What the Heck is Going on Today?

Lately I have stayed away from writing about the market but that time has come. I am going to attach in my next blog my last newsletter and will in the future add my newsletters as I prepare them.

This last Sunday the RGJ.com/business section had two very good articles. One on "High-end home sales dive but bottom could be near" and the other one by Diane Cohn on local insight on "What's hot, what's not in the Reno-Sparks residential area.

When this market started to develop in the fall of 2005 at first the projections were that Reno would see a soft landing, those of us that had deep experience felt that at best we would see a real thumper of a market change (oh hindsight is wonderful, if we had only known what a "thumper" was waiting for us) and I felt that we could possibly see prices recede to early 2005 values.

As 2006 came to an end, the media was filled with the facts that maybe the market change might be a bit tougher than expected but no worries, the market change in real estate values would never affect the rest of the US economy.

By late 2006 I knew that I was wrong on my feeling about what I expected in 2005 and now knew that we could easily roll back to 2004 values (I was laughed at, but then again I was laughed at in 2005 as well).

By the end of 2006 I was beginning to think that maybe, just maybe, a disconnect was going on in the economy with real estate and the rest of the market. Along came August of 2007 and in front of the whole world Wall Street undressed and exposed the true depth of the problem and as I speed up to July of 2008 it seems now that each month we wait eagerly for the next act in the drama playing out of Wall Street and the banking industry.

Today those of us active and knowledgeable in this business realize that we are working on triage with many of our clients. Just how bad or how good the markets are is going to be will depend on your viewpoint and the depth of your pocket book.

Sales in 2002 to July were 2,475 homes and today we are at 1,745 sales. Average sales price is higher in 2008 over 2002 by about $108,000. We have 3,168 homes for sale as a reference point.

I think that both articles were well written but lacked some important information. First the foreclosure/short sale market is eroding the markets and reducing our base values and how the banks look at foreclosures is interesting. I as a broker look at a home as to how to get the best value the banks look at the foreclosed home as a cost that needs to be disposed of at the least cost to bank and recover as much as possible of the bad debt. When the foreclosure rate was maybe a
less than 1% of the overall market such thinking was fine.

To measure a market and say that it is healthy to see a solid foundation develop is questionable due to how the banks are handling their sales.

Today with upwards of 42% of the sales in June being distressed sales the banks way of doing business is outdated and fueling our decline in values and is a leading cause of our seemingly bottomless drop in values. What are the fixes to this situation?

Well there are many suggestions but the primary fix needs to come from Washington, not with bail outs but with new regulations and incentives and tax credits, and programs. There are many suggestions and one that has been brought fourth is that the banks need to be encouraged to not dump the homes but much like new home builders they need to be allowed to offer "incentives" to borrowers. Incentives that FHA will allow and be acceptable to the government loan agencies. Incentives that will keep the lawn green, the home neat and encourage the buyer to pay real market values for the home and give the buyer some very strong bank approved incentives that allow the buyer to make major repairs or improvements without adding cash to the transaction. The banks need to be able of course write off the costs of the incentives to make such programs viable to them and the buyers need to be qualified buyers. For the moment at least investors need not apply.

In regards to the high end market it was the belief of many that the money issues would never rise to affect the well off. If the market had corrected in 2006 then that would have been true but by July of 2008 the time has come for many agents and their clients to understand that the rules really have changed.

The issue is what is normal, what is a good market? What are reasonable expectations? Are we at a bottom? A bottom of what?

As of July 17th in the greater Reno market place (this does not include Lake Tahoe but that we can talk about later as they now have their hands full) here is some food for thought:

High end is over $1 million dollars.

42 homes have sold in 2008 so far for an average price of $1,323,674
294 homes are for sale today for an average price of $1,357,500
11 homes are in escrow today for an average price of $1,228,043
(note I did not use two custom built homes in these numbers).

So, how long will it take Reno to sell all our current inventory? For a reference lets use 2006 as a guide for the top of the market. In the first 7 months of 2006, just before the market died off 79 homes sold for an average price of $1,395,000 or about 11.2 homes per month.

Today we have closed 42 homes for 6 sales per month. That means that we have OVER a 3 year supply of homes. The market needs to have a supply of high end homes of less than 18 months to become healthy and 12 month or less is where we really need to be.

Now lets stop here. First 42 sales is wonderful. The market is really strong and these are good numbers why, want to know what we sold in 2002? 22 homes for a $1,280!

Writers need to stop comparing numbers to 2005-2006. The funny money, stupid markets are gone and to make comparisons against those sales is only going to keep sellers fantasy's alive that some how they can still command silly numbers for their homes.

The sad facts are this: IF you bought during those markets your numbers are based on a foundation of quicksand. If you refinanced in those markets your issues are just as shaky. To talk about bottoms and floors first the REO markets must dry up and liquidity must return to the markets In addition expectations of the return to 10% + appreciation a year must be dropped.

It is in injustice for anyone, whether the media, the public or agents to keep measuring the markets by Wall Streets insanity and the results of an out of control market that was created in 2003-2006.

So where is the opportunity, every where, really. But there are just two rules, do not buy someone else's problem and buy for the long term (5 years). Oh and stop looking at price as your only option. More on that later.