The Millennium Wave

By John Mauldin, November, 2008

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore 

Over the next ten to twelve years, we will see three recessions that will slowly move the average price-to-earnings ratio of stocks to historic lows. Rising oil and energy prices will be a main culprit of both the slowdown in the economy and an increase in inflation. Ever-increasing monetary inflation will, in fact, trigger a huge increase in all commodity prices, as well as a decline in bonds. Asset inflation will show up in the housing markets as home values continue to skyrocket. The dollar will continue to weaken against major foreign currencies. The current war will become increasingly unpopular, and the next administration will be forced to withdraw troops, under the guise of declaring victory. The American voting public will be split as never before, with major patterns in voting habits making a generational change. The newspapers will continue to write about how an Asian country will dominate the world economically in less than a few decades.

Following this period of malaise, there will be an amazing cycle of new technical innovation that will spark yet another major bull market. The new technologies will change the world in ways that simply cannot now be imagined and will lead to whole new industries, putting amazing new power and abilities into the hands of individuals and governments.

The preceding scenario would, in fact, all come to pass. Except that the year that was written was 1970, (more…)

Click Photo to Enlarge

I recently reviewed some new Bay Area supply and demand graphs we are now following. They are generated from a data mining and graphing software we are now utilizing. One of the interesting graphs it produces gives us a nice look at the supply and demand trends of the many different Bay Area markets. It does a nice job of zooming in on what is happening in localized micro-climates.

At first glance I found it interesting to note the supply and demand trends in Kensington (above). I found it interesting to see that Kensington’s supply of homes (homes on the market) has gone down (year over year), while its demand (or homes sold and under contract) has been keeping pace with the market nicely. It is interesting to see that not all areas are seeing rapidly rising inventory as the media has made it seem. Don’t get me wrong there are buying opportunities in many markets, but as this graph allows me to illustrate, we have also been observing some nice selling opportunities as well.

Currently, the best advice for sellers, is to make sure your real estate professional has a good grip on your markets micro-economic conditions. What are your markets supply and demand trends? What is the data suggesting? You should have the information necessary to make an informed decision on the timing and pricing of your next transaction.

Thanks Stuart100 for this photo.

As I have been preparing for 2008, I have taken some time to be an observer of others around me. For instance, I recently observed those in my office who were complaining about the lack of good housing inventory currently on the market. This is perhaps a seasonal observation, but I began to ask them, “working with some buyers?” I got replies, “Yes, and I have nothing to sell them.”

I also have been observing the new news in the last couple of days and I began to pick up on the speculation of the interest rate markets. It appears the recent bad jobs data has sent the stock market into a serious dive. It has also begun to send interest rates and bond rates lower. Behind the Mortgage blog had a nice illustration of this trend and even went as far as to say rates would continue a choppy downward trend for the rest of the week.

So, where is the inventory? In past years, inventory started to hit the market in the end of January and early February as we all get back from holiday vacations. Will a flood of inventory hit the market this year? Will the seeming pent up buyer aggression cause a rise in median prices? Will more buyers hit the markets as interest rates drop?

It is my speculation that just like our current volatile stock market, our local real estate market will see volatility in 2008. This means we will experience spurts of buying and times of stagnation. We will experience tremendous selling opportunities in specific micro climates and we will experience great buying opportunities in others.

Having your finger on the pulse of the market will be paramount for a successful transaction in 2008. I also believe that buyers and sellers will continue to benefit from this volatility as many of my clients did in 2007. It will be interesting to see how the Bay Area market ebbs and flows. How the global economy, the stock markets, bond markets, the US Federal Reserve, political elections and other changing environments will affect the Bay Area for buyers and sellers.

Any interesting changes you are seeing? Let us know!

I often keep track of new tech innovations by reading Robert Scoble’s Scobleizer blog. Robert used to work for Microsoft’s channel 9 web site and he now works as the Vice President of Media Development at Podtech.net. He has written a fantastic book called Naked Conversations, which chronicles blogging as a transparent tool for companies to reach their customers. It is an interesting read for those of you that are interested in blogging.

In his current position Robert travels the world uncovering exciting new innovations. The video below is an interview Robert made with Arron Patzer who created a new financial web tool called mint.com that was unveiled at the TechCrunch 40 conference on September 17th in San Francisco. The video shows how this online application could rival Quicken. I always recommend that my clients keep track of their finances as a powerful way for them to keep tabs on their financial goals. This looks like a new low cost way to do it. The video makes it look interesting, but I have yet try it myself. Let me know if you have tried it and what you think!

Thanks Martapiqs for this areal photo.

I am often asked to speculate about the strength of the Bay Area real estate markets. My mantra is that in past down markets properties have transacted and the markets have continued to move inventory. A long term hold approach to real estate is always best assuming you believe in California real estate. There is no doubt that the credit crisis has slowed the markets, but where do we stand next to the rest of the nation?

I often find that the rest of the nation’s news of depreciation is counterintuitive common thinking that becomes false representations of our Bay Area markets.  For instance many buyers in our current market believe that the Bay Area’s home prices have fallen everywhere. This is false! It is my belief that this rhetoric enters the market through the national news, which often sets a tone for all of real estate even though we know that there are individual micro-climates in the Bay Area that have increased in value throughout the current national instability. Evaluating individual neighborhoods can be a block by block assessment in some Bay Area cities! This assessment is critical for buyers looking for value in our current market and trained experts who are transacting regularly in the market can make powerful assessments of these trends for home sellers and buyers.

I just read an interesting new study by Forbes Magazine that speculates about the strongest real estate markets in the nation. I was not surprised to see San Francisco as number 9 on the list with a city wide 2006 appreciation rate of 7.6% and a projected 2008 rate of 2.5%. The article speculates that our areas housing defaults will be a drag on our appreciation rates, but will not destroy our Bay Area real estate markets. It was interesting to note which other cities Forbes has ranked across the United States (Pittsburgh, Dallas, Seattle, San Antonio) as stable real estate markets in 2008.

As Curt has stated moving against the herd can be a powerful way to move. Take a look at average appreciation rates in the Bay Area. Historically when the real estate markets are slow and credit is only available to strong buyers, then for some the market may be ripe for the picking.

Mind the Gap
New Programs Promise to Bridge
The Analog-to-Digital Divide

By Jeremy Wagstaff, Wall Street Journal
September 7, 2007
JAKARTA, Indonesia — If you’ve ever lost a receipt, tried to remember an important idea you had while driving, or pondered why people rattle off the vital information — their names and numbers — in voicemails so quickly you have to listen to them four times, then you’ve encountered something I’ll pompously call the Analog To Digital Gap. It’s when we can’t move something from atoms to bits as easily as we’d like.

And for some reason it’s still with us. We seem to have spent most of the past few years fiddling with what’s already digital. Web 2.0, the cutting edge of the online revolution, is mostly about sharing stuff that’s already in bit form: photos, videos, music, blogs — all that kind of thing. Very little effort, from what I can see, has been spent on actually getting stuff into that form.

True, there are exceptions. Who uses a camera with film anymore? Most of our snaps are digital, making it relatively easy to store, share and edit them. And a large proportion of music is now digital, meaning we can listen to it on our iPods. But neither media is particularly kind in helping us move our old analog photos, videos and music to a digital format. Services and products do exist, but they’re either expensive or time-consuming or both.

Then there’s the world we move around in. (more…)

Thanks mkreyness for this spider web photo.

Yesterday, I was having a conversation that made me realize how truly difficult it is to find a good real estate agent. Finding someone who performs many transactions for both buyers and sellers may be tough enough. Yet, a truly valuable and powerful agent is transacting regularly, knows the ins and outs of their local markets and has the ability to surround their clients with a network of other professionals that have uncommon knowledge and can act to care for their clients concerns.

A power full agent and their team of advisors must be competent to make valuable grounded assessments, which will end up saving their clients time energy and money. A year ago this idealist philosophy may have seemed trite, but being a powerful agent that truly takes care of their clients concerns, has become necessary. With our current market changes no longer can an agent just put a sign up in a client’s yard and 2 weeks later receive multiple offers that exceed even their client’s wildest dreams. In today’s market an agent must back up their assessments, and assumptions with results. The average assessment is no longer useful, when market condition swirl making some areas hot while others are cold. In order to beat market expectations an agent must provide valued assessments that are uncommon and not always intuitive.

Agents must make sure they design buying and selling strategies that leave their clients in positive housing situations. Agents must have a mindful eye towards financial hardship, insurance risk, aesthetic concerns, and social interaction. With this understanding you can now see how difficult it can be to find someone competent to take care of your real estate concerns. Agents must practice as real estate professionals not as real estate laborers.

 
Thanks to .A.A. for this great photo.

Recently, Redfin a discounted real estate brokerage firm has garnished much media attention. Partly because it just received an additional 12 million dollars in venture funding and partly because of their bold claims of changing the real estate industry. I am always interested in new real estate business models and like many other real estate agents this is one that has become fascinating to me over the last couple of years. All this hype made me want to look at the financial benefits of discounted brokerages compared to our full service model.

Redfin is a discount business model. Discounted business models offer real estate buying and selling services at reduced prices. There are many different discount models that all have different pricing strategies. Redfin offers to list your California home for flat fee of $4,000. Discount real estate businesses offer reductions in commision by making a reduction in service. Thus the ultimate consumer question becomes what does the extra full service model get you in return? What services do the discounted models do away with and how does this affect your sale or purchase?

Recently, as I was transacting in the market and I came across a direct sales comparison of the results of a discounted service verses full service. At the end of 2005 I sold a property along the East Bay coastline in a tract housing community called Promentory in Richmond’s Marina Bay. I mentioned that it is a tract, because this illustrates that all the homes are very similar in size and style. Both properties were 3 bedroom, 2.5 bath homes on a 2736 square foot lot. I represented the buyer on one home while an Assist 2 Sell (a discounted broker) represented the seller. I sold the home to my buyer for $610,000. Just next door was the other home and it was sold by a full service agent in the same month for $677,000. That is a $67,000 difference in price. I saw the condition of both the interiors and exteriors of the properties and I can say they were both very comparable. The lots, community locations and views were also very similar. Even if a discounted broker could have eliminated all the commissions (5%) on the $677,000 home It would still have been a huge profit difference of $33,150 compared to the home sold by the discounted broker.  

Just think for a second… If you needed open heart surgery would you look for the low cost leader? Even worse would you do the surgery yourself? My advice would be to find the best doctor available.

Yet, discounted real estate brokers assume people will choose to lop off their financial success with no concern for their financial futures. For most of my client’s their homes are their largest assets. Getting an expert to act and get them the highest price possible is of the utmost importance. Just check out Redfin’s site and read about what they offer. They write a lot about what they are saving their client’s in commission and say little about how they generate the highest possible returns for their sellers. They speak a lot about their supposed negotiating skills and little about how their buyer’s end up in homes that fits their needs and their financial situation.

Marlow Harris at the 360Digest blog has had a lot to say about the current Redfin news. Most interesting to me has been her take on the financial aspects of Redfin. It seems to me they may suffer from the old adage, “we are losing money, but we’ll make it up in volume.”

Last month we listed and sold a home in Oakland’s prestigious Montclair hills neighborhood. 5940 Monzal was listed for $1,599,000. You can check out some of my full service internet marketing at www.5940monzal.com. We generated 7 offers and the property sold for $1,937,000. That is a 698% return on their investment in our commission. Navigating the Bay Area’s complex housing micro climates is not a job for the low cost leader. It’s a job for the avid advisor.

Thanks Kevin Labianco for this photo.

I am posting this purely for its entertainment value. The numbers will surprise you.

By Donald J. Boudreaux
Wednesday, May 16, 2007

The economist Paul Romer notes the astonishing fact that if you thoroughly shuffle a deck of 52 cards, chances are practically 100 percent that the resulting arrangement of cards has never before existed. (more…)

Thank you Casey Serin for this photo.

As our market changes we now have new additions to our real estate vocabulary. Just a year ago the term, “short sale” was not even a word on our terminology radar. So, it is not surprising that many of my clients are now asking, “What are short sales?” Maybe, more importantly can short sales be a buying opportunity?

A short sale is when a property is sold for less then the debt owed on it. It is usually done as an owner’s last resort for liquidating a property before a debt holder begins the foreclosure process. Short sales require the seller to come up with money at close of escrow to cover the difference between the debt owed on the property and the sales price.

So can a short sale be a deal for a buyer? The answer is most short sales are more complex and harder to negotiate than a typical real estate transaction between a buyer and a seller. Often when a sale is short, the seller does not have sufficient funds to come up with the difference. This brings the bank in to the picture. Banks do not like to lose money, and in our current robust market most banks are stiff negotiators. Banks are usually tougher to deal with in a negotiation than an individual seller. This is because they have capital and corporate structure to rely on when negotiating. They have more power than an individual to wait for good offers and withstand low-ball offers. Often if a bank has completed the foreclosure process they will want more money for the home than the owner. This is due to the high cost of the foreclosure process.

(more…)

I often find myself telling clients that the Bay Area is full of individualized real estate micro-climates. With buyers I am always hoping for bloated inventory and
inefficiencies in different local markets that can be used to minimize their cost and maximize future property values. With sellers I am always looking for periods of slim inventory and positive market conditions to maximize their sales price and current value. Some of my clients are selling in one area and buying in another which makes their predicament all the more complicated.

There have been many times I have read articles and looked at data that makes our markets seem similar and flat. The reality is that the Bay Area is an amalgamation of complex micro-climates and that the job of a Realtor is easier said then done. Altos Research shows this trend in their real-time median price data graphs shown above. This is a great visual representation of how 6 different Bay Area cities median price data can look. It is also a great representation of what a Realtor must navigate in order to serve their client’s best interests. These 6 cities are only several miles apart in terms of geographic location, but they are worlds apart in terms of market micro-climates.

It is evident that the media is behind the investment curve. I studied this latent effect in a college business course, when I reviewed a study that looked at all of the top tier money magazines (for example Money, Forbes, BusinessWeek, ect…). The study assumed that an individual bought in to all of the magazines combined hot stock picks. The study found that following this strategy would net you a worse than -200% return. Yuck! The interesting conclusion we came to was that by the time the information had been printed in the magazine, it was common knowledge. That the information contained in the article was useless, because it was common to everyone, and the market had already adjusted for the news.

So how does this relate to real estate? Every day we are bombarded with news information about our local real estate markets. For the past 8 months I was bombarded with information about how the real estate markets were slowing down. Being that I am a constant practitioner of selling real estate (through transacting I constantly have my finger on the markets pulse), I can say that by the time the media started talking about a slowdown, it had already happened. Behind the curve once again. This is important, because many times when I first meet with real estate buyers and sellers, I find they are relying or are influenced by what the media has to say. A generally bad decision unless you want to be behind the curve.

Above is a graph from a company called Altos Research. Altos Research provides real time real estate data to customers (Stay tuned, I am currently writing a posting that will use Altos Research’s data to show how individualized neighborhood real estate markets are very different from each other). On their home page they show the above graph, which I thought is an excellent illustration of the news media being behind the real estate slowdown curve.

How do you estimate the market? How do you get your market news? Let us know what interesting uncommon information you rely on.