For months I've been describing trends in surrounding areas of the region, state and nation--declining median prices weighted down in part by short sales and ''real estate-owned'' properties in many markets, tightening mortgage standards at all points of the income and property price spectrum, and so on. Overall, there's been a comforting ''flight to quality'' effect for Piedmont in particular and Berkeley in general. These markets have stayed quite strong.
Finally, we're starting to see some shifts in our own backyards driven by the same gale force winds blowing through the economy and the markets. So far, the changes are affecting the way purchases close rather than the price at which they close.
While higher-end buyers are used to purchasing their new homes before selling the beautifully staged and now vacant old home, that's all but impossible now, if the new house requires a loan--the lender on the new home wants that old home safely off the books or firmly rented out before putting their funds on the line. And financing for mortgages above $729,750 is quite difficult to secure. Both factors make buying and selling more complicated, and more buyers--and sellers--are sitting on the sidelines, exerting downward pressure on the market.
As recently as the summer, buyers of million-dollar homes could purchase with perhaps 20 percent down, easily borrowing the balance of $800,000 and above. Today, Fannie Mae and Freddie Mac will purchase loans from banks up to $729,750 [through December in our high-cost area--the maximum then drops to $625,000 if current law sticks]. Securing a loan up to this amount is a no-brainer for a well-qualified borrower (because lenders can sell these ''conforming'' loans on the secondary market). Above that figure, life gets difficult. Lenders must hold those larger loans in their own portfolios--there are no loan ''buyers'' out there willing to purchase them anymore.
Why is that a problem?
With the value of their holdings dropping overall, lenders' capital ratios--the regulator-required ratio of relatively liquid assets to outstanding loans--only gets worse with each new loan they fund and hold. A small number of lenders is still in this space, but they are very picky--given the chance, or a good excuse like a late payment on the credit report, they'd rather take a pass on your buyer's million-dollar loan.
A few months ago, the buyer of a $1.6 million home might have needed a minimum $160-$320,000 in cash, and it often came in the form of a home equity draw-down from their other home. Today, that same buyer might need $870,000 or so in cash ($1.6 million-$729K=$870K)--two or three times as much.
That's a big change!
As a result, we're seeing a bar-bell market--brisk sales in the under-$1.2 million market, where move-up buyers arrive with sizeable equity and a $729K loan, and again in the over-$2 million market, where the options- and bonus-driven buyers typically dwell.
I think the market hasn't caught up with this new reality, leaving great homes, sellers itchy to move, and very strong buyers on the sidelines.
In this market, buyers need their cash in hand, a local agent who can steer them through these shoals, and a relationship with a reliable local lender. Sellers might offer a private loan to close the gap between their buyer's strong downpayment and their $729K loan.
For instance, let's assume you're selling a $1.9 million home. You have three buyers, each with $1 million in cash--50+ percent down! One can borrow $1 million or more from parents--but if there's no competition, s/he thinks $1.8 million should get the house in this market. Two can borrow $729,750--they are fully prepared to offer their maximum--$1.729 million--but they think the house is objectively worth $2 million.
Wouldn't you rather have three buyers competing for the house, resulting in a $2 million sale price?
If you have an extra $275,000 in equity after owning your home for 20 years, you could make that happen by offering private financing, perhaps with some nice tax benefits associated with deferred capital gains. The private loan market is quite well organized these days, with third-party firms handling the paperwork and reporting. We've covered Circle Lending, a private lending support firm, in the past; they've been bought by Richard Branson and are now Virgin Money (see this link for more info).
In this complicated market, the path to selling success involves thoughtful and incisive pricing and positioning advice, as well as proactive engagement with potential purchasers' agents on creative possibilities you're up for, such as seller financing.
Any agent with good contacts can help you get your home in top shape and beautifully staged. All should be hiring professional photographers to portray your home's best assets. Most, with insight from you, can describe in words and pictures your home's advantages--the benefits of living there, not the eye-glazing list of features it and most other homes on the market have (don't get me started on this . . . ). Those who are web- and tech-savvy can reach and engage with your likely buyers, who are most likely to find your home on the web these days. (By the way, they read the New York Times or the Chron on-line at 11:30 the night before--they're not waiting for it to show up on their front walk in the morning, and they're definitely not reading the ads in the paper.)
But it's the pricing, positioning, and negotiation expertise--together with boundless energy and a positive attitude--that will bring a transaction to close in this complicated market.
Moving on to the numbers, 27 homes sold this quarter (compared to 20 during 3Q07) at an average $564 per square foot. They ranged in price between $5.9 million and $780,000, and sold in an average 30 days. Compared to the original asking price, sales prices varied between 120% of asking and 60% of asking, with most in the 90-103% range. (See the spreadsheet below, and note that these are 3Q08 transactions reported by the MLS through this 10/1.)
Looking only at the eight transactions closed since the beginning of September, they too ranged from the high end to the low end of the price spectrum, suggesting normalcy. Strikingly, however, no homes priced between $1.2 million and $2 million closed. Last year during this 3rd quarter period, half the closings were in that middle range. A real opportunity for sellers in that price range!
While the average price is quite similar to what we've been seeing in this market for the last couple of years, this is the first quarter in which we've seen a drop below the average $600-$610/square foot pricing plateau.
At the same time, yesterday's news was that the Case-Shiller Index suggests a slowing rate of price declines nationally--maybe we're getting to the trough--a good time to step away from the sidelines? And recent data from the state and region also see a slowing in the rate of decline. We're certainly seeing a large quantity of distressed property making its way through the system, and into the hands of proactive buyers and investors.
So what are the take-aways? First, remember that a home purchase is a long-term investment, with ups and downs in value to be expected, although recent swings are unprecedented. Second, remember that a home shelters life. That is, it surrounds and supports your lifestyle, your community relationships, your family. It's not just an investment. Third, if you're concerned about a looming interest rate adjustment in your future, talk to your mortgage broker, and ask me for names to get a second opinion. Fourth, if you'd like more stats and market insight, email me for a copy of the CAR economist's recent powerpoint deck on the East Bay and statewide market--Leslie Appleton-Young did a great presentation last week!
If you're a longtime homeowner thinking about a sale soon, seriously consider offering seller financing--it make offer a path to a higher sales price for a committed buyer. And if you have any questions, feel free to call anytime!