The “devil is in the detail”, and that saying certainly applies to our current real estate market.  Let’s look at the subsegments, beginning with the most active segment of under $1 million:

• Inventory is down approximately 20% from Feb 2009.
• Closed escrows are more than double Feb 2009.
• And, the leading edge of the market, pending sales are well over double last year’s performance.

If we look at the “upper end” of the Lamorinda market — $1.5+ million, we see a much different story:

• The actual market performance stats for Dec 2008 – Feb 2009 were better than for Dec 2009 – Feb 2010.
• Based upon closed sales in Feb, we have approximately 15 months of inventory in the Lamorinda real estate market over $1.5M.
• Although no home is “average”; the average price per square foot for homes in this segment has bounced around because of the scarcity of sales, however it is averaging around $475 per square foot.

Inventory levels by price segment:

• $1M – $1.5M:  10 months of inventory based upon closed sales.
• $1.5M – $2M:  10 months of inventory based upon closed sales.
• $2M – $3M:  12 months of inventory based upon closed sales.
• $3M+ :  14+ months of inventory based upon NO closed sales in Dec 2009 – Feb 2010.  There are two homes presently pending in escrow.

Conclusions:

• Our market has improved over 2009.
• Homes priced correctly to the market under $1M are moving with considerable velocity.
• As we move up market, pricing sensitivity becomes more acute as buyers have far more options.
• The upper end market remains very soft and inventory levels appear to be growing significantly.

OK… now that I’ve got your attention, let’s talk about a subject that seems to be coming up more and more as we move into the heart of the 2010 market. We are fortunate to live in an area where foreclosure properties represent a very small subset of our overall market. Clearly their is some “shadow inventory” being held back by the banks, but it now appears that they will slowly “meter” the inventory onto the market, as they are doing in the commercial sector where they have much greater exposure.  At present, there are only 7 REO/bank-owned properties on MLS in Lamorinda.

Even with these types of properties being such a small minority of the overall market, they seem to have sparked the interest of many, along with Lamorinda short sales.  For those who are not clear on the difference between these two types of properties, a foreclosure property occurs when the owner defaults and the bank takes back the home as an asset on their books.  A short sale occurs when the owner is attempting to get the lien holders to agree to some discount on what is owed on the loan, in exchange for getting the property off of their books.

Neither of these property types ensures that the buyer is getting a “bargain”.  In fact, the best “deal” that I’ve seen in the past 6 months was in Lafayette where an out-of-area agent SUBSTANTIALLY  under-priced a property that garnered 14 offers.  Even with the over-bids, the property sold for a minimum of 15-20% below market value.

In most cases, foreclosure buyers are purchasing “as is”.  In other words. its the old Latin saying of “caveat emptor”… buyer beware. Since the bank has never “lived” in the property, their disclosure obligations are limited to any knowledge they may have of the property, and they have no duty to disclose knowledge that may reside with the former owner-occupants.  To cut to the bottom line, a foreclosure buyer will need to depend solely upon what is discovered via inspections.  There are numerous precautions about buying “as is”, and they should be factored into the risk of buying a property on this basis.  What appears as a “deal”, may not be.

Short sales are another interesting item in today’s market.  Many of the homes being offered on this basis have more than one lien holder.  Both must agree on what they will respectively accept upon sale, and that agreement is NOT a foregone conclusion. Recently, there was a $2M+ home on the market in Lafayette via a short sale.  An offer was received in the low $2M range, but the lien holders could not reach agreement on the sale and their respective allocation of proceeds.  As a result, the property is now in foreclosure and will probably garner far less when it is finally sold.

You’ll sometimes see the price on short sale properties move up and down as offers are received on the property and rejected, thus prompting the listing agent to try and “signal” what the lien holders will accept.  Another $2M+ home from our Lafayette real estate market closed recently after months of being on-market and having the price adjusted up and down numerous times before an acceptable offer was received.  In the end analysis, I think the home sold at fair market value and no “bargain” was had by the buyer.

So, if you start down the road of seeking a “bargain” with a short sale or foreclosure property, do it with “eyes wide open”.  It’s not a recipe for instant equity gain, and there are inherent risks and frustrations in the process.  Never give up your right to inspections, and make sure you are choosing quality inspectors, engineers, etc.  If you see yourself as a “control person”, then buying a bank-owned property is probably not for you.  The bank will control the process, and to them, you’ll just be a slip of paper in a big stack. Most times, your best “deal” is buying a quality property from the “regular” market in a quality location that will be in high demand when you eventually seek to sell it.  From what I’ve seen thus far in our Lamorinda real estate market, most of those “deals” aren’t within the foreclosure or short sale pool.

According to Liz Ann Sonders, Chief Investment Strategist for Charles Schwab:

• “Increases in central bank money do not necessarily result in commercial bank money because the money is not required to be lent. Whereby the withdrawal of central bank liquidity necessarily compels commercial banks to pare back lending, the provision of central bank liquidity does not necessarily compel commercial banks to lend. If indeed it isn’t lent, it can result in the growth of excess reserves—characteristic of the present environment.”  In other words, just because we have propped up the banking system to keep it afloat doesn’t mean that they now need to lend out the money.”

In all fairness, high bank reserves is characteristic behavior following a deep recession. The good news is that as long as the Money Multiplier is low, there is little risk of high inflation.  As long as inflation remains low, interest rates should also see little upward pressure.

As I said in my last post, the ultimate performance of this year’s Lamorinda real estate market will be highly dependent upon bank liquidity and their willingness to loan money for consumer home purchases.  This isn’t just an “upper market” problem, rather an issue for buyers across all price points.

When trying to forecast the coming year for Lafayette real estate, or anywhere else in Lamorinda, the journey starts with the beginning of the money trail… our financial system.

• “[Within] a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.”

Even though Buffett didn’t specifically mention the Lamorinda real estate market, this a reassuring prediction for those who have have been sitting on the sidelines waiting for the market to bottom.  As I have said before, one will never know the market has bottomed until it heads up and we are looking back.  Although there are dire predictions of a “double dip” in the market due to forthcoming foreclosures, it appears thus far that those predictions have been over-stated and we are presently bumping along the market’s bottom… with relatively normal seasonality.  If Buffett is right… and he usually is… 2010 will be a very good time to be a buyer of real estate.

The “official” market stats have not been published yet by the various MLS boards, however that doesn’t mean we can’t take an early peek at the Lamorinda market for the month of February:

• 162 homes “Active” on the market compared to 172 homes in 2009.
• 78 “Pending” in escrow compared to just 21 in 2009!!
• 28 “Sold” with closed escrows compared to just 12 in 2009!!

These aren’t the “official” stats, however I don’t expect that there will be much variation from what the Contra Costa Association of Realtors publishes in the coming week.  Clearly, 2010 will be a MUCH better real estate year than 2009.  It is also clear that we could begin to see some firming up of prices, and perhaps some price increases in certain segments of the market.  More about this in subsequent posts…

• The WSJ article states that US banks last year posted the largest decline in lending since 1942.
• According to the article and the latest FDIC quarterly report, “while top tier banks are recovering at a faster clip, the rest of the industry is still suffering.”  Those plagued by looming commercial real estate losses are fighting for survival:

• According to FDIC Chairman Sheila Blair, “we are bumping along the bottom of the credit cycle”, and the number of bank failures in 2010 will “eclipse” the 140 failures we saw in 2009.

So, what’s the practical translation of this information to our reality within the Lamorinda real estate market?  Clearly, there are early indications of a much more optimistic environment with willing sellers and willing buyers.  The question is whether the lenders will allow the free marketplace to prevail so that buyers and sellers can enter into meaningful contracts that won’t be tainted by the shortcomings of the financial industry or simply a lack of liquidity.

Early indications suggest we will still have major issues with lenders and appraisals in 2010, based upon the onslaught of calls we’ve received recently from owners of Lafayette real estate who are attempting to refinance their loans.  Additionally, a handful of buyer transactions that we’ve represented in the last couple of months also suggest that lending policies have swung woefully too far to the right.

• Banks are still using incompetent, out-of-area appraisers with no understanding of the local market.
• A call from a Lafayette real estate owner this week involved his attempt to refinance a 2500 sq. ft. home in the Reliez Valley that was rebuilt from the studs up just 3 years ago.  The Citibank appraiser gave the home a valuation of just $800K and used “comparative sales” data from Pleasant Hill and Martinez to arrive at his valuation!
• According to the property owner, the appraiser had just completed an appraisal in Sacramento, stopped in Lafayette to do this appraisal, and was headed to Daly City to do the next one.

In this particular situation, the appraisal is probably off by a factor of about 50 percent.  It’s an extreme example of what we are seeing on a much too frequent basis.  If this had been a purchase transaction, the incompetence of the appraiser would have likely caused the escrow to fall apart.  In aggregate, these types of situations are market-affecting.

Should you find yourself in a position similar to this poor Lafayette real estate owner, don’t accept the bank’s appraisal — challenge it! You are the one paying for the appraisal and you deserve a competent analysis.  An appraiser of Lamorinda real estate should NEVER go out of the area for “comparative sales” data, except under the most extreme situations.  If you need comparative sales information to support a competent analysis, consult with your trusted real estate professional.  If you don’t know one, contact us.  Competent advocacy will be imperative in the 2010 real estate market!

A Cote’ is located at 5478 College Avenue in Oakland’s Rockridge district, just a short drive from anywhere in Lamorinda.  Featuring a bar that serves a selection of about 50  eclectic wine selections from around the globe, as well as hand-crafted cocktails (more on that in a minute!) — all designed to complement the restaurant’s ever-changing small plate (Tapas) menu of enticing food choices.

I’m not going to even pretend to be a food critic, so this post really isn’t meant to relate details of the food experience… sharing details about the olfactory and taste sensations we experienced while dining.  That’s way too esoteric and I’d probably do a poor job of describing the food for anyone who takes that sort of thing seriously.  I know what I like, and A Cote’s food is exceptional.  If you want to read a professional review, you’ll find some here.

So… back to the experience of dining at A Cote’!  When you walk in, it feels like a neighborhood restaurant… inviting, intimate, and clearly a local hang-out for people living in the immediate area who can literally walk to dinner.  If you are lucky, you’ll find Michael Moreno behind the bar, better known as “Mikey” (pronounced Mike—eeee or some of you may prefer “My Key” ).  Regardless, at about 6′5″ tall and surely 250+lbs, he is clearly on center stage when behind the bar.  You’ll find him actively engaged in conversation with the bar patrons, perhaps explaining the esoteric differences between the “Kekoporto” red wine from Hungary and Petit Manseng from southern France.  Heck, I’ve always considered myself to be a pretty serious wine person with a substantial cellar, and I get totally lost with their wine list.  It’s part of the A Cote’ experience, and a great reason to engage Mikey or any of their knowledgeable servers in conversation about wine pairings.  You’ll also find Mikey crafting hand-shaken drinks all evening long, truly part of the “show”!  Given his size and endearing personality, you can’t miss him when he’s shaking a Cosmo or martini overhead, and then slamming the shaker down on the bar as he personally samples each drink with a small straw before serving it.  (Don’t worry… finger over the straw, not his lips!)  It’s a show, and definitely worth getting there early enough to grab a seat at the bar.

The food last night, as always, was exceptional… from the flat bread, to the chicken tortoloni, the pork tenderloin with apples… to the special A Cote’ chocolate dessert  that we shared with friends.  Finally, the service was warm, inviting and always attentive.  Our server knew the menu and all of its subtleties, as well as being knowledgeable about their wine list.

So… one of the extraordinary qualities of living in the Lamorinda community of Lafayette, Orinda or Moraga, is the proximity to other richly diverse cultural experiences within a very short drive.  In this case, the Rockridge district’s wonderfully eclectic mix of shops and restaurants can be reached within minutes.  Don’t miss A Cote’!

One of the economists who actually did accurately call the correction in the housing market was Professor Robert Schiller of Yale University, best known for the Case-Schiller Home Price Index.  Another fairly accurate predictive model came out of the UCLA Anderson School. Professor Schiller is now stating that studying rents will provide a powerful indicator of where the price of housing is headed.  This is a bit challenging for Lamorinda real estate where the rental stock is relatively small when compared to larger metro areas.  Nevertheless, it might be worth looking at.  With regard to broader market trends, Schiller is suggesting the following:

• In normal markets, people won’t pay a large economic premium to own vs. renting.
• Historical trend data strongly suggests that when the ownership premium greatly exceeds historic averages, a housing “bubble” has occurred.  This is precisely what happened during the last run-up in housing prices.
• In the converse, an indicator that housing prices have normalized will occur when the ownership premium returns to historical levels for a given area.
• Deutsche Bank’s REIT research team found that in 1999 (prior to the real estate price run-up), Americans were willing to pay a 13% premium to own vs. renting an equivalent home.  This analysis took into consideration all of the obvious tax implications of ownership.  By mid-2006, Americans were spending an average 66% premium to own!  That was the peak of the “bubble”.
• The present picture varies widely across the US… in some areas it is now cheaper to own than rent (Riverside & San Bernardino counties), and in a 14 area metro study that included San Jose, the ownership premium is 6% or less.
• In aggregate, the analysis suggests that prices have another 5% adjustment ahead in order to be in line with 1999 levels… perhaps a bit more since rents still appear to be in slight decline.

So… what does this all mean for our local market?  We are probably at or near the bottom.  Since the only way we’ll know that we’ve reached the bottom is when we are on the way up and looking back, I’m still shrugging my shoulders a bit when I get the “Which way is the market headed?” question asked of me.  As a former business professor of mine at Berkeley once told our class, “If you take all of the economists in the world and line them up, they’ll probably all be pointing in different directions.”  I guess that leaves us to figure out the general direction of their index finger.

Fast-forward to today, and that passion still resides within.  Today, networks are spreading ubiquitously and have changed the way we live.  My latest read is Jump Point by Tom Hayes.  In this book, Hayes discusses how “network culture” is revolutionizing business due to the proliferation of networks.  Succinctly, we are rapidly approaching the 3 billionth person attaching to the internet worldwide.  Traditional market boundaries have been broken down, how people evaluate products/services has radically changed, and how companies reach out to consumers is undergoing a radical transformation.  With about 100 million people signing up for Face Book in the last 9 mos, we have become a networked culture.  These aren’t just “kids” signing up, they are adults like you and me. And, the fastest growing segment is women aged 55-65 years of age!

Real estate has always been way behind the tech curve, and once again it finds itself there.  The industry has tried to desperately protect its “listings” with proprietary MLS systems that are confined to certain geographic areas.  It has fought technology, rather than embrace it.  Very few agents understand technology, therefore the overwhelming majority of them still do business and “market” their listings via traditional media.  This isn’t an indictment of these agents, simply a statement of fact.  Listings automatically appear on the internet by virtue of  ”feeds” from the MLS.  That hardly qualifies as “marketing”, given the vast jungle that constitutes the internet, and the rapid changes in how consumers find and evaluate information — including real estate!  As an example, real estate searches on traditional real estate websites, such as Realtor.com are in significant decline, while consumer real estate searches on search engines like Google are rapidly increasing.

In order to reach consumers who are now relying on the “new media” of social networking, and making search engines their primary portal for their real estate search, requires a sophisticated understanding of network technology, social media, & search engine optimization.  I’ll be the first to admit that it’s not easy stuff, and I’m fortunate to have a pretty deep understanding of it.  With that said, I easily spent 6+ hours this weekend doing the tech work necessary to launch a new listing of ours and get it optimized for maximum consumer recognition in the world of “new media”:

• Check out the search engine optimized new property site for our new Reliez Valley home listing in Lafayette, CA. (Just click on the “Reliez Valley Home” link.)  Be sure and visit the professionally crafted video production of the listing and the additional links to the Lafayette CA City Guide Video and the Lafayette Reliez Valley Video.
• In fact, if you search for “Reliez Valley Homes” on Google, you’ll likely find the YouTube videos for our new listing and the overall Reliez Valley video!
• Video is now the richest form of consumer information and YouTube has become the second largest search engine site in the world, second only to Google!

I can’t give out all of the secrets, but weaving all of the piece parts of this technology together is very complicated and takes hours of work, even when you know what you are doing.  Fortunately, my wireless coverage extended to the outdoors this weekend, and I still got to enjoy the sunshine.

First of all, The Times is a bit late to the “party” with their coverage of predictions for possible a “double-dip” in home prices.  I’ve been writing about this possibility for months, and I lay no claims to the originality of analysis on this matter.  It’s absolutely possible that we could see further softening in prices this year, and we could also see prices in some areas migrate upwards.  It’s all about supply and demand in a free market system, and there are a multitude of unknowns about how the supply-demand relationship will play out this year.  At least I used sources that are a lot more credible than Zillow.

To run predictions of a “Housing Collapse” on the front page is simply irresponsible journalism that could affect the fragile nature of the local market.  Our economic climate is delicate right now as we try to extricate ourselves from the deepest recession in our lifetime.  So much of the restoration of our economic strength is based upon consumer confidence, that it is almost immoral to undercut it in a community hard-hit by the ravages of the economy, just for the sake of selling newspapers.  The real estate market is one of the most important foundational elements of our community, and we should all be outraged by a community media source that is so reckless with its headline coverage.

The simple facts are:

• Inventories have been in continual decline over the last 15 mos within Contra Costa County — a critical imperative to the recovery of the housing market.
• January 2110 over January 2009 inventory and sales activity data is very encouraging.  Things are getting MUCH better.
• The “shadow inventory” of foreclosed homes is concerning, but it will have little impact on some markets, and will remain an “unknown” factor for others in 2110.
• The banks may slowly release their foreclosure properties to market, choosing to “sit” on the loans, rather than dilute the market.  They are already doing this in both the residential and commercial markets.
• February has started out as a VERY busy month in the real estate community, and I predict that the market statistics will be VERY encouraging.
• We all need to be “real” about the market.  We are NOT going to return to significant appreciation anytime soon.  That doesn’t mean that we will not see encouraging improvement.
• As a former President once said, “It’s the economy, stupid.”

The Lamorinda Market - January 2010

The latest Lamorinda market statistics were just released and show distinct improvement from January of 2009:

• Inventories are down 20%
• Sales are up 50%
• And the leading edge of the market… pending sales are up 87%

Even for those of us who believe we still have a long way to go before we declare victory over the demons of this recession, the January housing numbers for our microcosm of the Bay Area are encouraging.  With that said, the number of months of inventory did turn upward slightly in January as new homes found their way to market, and now stands at slightly over 5 months of unsold inventory.  Click here for additional Lafayette & Contra Costa County Real Estate Market Statistics.