Mark Salkin Team Real Estate Newsletter for March, 2007
Are we returning to the hysteria of 2005?
Each year, right after Christmas, a real estate market phenomena recreates itself. I’m not sure how it happens, but what happens is this: inventory that was priced and appeared on market prior to the holidays is generally priced at levels different than similar inventory after the break, sometimes lower and sometimes higher. Reading and interpreting these differences is a clear indication of market strength. Add to our interpretation of this data what we have seen so far in the first ten weeks of this year and let’s see if the prediction holds up: that the bull market that fell quiet in 2006 will return in 2007. Why do we say that?
Well, first the price levels of the post Xmas inventory are higher than those pre-Xmas, Sellers who weren’t happy with the low ball buyer mentality last summer and fall are back in the market now, and they still aren’t ready to lower prices. Next we have generally low inventory levels, translating to more leverage for sellers. For example today we have only 21 SFR’s for sale in Culver City, 51 in Westchester, 9 in Playa Del Rey, 21 in Rancho Park, 36 in Beverlywood and a bit higher inventory levels in Santa Monica and West LA. These low levels, roughly 35 – 50% below traditional norms, are chastising to the buyers whose mantra last fall was, “I’m gonna wait, prices are coming down”. Well, here’s the truth: prices hit bottom in late November and began up in January.
Second, interest rates have come down. Today they are hovering at 5.75% for a thirty year conforming loan. Whew – that’s a record low. The over 10% drop in rates has psyched up the buyers and they are back – last Sunday, I visited an open house in Culver City’s Carlson Park and over 200 potential buyers showed up! These interest rates coupled with low inventory are driving today’s market.
Third, the investor / speculators are hungry. With the fast and easy days behind us, the business types are looking harder and farther afield and they are doing it on less inventory too. New on market construction is pricey - for example a new home high on the Mar Vista hill recently went on market over $1,950,000 and received two offers. Not quite a record, but not an attainable price last year. Just around the corner, we sold a tear down on a 6100 sf partial view lot for $775,000 (3.4% over asking with 5 offers). So these business worthies need something to do, and with less inventory they are prepared to spend what it will take to stay in business.
Last, we are seeing two phenomena side by side: Correctly positioned inventory in desirable move in condition is still moving quickly on multiple offers – a recent sale in Culver City’s Lindberg Park went for $920,000 against an asking price of $799,000 with 21 offers! Contrast that with the same home I saw last week with the 200 visitors still on market at $869,000 because the home, nice as it was, is dated. So the buyers are ready to go and will pay the price for perceived value, especially when pressed by market conditions. But anything less than desirable or a perceive bargain is going to sit.
Given the slippery slope the stock market is currently in, add to the recipe the traditional flight of capital to real estate when stocks are short, and you have all the ingredients for another round of fast track price rises: I expect this Spring to be a wild ride if the indicators seen so far hold true.
And on the Westside, I’ve seen the same in commercial: there is still no inventory to speak of, and still a large demand to locate here. One of our recent clients purchased a 5400 sf warehouse near the airport in Inglewood and the seller gave no concessions at all during negotiations!
All of this augers for a strong seller’s side market this spring, which if it continues through the season could mean price appreciation greater than the NAR predicted 7-9%. Time will tell.
WHAT’S HAPPENING TO THE LOW END OF THE MARKET? With everyone wanting to live on the West side, how can they afford it? Well, many times they can’t. So we try to switch people into newly emerging areas where the price levels of the past seven years have resulted in an influx of newly empowered high earning professionals. These newcomers have a stake in their market and slowly cause progression and improvements. Such areas as Inglewood, Echo Park, Leimert Park, Angeles Vista, old Ladera, Osage district in Westchester, Del Rey (a beach city), Del Aire (adjacent to El Segundo), PIckfair are all now target markets for those who can’t afford traditional Westside abodes.
Still, these homes may yet suffer some market holdbacks. Despite their being attractive price wise, the loans which fund many of these sales are drying up. Why? Because rising loan defaults and foreclosures (though we are a far ways yet from the heyday of foreclosures in the early 90’s) have created fear in the lenders and the sub prime loans they were making to these sometimes marginal buyers are gone. With fewer funds available, and harder qualifications from the lenders, it is possible that the bottom end of the entry level market will suffer. Alternate thinking must be employed to keep these clients in the market, using first time buyer programs and incentives from local city jurisdictions such as the housing authority low income levels available from the City of Inglewood as well as potentially returning to the days of seller’s creative financing may be the answers. Unless the lenders are ready to re-think this process, funds to generate sales in the low end will likely dry up – we shall watch sales in these districts to see if we’re right.
ARE TENANT IN COMMON VEHICLES ENTERING A NEW LIFE? These TIC deals are beginning to ruffle feathers. Typically these are larger commercial transactions with a small sampling of investors, usually 35 or fewer, more typically ten or less, who can’t afford to buy with their profits when they sell as a tax deferred exchange. When the IRS loosened its rules a few years back, the TIC became the new star: join with others of similar sophistication, form a management group and leverage into a larger more profitable deal. Our offices were one of the first to place clients in these investments, most spectacularly when we sold a 6.9% interest in a multi-story office building fully occupied long term by a first class university in Durham, North Carolina. So what’s the problem?
As usual, it’s a point of view. Are these land deals, to be dealt with by real estate brokers, or securities offering to be handled by licensed stockbrokers? Worse, what happens if it’s one and not the other and the IRS disallows the investment?
Even though the buyers obtain a deed and are on title, the necessity of joining a management group and related joint mortgages smacks of partnerships, and partnerships are securities solely under the jurisdiction of the stock managers. On one side the brokerage firms are aiming at moving in one direction, depending on the outcome of the 2008 elections: brokerage law is federal in nature so this would be dealt with on a national level. On the other side are the realty firms whose primary rights are local governed by their states – after all, we are buying and selling land. Who will come out ahead will have a big impact on the future of these transactions. Many people profess knowledge in this area, few are knowledgeable. Our advice is be wary, and hire a skilled and seasoned professional to guide you through the maze if you have any doubt. We still do a number of 1031 exchanges every year and are happy to refer you to industry leaders.
THE BIG WHY????? Recently I attended advanced training at my company HQ in Austin. There I learned what Gary Keller, our corporate guru, euphemistically labels The Big WHY? It’s really a question we each have to answer ourselves, why we do what we do. If the why is big enough, strong enough, hopeful enough, it empowers us to move ahead in search of financial security and emotional maturity. If it’s not, we falter. That’s why you meet people who consistently say TGIF when in fact it’s not their job, it’s their big WHY?
I write this newsletter as part of my big WHY. Fortune has smiled on us, and two years back we reached one of our major BIG WHY goals. So we no longer need every deal that comes our way, and we can afford to give back without fear of criticism or compensation. We are motivated to help. Real estate has become too entrenched, too expensive, too legal for you not to have a family counselor for real estate as you would an attorney, a doctor or even an accountant. And since our expertise is in all of those areas as they apply to real estate, why would you not want a relationship with someone whose interests last beyond the transaction? Indeed, we only get paid when you let us get paid, the rest of the time our advice is yours for the asking.
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More next month. Got any ideas? We’d love to share them at realproperty@marksalkin.com.
MARK SALKIN, ESQ., REATOR
KRISTEN MOSS, REALTOR AND TRANSACTION COORDINATOR
