Step aside, Chicken Littles—there’s good real estate news to be had.
A favorite childhood fable is the story of Chicken Little. Struck on the head by an acorn falling from a tree, the hysterical chick flutters about the barnyard, warning everyone of imminent danger, because “the sky is falling!”
The story is so famous, there’s now the Chicken Little Award, a dubious honor bestowed on people and organizations that the National Anxiety Center contends are engaged in media-driven scare campaigns. While the National Anxiety Center focuses its awards on environmental fear tactics, it might want to branch out a bit this year, because the pickings are ripe when it comes to media-generated hysteria about California’s housing market, especially in the North Bay.
Daily headlines assault the senses: record foreclosures, tanking sales and turmoil in the mortgage market. But are today’s Chicken Littles right? Is it all really doom and gloom?
We asked several North Bay real estate and mortgage experts to share their thoughts with us—a “real(i)ty check,” so to speak. We share their unique perspectives with you and remind you of three clichés that might help you make sense of all that’s happening:
“Location, location, location.” There’s an old saying, “all politics is local.” The same applies to the real estate market. What might be the case in one market is far from reality in another, even though they might only be separated by a few miles…or blocks.
“What goes up, must come down.” For someone to sell at the top of the market, there has to be a buyer willing to purchase at the top of the market. Housing prices went up in record numbers, and now most (but not all!) are coming down to a more realistic level.
“The rich get richer and the poor get poorer.” Mortgage lending policies during the housing boom pretty much let anyone who was capable of fogging a mirror get a loan, often with no down payment. Many of these “subprime” loans were taken out by people who couldn’t really afford the homes they were purchasing. Rising interest costs and tumbling home values left some of these people “upside down” (that is, owing more than the home was worth), with foreclosure their only option. In the meantime, housing prices in the upper tier—where demand is steady, buyers have money and mortgages usually aren’t a major factor—actually increased.
Avram Goldman’s “Confidence Bubble”
Avram Goldman is president and CEO of one of the region’s leading real estate firms, Pacific Union GMAC, which has 13 locations throughout the Bay Area. He’s frequently a guest on local radio programs that deal with real estate and has also appeared on CNN, Fox News and “Good Morning America.”
“It’s kind of interesting how the media looks at it, because they take a broad-brush approach,” Goldman says. “When I was taping a Fox News segment, you could feel a flavor for excitement, for tragedy—the whole premise that we were going to hell in a hand basket. The fact of the matter is, there’s a little truth in everything, and much of the time, you only get part of the truth [from the media reports].”
According to Goldman, the housing market is actually reacting to several things at once: tightening credit, economic uncertainty, the upcoming presidential election, stock market volatility and high oil prices, among others. “I refer to it as a ‘confidence bubble,’” Goldman explains. “Things are a bit unsettled right now, and people have become cautious. They’re sitting there, waiting. But the reality is, right now, if you’re a first-time buyer and confident of your job security, it’s a great time to buy. There’s more supply, more negotiating room and you can buy for less than two years ago in many price ranges.”
In the Bay Area, Goldman says it’s a tale of two markets. Sonoma, Napa and Solano counties have been the hardest hit. Marin has done well because the number of new homes built has been relatively small over the last five years. “The majority of new home building was for entry-level buyers who were extending themselves as far as they could to get into the housing market. They took out loans with teaser rates because they were hoping price appreciation would take care of all their sins—and it didn’t,” he says.
Marin is a different story. Very few new homes were built during the boom. Most Marin buyers aren’t entry level and are less impacted by the economy. “The high end of the market is doing quite well,” Goldman says. In 2007, homes selling for $1 million and up in Marin didn’t experience a drop in median price and increased 14.5 percent in sales volume [when all sales prices are added together].
“Things are even better when you look at the more expensive homes in Marin,” Goldman says. “In the $2 million-plus category, median price was up 8 percent, but sales volume was up 29.48 percent. And in the $3 million-plus range, volume was up 83 percent. Go to the $5 million-plus category, and you’ll find a volume increase of 208 percent, even though the median price remained about even with 2006.
“The wealthy believe in real estate,” Goldman says, “And they’re still putting significant dollars in their real estate investments. They think it’s a good time to buy.”
Goldman also debunks the theory that there’s no money for home loans.
“That’s just not true,” he says. “Yes, you aren’t being qualified for a loan if you have no income documentation or no down payment, but even if you just have a 10 percent down payment, there are loans available if you have income and good credit scores. People shouldn’t be discouraged by the horror stories they’re hearing. Lenders are being more stringent, but interest rates are still incredibly attractive,” Goldman says.
People need to keep in mind that “newspapers play on what’s happened in the short term in areas where there’s been a great deal of new home building,” Goldman says. “But if you look at the overall picture, housing prices across the country, between 2001 and 2005, according to CNN, home values rose on average between 25 percent to 88 percent. Those people who bought in 2001 to 2003 are still way ahead of the game.
Those who bought in 2005 and 2006, well, their prices may have decreased. It’s like the people who get into the stock market just before it drops. Timing is everything. However over the long term, prices return and rise once again.”
According to the National Association of Realtors, the two biggest years in the history of the real estate market were 2004 and 2005. “What people don’t know, because of all the bad publicity, is that 2007 will still be the fourth or fifth best year in real estate sales,” Goldman says. “You just have to put it all in perspective.”
Dennis Park’s “What If?” Ads
Frustrated by the media’s portrayal of the housing situation, Dennis Park, general manager of Creative Property Services (CPS) in Santa Rosa, took matters into his own hands. He placed a provocative ad in the Santa Rosa Press Democrat, asking a simple question: What if every time there was something negative reported about real estate in the news, there was something positive as well?
“We know good news doesn’t sell and doesn’t generate much interest,” Park says. “We felt we’d like to offer a different perspective on what was happening to help people make their decisions in a more informed environment.”
The ad pointed out that Sonoma County doesn’t appear in the top 10 areas of foreclosure rates in California, and that the overall average number of foreclosures is less than 1 percent of every 1,000 households. Also, one-third of all Sonoma County homeowners own their homes debt-free. The ad went on to point out that, on average, the value of a home nearly doubles every 10 years in California, even despite periodic downturns. Buying a home is a good way to build long-term wealth, and the average homeowner has 36 times the accumulated wealth of the average renter.
Park has been in the real estate business for 35 years and admits he’s “not a stranger to markets that go up, down or sideways. In fact, I’ve lived through quite a few of them,” he says. “What astounds me is the way newspapers cover the news in general. Why is a house fire in Stockton important to us in Santa Rosa? Fires, car accidents and crime, no matter where they occur, are reported, but local news that may be good is often overshadowed. It’s the same way with the housing story. There’s too much talk about the sky falling. Like Paul Harvey says, ‘What’s the rest of the story?’ The cycle of fear begins to feed on itself and exacerbate the situation. It all becomes a self-fulfilling prophecy.”
According to Park, the current housing correction was overdue. “We had to have a correction, because prices were going up too much and it’s impossible to sustain those rates of appreciation. There were loan programs out there that, in my humble opinion, were destined to fail. In any event, we would have had a down market as a natural occurrence—but I don’t think it would have been as steep or the slide as rapid had the media not focused solely on the negative. We work with a senior financial advisor at UBS, and I think his perspective is accurate. He says the media can take something that might have been a hand grenade and turn it into something much bigger. We’ve become a nation of sound bites, and the media can distort things,” Park says.
“I don’t mean to sugarcoat or obfuscate things, but we do need to look at things and see what’s real. The plate right now is full of doom and gloom—even talk of a depression. I say, this too shall pass. It’s terrible for the families that are caught up in it, but I think people have moved away from some of the basic values of home ownership,” he continues, referring to those who refinanced in recent years to tap into their home equity.
“The time has come to understand that your house is not a personal ATM machine.”
Fiona Van Dyke’s “Game of Numbers”
A real estate financial specialist with Indymac Bank (formerly Cal-Bay Mortgage Group) in Santa Rosa, Fiona Van Dyke firmly believes the media plays games with numbers.
“It’s how the numbers are presented,” she says. Van Dyke points to a recent report by the Sonoma County Economic Development Board, which shows the median price of a home sold in the county grew by 37 percent from 2001 to 2007 and sales maintained 98.9 percent of the asking price.
And then there are the foreclosure filings. “In September [2007], the local newspaper reported foreclosure filings had tripled from September 2006 with 272 Sonoma County homes in default or foreclosure,” Van Dyke says. That was the headline. Buried deep in the story was this: The foreclosure rate was only one in every 711 households, and with a total of 193,392 households in Sonoma County, the rate was less than one-quarter of 1 percent.
“There really aren’t as many people in trouble as they would lead you to believe,” Van Dyke says. “There are pockets, like southwest Santa Rosa but, overall, it’s not as bad as they say it is.”
Van Dyke notes that, compared with the rest of the nation, the North Bay is considered to have very expensive housing. “And you can skew the numbers any way you want, but the truth remains that real estate values double every 10 years. It’s proven.”
Ross Liscum’s “Buyers Market”
Ross Liscum, broker and co-owner of Prudential California Realty in Santa Rosa and Rohnert Park, says the media is missing an integral part of the housing story.
“For example, you can’t take a snapshot of September 2006 and compare it with September 2007,” he says. “Things change that they don’t even get into, such as the fact that, in August 2007, 100 percent financing pretty much disappeared, which was a strong financing program available to housing sales in 2006. That really impacted houses in the entry level $425,000 to $600,000 price range in 2007.”
According to Liscum, entry-level buyers are staying out of the market because of the media’s portrayal of doom and gloom, but “This is the strongest buyers’ market we’ve seen in more than five years. Sellers are giving concessions for closing costs and loan fees. It’s a great time to be buying.”
That’s not good news for sellers, but Liscum is an optimist. “Sure, their value has adjusted downward, probably about 15 percent from the height of the market. But their replacement property [the house they will buy once they sell their current home] is also down, and they’ll be spending less on property taxes as a result. In the end, it could balance out as a plus for sellers,” he says.
Liscum says a key to getting things restarted in the current market is to raise the conforming loan limit, which is now set at $417,000. “This would open the door to those people who are light on cash down, but have good income and steady jobs. They’re shut out of the market right now,” he says. But the chances of that happening are beyond local control. It all comes down to politics.
“You have a lot of people from the Midwest, where the median price of a home is about $250,000, maybe even less,” he explains. “When our Congressman, Mike Thompson, goes to talk with other Congressmen to get them to support an increase in the conforming loan limit, they say, ‘Well hell, where I live, you can buy a horse ranch for $417,000.’ We don’t get much sympathy. They all think we’re wingnuts living above our means. It’d be a simple fix, but it’s difficult to achieve because of the politics.” [Editor’s note: After this article was written, congress passed an economic stimulus package that raised the federal conforming loan limit to $729,750.]
Peter Rodgers’ marketing perspective
Between March 2004 and December 2007, Peter Rodgers, owner and founder of Marin-based advertising agency Monotara Creative, acted as director of marketing for Frank Howard Allen, one of the North Bay’s leading real estate firms. Rodgers agrees that one positive of the recent downturn is that buyers now have a fighting chance to actually purchase homes at more reasonable price points.
“The old market was stressful for buyers,” Rodgers says. “They were stretching their affordability based on the competitive nature of the market. It was an unhealthy climate, and all of us knew it wouldn’t continue that way. This cycle will take us back to more traditional loans—a normalization that will return the lending market back to a more healthy space. And that’s a positive.”
Rodgers points to another trend that’s emerging—a move to more professional agents.
“When it’s a seller’s market, just about anyone with a personality and a license can sell real estate. As a result, you have many firms and individuals enter the business during the cycle. Many of the agents who rode the most recent up-curve developed a false sense of ease to the whole process,” Rodgers says. “Now they really have to work with traditional methodology: nurturing relationships and getting referrals. They have to really work to retain their clients, because it becomes so much more competitive on all fronts.” As a result, many agents with lesser skills will leave the real estate business, while the true professionals hunker down and ride out the cycle.
“The smart ones work really hard to build their businesses during times like these. It’s the lower producers who depart. That means it’s now a very good climate for the next generation of real estate agents,” Rodgers explains. “Right now, the industry is skewed toward an older age demographic, but there’s a new generation that’s more Internet savvy, one that embraces change and is willing to work hard to make their careers a success.”
Rodgers notes that it’s a particularly good time to be a “buyer’s agent.”
“Were I personally in the business, I’d focus on advocating for buyers,” Rodgers says, “because in the future, these same buyers will become sellers.” And when they become sellers, chances are likely they’ll call the same realtor who helped them buy their home and ask him or her to be the listing agent.
Larry Brackett: Picking the best and the brightest
Larry Brackett and his wife, Brennie, have owned Frank Howard Allen since 1989. They bought the firm just as California’s housing market dipped and the nation entered a recession. “It was very difficult. We incurred debt when we purchased the firm, and we didn’t have an adequate reserve,” Brackett says.
He learned a lesson that resulted in a promise to himself and the others in his company, that they’d never have to go through a market downturn in the same way again. Over the last 18 years, the Bracketts paid off the company’s debt and carefully set aside a cash reserve to help them weather the next real estate storm.
Working with newly promoted President/CFO Noreen Smith, the Bracketts decided not to over-expand during the recent high times. “We didn’t know the make-up of the down cycle, but we knew it would come. Our focus was to get our infrastructure operating so that we could continue to devote our resources to supporting our sales agents,” Brackett says. “As a result, we have a special energy in our office. It’s true we’re not earning what we did two or three years ago, but we’re upbeat and our energy is strong.”
Brackett says he believes people will get tired of the way the media is promoting the current market adjustment. “The headlines will begin to go farther back in the newspaper and there will be less glamour around all of the negativism. The government will step in, and while it won’t solve all the issues, psychologically it will let people think it’s not all doom and gloom.”
Meanwhile, Brackett is in a unique position to actually use current market trends to build his business. “There are opportunities here. So many companies in the real estate industry over-expanded during the boom and are losing sales agents. We can offer those sales associates who meet our standards a chance to come work for us,” he says. At the same time, Brackett has been able to expand through acquisition. “Boutique firms have 40 to 50 percent of the market in Sonoma County. The current climate will let us acquire some of these small companies with the best sales associates. In the end, this will help Frank Howard Allen strengthen and expand.”
Gerrett Snedaker: Back to reality
Gerrett Snedaker is CEO and broker of Frank Howard Allen Realtors, The Wine Country Group, and manages the firm’s Napa and St. Helena offices. He’s been in real estate since 1966, selling in Florida and Illinois before coming to California in 1976.
Headlines these days don’t really bother him. “[The real estate market] had to come back to some form of reality. I was really more scared when prices were running away from us,” Snedaker says, “and I was also pretty frightened with all those stated income [aka no documentation] loans with no money down. What we have now is actually more real than what we had then.”
Repossessed homes are opportunities, he continues. “I’m seeing a lot of investors buying repossessed homes. People are chasing these things with good money and cash offers—it’s a bargain. The prices will go back up, even though it’ll probably take a couple of years before the REO [Real Estate Owned—a home owned by a bank] cycle shakes out.”
Snedaker sees an increase in discretionary buyers looking for a second home in the Wine Country for future retirement. “They’re still in the market, and they perceive that it’s a better value,” he says. “In fact, I’m seeing good activity in high-end properties with interest coming from all over the world.” With the exchange rate for the dollar quite low, real estate values here are now more attractive to foreign investors. “Our firm just went into escrow on a home with a family from Denmark. Even though it’s an expensive property as far as we’re concerned, to them it was a good deal.”
Heidi Pay: Location, location, location
Heidi Pay is the vice president of sales and also manages the Marin office of McGuire Realty. She says the housing market headlines that regularly appear in the Marin Independent Journal don’t accurately reflect the entirety of the market.
“Marin’s story isn’t as problematic as other communities,” Pay says. As a result, the Marin Council of Realtors put together a fact sheet to help calm homeowners’ fears.
In Marin, it’s all about location. The county’s proximity to San Francisco and its relatively small supply of houses has enabled it to weather the storm quite well—home values in Marin have held up well considering the general downturn and credit crunch.
And while Marin has recently experienced a market correction from the over-inflated values that were driven by speculation and credit accessibility, Pay points out that long-term investors have seen remarkable growth in the last 10 years and are likely to see continued growth in the future. And although December 2007 showed a noticeable 8.59 percent decline in median price from December 2006, over the course of 2007, the average sales price for a single-family home in Marin jumped from $929,103 to $1,223,678. At the same time, the median price of a Marin home rose from $750,000 to $900,000.
“The condominium market ended 2007 with a decline from the previous month, but an overall $35,000 increase from December 2006 for a median price of $535,000,” Pay says.
According to Pay, if Marin has a housing problem, it’s primarily confined to those who couldn’t afford their home mortgages, as well as speculators and builders who built spec homes that were too expensive for the property’s location and who now need to sell. “They overpriced their products, so the homes are sitting on the market.”
Pay says many builders were snagged by construction lag times. “When they conceived the project, the market was substantially different,” she explains.
The one consistent thread of thought among all those interviewed for this story is this: Now’s a good time to buy if you regard your home as a long-term investment. Or, as Pacific Union’s Avram Goldman says, “The bottom line is, a house is where you raise your family. You can’t sleep in your stocks.”
Besides, you need a roof over your head for the next round of media hysteria. It’s the best protection when “the sky is falling.”
