The real estate market has taken a major hit in recent years, but it’s not down for the count. Experts take a realistic look at how home sales are holding up.
What are experts on the ground saying about today’s local real estate market? “We’re on a full trajectory for rocketing ourselves into the ground!” laughs Jeff Lester, an agent with Artisan Sotheby’s International Realty in Santa Rosa, who spends time studying the history of real estate markets. “But,” he says, unphased by the shock of his statement, “that’s how our history goes. The market blows up, then goes down. When it’s up, the psychology goes up. When the market is down, the psychology goes down.”
Lester, whose range covers Sonoma, Marin and Napa counties, bases his appraisal on the market fluctuations over long time scales. Within that perspective, he’s serene. “We already know from American history that we can deal with adversity,” he says, “so if we can ‘re-remember’ that, we’ll expedite recovery rather than remain stuck in what’s wrong.”
In other words, make friends with reality. “It’s so simple that people can miss it,” he says. “If you’re going to sell right now, you’re going to take a loss, that’s all there is to it.”
Andy Gellepis, vice president and managing broker for Frank Howard Allen’s Mill Valley offices, fresh from a sales meeting, echoes optimistic realism. “There’s a lot of activity,” he says, “but there’s more stress, too. The transactions are a little bit more difficult. The lenders and appraisals are more challenging. The negotiations are more challenging, because the buyers perceive that market prices should be flat or going down, and the sellers sometimes think like it’s still 2007 or 2008 and want those prices for their home—and that’s just not realistic anymore.”
“It’s a very trying environment in which to get business done,” says Mark A. McLaughlin, president/CEO of Pacific Union International, Inc. and Christie’s International Real Estate. “It’s trying because you have the expectations of the seller, who wants to maximize his proceeds and has fond memories of the values of 2006 and 2007. And then you have buyers, who are influenced predominately by the national media and believe housing prices are off 25 to 50 percent.” Everyone wants a bargain.
Rebecca Celli, a sales associate with Coldwell Banker, describes the current picture in delicate terms. “I think there are solid, economically healthy people out there this year,” she says, “who are able to come out and buy the homes that the economically challenged people are losing.”
She describes many of these buyers as families who’ve been prudent, saved their money and had a down payment, or used an FHA loan. In short, she says, banks are more stringent on their requirements for both buyers and the condition of the properties.
“I’m seeing in the last four months the banks really working with buyers and buyers’ agents to clear up deficiencies and close escrows.” This is a shift from last year, when, as she says, “Everything was ‘Take it and like it.’ I think banks have a whole lot of inventory that’s coming, and they don’t want to hold on to this other stuff that’s in bad shape. At least that seems true in Petaluma.”
“For our company,” says Robert Bradley, president of Bradley Real Estate, “about 225 of our more than 300 agents are located in San Rafael and Novato, and we’re seeing a steady flow of bank-owned properties.” He says the influx has to do with old issues being resolved and banks catching up with people who’ve been sitting in their homes for a couple of years without paying their mortgages.
“I think many of us feel alienated by the depth of the problem,” says Stefan Jezycki, president of the Napa Chapter of Realtors, a state director of the California Association of Realtors and a Pacific Union/Christie’s Great Estates International Luxury Real Estate Specialist. “The dream we were sold was unrealistic,” he says, then tells me of his father, who came over from Poland and envisioned homeownership as part of the American dream. “Owning a home is something I’ve been thinking about since I was probably 10 years old,” he continues. “But how would I actually be able to buy my house and make a living in America?”
He says that seeing that dream explode in the faces of so many responsible people makes him frustrated and disappointed. But like Lester and the others, he’s a realistic optimist. “I also see lots of positives in the market right now.”
Napa is moving again
One big positive, for Jezycki, is Napa itself. “Napa’s only getting better,” he says. “We’ve spent tens of millions if not hundreds of millions of dollars in private, state and federal money with regard to roads, schools, infrastructure, businesses, the flood project, restaurants and hotels. So if you want to move someplace, Napa’s a great place to come.”
It’s not for everybody, of course, with average sales prices of more than $1 million, and still a number of people continuing to lose their homes, but still, in the higher end (a price point that’s been stagnant over the last year), things are moving again. Jezycki adds that great values are available throughout Napa Valley in all price ranges, from starter and family homes to luxury estates.
Heidi Rickerd-Rizzo, is vice president and cofounder (with Bill Facendi) of Terra Firma Global Partners, which covers Marin, Sonoma and Napa counties; her primary markets are Marin and the Sonoma and Napa valleys. In the business for 33 years, she sees current trends in historical perspective, and is again realistically optimistic.
“For our company personally, we’re actually having a very good year,” she says. “Our sales volume and projections are ahead of schedule. Our associates are doing very well in this challenging market, particularly in Napa Valley.”
Volumes up but values down
The high volume area tends to be in what Rickerd-Rizzo describes as the “very difficult market segment”—that is, foreclosures, known politely as real estate owned (REOs) and short sales. Here, she says, the “sweet spot” in Sonoma County and the city of Napa is in the $250,000 to $350,000 range. For these homes, it’s practically a feeding frenzy, with multiple offers, many from all cash buyers. In addition, first-time home buyers are getting shut out by overbidding investors. This is great for the lucky buyers and the agents who work in this price range, but, she admits, the average sales price is still down, which isn’t good for sellers who purchased at the peak of the market.
“Currently, we’re seeing a second wave of lowering price points,” she says, “but unit sales volume is very high. Depending on the specific location, the market segment price point can still be off between 29 and as much as 40 percent from the peak of the market.”
Julie Brooks Larsen, Pacific Union’s number one agent in Napa County for the last two years, has turned the downturn into a specialty and currently sells foreclosures, as well as high-end luxury and vineyard properties. “One thing I come across quite a bit,” she says, “is people thinking they’re going to get a good deal with a foreclosure and expecting to get below market rate. But that’s not factual. Banks aren’t in the business of giving properties away. They have to have two broker-priced opinions and a formal appraisal performed before the property comes on the market. They want to make sure the price is market rate. So if someone thinks, ‘Just because I have cash, I’ll get a 20 percent discount,’ that’s just not happening.”
Karen Cherniss, a sales associate with Pacific Union, reminds us of the impact foreclosures and short sales have on property values. Once one happens, whether it’s a short sale or a foreclosure, “that sets the bar.” Before the economic downturn, a house could be valued by its amenities, the lot size or the swimming pool, but in this environment, it’s strictly about what else is sold nearby. “You could have diamond-studded floors, but the value is determined by what else is sold in the neighborhood. You don’t get any points for having marble bathrooms.”
Statistics tell the tale
“If you look at the stats,” says Gellepis, “the number of homes sold in May 2011 declined by 12.5 percent over one year ago. So that doesn’t look good.”
He says both median and average sale prices declined slightly for homes that sold in May 2011 over May 2010. “But,” he says, “the number of homes that went into contract [had a sales offer accepted] reached a four-year high.”
Gellepis adds that he’s seen southern Marin sales in the $3 million to $5 million price range finally start to move after a pretty flat year. “We had a house on the market in Mill Valley for more than a year and a half,” he says. “It was listed for $4.995 million, and we just got an offer.” Was it an investor? “No. It’s a lifestyle buyer. Someone who loves Mill Valley and wants to move in.”
With the increase in high-tech and biotech industries moving into San Francisco, he says he’s seeing a lot of interest in southern Marin County. “Buyers who have money and can afford to buy the lifestyle gravitate here,” he says. “There are high-level CEOs and CFOs from all these new companies in San Francisco—from Google to Facebook to Twitter to SalesForce.com, and the whole Mission Bay biotech development project. A lot of the senior-level executives from all the biotech companies are buying homes in Marin County.”
Still soft in the upper end
While “quintessential” Marin—the high-profile, high-priced area with views of the Golden Gate Bridge and golden, grassy hills—may be holding its value, other high-end areas in the North Bay are starting to move, but only despite (or because of) significant value “adjustments.”
“Our offices have had several recent closings—including a few I represented—in Napa Valley,” says Rickerd-Rizzo, referring to properties that once listed in the $2 million to $7 million range, “that were purchased for 40 to 70 percent of those values.”
She says many current buyers are stepping into Napa Valley’s high-end marketplace, with all cash, and sellers, who may have had their properties on the market for three or more years, are finally ready to adjust their expectations and sell. “It took a long time for sellers to get their heads around the changing market value, particularly in upper Napa Valley, where they’re used to getting the prices they want,” she says. “So you’ll find people pulling their houses off the market [to wait out the downturn] or finally starting to make price point adjustments.”
Why, in prestigious Napa Valley, would these upper-range properties not hold their value? Two major reasons, she says. First, unlike the actual cities of Napa and Sonoma, where people live, Napa Valley, especially “up-valley” estates and wineries, tends to be more of a second home market for people with very large discretionary income. “When that income started to shrink,” says Rickerd-Rizzo, “people weren’t willing to buy at those higher price points.”
The second reason, she says, has to do with the nature of value itself.
Value is relative
“When I talk about 29 to 40 percent off,” says Rickerd-Rizzo, “we’re talking about off the peak of the market in 2006. That’s what every real estate professional looks at: before the Wall Street debacle and subprime mortgage meltdown.” In other words, loss is relative. If you bought high, you’re indeed losing equity in a fallen market. But if you’ve had your property for a long time, you’re losing expected value, not actual equity. This difference is important in the psychology of the marketplace.
“People keep asking, ‘Where’s the bottom?’ But it’s all really relative,” says Rickerd-Rizzo. “There are always people who have to buy. There are always people who have to sell. It’s always a good market. It just depends which end of the table you’re at in any given market.
“With current price points as attractive as they are, coupled with historically low interest rates, there’s never been a better time to buy. I don’t think I’ll see this kind of opportunity again in my lifetime.”
Are banks giving loans?
Pacific Union closed 250 deals in May, says McLaughlin, and close to 320 deals in June—and not all of them were cash. “We’re doing 120 to 145 deals per month with loans,” he says. “So there are opportunities out there for the conventional buyer to put 20 percent down and get an 80 percent loan-to-value. With interest rates hovering at or below 5 percent, that’s pretty cheap money, and there are some situations where we can bundle the primary loan with an equity line and get 85 percent loan-to-value. But that person has to have a good job and a savings account.”
In other words: If you have the credit scores, the down payment and the savings account, you’re good. The documentation you have to provide will be more extensive than it was a couple years ago, he says, “but [not having] that documentation is what got us into this mess.”
“It is a mess,” agrees Bradley. “On an individual basis, dealing with clients on the short sales, it’s a mess. Each of these people has a story to tell that’s heartbreaking. For the most part, there are three primary factors involved—the loss of a job, a divorce or a health issue.
Of course, many homeowners simply decide they don’t want to pay their mortgage now that the home value has gone down so drastically. And then there’s the group who’ve used their house like an ATM, drained away any equity that was in it and now cry “victim” and want to walk away. Realtors, who spend their days in good faith helping people find and negotiate the right deals, don’t like to talk about these cases. But they’re part of the story and part of what’s changing the culture of the market. Rickerd-Rizzo describes this change as moving from the pride of home ownership (that’s been a cornerstone of American culture) to, for some people, something akin to a pride in walking away. “In 33 years of business, I’ve never seen anything like this,” she says. “It’s important for people to understand that owning a home isn’t just about equity—even though, historically, it’s been the greatest way to grow wealth—it’s really about community and family.”
Robert Bradley adds that it’s now more difficult for people who don’t have verifiable income to get a loan. “We’ve partnered with a new lender, Met Life, and it’s being very innovative in lending to clients like that.
"It’s engaged one of the big accounting firms, so now, when someone applies for a loan, the tax return is actually sent off to a CPA firm [for verification].”
Coldwell Banker’s Celli cautions that buyers need to look at their economic snapshot right now to determine if they can comfortably afford a home. “I don’t take anybody out [to look at homes] without their having first talked to a mortgage broker and understanding what they can afford.” She wants for herself and her client to be sure they can move forward with a successful transaction. Knowing you can qualify for a loan can save everyone time and heartache. It can also give a buyer confidence.
“Don’t be afraid. Talk to a mortgage broker,’ she advises, adding that she’s seeing more Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans than ever before. “If you’re interested in buying a home or an investment property, it really is the time, right now.”
Is the tide of foreclosures spent?
“I attend numerous default servicing conferences across the United States, where we conduct roundtable discussions,” says foreclosure expert Brooks Larsen, “and from what I understand, we have potentially another three to five years of seeing foreclosures, because some banks haven’t even started the default process. We have people who bought with an adjustable rate in 2007 or 2008, which puts us into 2012 to 2013 before the rates adjust on those mortgages, and those people may potentially walk away if they can’t keep up the payments.”
Then, there are those who will wait and wonder whether it makes more sense to stay under water or walk away. “It’s just a big mess,” says Brooks Larsen. From her point of view, prices seem to be at bottom in Napa County, “but we can’t predict the future.”
She wonders: Are we going to get jobs back? What would happen if we had an earthquake or another big round of layoffs? Things could go very wrong, very quickly.
But for now, things seem to be stable. “In my opinion,” she says, “the market as we knew it during the boom years, with double digit appreciation on properties, is a thing of the past, and we may never see it again. Historically, properties appreciated at a rate of 3 to 5 percent annually. Homeowners who used their property as a piggy bank—taking out the equity and assuming the unsustainable, double-digit appreciation would continue—are the people who are underwater today.”
So what advice do these experts offer? To sellers? To buyers?
Gellepis cautions buyers to recognize that a rise in interest rates will cost more, in the long run, than lowering the selling price. “If a buyer thinks the market’s going to go down 10 percent over the next six months,” he says, “but interest rates are going to rise 1 percent during that same time, that buyer is better off buying now, because the 1 percent increase in interest rate in the life of that 30-year loan will cost more money than would be saved by paying 10 percent less.”
For sellers, he councils a culture change: “On the sell side, it’s the cost of the house versus the price of the house,” he says. “For reluctant sellers, there’s liquidity in the market even though it looks flat statistically. If you have a house in a desirable location, in turn-key condition and priced right for this market, you’ll be successful and sell it.”
Let’s go
“I have a buddy who says, ‘When the sky falls, everybody gets hit in the head,’” says McLaughlin. “Nobody escaped what happened, right? So maybe your equity portfolio might have dropped to 55 to 60 percent of what it was before the crash—but it’s well into its recovery and still a portfolio. So let’s get on with life. Hit the reset button and let’s go!”
His advice to sellers is to understand their motivation for selling. “Do they have a lifestyle change coming up? Do they need to get out for economic reasons? They need to separate themselves from, ‘I thought my house was worth $1 million, and it’s only worth $700,000.’
“I probably sit with 20 to 25 clients every month who come in and say, ‘I have to sell, and it’s going to be devastating.’ And I have to say, ‘You’re not alone with this. Let’s talk about how your life would change if you didn’t have the mortgage hanging over your head.’
“It really is about getting on with life—not just going out and acquiring things, but repurposing the intellectual capital and using creativity to manage your way out of a bad situation.”
Probably the best advice, expressed in one way or another by all interviewed for this article, is that if you’re buying a home, remember that it’s a home. You’re not buying it for a quick investment or even a semi-quick investment. If it’s what you want to live in, it’s a good investment for you. So how to go about it? Jezycki says to trust your instincts and create relationships: “I tell my clients that trust isn’t built in a day. Go meet the people face-to-face, and don’t make decisions based on fear.”
Finally, says Gellepis, “We have to be realistic, and we have to educate our sellers and our buyers that this is the new market. This is it!”
Rentals Going Wild
“We help find rentals as an accommodation to our clients,” says Andy Gellepis of Frank Howard Allen. While he doesn’t manage rental properties, finding rental situations for people while they’re looking to buy or helping owners find qualified renters is a good solution for some, in the short or even long term. In southern Marin, he says, people having a hard time selling often turn the property to rental as a way to keep up with the payments. He says people wanting to move into the area but unable to buy immediately are often happy to pay $4,000 to $6,000 per month to enjoy the lifestyle while they’re waiting for the right home. For some owners who need to make a change, it makes sense to rent out a home rather than default on the mortgage, while waiting for the best time to sell. Still, says Gellepis, “people who are relocating would rather buy a house for $1.8 million than rent it for $8,000 per month—provided they have the down payment.”
