Real Estate of Mind

Real Estate of MindReal Estate of MindFollowing the MoneyShowing Us The Money!Cash isKing?The Big SqueezeThe Whys of Low InventoryA Crimp in the Flow"Scratching for Answers"TheListing DroughtSomething's In the WindIs it Break Time?

X-nc: HIT sat 132 X-ac: 1.fra _sat https://tombrezsny.wordpress.com Provoking thought since 1990....Fri, 20 Feb 2015 18:49:34 +0000 en hourly 1 http://wordpress.com/ https://s2.wp.com/i/buttonw-com.png https://tombrezsny.wordpress.comhttps://tombrezsny.wordpress.com/2015/02/20/following-the-money/https://tombrezsny.wordpress.com/2015/02/20/following-the-money/#comments Fri, 20 Feb 201518:32:00 +0000

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On the trail of all those cash offers that have becomesuch a common feature in our real estate market over the past few years... to a degree never reallyexperienced or even thought possible in Santa Cruz County before. This isn't your Mother's sleepy-little beach town real estate market anymore. But then, it hasn't fit that description for quite a whilenow has it?

What's behind this unprecedented rise in the use of cash? Even when people have it, why use somuch of it to buy homes? Seems like, if they have huge chunks of cash in the first place, most oughtto qualify pretty easily for loans with more modest amounts of cash down.

Wouldn't they rather maximize the use of other people's money (OPM)? Specially when interest ratesare this low? Don't some of them want to take advantage of the best incentive and outright gift thatAmerican Homeowners/Taxpayers ever got - the mortgage interest deduction on their primaryresidences?

Hasn't the key strategy for building long term wealth always revolved around leveraging OPM to buyappreciating assets while fully utilizing accompanying tax advantages? That's what Rich Dad says inall those books. Poor Dad's the other guy.

All-cash offers made a lot of sense when the distress market was in full swing back in 2011-12 andmore than 40% of real estate transactions were short sales, REOs or pending defaults where people

had to or wanted to get out quick.

Median Prices were down 35-45% from the peak and cash often allowed hardcore investor-types tohammer purchase prices down even lower. In many cases cash was also the only thing that could cutthrough the mind-numbing, transaction-killing red tape that bank processes subjected both buyersand sellers to in those distress transactions.

If you were flipping a short sale or buying a foreclosure on the courthouse steps, you paid cash. Ifyou could get an amazing deal but you had to close in 10 days, you paid cash - there was no way theloan process was up to the task. If people wanted to avoid the temporary chaos created by newappraisal regulations, they offered all-cash.

But that was then. This is now. The distress market has waned. Residual distress properties make uponly about 5% of total sales. Prices are back up. Not quite to 2005-2006 levels, but almost. Loans areeasier to get and going through the process doesn't feel like a Guantanamo water-boardingexperience anymore. The appraisal system has steadied itself. Most of those quick flip artists havemigrated elsewhere. To greener pastures where their cash can access better margins of return.

Without all those distress properties haunting the market, the inventory of available homes hassteadily shrunk for the last 3 years. And it's low inventory that has continued fueling the highpercentage of all-cash offers.

Filed under: Real Estate Of Mind Articles Tagged: all-cash offers, cash buyers, low inventor, multipleoffers, real estate market, santa cruz real estate ]]

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Picking up where we left off last week. (Go totombrezsny.wordpress.com to grab the thread.) The big question hanging, call it the $64,000question or the $640,000 question, (or just keep adding zeros) : Where are all those all-cash offerscoming from? The one's the market has been experiencing at an unprecedented clip for the last twoor three years?

Who has that kind of money? Didn't everything implode in 2008? Wasn't everyone hammered by theGreat Recession? Where's all the dough coming from?

Is it funny-money people were stashing under their mattresses or in shoe boxes? waiting to cash-inon just the right rainy day market? Are more people selling their comic book collections? Are agrowing number of Doomsday Preppers digging up their backyard coffee cans full of goldkruggerands, sensing that now may be the perfect move-up market for a spacious Post-Apocalypticbunker to hunker down in for the rest of the world's dystopian future?

Or are all these cash Buyers someone else? Some new breed of Buyer that's evolved out of therubble of 2008? Homing instincts genetically altered by events radiating out from our bubble blastfrom the past? Driven by a different set of needs and desires? And strategies for getting what theywant?

I tried asking a few mortgage brokers where all the cash is coming from. They watch money closelyso I figured they might have a good feel for the question. But unfortunately, mortgage types don'tget the chance to interact with many all-cash buyers, since all-cash people aren't in need of any loanservices.

So I've turned to Realtors who are right there, stationed in the trenches and I've been going Agent-to-Agent, collecting as many different all-cash client origin stories as I can. Hoping to create somekind of over-arching composite profile that helps explain where all those mysterious cash buyers arecoming from.

I could probably just say all-cash offers are coming from rich people and leave it at that. We love tosay it's the rich people these days. But here in Coastal California, in a County that resides right nextdoor Silicon Valley and where the median price of a home borders on $700,000, I don't think it'sthat simple. I'm not sure I even know what a rich person is anymore and it's not going to providemuch helpful insight for anyone scratching their head, trying to figure it out.

Anyone that has a cash offer experience of their own is invited to e mail it to me. I welcome allthoughts or theories or tantalizing clues that anyone can come up with while we are trying to followthe money trail and track the cash.

Filed under: Real Estate Of Mind Articles Tagged: all-cash offers, buying real estate, competingbuyers, multiple offers, real estate market, santa cruz real estate ]]

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Recent stats say somewhere in the range of 30% of thehomes being sold these days are all-cash transactions. For most of the 26 years I've been doing this,the notion that our Santa Cruz real estate market could be made up of this many cash buyers wouldhave been - unthinkable.

Sure, there was a big influx of folks flashing cash on this side of the hill, during the dot.com-inspiredreal estate wave of the late 90s. That's when IPOs and Stock Options were raining down new-foundmoney, like manna from heaven, into the laps of a growing number of thirty-something tech-types.

And ironically, many of those techies that hastily ran out and bought houses with the unexpectedwindfalls burning holes in their pockets were, in hindsight, very happy/lucky they did. Speciallywhen NASDAQ crashed in 2000 and left lots of co-workers holding close-to worthless options at thesame time they were expected to pay taxes on the inflated value the stocks had when they were firstissued the previous year.

At least those early-real estate adopters ended up with brick and mortar assets, cool roofs over theirheads and something tangible to show for all those crazy, code -writing marathons they had pulled.Instead of nothing or even less than nothing in some cases.

But all-cash wasn't the king in real estate before then. And all-cash didn't register that big of animpact on our Santa Cruz market after that. Until recently that is. Even when real estate feverspiked and the market rose to its most en fuego pitch in the peak years of 2005-06, people rarelyoffered cash.

It wasn't considered smart or fashionable at the time. Leverage was the name of the game. And to dothat you needed as much OPM (other people's money) as you could get your hands on. And thatwasn't much of a problem when the mortgage market was handing out easy qual, no qual and sub-prime loans like Halloween Candy to anyone who showed up at the door.

In 2008-2009 the market imploded and old ways of doing things slipped into a black hole. Notabletrends were difficult to discern. Other than - it was damn hard to get a loan of any kind.

Sometime in and around 2010-2011, cash started to emerge as a bigger player in the growingnumber of transactions that were happening. When a surge of multiple offers hit in the spring of2012, all-cash offers pumped up their street cred. And by 2013 the best chance to compete in amarket that suddenly had a lot less houses to choose from, cash bulled it's way to the front of theline and became the very best way for buyers to compete against other multiple offers - somethingthat was becoming the staple of a new market normal.

So much for a brief history... let's turn ours attention to the more salient question that so manyAgents and Mortgage Brokers have turned their attention to and been scratching their heads about:Where is all the cash coming from?

More next week.

Filed under: Real Estate Of Mind Articles Tagged: all-cash offers, house flipping, multiple offers, realestate ]]

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Continuing our discussion of the Static Quo of the Status Quo. The No/LowInventory of homes on the market. A move-up market bogged down. A move-down market withnowhere to go. An entry-level market with shrinking opportunities. What's left? A side-waysmarket? Not really much incentive to sell a house just to be able to move into another one just likeit. Home transactions flow out of life transitions and contrary to the old adage, the more thingschange in your life, the more you don't want your home to stay the same.

In the old days, there was a natural progression in the prevailing wisdom about how homeownership should work. First you had to get into the market. Beg. Borrow. Scrimp. Save. Anythingto buy that first home.

Then you settled in. Built sweat equity. Waited for appreciation. And voila! Three to five years later,you had a stepping stone to the next bigger, better place. Then, you settled back in again. Repeatedsame.

Somewhere between the 3rd and 5th move-up - you were arrived at the end all/be all of perfecthomes. Until of course you realized that life really wasn't going to end there. And the biggest lessonlife teaches over a lifetime is, you never really arrive. There's always one more change ahead. Butthen... I digress...

Here's the list we started last week - factors that in one way or another or in conjunction with eachother that are helping to squeeze the current listing inventory. (Remember low inventory tends tobecome a self-fulfilling prophecy. Sellers become Buyers after they sell, so if no one is selling thennot as many are buying either. Low inventory is a cause and an effect.)

- Prop 13 Deterrence - Limits on Capital Gain Exemptions

- Step-ups in Tax Basis - Sustained Low Interest Rates

What else can we add to the mix of contributing factors? Certainly each of the following plays a role

in holding down the growth of inventory at this unique juncture in history.

- Fundamental Changes in Mortgage Lending

- Unprecedented Numbers of Cash Offers

- Inherent Undesirability of Contingent Offers

- Corresponding Low Rental Market Inventory

- Increasing Numbers of Foreign Investors

- Differences between New Tech Old Tech Trends

- Shrinking Middle Class/Concentration of Wealth with 1%

- Higher Employment w/o Corresponding Wage Increases

- Lack of Suitable Housing Density

- Slow Growth Planning Policies/Land-Use Politics

- Huge Surge in Aging Baby-Boomer Demographic

- Changing Millennial Attitudes about Home

- New Paradigm of Risk-Aversion since the Meltdown of 2008

Need we go on? Not right now since we are out of room anyway. Next week - we'll start talkingabout how some/all of the above can align in different ways to create a series of perfect storms forindividuals.

Filed under: Real Estate Of Mind Articles Tagged: low inventory, move-down buyers, move-upbuyers, real estate, santa cruz real estate, supply and demand ]]

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We hear it all the time. Buyers want to Buy but they arefrustrated. Stuck. Mired in a market that doesn't seem to be on the same page as their desire tobuy. And Sellers want to Sell but they can't quite pull the trigger and put their houses on becausethey can't figure out exactly where they are going or how they are going to get there.

The knot in the Mobius loop of supply gets tighter and tighter when Sellers insist on having a roofover their heads after they sell (unless they have gone on to their final resting place). In order toget it, they have to become Buyers in a market where there isn't much worth buying.

We could offer up the suggestion that more Sellers could rent after they Sell. But that's pretty muchof a non-starter for folks who've owned their own homes for awhile. And if there's anything moredisappointing than the number of homes to buy out there - it's the number of places available torent.

So we arrive at the Static Quo of our current Status Quo. Where the Quid No Quo of Low Inventorybegetting Low Inventory doesn't offer up many easy solutions.

Let's dig in and continue the discussion. If you want to catch up on previous columns leading up tothis one, go to tombrezsny@wordpress.com (the print is a bigger there too!)

Right now there are plenty of people talking about Low Inventory. But very few are talking about"The Why" of low inventory. What's causing it? Perhaps it's time to start outing a few of the factorscontributing to the mix. Rounding up a list of likely suspects.

Here's an initial list of some of the lesser characters involved in aiding and abetting low inventory.We'll call them "accessories to the time". The hotline is open for any additional tips you'd like tocall in.

Prop 13: The cap on annual property tax increases acts as a deterrent to selling in a market whereprices are rising.

Capital Gains Exemption of $250K/$500K for Singles/Couples: Many longtime residents are overthis cap and the tax consequences have ironically become a disincentive for some to sell homes

Rule Governing Step-ups in Tax Basis: Act as encouragement for many married sellers to stay intheir homes until one or the other to passes away before a move makes practical financial sense.

Sustained Low Interest Rates: Act as encouragement for homeowners and investors to hold on to thereal estate they've already purchased at incredibly low rates

The list will get longer next week. Then we'll spend more time examining it in greater detail. It's acomplicated mix of interrelated factors and underlying causes but I won't leave you hanging.

Filed under: Real Estate Of Mind Articles Tagged: low inventory, move-down sellers, move-upbuyers, real estate sales, supply and demand ]]

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We're ten days into 2015 already! Time's-a-wastin' sowe better get to work. There's a real estate market out there waiting to be distilled. Here's a quickrecap to make sure we are all on the same page:

First: There's no more significant factor shaping today's real estate market than the sheer lack ofavailable inventory. A fact that has brought increasing frustration to buyers. Placed huge crimps inthe regular flow of transactions. And overwhelmed many people's ability to find practical ways tomove up or down in their lives. Anything else we might choose to talk about would pale incomparison to the effects of our ongoing supply issue.

Second: Cyclical ups and downs in the marketplace aren't unusual or unexpected. World, nationaland regional economies are always swinging back and forth at the same time the real estate marketis busy either leading the way or following suit - waxing and waning between Buyers' and Sellers'interests, fluctuating waves of supply and demand and the subsequent rise and fall of prices.

Third: The precarious depth our inventory has now fallen to combined with the prolonged durationof its decline is a powerful statement that current conditions aren't just another iteration of cyclicalbusiness as usual. Something fundamental has shifted. Signaling a sea change well-beyond thescope previously imagined.

Fourth: Low levels of inventory are a permanent fixture of the new market normal - a truth that willcontinue to unfold over the course of the coming year. There's no simple solution to the inventoryproblem, waiting around the corner, ready to nudge the supply cycle onto its next phase.

Fifth: There's no question that many of the big changes real estate is experiencing stem fromdeeper, residual impacts still reverberating from the Great Recession. The world was turned upsidedown in 2008. While it would be comforting to assume we could just resume where we left off beforethe rude interlude of the last seven years, there are some aspects of how things work that havechanged forever.

Sixth: Something else happened on the way to the great recession and its patchwork recovery. Theperfect storm came along. While the economy was crashing and burning, the country was alsocoming to the tipping point of a huge demographic shift that's been in the works for a long time.Aging baby-boomers began reaching retirement age at the same time millennials began launchingjourneys into adulthood. These significant life transitions are changing the essential fabric of ourculture. Redefining notions about quality of life and how people want to live it. We haven't quitefigured out how to make our new choices, find comfortable places and build strong new foundationson all the left-over shaky ground we've got - where so many of the old rules no longer apply.

It's coming... but it's going to take courage, hard choices and a lot of work. More next week.

Filed under: Real Estate Of Mind Articles Tagged: low inventory, New Market Normal, santa cruzreal estate ]]

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The main feature in last Sunday's SF Chronicle RealEstate Magazine was a year-end poll that asked three high-profile Bay Area Realtors to respond tothe same question: What was the biggest surprise in the real estate market in 2014? All threeweighed in and gave the same exact answer: The biggest surprise, bar none, was the lack ofinventory of homes for sale.

The same conspicuously low inventory that has profoundly shaped every other factor in the marketfor the last two years. The one that will continue to remain real estate's biggest elephant in theroom heading into 2015. The one for which there is no apparent magic wand, ready to transform ourseverely ratcheted-down supply back into a steady, reasonable flow of good choices andopportunities again. Suffice to say that we're heading back into crunch time soon. Once more untothe breach Dear Friends.

None of the three were able to offer any enlightened perspective about "why" there is such lowinventory. Just that there is. And that's exactly what we've been scratching our real estate mind'sabout these last few weeks. Trying to get a few answers. Or at least a clue.

So here's my latest, best thought: I remember a wise person, once telling me that if I wanted tounderstand the big picture of real estate, I had to forget about all the nagging little ups and downsof the economy. Things were always going to ebb and flow back and forth. That was the norm.

Getting hung up on smaller cycles was a form of misdirection, sure to obscure the true slight of handat work, changing the game on a much more fundamental level.

If I wanted to understand what was really going on, I should dig deeper. Not by drilling down adnauseum into reams of statistical analysis but rather by stepping back and adjusting my gaze towarda broader, meta-view of the landscape.

When I couldn't figure out why something was happening, I should take note of any largedemographic trends taking place and start following them. Big changes in population - like shifts inage, migration patterns, birth rates - often happen below the conscious awareness of everyday life. Demographic changes are what happen when the world is busy making other plans.

Is there any evidence that suggests our prevailing pattern of low to no inventory is a symptom of amuch larger struggle that two different generations are having, trying to find their place in a worldturned upside down by the Great Recession? One that came of age and one that began reachingretirement age both during the last ten years?

Next Week: Aging Baby-Boomers and Millennials looking for their places

Filed under: Real Estate Of Mind Articles Tagged: demographics and real estate, lack of inventory,santa cruz real estate, supply and demand ]]

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It's tempting to look at how low the number of activelistings has fallen at the moment and chalk it up to being a normal part of the seasonal ebb and flowof the real estate market.

It's an easy excuse since historically, there are almost always fewer listings at this time of year thanin the spring and summer. No one likes putting their place on the market during the holidays if theycan help it. And surely there must be plenty of Sellers out there getting ready to put new listings onthe market in the coming months.

Except of course, we pretty much said the same thing last year. And the two years before that. Andsomehow all those great new listings we assumed would be coming, haven't quite materialized to the

degree we hoped they would. As most prospective Buyers will attest, there have been a paltry fewbut not nearly enough.

Since we emerged from the depths of the distress market in 2011, when short sales and REOsartificially swelled the supply and comprised almost 30-40% of total closed transactions, the sheerlack of available inventory has become the single most dominant factor driving our marketplace. Significant lack of supply has become a year round condition rather than a seasonal fluctuation.

In 2010-11, everyone was worried about the Shadow Inventory. That was the euphemism given to ahuge secret stash of foreclosed homes that people figured all those big nasty banks must bepurposely holding off the market. They were fearful that if all that pent-up supply was somehowreleased into the marketplace, prices would plunge even lower than the 40% drop they had alreadyexperienced.

But ironically instead of torrents of Shadow Inventory flooding the market, we somehow have foundourselves going through an unprecedented 3 year drought marked by relatively few new listings. One that has pushed prices up dramatically while it has also been shaking up some of the long heldbeliefs about the market we always thought we could rely on.

Take a moment to consider that this is the fewest number of homes that Santa Cruz has had for salein November/December in more than 18years. Add to that the fact that for 44 of the last 45 months,the number of listings has been lower than it was in the same month the previous year. And from myperspective, there is little on the horizon to suggest that real estate in 2015 is likely to be muchdifferent than it has been these past few years.

So it begs the question: Is there something larger afoot in all of this? A fundamental shift in realestate and how we view the nature of homeownership? To be continued...

Filed under: Real Estate Of Mind Articles Tagged: low inventory, market trends, nature ofhomeownership, real estate listings, santa cruz real estate ]]

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Let's start by recapping the conversation. The real

estate market is a shared collaboration between Buyers and Sellers. An ongoing co-creation thathappens between those who are listing and those who are looking. Without enough of one orenough of the other or enough of both, the whole thing just doesn't succeed very well. It getsharder to generate sales - which is exactly where we are at for the moment.

Right now, both sides seem to have settled into a tacit mutual agreement that allows them to take atime out and to beat a quiet retreat to their respective corners. Presumably, they'll wait it out thereuntil the magic moment "in the spring," when the machinery cranks back up again.

I know ... it's supposed to happen this way. Exactly this way. It's all part of "the normal seasonalpattern".

Every year around this time, as the theory goes, people become overly-absorbed with the holidays. Caught up in the crunch. Obsessed with family, shopping and parties. Or obsessed withpreservingtheir sanity in the face of all of the above. What are you reading this real estate section for? Getbusy and be with your family!

But is that all this is? The same old same old seasonal pattern? Is it that simple?

I've never been a big fan of the seasonal real estate theory. It has always seemed like an excuse totake the easy way out. When in doubt - pull out the seasonal card. When you know what'shappening you don't need it to explain something more complicated.

I'm not comfortable rounding up all the factors at work shaping the market dynamic at any giventime so I can lump them under the heading of the one of real estate's lowest common denominators. Like the weather. Or the holidays. Or Springbreak. Or tax time. Or school starting in the fall.

Do real estate transactions really falloff because everyone is on vacation or because it is raining? Arethey cliché-dependent? Those concepts are becoming less helpful each year,specially as the worldgrow more diverse and continues to change in strange and mysterious ways.

So let's put away our handy excuse to explain why things have wound down to such a noticeabledegree right now. Something bigger is at work that we should be trying to figure out. This is the45th straight month the number of listings hasfallen below the same month the previous year. Ithink it's trying to tell us something.

Filed under: Real Estate Of Mind Articles Tagged: real estate, real estate patterns, santa cruz realestate, seasonal real estate, year-end real estate ]]

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This is for all the would-be Buyers waiting in the wings. Those taking atemporary break from the rigors of the real estate market after experiencing months of frustrationand fatigue.

The one's who are girding their loins and girding their loans in preparation for next year's battle. Hoping to rest and recuperate now, so they can be ready for the flood of new listings they are hopingwill arrive.

There are plenty of left-over Buyers out there who gave it their all in 2014. They deserve an A foreffort, even if they weren't quite able to make it over the hump to the promised land. Well-qualifiedfolks who just couldn't seem to out-smart a difficult market and find their way home.

It's hard to live a normal life and look for a house at the same time. That's particularly true in amarket that demands such an exhausting state of readiness and preparation at the same time it onlyparcels a few meager new listings at a time to choose from.

Buyers who have been slogging around in the trenches in search of inventory for the last six monthsor longer, know what that "always-on" feeling is like. The barrage of search engine e mails thatbegins to look like spam rather than real opportunity.

Hours spent parsing Sunday open house ads trying to figure out whether "charming" really means"fixer" or whether "cute" really means "tiny." And whether they should drop everything, jump in thecar and head out to the open house to see for themselves.

The rush of an unexpected for sale sign popping up in the perfect neighborhood. The promisingsneak peak of a new listing on Thursday's Brokers Tour. The call from a sister-in-law that heard arumor about a friend of a friend thinking about putting their house on the market. God forbid youshould take a vacation and miss that once in a lifetime opportunity that could happen at anymoment.

On again off again. Hurry up and wait. All addressed up with nowhere to go. Weeks and months oflooking hard but finding nothing. Until suddenly, a house appears out of the blue. It'sperfect...except for the fact that five other Buyers with competing offers seem to have had the samerevelation.

So many questions for all those would-be Buyers lining up in the queue for next year. What are theywaiting for exactly? Is 2015 really going to be any different? Is that flood of new listings really on

it's way?

To be continued...

Filed under: Real Estate Of Mind Articles Tagged: low inventory, real estate buyers, real estatemarket, seasonal real estate ]]

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