Warren Buffet on the Housing Market

I was reading  Berkshire Hathaway’s Annual Report this morning which includes comments from it’s Chairman,  Warren Buffet.  Sometime called the ‘Oracle of Omaha’, Buffett is almost certainly the greatest investor in this country–his company has averaged a return of nearly 20% per year for the past 47 years!  When this man speaks, it’s worth listening.  Here’s his take on the U.S. housing market:

Housing will come back – you can be sure of that. Over time, the number of housing units necessarily matches the number of households (after allowing for a normal level of vacancies). For a period of years prior to 2008, however, America added more housing units than households. Inevitably, we ended up with far too many units and the bubble popped with a violence that shook the entire economy.

That created still another problem for housing: Early in a recession, household formations slow, and in 2009 the decrease was dramatic.  That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.

At our current annual pace of 600,000 housing starts – considerably less than the number of new households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This process will run its course at different rates around the country; the supply-demand situation varies widely by locale.) While this healing takes place, however, our housing-related companies sputter, employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own.  I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.

Wise monetary and fiscal policies play an important role in tempering recessions, but these tools don’t create households nor eliminate excess housing units. Fortunately, demographics and our market system will restore the needed balance – probably before long. When that day comes, we will again build one million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead.

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Portland Homes Sales Update

The new numbers are in for May 2011.  Generally, there were no surprises; prices trended down from a year ago though closed sales were down 15% from 2010.  Remember that last year we had the surge of sales activity through April due to the homebuyer tax credits.  That, in turn, led to a lull in sales through the summer. 

What I do see is a pickup in activity (Pending sales are up 45.1% from May 2010) as lower prices combined with low interest rates have helped qualified buyers make a move.  We also see that reflected in lower inventory numbers (6.8 months).  Good homes in the area surrounding our office (NE Portland) which are well-priced are receiving multiple offers and selling quickly.  It has also remained the strongest area for sales with only a .9% decline in prices from a year ago vs a 4.8% decline for the Portland Metro area.

There are still severe challenges in the whole home-buying process.  We like to say (only half-jokingly) that we spend most of our time just keeping transactions together where a few years ago, the process was often on auto-pilot.  Just this week, I had an appraisal come in more than 5% below the contract sales price!  On a different transaction, the lender would not accept a cashier’s check as an earnest money deposit from a buyer!  A normal 30 – 45 day closing on a bank-owned purchase is closing this week after nearly 90 days!  So every one of these issues requires time, patience and higher skill level to bring a sale to completion.

The complete report has more of the market details.  The good news: interest rates have trended back down, it is a good time to upgrade to a nicer home and Portland is still an attractive location for people from all across the country. . . . though they may not buy right away!


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Appraisal Surprise II

In my last post, I described a transaction where the lender required a second appraisal.  The result compelled the seller to reduce the price by $15,000 with my buyer as the beneficiary.  The other recent appraisal ran a different course.

This time the property was  a bank-owned home in North Portland which had a lot of promise but also some potential pitfalls.  The home was in a good location on an extra-large lot; in other words, an attractive property.  However, there were some cosmetic issues which concerned me: broken drywall, grafitti, missing bathroom fixtures, and a questionable roof. 

Even if the buyer is satified with the property, there is still the appraisal to work through.  The appraiser’s job is to determine the value of the property but sometimes that valuation is conditional; it requires some repairs in order for the property to appraise at the necessary price.  The appraiser can flag a property for safety issues (exposed wiring, missing outlet covers), functional issues (missing sink or toilet), or repair issues (life of the roof, broken windows, dry rot).  Sometimes repairs will need to be completed before the appraiser signs off on the valuation, a tricky proposition on a bank-owned property because they don’t like to do repairs. 

On a purchase last year, the appraiser made his report conditional on the garage being repainted with new gutters installed.  This was on a property where the garage really had ‘no value’ since it was already leaning and about to be torn down–it would have been a waste of money!   But there was no negotiating with the appraiser; he was sticking with his report.  Fortunately the seller was motivated enough to go ahead and ‘repair’ the garage . . . which my client tore down a couple of months after closing!

In the recent case, my buyer was satisfied enough with the property after all the home inspections to proceed with the purchase.  However, I was concerned enough about the appraisal to put together a back-up plan: converting to a ‘Renovation Loan’ .  This would mean additional fees for my client plus a lot more paperwork involving bids and contractors to get the final loan approval.

So what a pleasant surprise it was to have the appraisal come in $11,000 OVER the sales price with NO conditions.  It even passed the bank’s review committee!  I guess we must have negotiated a great price on the purchase and, again, my client came out the winner.  These are the surprises you want.

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Appraisal Surprise

Unless you are paying cash for a home, you will undoubtedly have to deal with an appraisal.   I use the phrase ‘deal with’ somewhat gingerly; yes, the appraisal is an important part of determining the value of a property.  But, the REAL value–what I like to call the only market value–is the price agreed upon by a buyer and seller in a strictly ‘arms length’ transaction.

The appraisal is there primarily to protect the bank–and, to a degree, the buyer–from an inflated value for a high-value asset.  The bank will be loaning the money based on the value of a property and the appraiser is their on-site expert evaluating whether the price is justified for the existing market.  The appraisal fee (around $500 today)  is usually paid by the buyer who is not obligated to share the results with the seller.

Not long ago, the appraisal was a given, simply another step in the home-buying process.  You could just about predict that the appraised value would equal the purchase price of a home.  No more.   We all have stories of entire transactions needing to be re-structured or simply falling apart based on a low appraisal.

I had two appraisals this month with vastly different results and consequences.  In the first case, the bank required a second appraisal–not uncommon these days–due to some of their internal rules.   Where the first appraisal had come in right at the sales price, the second appraisal–just four weeks later–had the value at $15,000 below the amount!  Did the home really lose that much value in a month or was the difference simply a matter of ‘opinion’ between the two appraisers?  You could make a case for either scenario . . . though it really doesn’t matter.  Because the bank based their loan on the second (lower) appraisal.

Now we only had two choices: either the buyer had to bring more money to closing (money which they didn’t have) or the seller would need to reduce the price equaling the second appraisal.  In this situation, the seller was ready to sell so he dropped the price.  Ultimately my client–the buyer–came out the winner because he was able to buy the home for $15,000 less than the original offer price.

The second appraisal incident produced a different unexpected result . . . .and we are still waiting for the implications.  That story in a future update.

NOTE: If you are selling a home in Oregon, some new rules are going into effect April 1 relating to Carbon Monoxide monitors.  Check the State Fire Marshall’s information page on Carbon Monoxide and details regarding the new laws seller and landlords.

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The New Normal?

The new home sales numbers for Portland came out this week.  No major surprises and the storyline remains the same: home prices remain soft and sales are weak.  Or so you would think.

I attended a presentation by Ted Jones, an economist with Stewart Title, this week who actually thinks our prices now are back to ‘normal’.  In his opinion, the last ‘normal’ real estate market was in 2002 and, if we followed normal price gains, home prices would be about where they are today.  The graph looks pretty and the argument is convincing.  And I really hope he is right.

From a realtor perspective, it certainly does not yet feel ‘normal.’  It takes much more effort to put together an accepted offer and, even then, there is no real assurance of the sale actually closing.  This week’s  Oregonian  story on the new numbers quoted a broker feeling the pain of young realtors ‘working twice as hard for half as much money.’ 

There are so many hurdles to overcome before a home changes hands from one to another: agreement on price & terms, initial loan approval by bank, home inspections, appraisal, document reviews on multiple levels by banks, sometimes a second appraisal, more reviews, final loan documents and sellers willing to be flexible in extending closing.  Just today I extended the closing for one of my clients (buyers) due to bank beauracracy (or incompetence!).  If we close next week, it will be more than 30 days past our initial closing date.

So I don’t know whether this is now ‘normal’ but that’s the way it is.  What it does call for is patience, pro-activity and perseverance.  I continue to believe that it’s a great time to buy during these days of historically low interest rates.  The key is to act and take advantage.

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The Numbers on Radon

When I fill-in for the local hosts on OPB Radio’s ‘Morning Edition’, I often don’t have the time to closely listen to the stories. There is too much preparation between the breaks on a live news show to just focus and listen.

But last Friday a story caught my attention and I listened to it twice during the 4-hour broadcast. It had to do with the dangers of radon in the home in light of this being ‘National Radon Action Month.’

I am not an expert on radon but I do know that awareness is growing, especially as it relates to home sales. Until last year, I might have had one client per year request that a home be tested for radon prior to purchase. Now it is almost standard procedure in most home sales in the Portland area.

Radon is a natural, radioactive gas which can seep into your home through basements or foundations.   It is, of course, not healthy to breathe in a lot of radon which has been linked to lung cancer.  The fix is usually quite simple: draw the air from under the home and vent it up past the roofline.  The cost is generally less than $2,000.

Now here’s what caught my attention.  The EPA estimates that 21,000 people die each year from radon-caused lung cancer.   But, as the NPR story pointed out, less than 3,000 of those who died were non-smokers.  So it would appear that it’s not just radon which is the risk but radon combined with smoking.  This was new information for me.  It is helpful to look at numbers but it is wise to look at the same numbers in context.  As Mark Twain once said: “There are lies, damned lies . . . and then there are statistics.”!

Some parts of the country have much heavier concentrations of radon but even within a region the amounts can vary.  The fact that your neighbor’s home tested clean is no guarantee that there is no radon coming up through the basement on your home.  Evaluate the risk and your risk tolerance.  But always make sure you get all of the information before making your decision.

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Thoughts from Asia

I just returned from a couple of weeks in Asia.  While this was mainly a time for ‘vacation’ with family visits and sight-seeing, I couldn’t help thinking about houses.  In our business, we like to say that the key to real estate is location.  So, having briefly surveyed properties and practices in some new ‘locations’, here are some initial thoughts.

It is a given that construction techniques, materials and zoning laws are quite different from what we have here in the U.S.  However, the basic premise remains the same: people need a place to live so your home is a great long-term investment.  And people who bought homes in prime locations (think core urban areas with dense populations) have built tremendous wealth over the past several years.

Aside from the differences and similarities between countries, I was struck by  two observations from my short time in India (where I spent the final week): 1. Indians consider only two investments as ‘safe’–real estate and gold; and 2. they like to own their properties free and clear (i.e. no mortgages).   They think the stock market is only for ‘sophisticated’ people who can understand what it’s about (is that even possible?).

Someone said to me: ‘We take our extra money to buy gold (jewelry) and land (or rental properties). What do you do with ‘all of that extra money’ you make there?  Good question!  Here we think about 30-year mortgages (which very few actually pay off).  There, even a 10 or 15-year mortgage is paid off in 5 years . . . which partially explains why they don’t have the spiraling foreclosure crisis despite the recent run-up in home and land values.  People have significant (or complete) ownership of their homes so there is no need or incentive to walk away.

I don’t want to brush off the considerable differences in tax laws and property transaction issues between the two countries.  But this does cause one to re-think how we look at our homes and how we think about debt.  I like to say that there’s good debt (mortgage) and bad debt (credit cards).  Now I think the best may be ‘no debt.’

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