Fellow 3 Oceans contributor and South Bay Keller Williams Realtor Bart Marchioni forwarded me a rather entertaining newsletter from National Building Inspectors. “Entertaining” and “Building Inspectors” aren’t normally found together…but — perhaps due to my macabre sense of humor — I couldn’t help laughing at this imagery…

Imagine a colony of termites infesting your home . Now imagine pouring orange juice on them. . Termites start drinking . Termites start dying.

Here’s what it might look like:

Ok, actually, the orange substance isn’t orange juice, but rather orange oil, or Limolene, a “terpene hydrocarbon colorless liquid with an extremely strong smell of oranges.”

And NBI is a reputable firm, so no, they wouldn’t recommend dousing your home with OJ in hopes of killing your termite housemates.

According to the NBI newsletter, they’ve been asked by many people about whether orange oil is effective at killing termites. A summary of their opinion:

• Yes, termites will be killed on contact by orange oil. (Of course, they would also be killed on contact with my foot!) Getting termites to come in contact with said orange oil, however, would be nigh impossible in the hidden wooden structures of the home — ie. in the vast majority of where you would find termites. A handy little diagram from NBI:
• Yes, orange oil will “defy gravity” — ie soak in all directions, including upwards — but, for that matter, so does water. The key problem is that orange oil apparently biodegrades after only 4 days.

The personal opinion of the newsletter’s author is that NBI “would never certify a home as being ‘free and clear’ of a drywood infestation that was treated with orange oil.”

Disclaimer: I am not a termite inspector. More importantly, I am not your termite inspector. If you have termite issues, or questions about termites, please ask your friendly professional termite inspector. Above all, do not pour orange juice over your home in an attempt to kill your termite housemates. ‘Nuff said.

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Well, it was just a matter of time before someone who bought at the top of the market sued their agent because they paid too much for their house. In this article in today’s New York Times, we learn of the sad story of the Ummels who bought a retirement home in Carlsbad, CA to be near their children.

The Ummels worked with a Buyer’s Agent who had a fiduciary responsibility to assist them in finding and purchasing their home. They looked for quite a while, fired one agent and then canceled contracts on two other homes that they had written offers on. I’m sure nerves were getting a little frayed for all concerned by the time they finally bought their home.

“Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.”

Where things get interesting, and their agent, Mike Little, makes the rest of us look bad is stated further on in the article:

“Mr. Little also worked as a mortgage broker. The Ummels say he encouraged them to get their loan through him. Mr. Little ordered an appraisal of the house but did not respond to the couple’s requests to see it, the suit charges.

A few days after the couple moved in, in August 2005, they got a flier on their door from another realty agent. It showed a house up the street had just sold for $105,000 less than theirs, even though it was the same size.

Then they finally got their appraisal, which told them the house up the street was not only cheaper but had a pool. Another flier in early October mentioned a house down the street that was the same size and closed the same day as the Ummels’ but went for $175,000 less.

The Ummels accuse Mr. Little not only of withholding information but of exaggerating the virtues of their house to push them into a deal.

Ms. Ummel said in her deposition that Mr. Little had told them “many times that it was a very good buy.”

The mortgage brokerage that funded the loan, and the appraisal company both settled out of court, but Mr. Little fights on. I bounced this off of fellow contributor Eric Trailer, and we saw a couple of red flags waving.

1) Mr. Little acted as the agent and loan broker. This is legal, but as noted in the article, he now has twice the motivation to get the deal done.

2) He urged them to get their loan through him - again legal, but the ice in sunny Carlsbad is getting thinner.

3) Mr. Little’s appraiser found the house to be worth $1,150,000 to $1,200,000 in the summer of 2005, the Ummels’ appraiser valued the house at $1,050,000. This is about 10-15%, which is pretty significant, but within the realm of possibilities. I’m getting nervous if I’m Mr. Little’s broker however.

4) Mr. Little didn’t share his appraisal the Ummels. (His broker is drinking heavily at this point.)

Long story somewhat less long . . . The Ummels (plaintiffs) are suing because they didn’t get what they felt was appropriate representation from their agent. This is what many consumers expect of Realtors, and books like Freakonomics don’t help.

One of the things we contributors to 3Oceans preach is Transparency in Real Estate. We share the information and tools that we use with our clients, provide data from unbiased sources like Altos Research, and don’t try to do loans and sell houses at the same time.

End of rant, let the comments fly!

Thanks for reading . . .

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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.

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Dsiclaimer: The following post is based on a presentation by Christopher Thornberg, an economist at Beacon Economics, that I attended last night, courtesy of my accountant, Tom Wagstaff of Petrinovich, Pugh and Co. This is a departure from my normally upbeat view of the local economy, and fortunately they re-opened the bar following the presentation for all the Realtors in the audience to drown their sorrows.

Economist Chris Thornberg showed some pretty convincing evidence for his expectation that housing prices will fall between 20% and 25% over the next couple of years, primarily because the ratio of home prices to incomes is higher than anytime in history, almost double the peaks in previous economic cycles. Gloom and doom for an hour, ah it brought tears to the eyes of many a Realtor in San Jose. Smugly I said, ” . . .but I live and work in Palo Alto, land of Stanford, Venture Capital, Facebook and Google! Sushi on every table and a BMW in every driveway! We are our own little world here, so we don’t have to worry about the housing market meltdown in Nebraska, or even the East Bay.”

Not so fast. The lastest housing boom has been driven by increasing housing prices, driven in part by cheap credit and loans. More people got these loans, bought more expensive houses, so the demand for these loans went up, and the cycle accelerated.

Now the appreciation is going the other way (flat to negative), and the equity that has driven consumer spending over the last few years (cash out refi = new boat), has gone away (bye, bye boat, and house!).  Thornberg forecasts that the subprime meltdown will be followed by Alt - A defaults (already happening) which will pull down the high-end markets from below (that would be Palo Alto, Los Altos, etc.). Even if the Fed were to reduce interest rates to 0%, it wouldn’t fix this mess. Much like last night’s temblor in San Jose, Palo Alto will be on the periphery of this shakeup. We won’t be knocked flat, but we will rock and roll a bit, and not in the fun way. Sigh . . .

To add to the gloom, I have been attending recent forums for candidates for Palo Alto City Council. Whether the topic is Palo Alto’s aging libraries, or green initiatives, the same topics keep coming up: Infrastructure, Schools, Tax revenue.

If you live or work in Palo Alto, I highly recommend you take an interest in the upcoming City Council race and the issues the candidates are raising. You can learn more about the issues and candidates on the Palo Alto Weekly website.

Happy Halloween!!

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You longtime readers (since March 29th) will remember my original Mortgage Mania article “Subprime Loans - Should Palo Altans Care?” that discussed some potential ripple effects of the subprime lending boom and bust, and the resulting changes in lending requirements for purchasers of million-dollar plus homes in Palo Alto and surrounding communities.

In that article I mentioned that tougher lending standards were on the horizon. Since major lenders do loans all across the country, they take a one-size-fits-all approach to guidelines, and in attempting to shelter themselves from risk associated with rising loan defaults in free-fall markets like Detroit (or Antioch, Gilroy, etc.), for example, they are making changes to lending guidelines that will make it harder for high-income folks with strong credit to buy homes here.

For some in-depth knowledge on this issue, the changing guidelines, and what you can do now if you are in the market for a home, I turn to Curt Van Emon of OPES Advisors, a wealth management firm with offices in Palo Alto, San Mateo and now Los Gatos. OPES is latin for wealth, and my go to source for analysis of what changing lending rules mean to my clients.

Curt is a fellow blogger, so you can read all of his analysis here at financeambition.com. I’ll just give you the summary here.

- As I mentioned back in March, guidelines are changing, and so buyers wanting to use interest-only loans for purchases will need to qualify based on their ability to make payments including principal AND interest.

- It will become harder to qualify for an adjustable rate mortgage than a fixed rate mortgage

- Buyers will qualify for lower loan amounts, meaning less buying power. (Goodbye 4-bedroom house, hello 3 bedroom)

When do the new guidelines take effect? July 22. So, read Curt’s recommendations, mark your calendar and contact your Realtor if you are planning on buying a home anytime soon.

If you aren’t currently working with a Realtor who is financially savvy and can explain what these changes mean to you, I know where to find some.

Stay tuned for updates on if and how these new guidelines affect buyers and the local real estate market in and around Palo Alto.

Thanks for reading . . .

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I long ago put together a buy vs. rent calculator and it served as the basis for my buy vs. rent series.

The New York times has just come out with a pretty good buy vs. rent calculator of their own (might soon disappear behind a paid firewall.)

Its conclusions are basically the same as mine:  Assuming roughly the same rental cost vs. property price ratio as we have here in the Bay Area, you’re better off owning than renting over a 4 year or greater period if property prices appreciate by 5% per year or more.

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I've been waiting for the right opportunity to really push the envelope of online real estate marketing, and, well, it's here!

I'm working on a listing in San Francisco's Potrero Hill neighborhood that fits perfectly into this new online marketing world:  it's slick, chic, and contemporary, will likely attract a younger and web-savvy crowd of buyers, and the sellers simply love the idea of creating a buzz online.

We're passing on the normal full-color ads in traditional local media like the San Francisco Chronicle, the San Jose Mercury News, and we'll be spending that money online instead.  To hedge our bets, we will be placing open house display ads in print media.

I'll be collaborating with several real estate online marketing companies to promote this property.  They'll be showing me — and, by extension, my readers — how to get the full benefit of their products.  I intend to chronicle our adventures here and invite you to follow along.  If you have some ideas, feel free to join in!

I'll announce the first collaborator tomorrow.

In the meantime, as part of our adventures, let's see how high this site currently ranks for the search, "San Francisco Potrero Hill Real Estate" — I suspect it won't be that good, since I've never written about Potrero Hill before!

Sure enough, on Google, Yahoo, and MSN, I'm nowhere to be found, not even in the top 100. 

Google: 

Yahoo: 

MSN:

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Let’s continue the saga of Bob and Betty, our hypothetical first-time home buyers who were introduced in the first of a series of articles I’ll be writing.

We met at 9am sharp on Saturday morning at my broker’s office in downtown Palo Alto. Though it’s easier to view homes with clients during open house times, I prefer to do first time tours when nobody else is around.

I had an ambitious tour planned: 12 homes in 4 towns along the 101 corridor. Always exhausting for everybody involved — every time I do this I have more liking for the part of the Redfin business model where clients do this bit themselves! — but nonetheless an important part of the whole process.

While driving, I pointed out important things about the neighborhoods we were in: The typical types of homes, the price ranges, which school district it belonged to, whether it was unincorporated or not, whether it was in a flood zone, where the nearest parks and public services were. I asked them to comment on what they liked and didn’t like in each neighborhood.

At each home we went through the same process, slowly at the first couple of homes, and then more quickly. “What did you like? What did you not like? What did you think of that kitchen? Do you like skylights? Fireplaces?”

By the 5th home I’m usually able to “get it” about what clients are looking for, and with this new knowledge, I crossed out 3 of the remaining 7 homes we had to see.

Suitably tired, we pulled back up to the office around 1pm to review what we had seen, what they had liked, and what they had not liked. I explained the next bit of the process: getting pre-approved. I’m happy to spend a few hours as a sort of “interview” with prospective buying clients, but before I invest too much more, I need them to put some skin in the game too by getting pre-approved. I generally find that if they’re not ready to dig up their financial records and go talk to a mortgage broker, then most likely they’re not ready quite yet to buy a home.

Betty was quite excited about three of the homes we had seen, but it was clear that Bob was losing interest pretty quickly. “Yeah…but nine hundred thousand dollars?” was his most common refrain.

We pressed in on that. Bob had been doing his homework the last week and pulled out all the discouraging figures he had found. Housing starts are down. Interest rates are up. Affordability is down. Condo developments in Las Vegas and Miami are being cancelled. How in the world could prices stay where they are here?

Prices in the Bay Area are indeed a pretty head-scratching discussion topic as they continue to defy gravity, pessimism, and seemingly the laws of economics year after year. I told them bluntly that neither I nor anybody else could guarantee anything about prices here. It is indeed possible that prices could collapse…by 40%…overnight…immediately after they bought a place. Possible? Yes. Probable? No.

I pulled up my secret weapon, Google Earth, on the flat screen wall monitor in the conference room. I zoomed in on the Peninsula and asked two questions: 1) How much land is technically available to build on? 2) How much land is actually available to build on.

The answer to the first question is: tons! From the Bay going west pretty much to Highway 280, nearly every square inch of land is already filled in. From the 280 west to the ocean, there are only a smattering of towns, like Half Moon Bay, Pescadero, and La Honda. The mountains make it difficult to build in that area, but we could certainly fit several hundred thousand more homes there.

However…it ain’t gonna happen! Most of that land is owned and/or protected by Federal, State, County, or City governments, private trusts, conservatorships, parks, and so forth, and not much building is going on.

If you can’t go West, then you have to use the Manhattan strategy: go up. Again, that ain’t gonna happen. San Francisco and San Jose have modest but growing skylines of high-rise buildings, but in between it’s rare to find any structure taller than 8 or 10 stories, and for the most part it’s only up to 3 stories tall. Those zoning restrictions aren’t going to be changing any time soon.

Essentially, 50% of the classic economic supply/demand equation is pretty much fixed, so the real question is what will happen with demand?

Again, at least for the short and medium term, the answer to that is pretty clear: demand is, and will likely remain, robust. Google and other local tech companies are doing well. Venture capitalists are pulling out their wallets again. Start-up nirvana 2.0 is here. Immigrants from across the country, and indeed the whole world, continue to move here.

So, could prices fall by 40% overnight?  Absolutely! But in the only scenario I can come up with in which that happens — a scenario which involves an earthquake, a terrorist attack, and bankruptcies of the top 5 tech employers in the area…all within 3 months of eachother — falling equity may not even make the top 10 list of concerns for many people.

We parted company, and they promised to get back to me within a few days about whether they were ready to proceed. I had my doubts, mostly about Bob.

Sure enough, a few days later I got a phone call from him. “We’ve decided to wait it out,” he said. “We’re just a bit nervous about these prices, and we’re not in a big hurry to buy.”

We agreed to keep in touch every few weeks and see how things developed.
Welcome to real estate in the Bay Area.  Prices are high, and you need a certain amount of faith and intestinal fortitude to dive in for the first time.

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Previously I reported that buyers appear to be more patient, less ready to pile on, and generally doing their best to avoid “buyer whiplash.”

Turns out that was a blip in market activity for perhaps a week or ten days.  Feeding frenzies seem to be now be back in force.  Last week clients of mine were one of 21 — twenty one!! — offers on a property.  Alas, we didn’t get it.  Rumor has it that the winning buyer threw in a Hawaii vacation, naming rights for their next child, and a promise to run up and down the street naked on every anniversary of the sale, waving a banner singing the praises of the seller.

Looks like chiropractors in this area will continue to see a steady stream of business.

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The Spring sellers’ market here in the Bay Area’s Peninsula continues unabated, with no rest in sight for buyers.  Multiple offers are still de jour on many sales in the area, with most listings selling for more than the list price.

This week marks a growing trend that could perhaps be called “buyer’s revenge.”  Tired of the constant whiplash inflicted on them by sellers hosting an offer presentation rodeo and then squeezing out every drop of blood they can (wow — three unrelated metaphors in one sentence!), buyers are backing off and becoming a bit more patient.

Anecdotes abound this week about properties that had a dozen offer “maybes” turn into only two real offers.  On some other transactions there were more offers — say, 6 to 10 — but the final price was only a few percentage points above the list.

Buyers seem to be getting more patient, more sophisticated, more value conscious.  They realize that if they pile on during a listing presentation and drive the price of a property up by 20%, that sets the benchmark on the next properties they bid on.

Anyone else seeing this?

(Image courtesy of www.necksurgery.com)

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