Making sense of home prices

Every so often, we read headlines about housing prices (seems like every other headline is about housing prices these days), and they all seem to contradict each other. Why is it that while NAR numbers say we are flat-to-mildly-decreasing, the Case-Schiller index states that we are decreasing? Which numbers do we trust, and why are they so different?

To start, there are 3 major indeces:

1. OFHEO (Office of Federal Housing Enterprise Oversight – they regulate Fannie Mae and Freddie Mac)
2. S&P / Case-Shiller index
3. National Association of Realtors (NAR)

1) OFHEO looks at existing home sales and excludes new home purchases. In addition, it only looks at conforming loans, ignoring transactions that are not guaranteed by Fannie and Freddie. Homes with non-conforming mortgages are seeing larger price declines than the homes that OFHEO tracks. So this means that the numbers that OFHEO reports are not as volatile as the rest of the indeces. To make matters even more complicated, OFHEO also considers appraisals that are generated when people refinance their homes, which is almost always different from the purchase price, and is a truer indication of market value.

2) Similar to OFHEO, Case-Shiller looks at existing home sales and excludes new home purchases. Although there are actually three Case-Shiller indeces (monthly 10-city survey,  monthly 20-city survey, and a quarterly report that looks at all nine U.S. Census regions), the one that makes it to headlines most often is the monthly 20-city survey. In addition to already being more volatile than OFHEO, this survey can be even more misleading as a proxy for the national situation, as it looks at only 20 metropolitan statistical areas.  It just so happens that these areas include some of hardest-hit areas as far as price declines, such as Detroit, Las Vegas, Los Angeles, Miami, Phoenix, San Diego and Washington, D.C. Additionally, Case-Shiller can miss trends in micro-markets, as it doesn’t consider sales of condos and co-ops. So, next time that you are tempted to get worked up over Case-Schiller numbers, don’t. Especially if it’s the monthly survey.

3) NAR’s methodology is much more straightforward.  It looks at sales of existing homes listed by MLSs, and reports median home prices.  As we know, there can be a disconnect between a sales price and a home value. In addition, NAR considers median prices only, reducing the impact of price volatility in upper price ranges.

Case in point: Freddie Mac home-price index indicateed that housing in New York state fell just over 4 percent in value in the past year. Meanwhile, the Case-Shiller index tells a different story, indicating that New York’s home prices are down roughly 15 to 16 percent from their high.

Source: To make sense of the home price indeces, I used a very well written analysis written by Matt Carter for Inman News

New Plan for Freddie / Fannie

found this fantastic video by reading this post in Noah Rosenblatt’s Urban Diggs blog (great blog about NYC real estate that I read quite a bit). Bill Ackman is proposing a new plan to solve the Freddy / Fannie problem and bring liquidity back to the market. This solution is not via a government bailout, but rather proposes a balance sheet restructuring (basically converting their debt to equity, in order to affect the crazy D/E ratio – currently at 129:1 – Yikes!!!).  I am not going to rehash Noah’s post and the video – they both do a great job explaining it. Check it out!

Video: http://www.cnbc.com/id/15840232?video=793726867

Be careful where your investing advice comes from!

Real Estate investing has historically been fraught with so-called late-night infomericial “gurus”. “If you only pay us $10,000, we will show you how to get rich in 1 month, and you will never have to work a day for the rest of your life.” Yeah, right! Few things in life are this easy, and there are no shortcuts to a solid real estate investing education. I came across this video today, and was appalled at the advice given to the poor woman in the video by Russ Whitney. He and his instructors recommended to flip the investment property. Well, anyone with half a brain can see that today’s market is fit for anything but flipping.

And yes, real estate conditions vary from state to state, city to city, and even neighborhood to neighborhood. Per my neighborhood real estate broker, my neighborhood in Jersey City only experienced a 5% drop in prices, while the less affluent parts of the city and Bayonne have dropped about 10% (of the new listings there about half are in foreclosure). But still… Even in Manhattan, the hotbed of real estate activity, unsold inventory is starting to build up, making a flipping decision tantamount to financial suicide.

Check out this video! (unfortunately, I am having technical issues embedding the video, so you will just have to click on this link)

Enjoy!

Top U.S. Cities for Real Estate Investment in 2008

HomeVestors (the “We Buy Ugly Houses” folks) has named the top 10 cities for real estate investing and 10 junior markets for real estate investing in the first quarter of 2008 (Junior markets are cities with a population of 150,000 or more). They are as follows:

1. Dallas, TX
2. Houston, TX
3. Atlanta, Ga
4. Fort Worth, TX
5. St. Louis, MO
6. Philadelphia, PA
7. San Antonio, TX
8. Denver, CO
9. Minneapolis, MN
10. Phoenix, AZ

Top 10 Junior Markets

1. Columbus, GA
2. Panama City, FL
3. Springfield, MO
4. Brevard County, FL
5. Greensboro, NC
6. Lubbock, TX
7. Columbia, SC
8. Ft. Walton Beach, FL
9. Kent/Sussex Counties, DE
10. Michigan City, IN

These findings are based on the number of houses bought in each market by HomeVestors in Q1 of quarter of 2008 (source http://www.homevestors.com/inthenews)

As the Dallas-based franchise company specializes in buying, rehabbing and selling single-family houses and rescuing homeowners from ugly houses and ugly real estate situations, the current downturn in residential real estate makes for a fantastic acquisition environment. As I mentioned in a previous blogpost, this climate of falling prices, inventory oversupply, and resulting homeowner desperation to get rid of their houses, is a prime time for smart investors to go heavy on property acquisition. As long as your exit strategy is to buy and hold, and not to flip (which is going to be very very difficult in today’s climate), and as long as you can afford to hold the property for at least 5-7 years, you should definitely take advantage of these conditions.

I have to admit that I don’t completely trust this data. I mean, I do not doubt that these are the areas where some of the best bargains can be had: HomeVestors does enough volume to observe significant trends. But there are so many other factors that make a city a hot investment market, which can not be ignored; the HomeVestors press release doesn’t address those factors explicitly. For example, the city’s economic development plans, jobs growth outlook, and other macroeconomic factors must be considered. Also, the rental outlook must be considered. As you buy a property, the low acquisition price is only one factor that determines whether you will see positive cash flow (or at least break even). Rents must also be strong and in demand. Overall, there is strong rental demand right now across the nation, as many homeowners lose their homes to foreclosure and many other hopeful homeowners can’t get a mortgage due to tougher standards. But some cities are definitely hotter rental markets than others. If people are fleeting a city due to lack of jobs, rental market will suffer. The HomeVestor list seems to be very TX-centric. By a sheer coincidence, the company is based in Dallas. Hmmm….. I would be very interested in hearing from our readers what they consider to be the top cities for investing.

Another question for the readers: would you consider investing away from home? What are some factors that you consider whether or not you feel comfortable with investing away from home? What resources do you use? Do you work with another local investor to show you the ropes? We are working on a tool that can connect investors to each other, based on area of interest, as well as other investing goals. As various areas of the country may become attractive to investors than their own home turf (Gulf Region GO Zone, for example), we see more and more people venturing outside of their own backyard. And we would love to help investors make the process a smooth one.

DC Urban Development

Last weekend, I attended a networking event in DC, at which Neil O. Albert spoke about the city’s urban development projects coming down the pike. Mr. Albert is the Deputy Mayor for Planning and Economic Development (DMPED). The event was held at Hotel Monaco in the MCI Center / Chinatown area of the District (the hotel itself if gorgeous; a visit to the website reveals that it’s an historic all-marble building that is a Registered National Landmark). I came into the area via New York Ave from the north. I hadn’t been to this area of the District in a little over a year, and I was blown away by all the new construction that was happening. Huge office and residential complexes, shiny and new. As I found out later at the talk, this is part of the NoMA (North of Massachusetts) revitalization plan, which is one of the key initiatives of the DMPED. There is a whole lot more development planned in that part of the NE, making it a mixed-use community, with office, residential and retail assets (check out this blog entry and this release from the DMPED).

At the heart of the DMPED revitalization strategy is the utilization of existing transportation assets, i.e. existing Metro stations. This is an approach that makes a whole lot of intuitive sense, as the underlying infrastructure is already established. In addition to NoMA, DMPED plans to invest in revitalization of Anacostia (including Anacostia Metro station and Ballpark District, which will revolve around a new baseball complex for the Washington Nationals). Bringing this huge project to Anacostia (SE) is a great initiative, as it will bring jobs to the area which has been economically depressed for decades. All in all, $10 billion will be spent on this area over the next two decades! However, my concern (and I am sure a lot of others are concerned about it as well) is whether or not there will remain affordable housing for the area’s current residents. Also, knowing from living in the DC Metro area, how saturated the DC Metro area is with condos, I hope that this new development doesn’t stick the city with a lot of unsold inventory. On the other hand, by the time this construction is finished, we will probably be in an “up” real estate cycle. Having spoken to several real estate folks at the networking session afterwards, there seems to be a lot of exciting development and investment in the area, and most of it doesn’t seem to be hit by the real estate meltdown (at least not as much as the suburbs). Their view is that the demand for real estate within city limits of DC is still strong. We will have to see if this remains true, as the down cycle progresses.

The Beginning of the End?

Is it the beginning of the end for the U.S. real estate downturn? Mark Zandi, Chief Economist from Moody’s Economy.com certainly seems to think so (CNN interview aired earlier this week). This discussion comes on the heels of the NAR report stating that existing home sales have actually improved from January to February 2008, but the median price is more than 8% down vs. last year. Methinks that inflection point is happening right now, because prices are finally low enough for people to get back into the market.

Zandi points to this latest increase in sales as the point where homes are starting to stabilize, putting us at the beginning of the end of the downturn, a process he still predicts to be very long. Home sellers are now “capitulating”, lowering listing prices to be in line with the market, and making the deals more attractive for the buyers. Additionally, the mortgage rates are low enough to stimulate homebuying activity. Finally, after decades of home prices outpacing salary growth, homeowners can somewhat afford to get back into the game. According to Zandi, “prices have been declining for two years. I think we’ll see another year worth of declines. We are down 10 to 13 percent from their peak. I think they’ll decline another 5 to 10 percent between now and the spring ‘09 selling season. So it’s not over. We’ve got a ways to go. “

So here you go. There is one good year left of rock-bottom housing prices, after which they should continue to climb back up. We as investors haven’t had an opportunity like this in several decades, to get into a property at a price low enough to produce positive cash flow. This is an opportunity not to be missed. I would like to re-emphasize from my recent blog post, that this real estate environment is a perfect time to acquire a property that you hold for the long term and rent out, and not designed for a short-term flip.

Top 10 Ways to Sell Your Rehab

Selling a house in today’s market is not for the faint of heart.  But if you are one of those investors who loves to buy shabby houses with lots of problems and rehab them into beautiful homes and sell to retail buyers, these quick pointers ought to help.

1. Price to  sell
2. Market and advertise the heck out of it
3. Hire a super-duper agent
4. Consider curb appeal
5. Be frugal, don’t overimprove
6. Instead avoid deferred maintenance
7. Don’t forget the driveway
8. Keep with neighborhood style and current style
9. Have open houses 
10. Staging is key

1.  Cash is king

Setting the right price is key to selling your house quickly and maximizing your profit.  Price is more  important than ever in today’s market, which is characterized by inventory that just keeps stockpiling. But each house has that magic selling point at which it becomes more attractive than the competition.

The trick is to price it well from the beginning instead of starting high and dropping the price. Most people selling property, even in today’s market, have an unrealistic expectation of the selling price.  Research has found that houses whose prices had been changed sell for less than homes whose prices had never been revised. The longer a house sits on the market, the more it becomes stigmatized in the minds of buyers–and the harder it is to sell.

So you must do your research.  Study comps (check out online resources like zillow.com and trulia.com), ask a few realtors whom you trust and who are real experts on the local market. Figure out what your competition is charging.

2. Become a marketer

Marketing and advertising are super important right now. You must capture the buyers’ attention. Place lots of ads in the paper and on the web, as well as post your property on sites like realtor.com, zillow.com, etc.  Whatever everyone else is doing, do more of it.  Put signs in the yard and around the community, talk to everyone you know, leave flyers around the places that your target demographic may frequent: bars, cafes, restaurants, grocery stores, gyms.  Figure out the profile of the buyer.  Is your house in a “B neighborhood”?  Then your target market may be someone moving up from a “C neighborhood”, because finally the price is right.  Leave some flyers around some of those neighborhoods. Are you targeting renters?  Leave some business cards on the premises (but don’t break any laws or upset the landlords).   Join local investment clubs and send notices through them.  And don’t forget about Facebook and other online venues where your target demographic may hang out.

3. Hire a super-duper agent

 Yes, you may need to hire a realtor with a proven track record for success.  In a market where houses are selling like hotcakes, you may get away with selling it yourself. But today, you must pull out all the stops.  Make sure that the realtor can get the job done, ask your investor friends for referrals.  You want to partner up with someone who understands real estate investors and what your objectives are vs. a homeowner.  And pay them.  Pay them more than your competition would.  Guess whose property they will show first?

4. Don’t curb your enthusiasm

To be competitive, you must also make sure your property is easy on the eyes.  Be sure your home isn’t an eyesore on the outside. At the very least, buyers visiting your home will expect a decent paint job. If the body of your house is in good shape, you may just need to touch up the trim. In addition to being attractive, a quality paint job (two topcoats) also protects against destructive effects of moisture, mildew, and the effects of the sun.

Clean up your yard as well; it’s one of the first thing potential buyers see before entering your home. Depending on the condition of the yard, you may also opt for some landscaping.  But don’t go nuts; the NAR recommends that you spend no more than 1 or 2 percent of your home’s value on sprucing up landscaping before you sell.  And if the season is right for blooms, place flowerpots around the entry and in the patio.

5. Be frugal, don’t overimprove

As you rehab the property, make it look updated, but don’t sink all of your budget into a state-of-the art kitchen and bathroom. I recently read (the source escapes me now), much to my surprise, that kitchens and bathrooms remodels, long considered the most profitable improvements to undertake, may return only 50 percent to 75 percent at sale–and only if you sell a year after the project is completed.

Making too many changes is a game of diminishing returns. Think twice before adding expensive upgrades, and ask yourself if it’s a ”must-have” or a  ”nice-to-have.”  Sticking to a frugal rehab budget will enable you to price competitively, pay your realtor well, and make a nice profit as well.  So avoid expensive appliances and state-of-the-art systems. Even swimming pools can decrease resale value, as they cost a lot to insure and maintain, and many buyers don’t want the hassle.

6. Deal with deferred maintenance 

Rather, spend your rehab budget on items that will protect the home from deterioration and damage, such as roof replacement, plumbing and electrical upgrades. These items will help preserve the property’s value, and you will be able to score bonus points with the buyer by showing them proof of recently completed work. Brand new equipment and warranties that are in place on move-in day will make the buyer feel secure about this significant of a purchase

7.  It’s not your asphalt’s fault

If the driveway hasn’t been resurfaced in a while and doesn’t have major cracks, go ahead and reseal it.  Just pick up some asphalt resealer and a spreader at the nearest hardware store. It’s a quick and cheap way to make it appear more attractive.

8. Don’t “One-Up” the Joneses  

Make sure your house fits in with the rest of the neighborhood.  You’ll get the biggest bang for your buck by keeping up with the Joneses, not by going them one better.  So don’t add a third story on the house if all the other houses only have two.  On the flip-side, if most houses have three baths and yours has only one and a half, adding a new bathroom will boost the value of your home. The same goes for bedrooms.

Also, remember to update your house’s overall style, if it looks like it’s stuck in the 70s or the 80s.  But avoid making it too trendy to where the buyer will anticipate changing everything the very next year.   Stick with the basics; simple white or beige walls provide potential homeowners with a clean slate on which they can envision their own personal touches.

9.  Open your house to an open house

Hold open houses.  A picture is worth a thousand words, but a house that the buyer can touch and feel is worth a thousand pictures. Make sure that your open houses are well-attended, even if you have to invite your friends and fellow real estate investors to make it seem fuller.  If a homebuyer sees many other potential buyers in the room (i.e. their competition), she will be more likely to pounce on this great property.

10.  All the world is a stage.

Let’s face it, home buying is an emotional experience.  Some of your buyers may be buying their first home.  Make them feel at home, appeal to their senses and emotions. Transport them to a happy time in the near future when they have already purchased the house and are moving in.  When you hold open houses, stage the house: make it look inviting and ready for move-in. Furnish it to make it look like a home, and not just a house, but avoid cluttering up the property.  Clutter can make a room seem smaller than it is.  You can rent furniture for the duration of your open house.  There are even special companies that you may hire that specialize in staging. 

 

A bright, tidy home will sell a lot faster than a dingy one.  So open up the curtains, show off the fresh paint job, turn on the lights.  Hang guest towels in the bathroom, set the dinner table with the best china, and place fresh flowers in an attractive vase. Appeal to the potential buyer’s sense of smell as well. Clean carpets and drapes. Light scented candles.  To make it seem more homey and to make your buyers salivate (literally), bake something right before the open house.  You will be able to put out the muffins / cakes / whatever else you make to treat your visitors, as well as fill the house with the smell of freshly baked goods.  Yum!

Real Estate Investing in 2008

Hello fellow real estate investors. We are MeetMOJO. We are two real estate investors and one techie, who are passionate about bringing about change in real estate investing, making things more open and transparent, and empowering investors to partner and collaborate more efficiently, with the help of online tools. So we are building a couple of tools to help the investing community out. I have to admit that my partner Stan has many many more years of experience than me. I got into investing a couple of years ago, and was overwhelmed with lack of online resources. So I decided to solve these problems for beginning investors, to reduce confusion and increase efficiency.

 

Companies like Zillow and Trulia provide some valuable information as far as property valuation, comps, and other neighborhood info, as well as available MLS listings. But there are so many other data points that investors look at. And overall, this information seems to be extremely disaggregated. So we are looking to aggregate all the information relevant to investors, into one place, and package it into useful analytical tools. So as we build our product and release various modules, we encourage you to contribute feedback, so that we can “hit the nail on the head” and provide the most value to the community.

 

Despite the current state of the economy and real estate in particular, we know that savvy investors are thinking ahead and going out and finding cash-flow-positive deals now. As the market continues to decline (in many, but not all, areas), the next couple of years are going to be instrumental in creating wealth for real estate investors. With foreclosures on the rise, banks are stuck with more housing inventory than ever before, and are more willing than before to do short sales. Also, due to the glut of houses on the market, properties are competitively priced. Since the main principle of all investing is to buy low and sell high, while receiving cash flow in the meantime, this is a great time to buy low-priced properties. This is the time for all investors, beginners and advanced, to either start or expand their real estate portfolios. Which is why we are here, to put the right resources within an arm’s reach for investors, as well as to empower partnerships and enhance collaboration.

 

So please add your thoughts about the market in general and ask questions of us and the investing community that we are in the process of building. And don’t forget to tell us what tools you would like to see more of online. MeetMOJO is for investors, by investors!