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Why Lemmings Die - How “Conventional Wisdom” can cost you

With all of the media coverage about the implosion of the real estate market and the rising rate of foreclosures, every time I turn around someone is asking me about the health of the local real estate market in and around Palo Alto. They seem to expect me to echo what they are seeing on TV and reading in the newspaper. Nothing could be further from the truth, especially in Palo Alto, which is still enjoying a Seller’s Market with prices maintaining their stratospheric levels as hordes of well-qualified buyers patrol the city in hopes of seeing something new to look at. Last week there were a whopping three (that’s 3) new homes coming on the market in Palo Alto.

When hearing this unexpected good news on the health of the largest investment and asset that most non-Google employees have, a few folks have asked me if I think this market will continue (I do - subject of another posting), and that they are considering selling their homes in the Spring.

Spring, like April 2008? I ask

Yes.

Why then?

Well, that is when all the houses seem to come on the market, so that must be the best time to sell . . .

I have gotten better at controlling my reaction (giggling is a great way to start off on the wrong foot). But I then usually explain things in economic terms of Supply and Demand.

If you are a lemming seller and put your home on the market when everyone else does, how do you make it stand out from the competition? You can spend more on preparation (fresh remodel, landscaping, staging, etc.), more on marketing (more advertising, open houses, etc), or you can price it below the competition, or a combination of all three.

These approaches all result in less of a return for the homeowner at the end of the day, much like the price of oil usually drops in May because demand for heating oil has dropped off and the summer driving season hasn’t started yet. Alternatively, when oil is scarce like during a particularly cold winter, or if oil producers reduce production, prices go up.

What if you could make a house scarce? Would that increase the relative interest level and selling price?

Generally, we see the number of homes in Palo Alto for sale increase in mid-February and be high until around Memorial Day, then there is another seasonal increase after Labor Day until late October. Seasonal lows in inventory run from mid-November to mid-February, and then there is another drought in late Summer. Selling prices tend to run inverse of these seasonal inventory fluctuations, as greater scarcity creates greater perceived value for Buyers.

In Summary, an easy way to get your property to stand out is to put it on the market during one of the low inventory times. Serious buyers are always looking, and who would you rather have trooping through your home, serious, qualified Buyers, or people who like to look at houses on a pleasant weekend afternoon?

If you are considering selling, don’t be a lemming and wait until Spring, contact your real estate professional and have him or her show you market data and discuss how to get your home on the market during one of the “off-times”.

Skeptical? Don’t believe me? You can see objective market data for your area, courtesy of Altos Research here, or sign up for a customized report on the market in your area here.

Thanks for reading.

Tags: , 94301, 94303, 94306, Altos Research, Area-information, Buyer and seller tips, Home selling, market timing, Palo Alto, palo alto market, palo alto real estate market, palo alto realtor, palo-alto-real-estate, when to sell my home?

Mortgage Mania Part 16 - The Hits Just Keep On Coming

Ben And The Boys (aka the FOMC) cut short-term interests rates by .25% earlier today in an attempt to:

1) Soften the mortgage industry landing from a smoking hole in the ground, to more of a smoldering skid mark. Don’t tell Washington Mutual who announced 3000 employees were getting pink slips in their stockings, and the bank is setting aside up to $1.6 Billion for losses in the 4th quarter.

2) Generate some consumer confidence this Holiday Shopping Season, since 2/3 of our economy is driven by consumer spending. Uncle Sam wants you to buy a Ford and / or Chevy.

3) Address concerns that “information suggests that economic growth is slowing,”

4) Give me somethnig to rant about (Thanks, guys!)

Interestingly, Wall Street, which has been on the rise over the last two weeks, had apparently priced in a bigger cut, so it responded by pummeling the Dow, lwhich lost 294 points on the day. Ouch! Maybe some retail therapy is in order . . .

Mortgage rates weren’t significantly affected by the rate cut. The Fed Funds rate is a short-term rate, and mortgage rates are long term. Mortgage rates are still at two-year lows, and it’s a Neutral or Buyer’s Market everywhere but Palo Alto.

Apparently, Palo Altans stayed awake in Econ 101 during the lecture on how relative Supply and Demand affects Prices. Although Demand in Palo Alto has dropped in recent months, Supply has dropped equally or more, maintaining or increasing Prices. Adam Smith would be proud.

Bueller, Bueller . . .

For an actual news article on today’s rate cut by an actual journalist, as opposed to a caffeineated Realtor, click here.

 Thanks for reading.

Tags: 4---mortgage-mania, 94301, 94303, 94306, buyer's market, Consumer, For buyers, Home buying, interest rate cut, interest rates, Mortgages, Palo Alto, palo alto market, palo alto realtor, palo-alto-real-estate, seller's market, washington mutual

Mortgage Mania - Part 14, Dubious Fees

My favorite online news source, The New York Times, ran a story today “Dubious Fees Hit Borrowers in Foreclosures” in which the writers interviewed Katherine M. Porter, associate professor of law at the University of Iowa. In a review of many loans that are now going into foreclosure, Porter found that questionable practices among lenders are leading some experts to contend that lenders are taking advantage of higher-risk borrowers and those facing foreclosure.

“Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

“Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of Iowa.”

You may be asking what this means to you in Palo Alto, happily making your payments on your $1+ million mortgage on your $2.4 million median priced home (no, that isn’t a typo!). As Mortgage Manics have heard me say before (OK, read), national lenders use a mostly one-size-fits-all approach to lending, meaning that practices and guidelines that are developed and applied to home buyers in Iowa, Tennessee and Colorado are also applied to us here in Silicon Valley. As a result, if you are reading about unscrupulous practices and excessive fees by national lenders that are being exposed in areas with high foreclosure rates, you may want to check the fine print on your mortgage and see what you are paying for in addtion to PITI.

In addtion, Porter found that lenders didn’t provide accurate payoff amounts for their loans to consumers, with one claiming they were owed $1,000,000 when the actual payoff amount was $60,000. That must be that fuzzy math stuff . . .

Countrywide was recently sanctioned by a court in Pittsburgh for losing or destroying over $500,000 in checks between December 2005 and April 2007 for homes in foreclosure. These are the companies holding the title to our homes, so we need to keep an eye on them.

You can read the full text of the article here.

On that happy note, have a great week, and thanks for reading.

Tags: 4---mortgage-mania, 94301, 94303, 94306, bay-area-real-estate, Countrywide, Home buying, Loan-Application, Preapproval, Prequalification, Real estate, real-estate-market, real-estate-prices

How Palo Alto ranks schools - We don’t!

Palo Alto high schools refuse to join Newsweek survey of best schools - SJ Mercury News, May 21, 2007 

When I saw the above article in yesterday’s Mercury News, I nearly spit a perfectly good latte all over the paper.

The schools in Palo Alto are a major driver of real estate values in the city and are consistently marketed and believed to be the best public schools in the area.

The local real estate community feels so strongly about this that they have an annual drive for donations to Partners in Education, to solicit donations for Palo Alto schools. In return for their generosity, local real estate agents who donate get their picture in the paper as a thank you for being donors and supporting Palo Alto schools. In recent years there has been quite a competition between the various real estate companies in Palo Alto for who donates the most money, which is kind of losing sight of the point of things, but I digress . . .

Interestingly, in Newsweek’s 2006 rankings, we saw a disparity in the rankings between Palo Alto High School and Gunn High School, with Paly coming in below Los Altos High and Cupertino’s Monta Vista.

Article excerpt:

Last year, Gunn High School in Palo Alto ranked 79, and Palo Alto High School ranked 361. But this year, prompted by concern at both high schools, the Palo Alto district refused to send in Newsweek’s required forms.

“We don’t want to be a part of it,” said Gunn Assistant Principal Tom Jacoubowsky.

Said Marilyn Cook, associate superintendent of the district: “It’s a very simplistic premise that the quality of a school can be measured by the number of AP tests students take.”

Gunn neither ranks students nor chooses valedictorians.

“We’re trying to do things to avoid and alleviate student stress,” such as reducing pressure to take advanced placement classes, Jacoubowsky said

Interesting stuff.

This also lends fuel to my personal fire that as increasingly affluent and educated people are moving into cities like Mountain View, they are injecting more money into the schools, while also demanding more of the administration. I prognosticate that we will begin to see increasing parity between Palo Alto public schools and those of the surrounding communities. If this happens, the upward price pressure resulting from a demand for homes in Palo Alto in excess of Supply could be lessened, leading to a stagnation of home prices or even sales.

Heresy! You say.

We will see. In the meantime I welcome your comments and tirades. I don’t pretend to be an expert on education or even to play one on TV.

You can see the rankings for local schools on the SJ Mercury website here.

Thanks for reading.

Tags: 94301, 94303, 94306, Home selling, Mountain View, Palo Alto, palo-alto-real-estate, Real estate, real-estate-prices, San Jose Mercury

Bamboo is the New Granite (Extended Remix Version) — A Contemporary Townhome in Downtown Palo Alto

Michael Hall and I had a lot of fun putting together our first property video review, and now that we’ve worked the kinks out, we thought we’d give it another spin, with more detail. Wellcomemat allows you to create “chapters” within the video so you can jump from one place to another. Very neat!

Interestingly, the first post sparked an email conversation with some folks about countertops: Is bamboo really the new granite?

One emailer had this to say:

Don’t believe everything you hear! It discolors easily, needs to be sealed annually, and can chip/crack. Composite stone is the new granite.

Somebody else said:

I hear concrete is the new kitchen counter granite. Next it will be back to those laminate ones…I don’t even remember what it’s called!

Tags: 94301, Home reviews, Palo Alto, Real estate, Wellcomemat.com

Part 2: There’s always a story in the numbers…creating FUD from that story is the media’s job; making sense from it is mine

A friend of mine named Eilam, also a numbers sort of guy, made an interesting comment about my previous post in which I dissected the year-to-date real estate numbers for Palo Alto, CA. He challenged me to look still deeper into the numbers and try to figure out whether I had the cause-and-effect in the right order.

I essentially asserted that, “Homebuyers were buying increasingly smaller homes from January to July, and increasingly larger homes thereafter, and that’s what led to prices going down between January to July, and upwards thereafter.”

Eilam asks if instead it might be this way around: “From January to July, homebuyers decided they wanted to buy less expensive homes, so they simply bought smaller ones. Thereafter, they loosened the purse strings, and therefore bought more.”

His exact quote:

Thanks. Good analysis.

However - it does beg a follow-on question. What can we learn from the down-tick and later up-tick in sizes of houses being sold ? Is there rhyme-and-reason underling the observed trend (which you very accurately analyzed) ?

I think ’sizes=total price’ (i.e. it isn’t that people are all of a sudden interested in larger or smaller houses at certain times of the year).

What is interesting to ask is: is this a pattern change in demand or in supply (i.e. is the reason smaller houses were selling for a while because larger ones were not on the market, or because they were on the market but people were not buying ?).

Also - what would be interesting is to overlay it with a possible ‘culprit’: interest rates.
Is the swing in ‘house sizes’ (again in my mind possibly an ‘alter-ego’ of total-purchase-price) correlated to changes in interest rates ?

Eilam

Great question — I would have expected nothing less from Eilam — and my answer for now is, “I’m not really sure.”
Here’s what I (think I) know and don’t know so far:

1. Since Altos Research’s data only goes back a year, I’ll have to go to another data source to find out if this is a seasonal trend — ie for whatever reason, people buy increasingly smaller homes in the first half of the year, and increasingly larger homes later on. I strongly, strongly doubt that’s the case. I have the data that will answer that question locked up in a 250MB Access database, but I haven’t had time to release and analyze it.
2. Interest rates may indeed be the reason. I don’t have a quick-and-dirty way of putting interest rates and Altos Research data on the same graph, so for now this will have to do:
   
   Palo Alto median home prices:
   Interest rates (from Freddi Mac)
   

   30-year fixed mortgage rates climbed steadily from 6.15% in January to 6.76% in July, and then crept down to 6.40% in September. As mortgage rates were climbing, home prices were going down, and when mortgage rates started going back down, home prices started going back up. Eilam’s theory may indeed be correct in that prospective homebuyers ratcheted down their size requirements to stay within a budget.

3. If this theory is correct, we should see a similar pattern in other towns. The results below don’t show a similar pattern; I’ve included towns both more and less expensive than Palo Alto.Menlo Park:
   
   
   Los Altos:
   Woodside:
   

   Redwood City:
   

4. Conclusion? I’m still not sure! Possibilities:
   • It’s unlikely that Palo Alto home buyers are more interest-rate sensitive than their neighbors in Menlo Park, Redwood City, Los Altos, and Woodside.
   • It’s possible that people who buy homes during the school year tend to have fewer or no kids and thus need less space, and those who buy during the summer tend to have more kids and need more space. Sounds like a good theory, but wouldn’t it be the same for other towns as well?
   • It may just be something completely random, an artifact of the characteristics of the homebuyers that happened to be on the market in Palo Alto this year.

Tags: 94301, For buyers, For sellers, Palo Alto, Real estate, Real estate data

There’s always a story in the numbers…creating FUD from that story is the media’s job; making sense from it is mine

If there’s one thing I learned from my tenure in consulting (apart from the names of the cabin crew on the mid-Sunday afternoon American Airlines flight from SFO to JFK…) it’s that the numbers always tell a story.

Remember this neat little chart from our little “Frolick with the data” yesterday, provided by those whiz-bang numbers folks at Altos Research?

Statistically-challenged reporters (is there another kind?) look at this and concoct two dramatic headlines, depending on whether you look before or after July 2006: “Prices drop dramatically!” or “Prices increase dramatically!”

Both headlines are, technically, true — in the same sense that your favorite team’s one-game loss could be a “losing streak” and a one-game win could be a “winning streak.”

What’s behind these numbers?

Quite simple: The variation in prices this year in Palo Alto is due nearly entirely to the difference in home size. Put another way, home prices fell between January and July because smaller homes were selling, and home prices rose between July and October because larger homes were selling. Boring facts like that don’t sell newspapers, however, which is why you’d never get an explanation like that in the San Jose Mercury News.

Check this out:

From January to July, median prices dropped 17%, most steeply between January and May, and less steeply from May through July. From July till now, prices have increased 13%.

Now let’s look at what happened to median home sizes during that time:

Uncanny, isn’t it? From January to July, we get a 20% drop in median square footage, and again we have a more steep decline from January to May, and a less steep one from May to July. From July till now, we have a 13% rise.

The fall and rise of median property prices matched nearly identically the fall and rise of median home sizes. The mild difference between the two sets of numbers — a 20% drop in sizes, but only a 17% drop in prices — is fully explained by the differences in price per square foot:

So what’s the real story? It’s not “Prices are falling!” or “Prices are rising!” but something far more boring and completely unlikely to sell newspapers: The price per square foot of homes in Palo Alto has stayed pretty much the same this year, varying by less than 3%. For the first 7 months, there was a steady 20% decline in the size of homes being sold, followed by a steady 13% increase in size.

Tags: 94301, Altos Research, For buyers, For sellers, Market-update, Palo Alto, Real estate, San Jose Mercury

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