North Sound Property News

Yesterday I sat down and compiled a set of real estate statistics for the city of Mukilteo going back two years.  I usually look at these statistics on a monthly basis but yesterday was the first time I compiled those into a spreadsheet to look at the market over time.  My goal is to go back as far as I can in order to get a good insight to how the Mukilteo market is performing currently as compared to previous years but I thought I would start just by comparing the last 2 years, which will show fairly clearly the decline of the local market in terms of sales volumes and pricing trends.

What finally prompted me to actually get going on this was the shockingly low number of closings in Mukilteo in the month of January 2009.  When I pulled up the closings for the month, I was surprised to see that they were less than half of any prior month for as far back as I could remember.  One normally expects January to be somewhat slow but even as compared to the last two Januarys, the number of closings was extremely low. 

In January of 2009, we had 4 closings in all of the Mukilteo 98275 area code.  This is an area with a population of more than 20,000, where we currently have 135 active listings.  Yes folks, that means we currently have an absorption rate of approximately 34 months - that’s nearly 3 years worth of inventory at the current rate of closed sales.  The good news is that the number of listings isn’t all that much higher than it was a year ago, but the rate of sales slowed almost to a standstill.

Another way to look at this, is to look at a seller’s chance of sale.  Sellers in Mukilteo had a 3% chance of selling their homes in January 2009.  During the brisk real estate market, the chance of making a sale was more in the 30% - 40% range!  So that is how different things are now.

I attribute this state of affairs to continued weakness in housing locally (as illustrated by this article in the PI on Friday, calling the Seattle area out as having the largest drop in sales in the US), combined with December’s snowstorms and overall lack of confidence on the part of consumers–as well as a relatively seasonal market for real estate in Mukilteo even under the best of circumstances. 

As far as weakness locally goes, I agree with Glenn Crellin of the Washington Center for Real Estate Research, that

“I am not surprised that we have one of the weakest performances out there.  It’s largely a reflection of (the fact that) we began to decline much later, so our cycle is less mature, if you will, than some of the other parts of the country that have already taken their lumps.”

However, it’s important to remember that “this too shall pass.”  As Crellin points out, we began our decline only last year.  The markets that were ahead of us, such as California, have already begun to rebound, and the National Association of Realtors also reported an increase in sales nationally of 7% year over year in December.  My thought is that we probably have another year or so of low levels of sales and declining prices before we reach a level where real estate as an asset class makes financial sense in a more conservative environment.  That’s barring massive layoffs and widespread financial disaster.  When the cash flow picture becomes more favorable, investors are likely to begin leading the way back into the market.  I know of quite a few investors currently in “wait and see mode.”  The upshot of this in my opinion is that further price declines in the coming year are highly likely.

In the shorter term, the big question is whether we will see any sort of bounce in terms of volume in Mukilteo’s real estate market moving into spring.   Typically, that is the pattern we would see.  Currently we have 16 properties pending in the area, although there have been no closings in February so far.  So it does seem as though a spring “bounce” back to last year’s level could be underway.  But in terms of closed sales, things are still pretty weak–and in the end closed sales are what matter.

Here is a chart illustrating how the Mukilteo market is currently performing in terms of closed sales as compared to the previous 2 years.  Sales in January 2009 are less than 1/10th of where they were in January 2007 at the top of the market, and less than half of last year after the financial crisis had begun to impact us locally.

In terms of pricing, the Mukilteo market is a fairly low volume yet diverse market, so it can be somewhat difficult to identify a clear trend when looking at median sales price.  It tends to bounce around quite a bit depending on whether a given month sees more high-end sales, or more sales in the lower end of the market.  However, looking at the sales price per square foot does show us that buyers are getting more house for the same money compared to back in 2007. 

The last item I will look at in this post is Original List Price to Final Sale price. This metric tells us how much sellers are having to revise pricing to bring a sale. Typically, I feel this number is a better indicator of how flexible sellers are on pricing than comparing list price that the time of sale to final sale price (which is the metric used by most Realtors). That List price at time of sale vs. final sale price typically hovers in the 95% range, meaning that sellers on average will only accept about 5% off their list price in order to sell.  However, when you look at Original List Price and compare it to Final Sale price, you will see that over the last year sellers in Mukilteo are discounting 8-10% off of their original list price order to sell.

So what is the underlying message? The underlying message to sellers is that it’s very difficult to bring a sale right now, and the best thing you can do from the outset is to make sure your home is priced the best in its class. There is just too much competition in the market to get away with over-pricing. Buyers will simply look elsewhere.

For buyers, I think the message is that pricing is somewhat more negotiable than it has been in previous years. If you can get into the ballpark with a seller, you have a better chance than you did in the past of being able to come to terms you both can agree to. Once upon a time, list prices were firm, but today many more sellers are willing to entertain “best offers” than would have been the case two years ago.

I am finally coming back from hiatus to blog here, and the first thing I want to do is to catch up on Snohomish County Market Statistics.

The market here in the county has been quite slow for homes since about August 2007 due to the credit crunch and what is now recognized as more widespread economic problems. In a sense, up until last year the Seattle area had been fairly well-insulated against these problems, but when investors lost confidence in the financial markets, those problems came home to roost. I guess the lesson being, real estate markets are local, unless there is a global financial crisis, in which case they are not.

That said, the news is not all bad. One of the things that is actually a positive sign is that absorption rates have stabilized over the last year. They seem to be hovering around the 8 to 9 month mark overall in southwest Snohomish county for most of the last year.  The only exception to this is the Christmas season 2008, where inventory levels shot up to 10 -  12 months and then promptly returned to the 8 - 9 month level in January.   This roughly followed the trend last year at that time.

Absorption rates are based on pending sales and active listings on the market, expressed in terms of how long it would take to sell through all active listings at the current rate of sales.  Our problem since August of ‘07 has been the combination of high levels of inventory….

Along with a significant reduction in the rate of sales…

You might visualize the scenario that this created as the proverbial “pig in a python.” The thing about pigs in pythons is that a python can digest a pig, but it takes a long time. Same thing applies to the inventory level in the county. The good news, I think, is that sales seem to have found a baseline level.  This baseline is about 1/3 of where it was at the peak of the market, and only absorbs a small percentage of inventory each month, but it seems to have stabilized and isn’t continuing to drop. 

What has been selling has seen a major sea change in the last year, as well.  Where up until a year or so ago we rarely saw sales of bank-owned or short sales, we’re now seeing those kinds of sales representing a significant portion of what is selling.  That, along with “selling-off” from builders, is driving a new pricing structure for homes. 

(Note that the above chart seems to imply that prices are on the upswing in area 740.  I think this may be more a function of the polynomial charting trying to find a trend in an area where the trend isn’t actually clear.)

The big questions for 2009 are going to be whether prices will reach a level that buyers and lenders will feel comfortable taking the risk of buying in?  For sellers, the question is likely to be, “what does it take to get a home sold in this market?” And in fact, these have always been the smart questions to ask, it’s just going to be more important than ever to ask them.

One of the problems we commonly see in the current real estate market is that buyers and sellers do not tend to agree on the value of any house.  Rare is the buyer today whose buying strategy is to pay full asking price for any home on the market.  And rare is the seller whose intention is to accept the first offer that comes along, no matter the price.  Even when a house is new on the market and priced seemingly competitively, most buyers are looking to see if there is any room to make a lower offer.  After all, the thinking goes, homes are declining in price so if I buy today, prices will go lower tomorrow.  Most buyers want to take that discount upfront, and this is where they get into conflict with sellers.  Most sellers want to sell at today’s best price rather than tomorrow’s worst.

 Which brings us to the idea of the “Offensive Offer.”  One of the first things that struck me as odd when I entered the real estate field was the idea that an offer could be so offensive that a seller would just decide they didn’t want to negotiate at all with a particular buyer.  Yet, we see it happen all the time.  After all, the rational mind asks, isn’t something better than nothing? 

Turns out, the answer to that question is often no.  

 It seems to go against common sense.  After all, in a difficult market, you’d think a seller would realize that getting an offer is a good thing, even if it’s not the one you are looking for.  And in a stronger market, why bother getting offended when you can just wait until a better offer comes along?  Why get emotional about it?

Turns out, this kind of emotional response has been studied by behaviorists, and has been found to be very common.  This article in Slate today, resonated with me:

We like to think we go through life as rational beings. Much of economic theory is based on the notion that humans make rational choices (which may mean that economists don’t get out much). In 1982, some economists came up with a little game to study negotiating strategies. The results showed that rationality is subservient to more powerful drives—and demonstrated why human beings so easily conclude they are being wronged. The idea of the “ultimatum game” is simple. Player A is given 20 $1 bills and told that, in order to keep any of the money, A must share it with Player B. If B accepts A’s offer, they both pocket whatever they’ve agreed to. If B rejects the offer, they both get nothing. Economists naturally expected the players to do the rational thing: A would offer the lowest possible amount—$1; and B, knowing $1 was more than zero, would accept. Ha!

In the years the game has been played, it’s been found that almost half the A’s immediately offer to split the money—an offer B’s accept. When A offers $9 or even $8, B usually says yes. But when A’s offer drops to $7, about half the B’s walk away. The lower A’s offer, the more likely the B’s are to turn their backs on a few free dollars in favor of a more satisfying outcome: punishing the person who offended their sense of fairness. This impulse is not illogical; it is essential. In Descartes’ Error, neurologist Antonio Damasio shows that humans who behave purely rationally are brain-damaged. Patients who have suffered injury to the areas in the brain that control emotion, but who retain their intellectual abilities, end up acting in socially aberrant ways.

My job as an agent is to try to get a buyer and a seller to see eye to eye with regard to the value of a home.  Knowing that when a seller is presented with a lower offer, his response is likely to be offense rather than acceptance, the way that an offer is presented is critical.  One of the most important aspects of this is to create a situation where the buyer and seller can understand and hopefully empathize with one another’s point of view.  Sellers are more likely not to take offense, and to consider a lower offer, when it is presented as “best we can do” vs. “most we will pay.”  Buyers also need to understand that sellers tend to counter offer only when presented with an offer that is in the range of what they feel is a fair price.  This is why we rarely see offers accepted if they are not within 10 - 15% of asking price. 

This illustrates why negotiating skills are so essential when selecting an agent.  Part of what a good negotiator does is create a situation where the ultimate goal of both parties–that is, for the seller to sell, and the buyer to buy–can be reached.

So maybe you noticed I haven’t been posting a lot lately.  Maybe you were wondering why?  Well, two reasons really.  One, I couldn’t see blogging much during the summer, because once summer finally arrived, it was fantastic.  If it comes to a choice between being inside blogging or outside doing just about anything else, I’ll choose the latter almost every time.

  Two, with everything that’s happening, I really couldn’t figure out what to say about any of it.  Call it denial, or writer’s block, or just a short attention span, the reality is, I didn’t feel I could do justice to the complexity of what is happening in the real estate and credit markets with a short post…  So rather than write a short post, or something trite, I chose not to write anything at all.  Bad blogger!

 But, I feel like it would be irresponsible to let this week’s events pass without a blog post about the issues with WAMU, and maybe a few words about the impact of the financial crisis on our Snohomish county real estate market, and Mukilteo in particular.

 With regard to WAMU, there is hardly anything I or anyone can say to express what a big deal this is, not just on the local level.  This is a news story of national, or even global scope.  If it fails it will be the largest bank failure in American history.  This is huge.

As to the government response, I think that the Treasury and the Fed have been a bit hamstrung over the last few months between wanting to control inflation, on the one hand, and recession on the other hand, brought on by the collapse of the housing market.  At this point, the biggest challenge to the health of our economy is no longer inflation.  Though, heaven knows that is much worse than we are being led to believe given that any American consumer can tell you that the cost of just about everything from gas to milk has gone up substantially in the last 3 years.  At this point, the biggest threat to our economy at this point is a recession, or possibly even a depression, brought on by lack of available credit.

 For better or worse, credit is the engine that drives our economy.  Without credit, the majority of Americans can’t buy a home.  Without credit, most new businesses cannot open their doors.  Without credit, existing businesses cannot expand, and our economy cannot grow.  And credit dries up when investors become afraid to invest in our economy.  Our government can’t allow this to happen, so when these are the stakes, I believe they are right to do whatever it takes to restore confidence that investment in our economy as a whole is generally a safe and prudent one. 

 So I am hopeful that this is a first step to restoring that confidence, but I doubt it will translate to much in the way of change for the local housing market for some time to come.  We still have too much inventory, prices are still too unstable, and there is still a long way to go before either of those factors change.

That doesn’t mean I think it’s foolish to buy or sell a home at this time, but I do think it is foolish to do so without being aware of the true situation, and the potential risks/rewards.  For some, the idea of buying into a declining market is completely unacceptable.  For others, the long-term rewards of owning still make sense - whether it’s the desire to put down permanent roots or the possibility of picking up a “bargain” in a weak market.  And for sellers, the decision to sell or hold a home will depend largely on your personal situation.  If you still have a lot of equity in your home, and are planning to move anytime in the next couple of years, now might be a great opportunity.  If you don’t have a lot of equity, and don’t really need to move, then now may not be the time.  The key is to do your due diligence and make sure your decision is one that makes the most sense in your individual situation.

So, all of that said, where is the bottom?  Are we getting close to it yet?

The first thing to note is that unlike this time last year, the addition of new inventory has slowed down.  That’s a positive–that indicates that things are stabilizing a bit.  By and large sellers have figured out that the gravy train has ended, and we are seeing less of the “fly it up the flagpole” types of listings coming on the market.  What we are seeing, however, is a lot more in the way of distress sales - short sales, pre-foreclosures, divorces, estate sales, etc.  These are the types of sales where bargains can be found.

So in general, we still have a lot of inventory, and new inventory is still hitting the market but it’s not growing at a 30% clip like it was last year, and most of it is what I would refer to as being “motivated.”   We are also seeing a slowdown in new construction hitting the market, but this may depend on where you are.  Here in the Mukilteo market, we still have a good amount of new construction coming online from Crown Park, Westridge, the Fairview and now, a new development coming in at The Arbors, which should have it’s first model available in November.  However, compared to last year, production has definitely slowed.  Areas with a lot of new construction are seeing the biggest price drops as builders try to unload their inventory.

 Which brings me to the first sign of finding the bottom: inventory will be shrinking, rather than growing.  All these projects that have been permitted in the last few years and which are still coming on line are going to be driving our market for some time to come.  Remember, it was lack of inventory that drove prices up, and now it’s a glut of inventory (along with a few other things like tighter credit terms) that is driving prices down.

Second sign of a bottom?  Prices will stabilize as a result of less inventory to choose from.  Just as prices started leveling off in June of 2007 and held steady for several months as the flow of credit into the market slowed and inventory began to increase, one would expect to see prices stop dropping and level off, and credit loosening up a bit, before any kind of return to appreciation is likely to occur. 

 In some areas of the country this is already happening, but the Seattle metro area appears to be lagging behind those areas.   Some argue that this is because much of Seattle’s business activity is in the B2B sector (think Boeing, Microsoft) and cutbacks/expansions in B2B spending tend to lag cutbacks/expansions in consumer spending.  We lagged behind the rest of the country as appreciation accelerated, we lagged coming into the downturn, and it probably makes sense that we will lag when things turn around.

Here is the first truth about short sales: there is no “one truth” about short sales.  If you ask 10 different agents about what it’s like to work short sales, you’ll probably get 10 different answers, which will be influenced by the agent’s personality and tenacity, the situation surrounding the short sale, the lender itself, and who they talked to at said lender.

 The point of this post isn’t really to imply that all short sales are the same and that there is only one way to handle them, simply to pass along some things I’ve learned when I’ve handled them.  Your mileage may vary.

 First things first.  You may be reading this and asking, what is a short sale?  A short sale can be called by many different names, but all of them refer to asking a lender to forgive debt on a house that is sold for less than is owed.  This situation is referred to as being ”under water” or negative equity.

In my experience, getting a short sale to go through requires a very tenacious real estate agent, buyer and seller.  There are a lot of obstacles that can get in the way of getting a short sale approved and you have to be willing to diligently work through those issues and provide the information requested in order to get the short sale approved.  You also have to know how to navigate through the various levels of bureaucracy involved, or it won’t happen.

 One of the first things to know is that if a short sale is approved, the debt to the lender does not go away.  Usually what they want to do is attach a lien to any other assets you may have, or work out a repayment plan.  If it’s clear that there are no assets and no way to repay, then and only then is it possible to have the debt forgiven.  If the debt is forgiven, the IRS considers this as taxable income, and you will have to pay taxes on it.

The second thing to know is that there is no way to do a short sale and not have it affect your credit in some way.  The best you can hope for is to mitigate the damage by being cooperative and communicative with the lender.

I think it’s already clear that this is not a situation to take lightly.  The only seller who should consider doing a short sale is one who is in a MUST SELL kind of situation.  Death, divorce, illness or disability, and other such life-altering types of events are the kinds of things that commonly are associated with these kinds of sales. 

Generally, if you’re still paying your mortgage, and it appears to the lender that there is no reason to believe you can’t continue to do so, they won’t approve your short sale.  If you are more concerned about the damage to your credit than you are about selling the house, and you are still able to pay your bills, you may not really be in a situation of having to do a short sale.  Perhaps a better choice would be to take your house off the market and rent it out, if you can find a renter.  Of course, if you can’t find a renter and if you can’t pay the mortgage without one, you may be back to having to consider selling short. 

The bottom line is, a short sale should be a last resort.

 To get a short sale approved, you have to put together a “short sale package.”  Each lender has slightly different criteria for this package, but there are some common elements.  The purpose of the package is to build the case for why the lender should consider taking a loss on their loan, as they won’t do so unless they believe that this loan is going bad no matter what.  The package usually includes a hardship letter, detailing the circumstances of the short sale–the sadder the story, the better the odds of approval.  Other elements of the package include financial statements, pay stubs, medical bills, divorce decrees, etc. 

 The most important element of the package is the purchase and sale offer, as a lender isn’t going to consider the short sale until there is an offer on the table and it can be proven that the sale price is indicative of market value, after having allowed a sufficient period of time to sell. 

Once this package is put together and submitted to the lender, it can take several weeks to get it approved.  The best way to speed the process along is to follow up diligently on all requests.  It’s also important to choose an agent who is experienced with short sales, understands the behind-the-scenes structure at the lender, and can motivate the different players involved to achieve a speedy resolution to the process. 

 There is a lot more to be said about short sales, but each sale seems to be highly individual, as every seller, buyer, lender and agent may handle things a little differently.  Some buyers think short sales are a great way to pick up a property that is a good deal…and in some cases they can be.  Most buyers wish to avoid the hassle and uncertainty involved with any deal where a third party is involved.  Some sellers think that a short sale is a “get out of jail free” card, when in fact a short sale is a very arduous process that involves some fairly serious negative ramifications.  Other sellers are so afraid of damaging their credit that they won’t consider a short sale until the damage done by waiting is worse than it would have been by approaching this kind of sale from a business perspective.

 The bottom line is, that in a market like the one we are currently experiencing, it’s becoming increasingly important to understand how short sales work, and decide for yourself whether buying or selling a short sale home makes sense in your particular situation.