GLG News by Mansur Hasib

Implications: Social networking web-sites are bringing people closer at an unprecedented pace.  The Trulia Voices forum at www.trulia.com/voices brings buyers, sellers, and real estate professionals together to discuss and exchange ideas, issues, problems, and solutions.

Analysis: America's first ever National Open House Day is November 4, 2007.  This unprecedented event is a remarkable example of how social networking can quickly transform an idea that originated just a few weeks ago into a national event bringing together professional real estate agents, buyers and sellers. 

Participant states in this important event range from the West to the East coast and anyone who has a home to sell can sign up at: www.National-Open-House.com

Sensational headlines in much of the media has been driving fear into the hearts and minds of buyers.  Participants in the event hope to provide a balanced persepective of reality and allow consumers to openly share their ideas and information while browsing through a bountiful inventory of homes available at prices that has not been seen in a while.
 
The buyers who buy during this buyer's market will greatly benefit from the next seller's market.  

Implications: The author provides a good explanation of real estate brokerage commissions and the correct way to think about it.

Analysis: The artlicle helps to understand the basic flaw in the discount brokerage pricing model. Even though sellers write the check at settlement since it is the buyer that pays the price of any product, all marketing costs of a product are passed on to the buyer. Lower marketing results in lower priced sales in a seller's market and little or no sales in a buyer's market. Due to the high volume of sales during a seller's market even low priced sales are sufficient to keep discount brokerage profit margins within sustainable limits. In addition buyers are unable to demand any more service when the market is against them. When the market changes, buyers want more service and given choices often opt to go for more service for their money. Hence several discount brokerage companies are now facing bankruptcy and going out of business. Practioners in the real estate industry who are in for the long haul have to have a pricing model which is designed to ride out the cyclical nature of residential real estate.

Implications: It is designed to save an estimated 240,000 homeowners from going into foreclosure.  It benefits creditworthy borrowers who financed their homes by using riskier adjustable rate mortgages which have interest rate reset dates between June 2005 and December 2009.  The program is also expected to create more liquidity in the mortgage market.

Analysis: The program is definitely an excellent program that is likely to help many people.  FHA loan rates are often more attractive than conventional loan rates.  A new risk based mortgage insurance premium pricing structure available starting January 1, 2008 will help  further. 

Property appraisal is likely to be the most difficult hurdle to overcome in using this tool.  Refinancing borrowers will require a minimum of 3% cash or 3% equity in the home to qualify.

Most people who purchased during 2004 will probably be able to use the program effectively.  Some of those who purchased in 2005 may find property appraisals coming in lower than what they owe.

Implications: The model of discount brokerage is based on high volume and quick sales.  The article points out how the Foxton's discount brokerage model collapsed at the slightest change in the pace of home sales.

Analysis: There is a prevalent misconception that sellers pay for brokerage services. The discount brokerage model is based on this misconception -- the idea is to convince sellers that they can "save" money by hiring a discount agent.

Enticed by a low brokerage fee the seller is signed on at a low enough selling price where it will sell with little or no effort. A low price during a seller's market may require only a 10-15% market exposure to sell a property.

The seller never realizes that during a seller's market 100% marketing by a highly skilled listing agent would have netted far more money than was "saved".

When markets change to a more balanced market -- which is usually the norm -- or when it actually changes to a buyer's market, 10-15% marketing no longer works.

The pricing structures of full service brokerages are designed for the long-haul ups and downs of a cyclical real estate market. However the discount brokerage model is not designed for riding out the slow periods.

During periods of slow sales or normal markets, the discount brokerage model does not work.

Implications: The author provides a scholarly examination of the relationship between expectations and price changes. The author concludes that Fed actions typically do not affect prices directly but they do impact expectations.

Analysis: Coming from the author of the book "Irrational Exuberance", this article is very well written and provides a view that is very close to mine -- expectations govern people's decisions about making home purchases more than anything else.

The expectations of the average buyer and seller is going through a period of indecisiveness at this point.

It will be important for people who are considered to be thought leaders to continue to reinforce that fact that while exceptionally exuberant expectations along with the availability of easy money may have fueled a portion of the run up in prices, the market is right now trying very hard to achieve normalcy in terms of prices and long term growth and we need to focus our attention on helping people adjust their expectations accordingly.

Implications: The article essentially summarizes some of the key elements of some options such as refinancing options using FHA loans that the government will make available for creditworthy homeowners to be able to save their homes.   The article also suggests that the Fed may act to cut rates if necessary.

Analysis: Speculators are part of the reason of why we are where we are with regard to housing prices and the need for extraordinary numbers of people to use creative financing to purchase homes that they otherwise could not afford.

While in a normal market we usually see about 10-13% investor activity, during the peak of the housing market boom we saw over 30% speculator sales.

Currently the market is trying very hard to achieve balance. In general, a balance market is good for everyone and I hope the government and Fed actions can help to achieve this balance with ease.

Implications: This report for the 2nd Quarter of 2007 is part of a regular series produced by the US Department of Housing and Urban Development, Office of Policy Development Research. While the first quarter of 2007 had shown some improvement in housing affordability, the second quarter showed an increase in prices. Quantity of sales declined however.

Analysis: The article provides a good high level summary and comparative perspective. My own statistics for the Washington D.C./Baltimore region showed some surprisingly higher numbers for average sale prices in the month of July even though the month of June had shown some declines compared to a year ago.

I saw sales numbers and buyer traffic also decline in July even though June had been better.

Since sellers in general have been reluctant to reduce prices, it is possible that July saw the average price increase as some buyers who had to buy before the school season did so.

The August numbers are about to be released and it will be very interesting to see what they show.

Implications: Deciding on a price is extremely important in the current market.  The author suggests waiting it out if sellers do not have to sell.  If they do they need to price towards the lower end of comparable sales rather than the higher end.

Analysis: In pricing a home, many people forget that the price is essentially the beginning of a conversation.  The price must entice someone to start talking to you. 

The lower the price, the larger the pool of buyers at that price.  In the current market it is extremely important for sellers to expand their pool of potential buyers. 

In a slow market where prices are not heading upwards, the best way to get a good sale is to price it as accurately as possible so it is appealing to buyers right away.

Implications: The author suggests that since there is a greater than reported downturn in housing, the Fed should act soon and cut rates.

Analysis: I think it would be wrong for the Fed to cut short term rates.  Easy access to financing and the historically low short term rates were part of the reason for the historically unprecedented rise in home prices in the Washington DC region.

Yes there will be some pain for a while.  However, tt is important for the market to return to normalcy on its own.  Fiscal policy to sustain a market where affordability of housing has become a real problem in a region may soften the blow for some but in the long run it would prevent the market from returning to normalcy -- and increase the pain for buyers.

Implications: Article points out that Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.21 percent nationwide this week, up from 6.15 percent last week and that it was at highest level for 30-year mortgages since they average 6.22 percent the week of April 12.

Analysis: It does not appear to me that mortgage rates have moved significantly in any direction in several weeks.   When it moved down to 6.15 last week, we saw some headlines about it being down quite a bit in response to a lower fear of inflation.  Within a week it has crept up to where it was about 5 weeks ago.  The rates have essentially fluctuated around a few numbers and the trend appears to be neither up nor down at this time.

Implications: Condo sales in 2006 was half that of 2005 in the Washington DC area.  Several projects have been cancelled and some developers have been driven out of business. There is an oversupply of condos in the region.

Analysis: At the micro level foreclosures are never a good thing for the individuals or companies affected.

Unfortunately at the macro level these are necessary evils if the market is to return to a stable equilibrium.

The most important recent change is buyer expectation.  The buyer is no longer expecting prices to rise.  Therefore their urgency to purchase has gone.  The only way to create urgency now is to give buyers an attractive price. 

Implications: The article discusses the role of federal fiscal policy and its impact on the US economy and provides an interesting perspective that should not be ignored.

The author is concerned that we are not treating the problems in the mortgage industry seriously enough.

Analysis:

I thought the perspective of the author is interesting and thought-provoking and certainly worthy of further discussion. 

The housing industry fed a major part of the economic expansion during the past several years and its malaise does not appear to me to be a temporary hiccup.

We must recognize that home prices in many parts of the country  have risen beyond the ability of buyers to purchase fed in large part by easy access to credit. 

As the mortgage industry focuses on implementing sound business practices, home prices are likely to continue facing downward pressure.

As the psychology of home owners settle down, their propensity to consume by dipping into their home equity is likely to face downward pressure as well.

Implications: While sub-prime mortgages were always a small component of the market it had a much larger impact during the 2004-2006 period.  
Its decline is part of the reason for the recent decline in the housing market.  The possibility of it affecting other types of mortgages exists.

Analysis: I am not sure how an "infection", as the author calls it, from the sub-prime mortgage market spreads to the prime market.

I see the return to rationality in the mortgage market as a good thing for the overall industry. Standards are good. Quality is good. 25% house appreciation year after year is simply not sustainable and to think that the small correction we are having is bad is somehow missing the point.

We are actually trying very hard to return to balance and these are all good signs.

Implications: Prices obtained by FSBO sellers are typically at least 10% lower than that obtained by high quality real estate agents.

Analysis: In the current market FSBOs are seeking the services of full-service brokerage services more and more.  However the sellers tend to lose more when there is a seller's market because at this time the market is typically moving up so fast that more sellers are unable to keep up with it.

All my FSBO clients made roughly 10% more than they would have had they been successful on their own.

Implications: The article discusses two web-sites where visitors can weigh in with their opinions on homes for sale.

There is cause for concern among some real estate practitioners that this will lead to mischief.

In some cases public opinions seem to have corrected fluffy ads or remarks.

Analysis:

In this information age it is understandable that these two web sites and more of this nature are likely to gain a large following.

As with any information, remarks which are highly charged with emotions or skewed too far in one direction should be interpreted carefully.

In purchasing a home the guidance of a real estate professional that is looking out for the best interests of the buyer and professional inspection results should be the best guide for any buyer trying to make a decision on a purchase.

Complete reliance on web-site information from other people who have seen a home would be a mistake because each home is unique and each person's tastes and preferences is unique. 

I have seen many buyers fall in love with homes others would hate.