screw jacks” positioned on the outside foundation, at least one that was bent from the precarious load.  This was not mentioned in the “pre-inspection” report.  When the first inspector was asked why it wasn’t mentioned, he said that he “didn’t think it was a problem”.  When I asked him why he chose to mention “uneven flagstone” on a garden pathway as a “potential trip hazard” and NOT mention screw jacks holding up part of the home’s perimeter, he was speechless.  He had missed it, clear and simple, Nevertheless, he stood by his story and tried to cover his “rear” by writing a letter stating that it was not a concern.  Our home inspector, a foundation contractor AND an engineer said it was a significant, but fixable problem.

This past week, the home inspector representing the buyer of one of our listings, stated that they should have a “drainage inspection”, and recommended that an HVAC and pest control company evaluate “evidence of rats” ENTERING the ductwork.  The home is located on a totally level lot, and was found to be “bone dry” underneath, following one of the wettest winters in the last 50 years, yet the home inspector recommended a “drainage inspection”.  Also, upon further questioning, it turned out that the home inspector “pushed the wrong button” on his tablet PC which caused the report comments about rats in the ductwork.  Fortunately, the buyer’s agent selected a drainage contractor with a high level of integrity who did a verbal “report” stating that no drainage work was needed.

Bottom line, even with all of the “protections” of disclosures, inspections, “certified” home inspectors, licensed pest control companies, and “inspections” by contractors, there is no substitute for a dose of common sense and the selection of competent, honest experts in the home evaluation process.

The Lamorinda Real Estate Market

• Inventory levels are at a similar level to last year’s, however sales levels are running at more than double the 2009 rate.

Like all statistics, the more closely you look at them, the more useful they are.  Let’s begin by looking at the $1M and under market segment:

The Lamorinda Real Estate Market Under $1M

•  Representing a little over one-third of the total inventory, the sub-$1M market segment in Lamorinda accounts for over half of the sales in the present market!

Let’s take a look at the broad “mid-market” segment of $1M – $2M:

The Lamorinda Mid-Market Segment of $1M - $2M

• As one might expect, the performace in this segment is much different from the sub-$1M range.  Less than 20% of the homes on the market actuallysold and closed escrow in April, and the “pending” sales show forward momentum of roughly one in four homes selling.  Competition is much keener.

Let’s now look at Lamorinda’s upper-end market… homes priced at $2M+:

Lamorinda's Upper End Market at $2M+

• A much different picture emerges for the upper-end market, although April was a sensational month with 7 homes over $2M going into escrow — all in the first two weeks of the month, and all but one located in Lafayette. 

There are some telling indicators of what lies ahead:

• In the first week and a half of May, inventory levels in Lamorinda have risen more than 20%, and now stand at 270 homes… up from 221 homes at the close of April.
• An incremental 24 homes have gone “pending” since May 1st, suggesting a sales run-rate approximately equal to April’s.  With the Memorial Day weekend ahead, we may see that this month’s sales end up at a lower level than April’s. 
• The greatest competition is in the upper-end market… home’s priced at $2M+.  As of today, there are 40 homes in this price range on the market in Lamorinda and one incremental “pending” sale since May 1st.

So, as we work our way out of the economic crater and approach the heart of the 2010 real estate market, let’s take a look at some quick facts and observations:

The Facts –

• Inventories are rapidly climbing.  As of today, there are approximately 374 properties in the Lamorinda real estate market in the “Active” or “Pending” category.  By any measure, there is a LOT going on in our market!
• Of the 374 properties, approximately 261 are “Active” and unsold, leaving about 113 as “Pending” in escrow.

Observations –

• Buyers are tentative, but willing to jump into the market when they feel the time is “right”.  The only homes selling quickly, e.g., first week on-market, are the ones that are clearly underpriced to the market.  There have been several recent properties go into escrow inside of a week on-market.  In all cases, we felt that the property had been substantially underpriced and watched as agents scrambled to even get their clients to the home in time to see it and then potentially submit an offer.  Quite honestly, we have wondered about whose interests were really served via this strategy… agent or client. 
• Most homes, no matter how beautifully presented and compelling, are taking weeks to gain traction in the market.  We have recently been involved in multiple offer situations on both sides of the transaction — once representing a buyer and another time a seller.  Both properties had been on the market for 2 or more weeks.  In one of the situations the winning bid was over asking price and the other it was under.  Just a couple of years ago, we would have never seen a property with 3 or more offers end up under list price.  In each of these situations, the buyers circled, and circled… then all decided to write offers once one of them mustered the courage to step forward. 

Approximately one in four homes in the Lafayette real estate market, Orinda & Moraga are selling.  This is encouraging.  In upcoming posts, I’ll take a more indepth  and telling look at individual market segments and the “anatomy” of some of the transactions.

As reported recently in the Wall St. Journal, the S&P/Case-Schiller survey results “suggest housing prices bottomed out around April 2009, when its 20-city composite index was down 32.6% from its peak reached in June/July 2006.”  The article goes on to say that, “Since then it has gained 3% through January 2010, with some markets much stronger, especially San Francisco and Minneapolis.”  This is very encouraging, but I would caution clients in their interpretation of local housing statistics that show rising prices, for they can be very misleading.  As an example, I mentioned a week or so ago that there were 7 homes over $2M that had gone pending within the Lafayette. CA real estate market inside of about a 14-day period. Assuming most of those homes close escrow in the May time frame, we’ll see the May statistics report a very significant rise in Lafayette’s median price. If the media picks up on our relatively small Lafayette real estate market, it will undoubtedly report a “sharp jump” in prices that won’t be truly reflective of the market.  Never take statistics at face value… always interpret them within the proper context.

Bottom line, there are lots of positive reasons to believe that the worst of the market is a ways behind us and that the outlook for the future is much more positive.  Other indicators include:

• Sales of new single family homes jumped 27% last month on a nation-wide basis per the Wall St. Journal.  Sure, most of this is due to the expiring tax credit for first time buyers, but don’t forget the fact that we need to see this segment firm up to underpin the overall housing market.
• The 30-year fixed-rate mortgage averaged 5.07% for the week ended April 15, down from 5.21% last week.  As reported, this rate is only slightly higher than the 4.82% average for a year ago during the depths of the market.

If you haven’t decided to jump in yet, now is probably the time to do so, but be sure to do it with reasonable expectations.