In the midst of all this, I found myself as thunderstruck as most other local agents by the strength of housing.  There was no particular news to drive the shift, as unemployment remained high and the government wasn’t providing any more incentives.  But, the reality we saw was fierce bidding wars, going in far above asking and often losing out to an all-cash buyer who didn’t need to worry about appraisals.

What could explain this sudden stampede?  As with any shifts in herd-mentality, the underlying cause was years in the making.

As discussed in the first half of my blog, when an asset class collapses under the weight of overleveraging, fear pervades throughout the investor pool.  So, when housing collapsed in 2007 and dragged down the economy and the stock market, investors sought relative safety in cash and government backed debt.  This led to record low interest rates for debt instruments, which was compounded by the ineffective efforts of central banks around the world to use monetary policy to fight the inevitable deleveraging.  (China and the developing world weren’t as heavily leveraged, since they didn’t have that privilege, so their economies responded well to monetary stimulus.)

Of course, when one asset category shoots sky-high, investors immediately looked for ways to offset the perceived increase in risk.  (In hindsight, they were correct to be fearful as the continuing Euro sovereign debt-crisis illustrates.)  So, this fear trade led to all sorts of distortions, principly in commodities as oil, gold, silver, etc. all shot up to record highs.  Even now, they’re not far off those records.  Then, once those got very high priced, investors rotated back to depressed equities on the stock market.  Now, we are within shouting distance of the bubble peaks, at least on the broad market basis.

Then, with all these investment categories at or near record highs, the fearful investor has few places to turn.  But, thankfully, housing had been soundly beaten down and until February this year, the pundits were still brow-beating it.  So, prices remained low while rents climbed from a still growing population.

Perhaps it just required the seasonal pickup in homebuyer activity to drive the already eager investor buyers into a frenzy.  In any case, when buyers had to line up for their turn at open houses, the market signal was unmistakeable.  With bids climbing, cash-heavy investors were still in the best position to win deals.  They’ve done their analysis (or worked with an investment Realtor) and know how much room is left in deals, allowing them to out-bid homebuyers while still making a good return.  With interest rates still being held to record lows, even a 4-5% ROI (30-40% lower than 2011) is attractive.

Meanwhile, credit remains relatively tight so many homebuyers find themselves in the rather unsavory position of having to bid obscene premiums above asking prices to be competitive against investors on prime properties.  Investors for their part have very good credit ratings and can get leveraged returns in the double-digits, justifying ever higher offers.

When will this end?  It’s hard to say only because it’s so early in the cycle for housing.  We’re still far below the price records of 2007.  Many Bay Area condo communities are still 60% below the peaks, making the recent 10-20% price spikes seem trivial.  Plus, much of the price appreciation is being driven by cash or cash-heavy buyers who aren’t going to be affected even if interest rates rise.  And, with rental returns still very solid, we may be in the middle of a steep 2-3 year recovery cycle.  While occasional speed-bumps on the path to recovery are unavoidable, the savvy investor or buyer will lock up good deals whenever possible as the housing market makes it way back toward the peaks.

Like many other real estate related websites that provide listings of homes, Zillow gets a syndicated feed of listings from the multiple listing service (MLS).  Since most Realtors use the MLS to promote their listings, the data quality on the MLS is quite high.  There might be a few occasional mishaps, but those are the exceptions.  But, once that data finds a home on a syndicator’s site like Zillow, it gets lost in a jungle of expired, pending, and cancelled listings.  It’s quite frustrating to find a great house only to find out that it’s not actually for sale.  I’ve had plenty of clients excitedly send me listings from Zillow only to find out those homes were already pending or sold.  That’s one of the reasons why my firm only provides the most up-to-date listings.  If it’s an active listing where the property is actually on the market for sale, then it’s on our site.

Also, like other sites, Zillow combines market listings with properties in various stages of foreclosure.  While having foreclosure data is useful information, for the real estate professional who understand the process, it’s really just confusing for the casual consumer.  Usually, the foreclosure listings just show a street name of a property that may have received a notice of default.  Unfortunately, many homebuyers believe that those are also valid listings of properties for sale.  They spend many hours trying to chase down those properties only to discover that there’s virtually no chance of them getting it.  Bottomline, just because a property is in the process of foreclosure, it doesn’t mean it’s a foreclosed property that’s available for sale.  There’s a big difference that gets lost in the terminology.

What a buyer should look for is a property in the process of foreclosure that’s on the market, either through an auction or a short sale.  Buying at different stages of foreclosure requires different sets of preparation and capital available.  As with investors, the best deals go those who have the cash in hand.  Trying to pre-empt the foreclosure process by approaching homeowners in the foreclosure process is both a dangerous and low-return strategy that’s best left to experienced real estate investors.

It’s far better to look for homes actually put up for sale with a Realtor.  You can avoid spinning your wheels for months trying to figure out which mysterious foreclosure on Zillow is actually available.  If you’re feeling lost, I’d be glad to help.

Four solid years into a historic housing bust, it’s become patently obvious and even fashionable to be pessimistic about the health of the US housing market.  Since 2006, I’ve been comfortably sitting in that camp, along with a growing number of fellow campers.  Yet, notwithstanding the perennial cheerleading of the National Association of Realtors (NAR), there are real signs of life emerging out of the carnage.  And, as any good investor knows, it pays big to look for the signs that gets you just a few steps ahead of the crowds.

One of the main reasons that we may be coming out of the housing doldrums soon is also the same reason we got into the bubble in the first place — our efficient capitalist system.  When housing boomed in the early 2000s, builders responded by increasing output.  As demand seemed to increase without end, builders cautiously increased their output — many were only recently chastised in the late 1980s building bust.  According to the US Census Bureau, the increased output weren’t much above the long-term 45 year average, including today’s market.  But, when the housing market started to turn, builders responded immediately.  Construction output collapsed, dropping to just about a quarter of the peak construction years.  The drop over the past four years has been so dramatic that it wiped out the above average housing output of the eight years prior.  We are now seeing new construction volumes last seen in the 1940s when the US population was less than half our current size.

As a result, what we’re seeing today is a strong uptick in demand for the relatively few new housing units being built.  Still, builders are staying prudent as a matter of self-preservation.  They are no longer making gambles in far away exurbs barely commutable in an hour.  New construction tends to concentrate near city centers where the remaining good jobs are.  In addition, builders have adjusted their cost structure with a combination of cheaper labor and materials to make sure they can price their homes competitively against existing inventory, some of which are financially distressed and discounted.  This means the homes being built today are sensibly priced, making them very attractive when compared to similarly priced but much older inventory.  In a very real sense, buyers of new homes don’t need to worry about the overhang of “shadow” inventory, since none of that inventory will ever be comparable to a new home.

Otherwise, on the supply side, a few investment-minded buyers are picking up financially distressed homes and renovating them for either a bargain home or an investment gain.  While often maligned as bottom-feeders, these people are making a genuine effort to preserve both neighborhoods and the stability of the housing market.  But, with so many repossessed homes on banks’ books, large numbers of homes will inevitably be lost to sheer neglect and be torn down rather than repaired, reducing the available housing stock for years.  Unfortunately, since the majority of residential mortgages are effectively backed by a government-sponsored enterprise (GSE) like Fannie Mae and Freddie Mac, there are still millions of homes stagnating on their books and we as tax-payers remain on the hook for those losses.  Last quarter alone, Fannie Mae took another $7.6 billion dollar loss.

Meanwhile, demand remains too weak on a national level to drive a recovery in prices.  Persistent high unemployment, particularly amongst young adults of typical household formation age, has led more people to live together to share the burden of housing costs.  Current estimates suggest there are over 1.5 million young adults living at home who would have normally purchased new homes for themselves.  While this stop-gap solution has been tolerated in difficult economic times, it’s not sustainable long-term.  Soon, these young adults will want to form their own families and shape their own lives, which can best be satisfied with their own homes.  We are already seeing signs of that trend with the recent spike in rental rates.

As the GSEs

have returned to the financing standards set prior to the last housing boom, prospective home buyers are being constrained by a tightening of credit.  While a difficult process of adjustment, this is actually a healthy trend for the housing market in the long-term.  Despite the misguided protests of the NAR, our country is better served with a disciplined population of savers than profligate consumers who must have easy credit to buy.

Soon, all of these trends, along with many others, will converge into a pronounced housing recovery.  The extremely low rates of new construction and continued deterioration of existing housing stock is correcting for any prior excesses and limiting the availability of housing.  We’re currently running about 1-1.5 million units below average each year.  At the same time, our population is still growing with millions of young adults looking to move out of their parents’ homes.  Fortunately, they’ll find themselves able to afford homes even with tighten credit standards as they are now able to save much faster by living at home than traditionally paying for rent.  In a few years, builders will find themselves having to once again build above average numbers of homes to meet demand for 4-6 million new households, while those with homes or investment properties today will see prices rebound to record new highs.  When this will happen, 2014 is my call.  

By now, we’ve all heard the persistent horror stories about short sales — they drag on for endless months, tangled up in an opaque and convoluted process.  Often, after lengthy and frustrating negotiations with the bank, the buyer backs out and the home ends up foreclosed anyways.  As a result, many Realtors simply avoid short sales and similarly dissuade their clients from considering short sale listings.

But, short sales don’t have to be that tough.  This month, I sold a short sale listing in just 3 months, starting from putting it on the market to closing escrow.  This amount of time is very comparable to most regular listings and didn’t strain the patience of the buyer.  So, how did I do it?  Here are 5 tips for a smooth short sale.

1.  Understand your loan and lenders – One loan is better than two loans, which is easier to negotiate than two loans with different lenders.  Develop an appropriate game plan for each scenario.  Also, accept that banks or lenders are all different.  Some have got well-honed processes for short sales while others haven’t got a clue.  Having worked with Bank of America on both sides, I concede they have one of the most polished processes, even though sometimes one hand still doesn’t know what the other is doing.  This means the successful Realtor will take the initiative follow up daily, if not hourly.

2.   Organize all your documents – Be prepared to submit all your financial data to the bank and often – including bank statements, tax returns, pay stubs, etc.  Get everything in order and don’t try to hide anything.  If the bank smells something that’s off, they will just demand more documents or reject your application.

3.   Prove a real hardship – If you have a real life situation that makes you unable to afford the home, it can help to convince to the bank to approve the short sale.  It can be divorce, job loss, illness, or relocation.  Once again, honesty is the only policy.  You will have to write a hardship letter to describe your situation and have the documents to prove it.

4.   Market and price the listing right – A lot of short sale agents take the tactic of listing an artificially low price to attract an offer that stops the foreclosure process. Unfortunately, this sets an unrealistic price expectation for the buyers.  When the bank does its own appraisal and demands the market value, those initial buyers will evaporate.  Not only that, later buyers will suspect a difficult short sale process and avoid making offers.  So, price it to the market and don’t accept any shortcuts on marketing from your Realtor.

5    Find the right buyer with the right agent – Many short sales drag on or fail because novice buyers get frustrated and repeatedly back out.  Most of this frustration stems from short-sighted listing agents over-promising on a quick process to you and to buyers.  Avoid those agents who claim to get responses from banks within days.  A short sale is not for everyone.  Before accepting an offer, your agent should set the right expectations on the entire process and work only with buyers and agents who are prepared to hang on for at least a few months.  Keep them engaged through the short sale process, and they will stay on the ride till the end.

Letting your home go is difficult enough, so the short sale process should not make it more painful.  Follow these tips and work with a Realtor experienced in handling short sales and you can move on with your life.  If you need help with

your short sale,

feel free to give me a call.

Once in a while, I come across a really useful real estate article to share with my readers.  This one from the Wall Street Journal is surprisingly simple and yet powerful.  It describes research results which confirms our general intuition about distressed properties, like foreclosure short sales and bank owned, weighing down overall real estate prices.  As the percentage of distressed properties on the market increases, it drives down market prices by a similar percentage.

This relationship can be explained by simple market pricing mechanism.  With each additional distressed property, there’s more competition for purchasing dollars with existing distressed and non-distressed properties.  Since distressed sellers are less price sensitive for a large variety of reasons (described in my prior blogs), the negotiated prices will fall until buyers feel they are getting a compelling value.

Thus, with a high proportion of distressed properties, more distressed transactions will close, which leads to lower median prices for all other properties.  This forces the non-distressed sellers to either lower prices to compete or back out of the market.  The vicious cycle continues so that eventually, fewer non-distressed sellers are in the market than normal and the distressed properties come to

dominate on a proportional basis.  As the high quality non-distressed properties are not being put on market, the median price is driven down further.

That’s what we’ve all been witnessing here in the Bay Area and particularly in San Jose.  While the volume of distressed properties has dropped from earlier in the year when banks flooded the market with their real estate holdings, the percentage of distressed properties has remained high, reaching above 50% in some neighborhoods.

So, what does this mean going forward for the local market conditions?

Since the pipeline of distressed properties looks solidly in place with little improvement in the regional employment situation, the proportion of distressed properties appear poised to continue climbing through the rest of the year.  This trend reflects more of a drop in non-distressed sales than a rise in distressed properties.  So, while the chief economists of the NAR and CAR offer vacuous forecasts based on guesses about household formation and employment, we take a more ground-level approach and track the actual property inventory figures on a monthly basis to provide our guidance to clients.

t working out the distortions from last year’s government stimulus.  This was expected.  Looking past the headline numbers, we see that prices of regular sales have stabilized and are actually recovering.  $1M+ homes are holding up surprisingly well, showing that the well-to-do are doing just fine in this economy.  Meanwhile, lower priced distressed sales still dominate the market as investor appetite continues to be solid even as these transactions drag median prices down.  Unfortunately, prospective first time buyers have been scared out of the market, even if homes are

now more affordable than it has been for generations.  This means that we’ll continue to see a growing proportion of lower-middle class workers struggling to pay for escalating rents to investors over the next decade.

Presentable properties are still attracting multiple offers.  Beside the emotional appeal of a quality property, buyers are efficiently factoring in the costs for additional repairs in distressed properties, which average 2.5x more.

As real estate brokers, we usually approach short sales in the following generic manner.  A distressed homeowner who is unwilling or unable to continue supporting his mortgage payment and owes more than the current market value of the property would apply for a short sale approval with the mortgage servicer or lender.  This would allow the homeowner to sell the property for less than what is owed and allow the mortgage-holder to accept the loss.

Since the mortgage-holder or bank is taking a loss on principal, the goal is to sell the property for as much as possible to minimize the realized loss.  To this end, banks want the participating real estate brokers to affirm in writing that the transaction is arms-length, or between two unrelated parties with no undue benefits to each, and that the property has been properly marketed.

Even when everything is done properly, the bank usually does not agree with the offered market price and has its own internal negotiator work

out a price that the bank can accept as being close to the market price.  While this process can go on for months, the large number of recent completed short-sale transactions have helped to standardize the process.

However, sometimes a listing agent would require the involvement of a third-party negotiator who assists the buyer in working out a deal with the bank.  Ostensibly, this negotiator is experienced in the process, and he comes at a price to the buyer, anywhere between $750-1500.  I find this practice to be quite objectionable.  If the bank is already paying for the commissions of both the seller and buyer agents, then the extra fee charged by the negotiator to the buyer is effectively an extra loss to the bank.  I’m all for savvy buyers getting a good deal, but that’s the whole point of hiring good real estate brokers to represent them.  Paying somebody else to do the listing agent’s job isn’t economically or ethically acceptable.

Another even more questionnable practice involves “investors” who try to flip a property.  These guys seem to have received their investment scheme training from something called the Real Estate Strategies Institute.  They do something quite different from traditional real estate flips in which an investor buys, repairs, and sells a property for profit.  Rather than put in an effort to add economic value to a property, they try to short circuit the short sale transaction by getting a complicit listing agent to submit their low-ball offers to out of state servicers and hold back higher offers.  So, while the listing is being marketed on the MLS, the market-based offers are not reaching the bank.

This is different from the more obvious fraud of having accomplices submit false BPOs or appraisals to banks, but it achieves the same goal.  Apparently, they come armed with special legal documents that they want any potential buyers to sign as addenda to the offer.  Effectively, they want the buyer to accept the fact that the interloping investor has already received a lower approved price from the bank and will resell the property immediately to the buyer at a profit.  In addition, they also want the buyer and his agent to not attempt to submit the higher offer to the bank.  I’m not a lawyer, but that just sounds more than fishy to me.

Aside from the legal grey area, a more pressing problem is the inability of the buyer to refinance the purchase since the interloping investor just added a transaction to the process, violating many lenders’ rules requiring seasoning to prove a transaction was arms-length.  The lenders I work with aren’t comfortable with these suspicious transactions either.  So, if you come across such a situation, I’d advise caution for any buyers or buyer agents.