Home Sales Fall Despite Falling Rates?

Another great blog from Jay Vorhees at JVM Lending! He asks, with home sales falling despite the rates also falling, whether the end is finally here? “We can only hope,” he quips. Read on for more from Jay, and a bit of insight from yours truly at the end!

Tulip Mania

In the 1630s, the Dutch experienced one of the world’s first major financial bubbles – Tulip Mania. They were all convinced that the price of the exotic (at the time) tulip bulbs would increase forever, not taking into account how easy it was to reproduce them and how the ridiculously high prices were clearly not sustainable.

Everyone (even common laborers) was borrowing money to buy as many tulips as they could, trying to get in on the action. At one point, a single bulb cost as much as some of Amsterdam’s most expensive mansions at the time. Then, it all collapsed. There have been many bubbles since, including the 1929 stock market crash, the dotcom crash of the late 1990s, and most recently – the mortgage meltdown of 2008. All those bubbles were partially driven by easy credit, so every time the Fed lowers rates, I am terrified that it is fostering a new bubble.

Home sales fall in June – despite lower rates, higher wages, and lower unemployment

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So, that is why I was actually marginally encouraged to see this recent headline and article in the WSJ: U.S. Home Sales Stumble (in June). “Home sales slumped in June as home prices for major West Coast cities decline for the first time since 2012, ending the spring selling season with a thud.”

This is amazing to me because rates were about 1% lower than where they were the previous June, and everyone thinks rates drive housing prices. But, they clearly don’t. Home sales fell in the face of rising wages and decreasing unemployment too, leaving economists perplexed, as those factors are also supposed to drive prices higher.

Sales are probably falling because borrowers are hitting their affordability limit, and because buyers are acting prudently (unlike prior to 2008). While fewer sales overall are never a good thing, it is a good thing to see a potential bubble start to deflate instead of popping – so YAY! (sort of)

I might add that a huge brokerage we work with in Texas is currently projecting a downturn in the near future, telling agents that they need to trim expenses by 20%. So, it is not just the West Coast experiencing a slowdown. And finally, despite the apparent slowdown, numerous agents we work with are still experiencing record years simply because of their relentless marketing. We too have almost tripled our purchase volume year over year by improving our value props and increasing our marketing efforts.

Takeaways from this blog: This slowdown might be averting another bubble-pop! The Fed can’t stimulate everything with low rates. They might call Japan and ask how their low-rate experiment has gone, as 20 years of near-zero rates have not revived Japan’s economy at all. No matter how soft markets get, the overall market remains huge and business can always be found with stellar value props and very aggressive marketing.

Kristin’s insight: Some houses still have multiple offers, usually ones that are updated, and are priced slightly below market or in a highly desired neighborhood. The rest are sitting longer on the market and may see a price reduction or two as buyers become much more discriminant.

Who funds Mortgage Loans?

For buyers, this JVM Lending blog from Jay Vorhees is a great “101” on the differences, pros, and cons of the three institutions you can go to for your loan. I often recommend JVM for their efficiency and getting the loan done in a short time frame, not because I get something in return. Having said that, I do get a big benefit by having a smooth escrow, closing on time with short contingencies, and happy clients. A buyer who has never been through a nightmare purchase will never fully appreciate a smooth buying process, but at least I know I have done a good job representing them.

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We host “Homebuyer Seminars” for buyers and “Mortgage 101 Seminars” for agents, and one of the slides that always derive a surprising amount of interest is the one that sets out the different mortgage origination channels.

This is because there are so many companies and individuals offering mortgages that it can be both very confusing and overwhelming for consumers and agents alike. Because of this, I am revisiting the topic in today’s blog.

Three Primary Channels for Mortgages: Commercial Banks and Credit Unions

These big institutions dominated the mortgage industry after the 2008 meltdown, but their overall market share has been dropping quickly in recent years, as Mortgage Banks and Brokers (see below) reclaim market share. The “big banks” include Wells Fargo, Citi, Chase, B of A, and U.S. Bank, among others. Major Credit Unions include Navy Federal and USAA, but there are hundreds of others.

Advantages: Bank and credit union advantages include a low cost of funds; they can loan out customer deposits and sometimes offer low rates. They also can “portfolio” (or retain) tough loans that otherwise could not be sold on the secondary market.

Disadvantages: The big banks are very slow and bureaucratic largely because they are so heavily regulated. They also rely on national appraisal management companies that do not employ the best, local appraisers – so appraisal issues are common.

Private Banking: Commercial banks have an offshoot for “high net worth” customers called “private banking.” These channels often offer exceptionally low rates that other entities usually can’t compete with.

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Mortgage Banks: Mortgage Banks include Quicken, Guaranteed Rate, and Fairway at the national level, and RPM and SWBC at the regional level. JVM Lending is also part of a mortgage bank. Mortgage banks do not hold deposits; the ONLY thing they do is underwrite and fund mortgages. Mortgage Banks use lines of credit to fund mortgage loans and then quickly sell the loans to investors or third parties to make money.

Advantages: Mortgage Banks can typically move much faster than commercial banks because they are less regulated, smaller and more nimble. They can also set up their own appraisal management companies, ensuring access to local appraisers and better appraisal quality.

Brokers: Brokers do no underwrite or fund loans. They only “originate” loans and then send them to outside “wholesale” lenders for underwriting and funding.

Advantages: Brokers can access dozens of different wholesale lenders and submit loans to whichever lender is offering the lowest rates or best terms at any given time.

Disadvantages: Wholesale lenders force brokers to use national appraisal management companies (like the big banks use) and there are frequent appraisal issues as a result. In addition, brokers have no control over underwriting (because it’s not “in house”) and turn-times. Brokers also have very few competitive options for jumbo financing. JVM was in the broker channel for years, but left it in 2014 because we had too many appraisal and service issues.

Higher Fees vs. Lower Commission: Friction Avoidance

Jay Vorhees at JVM Lending had a good blog recently about iBuyers, which are large firms that buy homes from sellers to get around the listing and showing process. Read on:

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The National Real Estate Post recently posted this interesting comparison of iBuyers and real estate agents. What is an iBuyer you ask … iBuyers are large firms that buy homes from sellers outright so sellers don’t have to go to the trouble of listing and showing their homes. The iBuyers then resell the properties as quickly as possible and usually for a profit. Some of the major iBuyers include Opendoor, Offerpad, and Zillow.

iBuyer fees are higher than realtor commissions

The video’s host points out that the iBuyers charge large “fees” that are really no different than commissions. What is surprising though is that the iBuyers’ fees add up to more than the average commission rate charged by real estate agents.

Opendoor and Offerpad charge fees that total 7.5% of the purchase price, while Zillow charges fees that total 7%. The fees for Opendoor, for example, include such line items as an “Experience Charge” and Repairs, and even a “Market Risk” fee.

The average real estate commission paid by sellers is now just over 5% according to the host, so sellers are paying substantially higher fees to the iBuyers. In addition, the iBuyers are unlikely to offer top dollar, given their desire to resell the homes at a profit.

The hosts also cite this WSJ article that discusses iBuyers at length as “The Future of Housing.” The WSJ article points how much traction iBuyers are getting in cities like Phoenix where there are large tracts of similar houses (something iBuyer algorithms require). The article also mentions a couple in AZ who sold their home for $215,000 only to watch Opendoor quickly resell the home for $240,000 after painting and slapping in some new floor coverings (something any agent would have recommended from the get-go). So, the sellers effectively left $30,000+ or more on the table by going the iBuyer route.

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In any case, there is a lot of data that agents can readily use to convince sellers not to sell to an iBuyer. And I suspect the iBuyer model will become much less viable if and when real estate takes a downturn and homes end up sitting on the market.

But, the biggest takeaway from all of this is that sellers are obviously willing to leave a lot of money on the table simply to avoid friction. Friction avoidance is something all agents will need to focus on to win and keep clients.

These days, my job is often project managing and coordinating the service providers to get the house market-ready. Doing that work the iBuyer companies do so it can be sold at a higher price. Often the seller is in another city or already moved out, so I manage the process with the objective of keeping it less stressful for the seller. Our area is much harder for the iBuyer companies because we tend not to have cookie cutter subdivisions in our area. The value of a good real estate agent is often undervalued because if they do their job well, the seller will often think they didn’t do anything because it all went so smoothly.

How much is an in-law unit worth?

It’s been a while since I brought in my friend Jay Vorhees of JVM Lending. Let’s get back to him, with a blog he shared recently that got me thinking about everybody considering doing an in-law unit or ADU, and whether you know how much value that unit adds to the overall price of a home? Read on!

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Realtor misses value of his own home by $500,000

Years ago, I was refinancing a realtor who insisted his remodeled 3,700 square foot home was worth at least $1.5 million. I was, therefore, shocked to see the appraisal come in under $1 million. I reviewed the appraisal and quickly realized why it was so low. The “main house” was only 2,300 square feet, while there was a fully permitted 1,400 square foot in-law unit above his massive garage.

No interior access

Because there was no interior or direct access from the main house to the in-law unit, it could not be included in the overall gross living area. Hence, the appraiser could only use comps that were similar in size to the 2,300 square foot main house. He also used comps with somewhat similar in-law units, but he was only able to support a value estimate for the unit of $75,000 (even though it was so large and brand new).

Permitted in-law units

An in-law or “accessory dwelling unit” that is built with permits can only be included in the overall gross living area if it has direct interior access to the main house, as mentioned above. Interior access often makes the in-law unit more valuable on paper because appraisers can then correlate to much larger comparable sales overall. When there is no interior access, appraisers must support value using comps with in-law units and main dwellings that are similar in size to the subject’s main dwelling. They then “extract” the estimated market value with what is called a “paired sales analysis.”

In most cases, the estimated market value of such units ends up in the $25,000 to $50,000 range, depending on the market – much less than most people think.

Unpermitted in-law units

In-law units built without permits can never be included in the overall gross living area, whether there is interior access or not. They can, however, be given value, similar to permitted units, IF the appraiser can show that there is marketability in the area for such units. The appraiser must, however, find similar comparable sales, with in-law units, to support the value. In many cases, however, unpermitted units are given no more value than similar-sized storage space (which is often minimal, at $5,000 or less).

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No stoves, please!

If a unit is unpermitted, underwriters often require that stoves be removed from the units prior to funding, as such stoves represent “health and safety” hazards. While most buyers simply replace the stoves after their loans fund, this is a requirement that all parties to a transaction should expect.

As you may or may not know, I have been considering an ADU myself, but when rates went up last year, I decided to really save money before I start. As I learn more, I keep re-thinking what I will do. I am now thinking I will attach the in-law unit to my existing home and maybe keep it on the same sewer line, but have separate PG&E services. It is still a work in progress, but I need to get going on it sooner rather than later. What I am finding is contractors are busy and you have to book out months in advance, in part due to all the work from wildfires, plus the price of wood has gone up due to demand from the fires. I also heard a few new positive changes will be coming our way in the form of lower fees, as we have a housing shortage and the ADUs are a way for people to find living situations.

Open House Alert – WC Condo! This Saturday!

Hey, you! What are you doing this weekend? Are you in the market for a new condo walking distance to Pleasant Hill Bart? We are having an Open House this Saturday (7/13) & Sunday (7/14) from 1-4 pm at 2627 Oak Road #A in Walnut Creek.

This home has been freshly painted with new carpet in the bedroom and updates to the kitchen – including subway tile, a new range, dishwasher, and updated lighting.

We are also having a Wine & Cheese Twilight Tour on July 18th from 5-7 pm. Come swing by and check either of these events out. I would love to meet you!

The new Riviera Apartments: SF in WC?

The new Riviera units downtown are pricey, but they give some people San Francisco vibes. Top and middle level ones are going in the $1-2 million range, but their target buyers are people moving out of the city for a reason. Not only is there parking, but it’s near BART and Target and have an HOA.

Some new tenants like the “city feel” the building itself puts off, with all the amenities you’d expect from newer units in downtown San Francisco. There is a nice upstairs lounge area, it’s close to public transportation, and best of all, there is car and bike parking!

There is even a fire pit, a bike lock and repair station, and views of Mt. Diablo. I know of one tenant who opted for one on the non-Mt. D side because looking at another building actually reminded her more of living in San Francisco. To each their own!

So far, the units are about 40% filled, but I’m sure that will continue to go even higher. Units get snatched up in Walnut Creek super fast these days, and the location is pretty ideal. It will be interesting to see how many SF transplants the Riviera apartments end up getting!

Top 6 reasons you should hire a professional Real Estate Agent

The house-buying and selling processes can be tricky, to say the least. Luckily, there are professionals (like me!) to guide you through it! I recently sat down with a first time home buyer who doesn’t understand the value of a real estate agent. He wanted to know what I do as he can find the houses himself.

The rubber really hits the road when you find the house you want to write on. This particular buyer was interested in a house, but now it is pending. If he had an agent working on his behalf, that agent would have called the listing agent, found out if they were looking at offers on a specific day or as they come and then find out if there is interest in the home. That all could have been communicated to this buyer and they might have put in an offer.

We are all very busy, and real estate can be a stressful process, taking up a lot of time on top of everything else you have going on. Why wouldn’t a buyer want an experienced professional to help them? It doesn’t cost them a cent as the seller pays the commission. For a seller, it is very apparent why you would hire an agent, but here are the top six reasons. At the end of the day, I think it is about trust. Do you trust this agent to work in your best interest?

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1. Neighborhood Knowledge

Agents either possess intimate knowledge or they know where to find the industry buzz about your neighborhood. We can run a neighborhood comparative market analysis, in addition to pointing a buyer where more data on schools, crime, demographics and open house listings exist.

2. Price Guidance

Contrary to what some people believe, agents do not select prices for sellers or buyers. However, an agent will help to guide clients to make the right choices for themselves. Buyer’s Agents will ask buyers to weigh all the data supplied to them and to choose a price. Then based on market supply, demand and the conditions, the agent will devise a negotiation strategy.

3. Market Conditions 

Real estate agents can disclose market conditions, which will govern your selling or buying process. Many factors determine how you will proceed. Data such as the comparative active/pendings/solds of similar homes, median and average sales prices, average days on market and ratios of list-to-sold prices, among other criteria, will have a huge bearing on what you ultimately decide to do.

4. Education & Experience

You don’t need to know everything about buying and selling real estate if you hire a real estate professional who does. Henry Ford once said that when you hire people who are smarter than you are, it proves you are smarter than they are. The trick is to find the right person (back to trust). For the most part, they all cost roughly the same, so why not hire a person with more education and experience than you? We’re all looking for more precious time in our lives, and hiring pros gives us that time.

5. Professional Networking

Real estate agents network with other professionals, many of whom provide services that you will need to buy or sell. Due to legal liability, many agents will hesitate to recommend a certain individual or company over another, but they do know which vendors have a reputation for efficiency, competency, and competitive pricing. Agents can, however, give you a list of references with whom they have worked and provide background information to help you make a wise selection. If an agent has a great reputation amongst their peers, it can help a buyer get into contract. Agents want to work with agents that are professional, communicate and are known for a smooth process.

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6. Negotiation Skills & Confidentiality

Top producing agents negotiate well because, unlike most buyers and sellers, they can remove themselves from the emotional aspects of the transaction and because they are skilled. It’s part of their job description. Good agents are not messengers, delivering buyer’s offers to sellers and vice versa. They are professionals who are trained to present their client’s case in the best light and agree to hold client information confidential from competing interests.

So, next time you’re in the market for buying or selling, and start thinking it’d be easier and cheaper to do it without an agent, think again! These are just a few of the reasons why hiring an agent ends up being the best way to go. Give me a call if you’re looking to buy or sell!

A new closing at 831 Niagara!

Recently, I closed a sale on 831 Niagara in Concord. I was thrilled to help Ann & Andrea as they retired and are ready to move on to the next chapter in Chicago.

I met them about five years ago with another past client, Teresa Debarard, who works for the Coast Guard with Ann & Andrea. They wanted help buying the home they were renting, so I met them, checked out the house and discussed the process. The seller only wanted to use their own agent to save on commission, and since they had been living there they already knew about the house. I understood and said let me come over and show you the comps and give you recommendations for inspections and what you should be looking at regarding price.

Over the years, they made some wonderful updates to the kitchen, yard, RV pad, and had an amazing backyard made for entertaining. When I came to take the listing, Ann said they were working with me because all those years ago I provided insight and information for them to make a more informed decision even though I would not be part of the process. I truly believe it is always best to give first and help people make informed decisions weather or not they end up working with you. It comes back in so many wonderful and unexpected ways!

More apartments to come in WC Transit Village

As you may have noticed, the Walnut Creek BART station has taken on some renovations. There is now a new large 900 space parking structure along with a bus terminal at street level on the southwest side of the Bart station. Now, the loading zone is on the opposite side and getting there is trickier than it used to be as you can’t get in and out of area the way you could before.

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WCTransitVillage.com

This is all part of the transformation to the Walnut Creek Transit Village which is starting to taking shape. In addition to all the construction of apartments and condos on the side streets around Walnut Creek BART (see past blogs), they are building a mixed-use development with 360 apartment units, shops, restaurants and public plazas in the northwest lot next to Pringle Ave. It is supposed to have all the amenities you’d expect from a modern housing development (co-working space, pool and spa, rooftop deck, bike repair lounge, fitness center, etc.). Currently, there is a fence surrounding this old parking space and lots of weeds.

The second part of this project, on the corner of N. California Blvd. and Ygnacio Valley Rd. will have about 240 units and 12,000 square feet of retail space. That is expected to break ground next year. Combined with all the other new living areas around BART, the station really is being transformed into a living/shopping village.

The renderings look beautiful and the BART police station rendering turned out exactly like the finished product. As with any new development, the city requires some sort of art work to be installed and the most recent garage addition recently added their personal touch. We’ll discuss these pieces later in a separate blog post. My son visited me this weekend, hasn’t been in Walnut Creek since last August, and he feels it has really changed in nine short months. Our once sleepy town has grown up and continues to transform.

When appraised value is not market value

Sometimes, when the market is in a state of extremes, appraised value does not equal market value. Things are not appraising equally right now because the market stalled at the end of 2018, so homes sat and price reductions occurred. Now that the rates have dropped, buyers are back out, prices are up, but the comps are still off. Here is my friend Jay Vorhees at JVM Lending with more:

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HomeLight

Because the market is heating up again, we have had several appraisal issues recently where there were simply no comparable sales available to support the contract price (despite multiple offers at that price). Because the agents involved in the transactions were frustrated, I thought it was necessary to repeat this blog.

Ten offers over $1 million; appraisal comes in at $850,000

We once had a transaction in Berkeley, CA involving a property that was listed for $850,000, and there were more than 10 offers for over $1 million. The market value for that property was clearly over $1 million because there were so many buyers willing to pay over $1 million in an open market. The appraised value, however, was much less because the highest priced comparable sale in the area was only $850,000. The appraiser knew about the other offers and he knew the market value was probably over $1 million, but he was constrained by appraisal guidelines.

The appraiser could only use comparable sales within one mile of the subject property that closed within the last three months. He could not correlate to the other offers or similar pending sales at all. So, the appraisal came in at $850,000 and this is clearly a case where the appraised value did not equal the market value. This happens all the time in “hot markets” where there are multiple offers and prices are increasing too fast for comparable sales data to keep up.

Why appraisers can’t “push” values

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Credit.com

Further, if appraisers push value too far in an attempt to support a contract price, other issues arise. An underwriter will likely call for a full review of the appraisal that will probably result in a significant cut in the value. Or worse, if the appraisal makes it past underwriting, investors may refuse to buy the loan on the secondary market because they are unfamiliar with Bay Area markets and the property appears overvalued on paper.

In any case, prior to the meltdown in 2008, appraisers could correlate to other offers and even pending sales to some extent, but nowadays they are not allowed. Appraising is all about closed sales and tight appraisal guidelines, and not always about estimating market value.