News reports circulate on an almost daily basis about declines in housing, either across the country or on a market-by-market basis.  They bring to mind the quote attributed to Mark Twain: “Reports of my death are greatly exaggerated.”

            Moody’s economy.com (http://www.economy.com/home/products/housing/default.asp?src=hattp_economy) weighed in the first week of October with a report widely quoted by the news media expecting median price declines of ten percent or more likely to appear in at least 20 markets, and that these median prices may continue to fall into 2008!

            San Diego figures in the study with a projected 8.5 percent decrease that started in April 2005 and that Moody’s expects to bottom out by February of 2008.  Riverside can look for a sharper 11.4 percent drop from January 2006 through April of 2008.

            If Fallbrook and Bonsall fit in among the San Diego numbers (hard to say), or even tangentially against Riverside, I say we’ve seen the steepest part of the decline and probably reached the bottom in mid-summer.  The Wall Street Journal, reporting Oct. 5, 2006, on these findings says: “No study, of course, can tell exactly how bad the market will get or when it will hit bottom.  Even if accurate, a prediction for a metro area won’t hold true for all neighborhoods or all types of housing.”

            For those who follow my monthly reports, I indicated the bottom for our two communities occurred in July, and August represented the turn-around month.  So far that assessment remains.  Further declines in prices can occur, more likely on a seasonal basis.  The fall and winter months show slower sales, anyway.

            Many factors influence supply and demand in residential real estate:  market affordability, national monetary policy and interest rates, local employment, financing community practices and others. 

If there existed a single overriding factor that drove our local market over the past two years, look no further than professional investors.  In 2004 and into 2005, they pushed prices up; then in late 2005 and early 2006 many stopped buying.  Conventional wisdom suggested they sensed the market topped in mid- to late-2005 and, to exacerbate one problem with another, not only did they stop buying but some became sellers and increased the inventory by putting their properties on the market.  Today’s excessive inventory in Fallbrook and Bonsall includes many investor-owned properties, among them spec-built homes.

            Markets, however, operate with more complexity than revolving around one factor.  Big doses of psychology, often with a large margin of error, exist in the housing markets.  Psychology seems to run counter to reality.  Interest rates, a primary fuel for the housing market, remain very low.  Supply appears generous.  Buyers want quality homes in quality areas (think Fallbrook and Bonsall).  Homeownership continues to be a great investment for the average buyer. 

            That, too, persists as conventional wisdom.

So, with the appearance that we might have reached the bottom of the correction here, what does this mean for sellers who want/need to sell their homes?  Persistent high inventory still hangs over the local market, though I’ve noticed a five percent drop in listings through mid-October.  Prices remain under heavy pressure to go lower while the inventory hovers well above a more sustainable 250 homes (the inventory reached 500-plus homes earlier in 2006 and remains there today). 

What do you do about staying and remodeling for the long haul versus a quick fix and hopes of finding a buyer?  How do you price in a period of uncertainty such as the current market?  In the two articles that follow, I hope to give prospective sellers a little insight into the dynamics of pricing in this market.  As always, a personal no-obligation report and conversation can provide you with more pertinent insight than these admittedly broad and general statements. 

After all, pricing a home for sale becomes more of an art and less of a science in a period of market uncertainty.

One point needs to be made here: differentiating between widely used median prices versus the seldom used but preferred average price metric.  Most analysts report median prices, i.e. an equal number of homes sold above and below a certain price point.  A small number of expensive homes or large number of inexpensive homes can distort median prices, and it doesn’t accurately tell whether or not market value of homes rose or fell.

Very few in the media, other than me, report average prices.  While sometimes more volatility registers with this type of reporting, it more accurately reflects pricing trends; hence the reason for my use of this metric versus median pricing in annual and monthly reports.  You can get back reports or subscribe to future reports by sending an email to me: jerry@jerrykalman.com and indicate in the subject line – monthly report subscription or annual report copy.

REMODELING COMES BACK

Remodeling continues to be an important way to increase the value of your home.  In early October, the Wall Street Journal reported that many contractors want this lucrative business, after many years of shunning it.  The reason:  the slump in new home construction freed up the schedules of many of the smaller firms, as well as the availability of sub-contractors who specialize in one aspect or another of remodeling.

The Journal also reports that materials seem to be approaching lower prices, as well.  Lumber, plastics, gypsum (as in wallboard) all show current and anticipated declines in prices.  Upward pressure on commodity prices comes from two sources: rebuilding the Gulf Coast communities after the 2005 hurricanes and the construction boom in Asia.  Downward pressure comes from the slowdown in home construction in many formerly hot markets in the United States, led in part by the decline also in oil prices.

Right now excess supply and little demand in the US favors declining prices.

The trade-off looms, as always:  will the cost of the improvement be recouped when selling-time comes?  As prices of existing homes approach an apparent bottom, homeowners need to determine whether or not the envisioned project will pay for itself when they list their home. 

Of equal pertinence, ask yourself whether or not you will be in the home long enough to enjoy the renovation.  Quite often, the investment in a kitchen or bath or other project is more than outweighed by the psychic pleasure of improving your surroundings. 

In San Diego County, the payback ratios vary from those in other parts of the country, so anyone who wants to start a project here with an eye to return on investment should consider how various remodeling efforts reward homeowners with higher levels of marketability.  Remodeling Magazine (http://www.remodeling.hw.net/magazines) annually publishes a report on these returns, often in the November issue.  This valuable resource should be considered before any homeowners ponder a sell versus upgrade program.

For more information on past remodeling project returns check out the magazine’s archives or send me an email and I will be more than happy to conduct the research for you (jerry@jerrykalman.com).

#          #          #

PRICING IN AN UNCERTAIN MARKET

            We’ve gone from a market correction to market normalization, if you believe the pundits.  I do.  Which means the year-long price declines appear over for residential housing in Fallbrook and Bonsall. 

            But in the wake of the correction, many wonder what models to use to price their home for sale.  Understand that age-old factors such as location, comparables, curb appeal, interior condition, etc. have assumed greater importance than in the immediately prior years when almost anything sold.  The days of looking at comps and adding a percentage increase faded from view early in 2006, leaving us with the need to return to blocking-and-tackling in real estate sales.

            First off, consider who we want to influence with our pricing decision.  Buyers and their agents certainly represent the primary influencers.  And almost all make price one of their primary criteria.  When I discuss pricing with sellers, I focus our attention on how the home compares with active, in escrow and sold homes. 

Active homes represent the competition, and the first area for comparisons.  Those in escrow indicate where the demand current resides.  Those sold recently carry the most influence because they represent actual market values. 

            Agents have the local MLS as their primary database of properties, and buyers’ agents search by price and other criteria given to them by their clients. Agents see current active listings as well as those in escrow and sold, often back many years.

Buyers, on the other hand, most often only see active properties.  They use a variety of sources to scope out the market.  Research estimates suggest that more than 90 percent of all purchasers touch the Internet at least once during their research.  With many brokerages providing access to MLS data through IDX or other services and the proliferation of online sites, buyers can quickly assess price versus features of homes in just about any geographical market in the United States.  Often nuance gets cut out of these displays and read-outs, leaving your new roof, upgraded kitchen, play-yard for the kids or other significant factors missing.  That puts more emphasis on the right price at the outset.

If a buyer’s budget tops out at a $500,000 home, they need incentives to go over that figure, incentives often buried in the Multiple Listing Service report or marketing materials.  Many buyers’ agents bracket their searches with price-points a fixed percentage above and below the buyers’ range and hope to see whether or not there is softness at the high end or hidden value at the low end.

I often hear sellers say: “Let’s price high and indicate we’ll come down, if need be.”  A flawed strategy when excessive inventory levels make decision-making difficult already.  If too far out of the range where values reside, the home won’t be included in the first cut.

Consider, also, what you do if the home languishes more than 30 days without an offer.  Many in the industry feel that the sweet spot occurs in the first three or four weeks of a listing.  If no action during that period, the dreaded term “it’s stale” comes into play.  After the fourth week, consider Plan B:  a price reduction or a series of timed reductions to maintain interest in the property.  The number of reductions and their magnitude vary by agent-style and market.  Too little of a cut and infrequent adjustments indicate no serious motivation by the seller.  Too much and too often sends a signal of panic to the market.

            Finally, don’t overlook the others who support or crash even the best rationale for a price and make or break a deal:  appraisers, lenders and even neighbors.  In a tight market, appraisers and lenders assume greater importance as they factor in market implications of changing loan to value ratios.  If the home carries a higher price and therefore the underlying loan for a buyer distorts the loan to value ratio, the deal may never make it through funding.  Appraisers and lenders need to be convinced the home carries the right value at the agreed upon price. 

If neighbors pooh-pooh the home and its price in often casual conversations with buyers, that can spell trouble for the deal, too.  Just as a neighbor can scuttle a deal with inappropriate comments about neighbors or community history, they also either intentionally or unintentionally can blast the deal when commenting on the price to buyers, appraisers or others.

For more on pricing, see my expanded report at:  http://jlkalman.web.aplus.net/id3.html