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Tax Credit Extended, Markets Further Stabilizing and Real Estate Ideal Hedge

Tax Credit and Conforming/FHA Loan Limit Extended

Made official on Friday, the tax credit for home purchases was extended through July 1, 2010 and the important details are exactly as they were in my post on Friday the 30th of October, which was summarized as follows:

· Effective on binding real estate contracts from December 1, 2009 through April 30, 2010, The tax credit would be $8,000 for first time home buyers and $6,500 for move-up buyers who have owned their current home for at least five years

· The tax credit expires on April 30, 2010; however, if a binding contract is reached by April 30, 2010, buyers have an additional 60 days to close the deal and still be eligible for the tax credit

· For purchases made in 2010, taxpayers would be able to claim the credit on their 2009 income tax return

· The income limits for both first time home buyers and move-up buyers would be $125,000 for single return and $225,000 joint return.

· Cost of the home may not exceed $800,000 to be eligible.

Remember that a tax credit has about THREE TIMES the impact of a tax deduction, which allows someone earning $125,000 per year to be taxed on about $102,000*. And since other items like interest and property taxes are also deductible*, that same individual may be looking at less than half of their earnings being fully taxable..!*

Add the above news to the fact HUD also extended the conforming loan limit of $729,750 in the Bay Area to December 31, 2010, and you have a “perfect storm” for every qualified first-time buyer in the Bay Area.

S&P Case-Shiller Confirming Further Improvement of Housing Prices

Released last week, the S&P Case-Shiller index confirms that housing prices continue to improve, especially in areas like San Francisco where the index moved another 2.8% in August to 132.47. This marks the seventh straight month of improvement.

Zillow also reported that their index reflected further stabilization for the third quarter, with over 26% of the metropolitan statistical areas showing signs of improvement.

Real Estate as an Ideal Hedge to Both the “W” Concern and Inflation

You may recall from my last post that we are seeing far more application activity for purchases in the $1mm+ range, especially the $1.5mm to $4mm range. These applications have been coming from our more financially-minded clients, as they not only see tremendous opportunity to obtain a more valuable home, but they are very concerned about a “W”-shaped economic recovery and subsequent inflation. As such, obtaining an upgraded home for less, cheap financing and hedging against inflation make buying a larger home an ideal move. All things being relative, the reality is that the S&P 500 currently has a rather high price-to-earnings ratio at about 19.52 versus the historical average of 15.7. As such, if we were in average economic circumstances, it’s arguable that the stock market is overvalued by about 25%. Given the fact that our current economy is FAR from being in average condition, it’s anyone’s guess just how overvalued the stock market is. All I know is that my savviest, financially-minded clients think that the stock market is due a correction and that real estate is a great asset to have as a hedge against both a market correction and inevitable inflation.

Fannie’s New Program: Deed for Lease

Announced on November 5, Fannie Mae is helping those qualified applicants to essentially sell and lease back their current home. This program is also applicable to investment-property owners who are facing foreclosure and wish to deed the property over to the lender and allow the renters to continue renting at market levels.

Rates and Activity

• Rates continue to run as low as 3.75%, depending on a number of different factors, with the conforming 30-year at just under 5% and the jumbo 30-year at about 4.75%
• 71% of our transactions last month were purchases, and the average loan was in the $500k range.
• As mentioned above, we’re seeing a heavy trend in purchase applications for the move-up market, but inventory is turning off a majority of those buyers
• We closed a deal in TWO weeks, but we still recommend a 30-day closing period
• If you or someone you know prefers to pay cash for a purchase, then finance that purchase within 90 days to protect valuable tax advantages, we can help, as we have programs that DO NOT require 6 months seasoning and pricing is based on purchase money, NOT a cash-out refinance

* Does not constitute tax advice.  Please seek any qualified tax professional for proper guidance.

Tales From The Front – My world in real estate, October 9, 2009

I’m going back to some of our original content here on 3Oceans and providing some commentary on selected homes I saw today on Broker’s Tour that are worthy of mention to me. Thanks to JT for driving today, and Steve for navigational assistance.

I dragged my Los Altos compatriots to Palo Alto today to see a couple of fine homes from the 1930’s. Being an old house nut, 320 Kellogg Avenue, listed by Tim Trailer of Coldwell Banker in Palo Alto really captured my attention with its period details, classy kitchen remodel and the big soaking tub in the master suite. Set on nearly half an acre of Old Palo Alto, this fine property will only set you back $9,750,000.

Moving downmarket to 2050 Waverly Avenue, listed by Bonnie Bjorn of Coldwell Banker in Menlo Park is this beautifully restored Dutch Colonial, offered with the reduced price of $4,995,000. It’s less house and less land than Kellogg, but you don’t have the train noise, and I actually like the neighborhood better. Plus the almost $5million in change will get you a nice little place overlooking the fairway at Pebble Beach, or a small winery in Sonoma . . .

The highlight for me today was this newer Palo Alto Hills estate, listed by Grace Wu of Alain Pinel for $4,299,000. Almost two acres of land, sweeping views of the Hills, and a 3 car garage (must have!) make this a winner. No open houses, but I can set up a showing if you are interested.

Finally, a big shout out to David Chung of Alain Pinel for rocking his new Audi R8 on broker’s tour today! I think he is the new winner in the sexy Palo Alto Realtor Car competition. Eat your heart out Ken!

If you would like to see any of the homes I wrote about today, let me know.

Thanks for reading . . .

How Come Redfin’s P&L Looks Distinctly Unlike That Of A Traditional Real Estate Brokerage? Because Redfin Is Actually A Brokerage, Not A Landlord!

Tipped off by another insightful Greg Swann piece (Greg — do you ever sleep?) I just read through Glenn Kelman’s fascinating soul-baring finances-revealing post over on Guy Kawasaki’s blog. As a serial entrepreneur — and quite a successful one at that — Glenn has certainly done more than his fair share of financial modeling, and his post is rich in advice for the prospective entrepreneur.

What is particularly fascinating is how Redfin’s financial modeling is thoroughly and utterly unlike that of a traditional broker. That makes sense, of course, since Redfin is, well, not a traditional broker. In particular, unlike traditional brokers, Redfin makes its money through the act of – wait for it — brokerage — that is, representing buyers and sellers of homes.

Traditional brokerages — Coldwell Banker, Prudential, ReMax, Keller Williams, Alain Pinel — on the other hand, most emphatically do not make money through brokerage activities — they leave that work to their agent work force, usually a collection of independent contractors. Traditional brokerages, you see, make their money through landlording.
They provide agents with office space, training, mentoring, branding, open house opportunities, telephone lines, etc. and then charge these agents twofold: first, a portion of their commissions (starting at 50% or more for new agents, going down to perhaps 5% or 10% for the top agents, averaging perhaps around 25%) and secondly, a rather long laundry list of fees, including tech fees, desk fees, legal fees, and a myriad of others.

Much of what remains in the agent’s pocket after the broker’s share is divvied up among countless vendors, including the local MLS, newspapers, cell phone carriers, web site vendors, and Lexus dealers.

Here’s a picture of the money trail:

…and here’s one of them new-fangled Sketchcasts…

Further commentary from others:

• Ardell summarizes her take on the article: Sounds like the practical people are the ones asking for money, and the impractical ones are the people giving the money.
• Joel wonders if the downturn in the market will do a Foxton’s to Redfin.

Trulia Turns Two Today

Trulia, the online listing site which aggregates data from brokers and agents around the country, just turned two today.  In that short time, they’ve accomplished some fairly impressive feats:

• They built a home search site, getting listings Realtor-by-Realtor, broker-by-broker, without going through MLS’s.
• They formed partnerships with a number of leading regional and nation-wide brokerages, including Alain Pinel, Coldwell Banker, and Keller Williams.
• They layered on an impressive array of quantitative data on schools, neighborhoods, price trends, and so forth.
• They mixed in qualitative information with their Voices product, which has spawned quite an active consumer-agent forum.
• They became one of the leading sources of online traffic for many of their broker partners.

As founder Pete Flint notes in this blog post, they did all this without resorting to the all-too-common bait-’n-switch tactics in this industry.

The Innovator’s Dilemma In Real Estate: Beware Of That Redfin Swimming Just Below You

Redfin is the company everybody in the traditional real estate industry loves to hate. “They’ll go bankrupt just like all discount firms do when the market turns bad.” “Can you believe how they force listing agents to do all the work?” “Their agents don’t have a clue about the market!”

Deride Redfin if you want, be skeptical of its business model, take potshots at Glenn Kelman all you want…but whatever you do, don’t dismiss Redfin out of hand, at least not before hearing what this man has to say.

Clayton Christensen is a professor at Harvard Business School who has become well-known for his research into how technology disrupts industries. His theory, put forth in his books The Innovator’s Dilemma and The Innovator’s Solution posits that new entrants into an industry often take advantage of a disruptive technology to enter the marketplace at the lower end, catering to the low-margin customers that the established players aren’t that interested in serving. He gives examples in many industries, including financial services (Charles Schwab came into the brokerage business catering for the budget stock investor), steel manufacturing (mini-mill technology), and hard drives.

While Redfin is by no means the first entrant in the discount brokerage space, it is arguably the one that has generated the most attention. Redfin’s technology — its slick real estate search site, its semi-automated offer-writing system — may not appear too disruptive, but its technology and associated business model have struck a chord with a growing market segment that is disenchanted with the traditional real estate industry, and, not coincidentally, the industry has returned the favor. That market segment — initially diehard do-it-yourself’ers who just don’t see the value of schlepping around town with a real estate agent — is one the traditional industry isn’t too fond of catering for, on the assumption that if we let clients out on their own, they might discover it’s not that difficult to plan an afternoon’s home-shopping around an open house schedule, and then they might question our overall value. For the most part, the traditionalists aren’t too sad to see this type of client defect to Redfin. “They think they know everything, they don’t see the value of a Realtor, and then <insert shock> they want part of my commission!”

What is common about the customers of these new lower-end entrants in any industry is that they’re not interested in a gold-plated product or service — they want something “good enough” and cheap.

If the new entrant succeeds, it starts to take market share from the incumbents, who finally wake up — often too late — and discover that the “cheap, undesirable” part of the market is both larger and more lucrative than they previously thought.

Even more interesting is that as the new entrant grows, its clients’ needs often change over time — to the point where the new entrant now also provides more of a “traditional” experience. Think back to Charles Schwab: its early customers were drawn in by the prospect of significantly less expensive stock brokerage services. The Charles Schwab of today still provides that, but also provides a higher-touch, higher-cost service, akin to that of the Merrill Lynches.

Might this happen to Redfin? Nobody knows…but if they are successful in what they’re doing, don’t be surprised if five years from now Redfin offers not only a discount real estate experience, but also a full-service one.

How can established companies lessen the risk of a low-cost competitor coming in at the lower end, then working its up the value chain? One of Christensen’s suggestions is as audacious as it is — for most companies — implausible: spin off a separate lower-cost business unit to learn about the lower end of the market.

So, how about a “Coldwell Banker Lite” offering? Want a full-service, full-fee experience? You can use the Coldwell Banker you’ve always known. Thinking of using a discount service, but unsure about Redfin’s brand? Then you can go to the Coldwell Banker Lite offering. Either way, Coldwell Banker can serve you. From the company’s point of view, they’ve retained a client; sure, it’s a low-margin client — for now. But five years down the road, the customer’s good experience may lead him back to the Coldwell Banker name, and perhaps this time using the full-service, high-margin option.

Skeptical of Redfin? That’s fine — but just don’t write them off until you look at the uncanny resemblances between our industry today and the industries Christensen describes in his books.

If You Were Designing The Real Estate Industry From Scratch, Would It Look More Like Coldwell Banker Or Redfin?

There, I knew I’d grab your attention with a headline like that!

Imagine you could wave a magic wand and, presto! our whole industry structure disappears and gets replaced instantaneously with whatever you decide.  What would the new real estate industry look like?

Would you want to recreate what we have now, with some 1.x  million independent contractors working under the casual-at-best supervision of brokers who then help themselves to a significant chunk of the commission pot?  Would you recreate an incentive system that encourages churn-and-burn of new agents?
Think about it: In order to be really successful in this business, you’ve got to be pretty handy in at least these completely different areas:

1. Attracting new customers
2. Managing client relations
3. Negotiating
4. Providing counsel
5. Managing transactions and work flow

Is it any wonder so many agents don’t make it through the first year?  You could be the world’s best haggler, able to sell ice cubes in winter to my Dutch kin at $50 a pop…but if you’re not also good at shaking new clients from the tree, you’ll never get a chance to demonstrate your negotiation prowess.  Or, you might be really skilled at building up a client base, but detail-oriented paperwork isn’t your thing, so your deals have a tendency to self-destruct.

Most well-run companies cater for people’s diverse skill sets by specializing.  Marketing and sales teams fish for new clients.  Account executives manage the client relationship.  When there are deals to be made, other folks step in.  A back-end team handles the paperwork.

As it turns out, this is pretty much how perennial bad boy Redfin seems to run its business.  The agents who show houses at $x/hr may not be the same as those who write up and negotiate the contract, and they’re certainly not the same folks who make their web site oh-so-web-2.0-sticky or write content for their blog.  And open houses?  Well, they sub that work out to the cheapest labor force imaginable:  their own clients!
Redfin may or may not succeed in the end.  If they do, a big part of their success will be the leveraging of their employees’ different skills to achieve cost savings…which they then, to the chagrin of their competitors, pass on to their clients.  If they don’t succeed, it will largely be because of the resistance of the Coldwell Bankers of the world to doing things any differently.

[Yikes, do I sound like a recovering management consultant, or what?]

Why Can’t The Industry Response Effectively to Zillow? For the Same Reason Your Local PTA Ain’t Gonna Be Fielding a World-class Baseball Team Any Time Soon!

Michael Wurzer, the author of the well-written, provocative, up-and-coming FlexMLS blog, offers an MLS software provider's perspective on the recent Zillow developments, which from his point of view are yawn-inducing. Given that he first heard the news in the middle of the night after having been woken up by a puppy, he's probably grateful.

Michael raises the following challenge: Now is the time for brokers, agents, and MLS organizations to realize and increase the value of the MLS data repository.

I couldn't agree more. The unfortunate thing is…it simply ain't gonna happen. Why?  There are many reasons, not the least of which is organizational:  Realtor and MLS boards are designed with certain goals in mind, none of which have anything to do with technological innovation.

That's not necessarily a bad thing, mind you, since excelling in technological innovation is not a prerequisite for excelling in the real raison d’être for Realtor and MLS boards, namely fostering cooperation amongst otherwise fiercely competing brokerages and Realtors.  It really is coopetition in its purest form.

Think about it.  In our local market, the three biggest brokerages are Alain Pinel, Coldwell Banker, and Intero Real Estate.  The rivalry between these three companies, and between their respective agents, is fierce and unrelenting.  A new listing for Alain Pinel often takes place at the expense of the other two, since anybody interviewing multiple agents is likely to pick one from each company.  And yet, despite this intense competition, agents from any company — not just the big three — regularly and gladly show all the listings on the market, without regard to the listing broker.  Similarly, listing agents regularly and gladly listen to all the offers that other agents bring in, no matter which brokerage they come from.

It really is quite impressive, and the structures behind this are the much-maligned Realtor and MLS boards.  They create and enforce rules that enhance cooperation amongst competitors.  They have arbitration committees for settling disputes.  They have codes of conduct that prohibit poaching another Realtor's clients.  They require all members to upload new listings within 48 hours.

The big price they pay for enabling this coopetition, however, is that these boards tend to be consensus-driven (or nearly so), slow-moving, plodding, and methodical.  While this is the only way to get sworn business enemies to agree on anything, it's a terrible way of fostering  innovation.

Want to put sold listings up on the MLS?  Hell, no!  If one key player puts his foot down, perhaps threatening to remove his listings from the MLS, then that ain't gonna happen.

Let's talk about uploading the listings to Trulia, Google, or Zillow?  Absolutely not!  (Unless you're the Houston MLS.)  All it takes is one big broker to feel threatened by this move and it simply won't happen until there's absolutely no choice.

Ok, then, let's discuss creating a snazzy state-wide MLS to compete with these interlopers!  Sure, we'll discuss it, but what we really mean is "let's set up a feasibility steering committee to investigate this and report back to the board in the Spring of 2009."

Zillow and the other 2.0 players have no such restrictions.  Quite the opposite:  they're designed to turn on a dime, to be responsive to competitive pressures, to be creative, to be laser-beam focussed on consumers.  That's why they're so good at constantly turning out great products:  they're designed from the ground up to do precisely that.

Think of the Realtor and MLS boards as being akin to your local PTA.  The PTA is set up to do  extremely well at certain things:  raising money for a school, getting parents to volunteer in the classrooms, fostering interaction between parents and teachers.

But would you choose a PTA-type organizational structure to field a team of world-class baseball players?  No way!  To do that, you'd need to be much more business-oriented.  You'd have to be willing to take chances, to fire players that weren't doing well, and to be a hard-nosed negotiator.  That's now how PTA's are set up.

The next time you get frustrated at our industry's seeming inability to respond to these competitive threats, remember that that's simply the price we pay for having an organizational structure that otherwise suits our needs quite well.  Your local Realtor or MLS board ain't gonna be beating Zillow or Trulia at the technology game any time soon.

Today’s Menlo Park Real Estate Tour: The Travails of a Gluten-Intolerant Realtor

Alas, the Americans with Disabilities Act does not consider gluten-intolerance a protected condition, and thus I went hungry during today’s Menlo Park real estate tour, in which many homes offered tempting delicacies to lure us in.
Though the dearth of housing inventory remains an issue (see the 90-day rolling average chart to the left), the numbers have been increasing lately (per the 7-day rolling average chart on the right), and this was reflected in today’s tour which featured a surprising number of properties in the Willows.

But before stopping by the Willows I went to the Flood Park neighborhood sandwiched between Bay Rd and Highway 101 to see Corey Sijbrant’s listing at 1033 Ringwood, Menlo Park. Weighing in at $1,049,000, with 3 bedrooms, 2 bathrooms, and 1600 square feet, it’s been nicely done up and the master bedroom boasts a loft area, a touch I’ve always liked.

Moving on to the Willows, I started at 927 Arnold, a Tasha Standridge (Keller Williams) listing. This home is a classic “Timing is everything story.” On the market during last year’s doldrums, it just didn’t sell. Tasha wisely took it off the market, made some improvements, and now it shows even better than before and will doubtless sell within the week. With two stories, 4 bedrooms, 2 bathrooms, and about 1750 sq ft, this home is listed for only $990,000. A home that large in the Willows for under a million dollars? What gives? Simple — it’s unfortunately only a stone’s throw from Willow Rd and from highway 101. The sound barrier wall deflects a lot of the noise, but there’s still enough noise to make the property’s yard a poor choice for a yoga meditation session. Check it out this weekend during the Saturday and Sunday open house.
Next was this week’s winner of the “great spread” award: 212 Chester St from mother-and-daughter team Gloria and Caitlin Darke (Alain Pinel). I had to content myself with the healthy stuff there — celery sticks and carrots — and pass on the undoubtedly delicious, but tragically gluten-ridden, breaded chicken. Oh yes, the home itself…Priced at a whisker under $1.3M, the home has been significantly redone, boasts a large lot over 7300 sq ft, and has nearly 2000 sq ft of living space. See it for yourself during this weekend’s open house on both Saturday and Sunday.

Next up was Karen Izzo’s (Coldwell Banker) listing at 3 Cleland Place. Also open this Saturday and Sunday, this $1,200,000 “Charming Willows Bungalow” has a surprisingly large back yard — complete with a nostalgia-inducing tree swing — and 1410 square feet of living space, including 3 bedrooms and 1.5 bathrooms. Her Realtor treats included some much-needed coffee and some undoubtedly also delicious, but sadly be-glutenized muffins. I had to pass.

From there the next on my list was local Keller Williams superstar Miles McCormick’s listing at 336 Concord Drive. Miles was in the business and web-savvy early enough that he snagged the domain name “HomesOfThePeninsula.com”. At $786/sq ft, this 1520 square foot property will set you back just under $1.2M, and you’ll get not only a spectacular Willows location — with proximity to downtown Palo Alto — but also a very nicely done up 3 bedroom, 2 bath home. Again, delicious treats. Again, not for the gluten-intolerant Realtor. Oh yes, this home is also open on both Saturday and Sunday.

Now Here’s How To Do Up an Eichler!

There are Eichlers, and then there are Eichlers…

Newcomers to the San Francisco Bay Area real estate scene get introduced to the Eichler scene fairly quickly. Joseph Eichler was a mass-scale builder in the 1950’s and 1960’s, constructing over 10,000 homes in the Bay Area. There are entire neighborhoods in Palo Alto, Sunnyvale, and other nearby cities in which nearly every home is an Eichler!

Originally characterized by walls of windows, gently sloping roofs, radiant heating, and entrance atria, there are many nearly original Eichlers left, but many more which have been remodeled. (Click here for more information on the Eichler phenomenon.)

Most newcomers either love ‘em or hate ‘em, but once you’ve been here a while, you can’t help but fall in love with their distinctiveness. You walk into an Eichler, and though you know just what to expect, you’re often pleasantly surprised at the owner’s creativity in doing it up.

Such was the case with 1030 Harriet Street in Palo Alto, a listing brought to market by none other than Coldwell Banker’s Dante Drummond. It was the first property I saw on tour yesterday, and I found myself wishing I didn’t have to hurry on to the next one.

You wouldn’t know from the outside…

…that a large open atrium awaited you, partly open to the sky, with lush foliage.

After wading through the crowd of caffeine-deficient Realtors crowding around the coffee bar, I made my way to the kitchen and living room…

…and finally outside, where a nice backyard and pool awaited.

Want to see it for yourself? There’s an open this weekend on both Saturday and Sunday from 1:30pm to 4:30pm.

Trulia Gets More Listings and More Delightful

Hot on the heels of Trulia’s announcement that Keller Williams’ listings will soon be added to Trulia’s database, now the company can proudly boast that another giant — Realogy — is on board. Included in Realogy’s portfolio are the giants Century 21, Coldwell Banker, and ERA.

Trulia has been slowly building its relationships with brokerages around the country to get their listings on board, and has won the trust of the industry — naturally wary of online predators who take the listings, snazz them up, and then sell them back as leads — by faithfully directing traffic back to the brokerage’s sites and staying true to its promise of making money only through advertising.

Don’t know how I missed this promo when it launched on Youtube late last year, but here’s some slick advertising for the company, featuring, amongst others, Alain Pinel’s CEO Larry Knapp.

This is where things start to get interesting. While Trulia’s search experience has always been at least on par with the best real estate search engines out there, its relative dearth of inventory — compared to broker-run and MLS-run sites — has been its Achilles heel. Sure, it’s always been fun and cool to search on their site, but in the early days when their site had only 20% of the listings in an area, many would have sacrificed Trulia’s coolness for the completeness of less cool sites.When Trulia got up to 50%, the same could perhaps be said. With Keller Williams and the Realogy giants now on board — as well as the large local players, like Intero and Alain Pinel Realtors here in the Bay Area — they could well soon reach the tipping point of, say, 80%, after which the remaining stragglers will have no choice but to go on board as Trulia becomes a more popular search destination.

It’s unlikely Trulia would ever have 100% of the listings in any given area because of the “long tail” nature of listings. In our MLS catchment area, for instance, there are currently 4110 active listings, of which fully 536 are from brokerages that currently have only 1 listing. There’s simply no way Trulia can knock on the doors of all these brokerages to get those stragglers, so the company will have to rely on the “me-too” syndrome for them to join.

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