Car 2008 Homebuyer Survey

survey of california home buyer (formerly internet vs. traditional buyer survey)

Published and distributed by REAL ESTATE BUSINESS SERVICES, INC. a subsidiary of the

CALIFORNIA ASSOCIATION OF REALTORS® 525 S. Virgil Avenue, Los Angeles, CA 90020 (213) 739-8227 FAX (213) 480-0864 www.store.car.org

Copyright© 2008 CALIFORNIA ASSOCIATION OF REALTORS®

table of contents

Executive Summary Introduction

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How Buyers Operate in the Current Market Buyers’ Use of Technology

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Buyers Continue to Demand More from Agent Expectation and Satisfaction on Response Time

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Satisfaction Suffers As a Result of Market Turmoil First-Time Buyers – Where Market Recovery Begins Conclusion Graphs

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Survey Methodology & Questionnaire

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EXECUTIVE SUMMARY The housing market has confronted headwinds on several fronts since early 2007. LAX underwriting standards that left some sub-prime borrowers unprepared for rate adjustments, the global liquidity crunch, sluggish economic growth, and higher fuel and food prices are some of the factors that led to the downturn in the housing market. As the housing market dropped sharply from record sales levels that were set in 2004 and 2005, and prices began to soften, home buyers dramatically changed their attitudes and behaviors towards home buying and adapted to the new housing environment. This report is the 9th annual CALIFORNIA ASSOCIATION of REALTORS® (C.A.R.) Home Buyer Survey (formerly the Internet vs. Traditional Buyer Survey). It details changes in buyers’ behaviors in the housing market, driven in part by the health of financial market, by the increased use of the Internet in the real estate business, and changes in consumer psychology. Some of the key findings include: • Decreases in home prices and low mortgage rates were cited by home buyers as the top motivating factors in the market that encouraged them to buy. • Home buyers continued to rely on real estate agents to carry them through the process of home buying. Consistent with past years’ results, nine of ten home buyers (88 percent) hired an agent to assist them through the home sales transaction. • Before contacting an agent, home buyers on average spent 7.2 weeks considering buying a home and 6.2 weeks investigating homes and neighborhoods. After they found an agent, they spent an additional 8.7 weeks previewing and visiting 15.1 homes with the agent. • When selecting an agent, more than four of five home buyers considered the agent’s response time either “very important” or “extremely important”. • When asked why they were not satisfied with their agent, home buyers cited “agent did not negotiate aggressively on my behalf” and “agent was slow to respond” as their primary reasons for dissatisfaction. • Home buyers began their search process by using search engines on the Web to identify real estate sites, where they found housing related information on a wide rage of geographic areas and accessed comprehensive information on homes for sale. As they refined their process and narrowed down the properties they wanted to view, they found their agent’s site to be most useful. • The recent decline in home prices and low interest rates were the primary factors that influenced first-time buyers in their home purchase decision. Seventy-seven percent of first-time buyers, as compared to 64 percent of repeat buyers, said that lower home prices played a role in their decision to purchase a home.

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INTRODUCTION The housing market in the first part of 2008 has confronted headwinds on several fronts. First, many sub-prime borrowers who bought in 2005 overextended themselves financially and were unable to pay the higher premium as their mortgage rates reset in 2007 and 2008. This resulted in record delinquency and foreclosure rates in 2008, which pressured home prices to fall. Second, the global credit or liquidity crunch that emerged in mid-2007 cut off sources of funds for mortgage lending. This hit California particularly hard because so much of the housing market consists of non-conforming jumbo loans that could no longer be funded. Third, since early 2007, tighter underwriting standards have constrained the pool of qualified buyers. Fourth, economic sluggishness, lagging consumer confidence, and higher fuel and food prices all combined to further weaken the housing market. While tighter underwriting standards affected the entire market, the impact has been more severe on sales of lower-priced homes, where sales declined by as much as a third compared to a year earlier. In the late summer, sales of high-priced homes were dealt a major blow as the global liquidity crunch extended to the jumbo loan market. Although sales had recovered to pre-crunch levels by the end of the first quarter of 2008, the housing market remained weak in comparison to the peak years in the middle of the decade. Meanwhile, prices continued to be weak as housing inventory increased significantly in 2007 and early 2008. The statewide median price hovered about its April 2007 peak of $597,600 for much of the summer, but declined by a third to just over $400,000 by the first part of 2008. With the median price retreating back to 2004-05 levels, many homeowners who purchased in the past three years were left with little or no equity, or even negative equity. Housing affordability, on the other hand improved dramatically, increasing from 24 percent to 33 percent by the end of 2007. Improved affordability is sorely needed for the housing market to begin to climb out of its slump. On a seasonally adjusted basis, monthly sales in California appeared to have bottomed out sometime during the fourth quarter of 2007 and have gradually improved since then. Houses are much more affordable than they were a year ago at least until year-end 2008. Along with near-historical low mortgage rates, higher conforming loan limits, and financial assistance from the government through the economic stimulus package, the housing market should gradually emerge from the trough of the cycle as the economy recovers in the second half of the year. This report is the 9th annual CALIFORNIA ASSOCIATION of REALTORS® (C.A.R.) buyer survey that details changes in buyers’ behavior in the housing market, driven in part by the end of the market boom, by the health of the financial market, by the increased use of the Internet in the real estate business, and by the shift in the consumer psychology.

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HOW BUYERS OPERATE IN THE CURRENT MARKET Home buyers changed their attitudes and behavior towards home buying in response to the rapidly changing housing market conditions of the last few years. Perhaps the most obvious change was the dramatically changed role market conditions played in their decision to buy a house. Although many home buyers still cited low mortgage rates and likelihood that rates will move up as the motivating factor to buy a home, even more buyers said price depreciation was the top motivating factor that encouraged them to buy. • Sixty-nine percent of home buyers said price decreases motivated them to buy. • Forty percent said low interest rates help them move to a better location. • Twenty-three percent claimed the likelihood that rates will move up as the motivating factor.

Tip 1: Since market conditions play a role in buyers’ decisions, be sure to include local real estate market trend information at your next open house. You may compile this information through several sources including your MLS, local newspapers, and C.A.R.’s County Economic Profiles (CEPs) at www.rebsonline.com.

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With significantly more homes available to view than in recent years and a sense that home prices have not yet bottomed out, buyers have grown more cautious and moved more slowly than in previous years. They are more concerned about how home prices would be affected by the slow-down of the economy, the turmoil in the credit market, and the health of the housing market. This resulted in home buyers devoting more time to each part of the housing process. • Overall, home buyers spent an average of 7.2 weeks considering buying a home and 6.2 weeks investigating homes and neighborhoods before contacting an agent. After finding an agent, they spent an additional 8.7 weeks previewing and visiting 15.1 homes with the agent. • Consistent with past years’ results, the amount of time spent on each part of the housing process differed between Internet buyers and traditional buyers. Internet buyers were those who responded “yes” to the question, “Did you use the Internet as an important part of your home buying and selection process?” Traditional buyers were those who responded “no” to the question. The share of Internet buyers increased from 72 percent in 2007 to 78 percent in 2008, and the share of traditional buyers decreased from 28 percent in 2007 to 22 percent in 2008.

• Internet buyers spent an average of 8.2 weeks considering buying a home before contacting an agent in 2008, up from 7.6 weeks a year earlier. For traditional buyers, this measure dropped to 3.6 weeks in 2008 after doubling from 2.0 to 4.0 weeks in 2007.

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• Internet buyers and traditional buyers also spent significantly more time investigating homes and neighborhoods before contacting an agent, when compared to three years ago when the housing market was on its upswing. Internet buyers spent 6.9 weeks on the activity in 2008, the same as in 2007, but 2.2 more weeks when compared to 4.7 weeks in 2005. Time spent on investigating homes and neighborhoods for traditional buyers declined slightly to 3.8 week in 2008 from 4.2 weeks in 2007, but more than double from 1.6 weeks in 2005. • Although Internet buyers continued to move more quickly than traditional buyers once they began to work with an agent, they spent much more time with their agent in 2008 than they did in 2007. Internet buyers spent an average of 8.3 weeks looking for a home with their agent, an increase from 5.2 weeks in 2007. The time spent with an agent nearly quadrupled from two years earlier when Internet buyers spent from 2.2 weeks looking for a home. Traditional buyers spent 10.3 weeks on the activity in 2008, as compared to 8.0 weeks in 2007. From 2003 to 2006, the typical traditional buyer spent an additional five weeks with their agent when compared to an average Internet buyer. The spread between the two types of buyers has shrunk to two weeks since then. • Home buyers spent more time with their agent largely because they visited more homes in 2008. Internet buyers on average visited 12.7 homes with their agent, an increase from 9.3 homes in 2007, and more than double the average number of homes visited in 2005. Traditional buyers visited 23.3 homes with their agent, as compared to 20.2 homes in 2007, and an increase of 62% from 14.4 homes in 2005.

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Tip 2: As buyers investigate and visit more homes in 2008, it may be time to go back to the “basics”. Asking more specific questions about their housing needs and previewing homes in advance, might help shorten the time spent and number of homes you have to show your buyers. Despite the adjustment in behavior and attitudes brought on by the change in market conditions, home buyers continued to rely on real estate agents to guide them through the process of home buying. Consistent with results from previous years, nearly nine of ten home buyers (88 percent) hired an agent to assist them through the home sales transaction. Ninety-three percent of traditional buyers hired an agent to assist them in the home buying process, while 87 percent of Internet buyers used an agent in the process. Virtually all aspects of the home buying process had lengthened in 2008 when compared with a few years ago. This included the time devoted to the agent selection process: • Seventy-one percent of all buyers interviewed two or more agent before selecting one in 2008. • Sixty-four percent of all Internet buyers interviewed two or more agents in 2008, as compared to 53 percent in 2007. • The share of traditional buyers who interviewed two or more agents also increased slightly from 94 percent in 2007 to 95 percent in 2008.

Tip 3: Asking buyers to sign a Buyer Broker agreement may help you in a market where buyers are interviewing multiple agents. C.A.R.’s publication “The Relationship Between You and the Buyer” (available at www.store.car.org) helps explain how to work effectively with buyers while utilizing C.A.R.’s Buyer Broker forms.

Home buyers found their agent through different channels, depending on whether the home buyer was an Internet buyer or a traditional buyer. While Internet buyers found their agent mainly through the Internet (90 percent), traditional buyers found their agent through a number of different channels: • Prior dealings with the agent (32 percent) • Agent’s farming materials (28 percent) • “For Sale” signs in the neighborhood (27 percent) • Referral from friends or relatives (14 percent).

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Tip 4: Take advantage of C.A.R.’s ClientDIRECT™ online marketing tool. It’s free for members and helps you stay in touch with current and past clients on a regular basis, thereby retaining repeat buyers. For more information, go to: http://www.car.org/index.php?id=MjgwNw=

All buyers continued to have high expectations regarding an agent’s response time, but because buyers were more cautious and were taking their time with the home buying process, just being the first agent or the quickest agent to respond apparently was not a sufficient reason for the agent to be selected. • Forty-four percent of Internet buyers and 43 percent of traditional buyers selected their agent because he or she seemed to be the most responsive. • Twenty percent of Internet buyers and 17 percent of traditional buyers selected their agent because he or she was the most qualified. • Nineteen percent of Internet buyers and 22 percent of traditional buyers selected their agent because he or she appeared to be the most aggressive on their behalf. • Nine percent of Internet buyers and 11 percent of traditional buyers selected their agent because he or she was the most knowledgeable.

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• Five percent of Internet buyers and 3 percent of traditional buyers indicated that they selected their agent because the agent was either the first agent or the quickest to respond to his or her inquiry. • Three percent of Internet buyers and 4 percent of traditional buyers selected their agent because the agent was in the market area where the buyer wanted to move.

When asked how important the agent’s response time was in their decision on the selection process, • More than four of five (84 percent) home buyers considered the agent’s response time either a “very important” or an “extremely important” factor in their decisionmaking process. • Nine of ten (91 percent) of the Internet home buyers said the agent’s response time was either “very important” or “extremely important” when they decided whom to use as their agent, virtually unchanged from 90 percent in 2007. • About two-thirds (62 percent) of all traditional buyers thought agent’s response time was either “very important” or “extremely important” in their selection process, a slight increase from 61 percent in 2007.

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Tip 5: To enhance responsiveness, consider using a BlackBerry®, a Treo or other wireless PDA device that allows you to receive your clients’ e-mails immediately. In addition, think about setting up an auto response on your business e-mail correspondence that includes your cell phone number if your clients need to get a hold of you right away.

BUYERS’ USE OF TECHNOLOGY The use of the Internet as a significant part of the home buying and selection process has been growing since 2000. The share of Internet buyers has grown from 28 percent in 2000 to 78 percent in 2008, while the share of traditional buyers declined from 72 percent in 2000 to 22 percent in 2008. Growth in the use of the Internet in the home buying and selection process has been accelerated by the growth in broadband use, as the share of Internet home buyers using high-speed Internet doubled from 35 percent in 2003 to 73 percent in 2008. With broadband Internet access becoming available to more online users, home buyers were able to access interactive Web content through the Internet more efficiently. Web content such as digital photos, maps, and videos offer a richer experience than viewing one or two photos and a brief description in a print publication, and are valued by home buyers. When asked to rate the importance of several online tools: • “Multiple pictures/slide shows” was considered by most buyers as one of the most important online features in the home viewing process, with 87 percent of Internet home buyers rating this feature either “very important” or “extremely important”. • Similarly, “virtual tours” were rated as either “very important” or “extremely important” by 87 percent in 2008. • Eighty percent of all Internet buyers indicated that “Map/Directions” was either a “very important” or an “extremely important” online feature in 2008. • “Agent Contact Option” was rated by 74 percent of all Internet buyers in 2008 as either “very important” or “extremely important”. • With 74 percent of all Internet buyers rating it either “very important” or “extremely important”, “Neighborhood profile” declined for the second consecutive year from 82 percent in 2007.

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Tip 6: Since pictures are important to most buyers, maximize the number of photos when posting your listings on the Internet. Pictures featuring the positive aspects will help promote your listing more effectively than a description alone.

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With the help from these online tools, home buyers were able to conduct research activities such as previewing homes to narrow search, learning about specific neighborhoods, getting home financing information, and identifying homes for agent to show. • Seventy-one percent used the Internet to find a specific real estate agent • Fifty-five percent used the Internet to find a real estate firm • Sixty-two percent went online to preview homes to narrow their search • Sixty-five percent were able to identify specific homes for an agent to show through the Internet. “Identifying specific homes” and “previewing homes” online were the only activities with an increase in 2008. • Forty-eight percent obtained information on home financing and down payment on the Web, a decrease from 66 percent in 2005. Many home buyers probably realized, through media reports on the recent mortgage crisis, that home financing is a complex subject that would require a more in depth discussion with a professional in the field. • Forty-two percent used the Internet to learn about the neighborhoods to which they want to move Home buyers frequently visited more than one Web site when they conducted their research on the Internet. Some of the popular Web sites that Internet buyers visited were: • REALTOR.com (87 percent) • Individual real estate agent’s Web site (82 percent) • Web sites with listings of homes that buyers were interested (65 percent) • Real estate company Web sites (62 percent) • Zillow (36 percent) • Craigslist (34 percent) • Yahoo! Real Estate (32 percent) Consistent with last year’s results, Google was still the first Web site that home buyers – first-time buyers as well as repeat buyers – visited during the home buying process, followed by Realtor.com. The logic behind the statistics is intuitive: home buyers begin their search process by using search engines on the Web to identify real estate sites, where they could find housing related information on a wide range of geographic areas and look up comprehensive information on homes for sale.

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As they refined their search process and narrowed down the properties they wanted to view, they sought help from an agent, and found the agent’s site to be most useful. This was supported by results from the study, which confirmed that sites home buyers considered most useful were the individual agent’s Web site (33 percent), Realtor.com (23 percent), and Web sites with listings that buyer was interested (22 percent).

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In general, home buyers were pleased with their experience of using the Internet during the home buying process. Almost all agreed that using the Internet helped them to better understand the home buying process. More than nine of ten agreed that the Internet helped them understand home values better. Nine of ten agreed that using the Internet put them more in control of the home buying process. Seventy-two percent either agreed or strongly agreed that using the Internet helped them better understand and increased their appreciation for what real estate agents do. Fifty-five percent agreed or strongly agreed that the Internet helped them locate the best possible neighborhood. The Internet provides useful information for buyers to make decisions throughout the home buying process, but buyers continue to value highly the expertise of their agent as suggested by results from the survey. • More than half of Internet buyers thought the information they gathered on the Internet was less useful than that provided by their real estate agent. • Over one-third said that the information they gathered from the Internet was different from that provided by their agent. • Only about one of ten Internet buyers felt that the information they gathered online was as useful as the information provided by their agent, while none of the Internet buyers said the information they collected online was more useful than that provided by their agent. Survey results also show that 91 percent of the Internet buyers who used an agent found their agent through the Internet. As such, a strong online presence is a must for an agent to generate leads. Since an agent’s Web site was visited by most buyers and was considered by many as the most useful site on the Internet as previously stated, it is extremely important for agents to have a Web site that offers clients relevant information that they may need to help them make the best decision in the home buying process. Information such as listings with pictures and videos, news and trends of the housing market, tools or calculators to figure out how much home a buyer can afford, and options on home financing are just some of the content an agent should have on the personal Web site.

Tip 7: Make sure your C.A.R. Member Profile page is updated and includes a recent photo along with your current designations and areas of specialization. This will increase your chances of securing buyers who use the Internet to find an agent.

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BUYERS CONTINUE TO DEMAND MORE FROM AGENT As the Internet continues to empower consumers overall, they have also “raised the bar” in both the home buying process and what they expect from REALTORS® in terms of expertise and service. With more uncertainties in the housing market as compared to the last few years, buyers are demanding more and expecting more value from their agent. Home buyers expect their agent to help them navigate their way through the home selection process, the bidding process, finding and securing a loan, and closing the sale. With the housing market weathering the down cycle and the credit market tightening its standards, there is more stress at each of these points in the relationship than in years past and more opportunities for less than satisfactory outcomes. Buyers are also expecting more and are more difficult to satisfy partly because their mentality is different from that of buyers in prior years when the housing market was sizzling. At least some of the buyers today had been sidelined and had been patiently waiting for home prices to go down for years. As the housing market dynamics shift, these buyers realize that they have more power over the home buying process than before. Being in control of the situation, they want the best deal they can find in the market and expect their agent to deliver it to them.

Tip 8: In a market where buyers want the best deal they can find and sellers want the top dollar, presenting a Comparable Market Analysis (CMA) before an offer is written is a must. This will assist your buyer in deciding how much they would like to offer and may help minimize the number of unrealistic offers you write.

EXPECTATIONS AND SATISFACTION ON RESPONSE TIME Reflecting the ‘instant-access’ aspect of today’s world, buyers continued to ask for quicker and more frequent communications from their agent in 2008. Both Internet and traditional buyers demanded faster response times from agents in 2008, when compared to 2007. • Thirty-one percent of Internet buyers expected their agent to respond instantly, an increase from 22 percent in 2007. None of the traditional buyers, on the other hand, expected an instant response. • Sixty-eight percent of Internet buyers expected a response from their agent within one hour or less, compared to 59 percent in 2007. Fifty-nine percent of traditional buyers expected their agent to respond to them within one hour or less, a slight increase from 58 percent in 2007.

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• Ninety-six percent of Internet buyers expected their agent to respond within four hours or less, compared to 94 percent in 2007. • Seventy-three percent of traditional buyers expected their agent to respond within four hours or less, compared to 72 percent in 2007. • Ninety-eight percent of Internet buyers expected at least a same-day response from their agent, compared to 87 percent of traditional buyers. Tip 9: If your phone has an alert function that notifies you when a call has been missed or a message has been received, consider changing the frequency of the reminder alert, so you are notified every 2 – 15 minutes. You may also want to consider installing a “call me urgent” option on your website. There continues to be a gap between expected and actual response times. The share of home buyers who said their agent surpassed their expectations on response time dropped dramatically from 62 percent in 2007 to 36 percent in 2008. On the other hand, those who reported that their agent fell below their expectations slightly improved from 30 percent in 2007 to 27 percent in 2008. • Although Internet buyers were still more satisfied than traditional buyers with their agent’s response time, their satisfaction level fell considerably in 2008 when compared to the previous years. Thirty-nine percent of Internet buyers said their agents surpassed their expectations, as compared to 91 percent in 2007. • Five percent of the Internet buyers indicated that their agent well surpassed their expectations, a significant drop from 54 percent in 2007. Those who indicated that their agent response time fell below expectations also increased from 4 percent in 2007 to 18 percent in 2008. • Twenty-eight percent of traditional buyers said their agent surpassed their expectations, a moderate decline from 38 percent in 2007. After increasing sharply to 52 percent in 2007, those who said their agent fell below their expectation on response time further increased to 55 percent in 2008. The time to complete the home buying process stretched as the housing and financial environments have changed from earlier years. Buyers may not understand fully how timelines have lengthened, a factor that may lie behind decreases in satisfaction with response times. This is likely going to be the case over the foreseeable future, as the housing market slowly recovers but is still characterized by uncertainty. In the end, the key to dealing with buyers of any sort is to understand their expectations, to guide their expectations with frequent updates on the market and the process, and to respond to them in a timely fashion as concerns arise throughout the process.

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SATISFACTION SUFFERS AS A RESULT OF MARKET TURMOIL For the second year in a row, satisfaction levels of home buyers declined on all aspects of the buying process when compared to results from the previous year. On a scale of 1 to 5, where 5 is most satisfied and 1 is least satisfied, the satisfaction level for the overall process of finding a home declined from 4.4 in 2007 to 3.3 in 2008. The satisfaction level for the agent’s overall performance also fell from 4.2 in 2007 to 3.3 in 2007. Although Internet buyers continued to be more satisfied than traditional buyers on most aspects of the home buying process, the effects of a weak housing market environment likely lowered the satisfaction levels of both types of buyers across the board. Tip 10: One way to put recent market trends in perspective is to demonstrate the historical long term pricing trend of your local housing market. Reminding buyers that homes have statistically appreciated over longer periods of time may help alleviate some of the anxiety in the current market.

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• Internet buyers continued to be more satisfied with their overall home buying process rating it a 3.4, compared to 3.2 of traditional buyers. However, because the decline in rating from last year was more significant for Internet buyers than for traditional buyers, the satisfaction levels of the two types of buyers were much more in line than before. • Internet buyers were also more satisfied with their agent’s overall performance than traditional buyers, as they rated their agent with a score of 3.3 compared to the traditional buyers’ 3.2. • With the satisfaction levels for agent performance dropping from the previous year, it should not be surprising to see a decline in satisfaction regarding the value they received from their agent. Internet buyers’ satisfaction level declined from 4.4 in 2007 to 3.5, as compared to 3.7 to 3.3 for traditional buyers, for the value they received for what they paid their agent. When asked why they were satisfied with their agent, Internet buyers cited “always quick to respond” (79 percent) and “negotiated good deal on their behalf” (65 percent) as their top two reasons. Traditional buyers were satisfied with their agent primarily because their agent “listened to what they needed” (78 percent) and “helped find the best home for them” (62 percent).

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It is also important to understand the reasons behind why many home buyers were not satisfied with their agent, especially for this year when the satisfaction level on most aspects fell sharply from the previous years. Home buyers - Internet buyers and traditional buyers alike - were not satisfied with their agent primarily because the agent did not negotiate aggressively on their behalf (80 percent). “Not negotiating aggressively” has always been the most cited reason for traditional buyers’ dissatisfaction with their agent. But as all buyers have become more price conscious, even Internet buyers were expressing discontent with their agent’s aggressiveness in the negotiation process. Consistent with past years’ results, Internet buyers were also not pleased with their agent because they did not communicate effectively or efficiently during the home buying process (19 percent). Traditional buyers, on the other hand, were not satisfied with their agent because they felt that the agent wasted their time on homes that they had no interest in (21 percent). Although home buyers did not mention it, failure to close escrow on time probably contributed to the level of dissatisfaction buyers had with their agent. Fifty-seven percent of Internet buyers and 54 percent of traditional buyers did not close their escrows on time in 2008. When asked whether home buyers would use the same agent again in the future, 61 percent of all home buyers said they would, a decline from 67 percent in 2007. Twenty-five percent said they were unsure. • Only 71 percent of all Internet buyers said they would use the same agent again, a decline from 92 percent in 2007. Sixteen percent were unsure in 2007, compared to 5 percent in 2007, and 0 percent in 2006. • The share of traditional buyers who would use the same agent again fell from 47 percent in 2007 to 27 percent in 2008, and was well below the figure of 79 percent in 2005. Those who were unsure fell from 50 percent in 2007 to 52 percent in 2008. The decline in agent loyalty may be attributed in part to heightened stress faced by home buyers in the current market climate. This should be cause for concern on the part of agents, since repeat clients and referrals are such an important part of an agent’s long-term success in the business.

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FIRST-TIME BUYERS - WHERE MARKET RECOVERY BEGINS A key ingredient to recovery in the housing market will be an increase in the ability of first-time buyers to enter the market and buy a home. This will happen when affordability improves sufficiently, both because of lower prices and favorable interest rates. Sales will recover when first-time buyers start absorbing entry-level homes and free up equity of repeat buyers who would then trade-up for their next property. As such, it is important to understand first-time buyers’ behavior, to know how to serve them well, and to learn about current opportunities to turn renters into buyers, either by matching them up with a for-sale home or by assisting them in locating and buying a distressed sale. The share of homebuyers who purchased for the first time in 2008 made up 19 percent of all buyers, while repeat buyers was at 81 percent. First-time buyers, typically in their early thirties, were in general younger and had a lower household income than repeat buyers. Because of lack of equity, first-time buyers bought homes that were more affordable than those purchased by repeat buyers. Thus, it was not surprising that declines in home prices and low interest rates were the primary factors that influenced first-time buyers in their home purchase decision.

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• Seventy-seven percent of first-time buyers, as compared to 64 percent of repeat buyers, said that lower home prices played a role in their decision to purchase a home. Home price depreciation was not cited by either first-time buyers or repeat buyers in the previous few years. • Forty-three percent of first-time buyers decided to buy their home because low interest rates helped them move to a better location, consistent with 41 percent in 2007. • Twenty-three percent of first-time buyers decided to buy their home because they believed interest rates will likely move up, a significant decline from 84 percent in 2007. First-time buyers devoted more time than repeat buyers to research on their own in the early stages of the home buying process. With more uncertainties prevailing in the housing market recently, first-time buyers wanted to do more research on their own and with their agents before buying a property. They spent more time considering buying, investigating, and previewing homes in 2008 than in 2007. • First-time buyers spent 8.3 weeks considering buying a home before contacting an agent, an increase from 7.6 weeks last year. • They also spent 6.0 weeks investigating homes before contacting an agent, an increase from 5.7 weeks in 2007.

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• After they contacted their agent, they spent 9.6 weeks previewing an average of 14 homes compared to 5.8 weeks previewing 11 homes a year earlier. With two-thirds of all first-time buyers under the age of 35 and 97 percent under the age of 45, most first-timers were comfortable using the Internet. In fact, four of five of these first-time buyers shopped online at least once every month, and 37 percent shopped online at least four times a month. Ninety-two percent were considered Internet buyers, and 89 percent communicated with their agent mainly via email. Nine of ten first-time buyers hired a real estate agent to guide them through the home buying process. Ninety-two percent found their agent online, either through an Internet listing (86 percent) or a real estate company’s Web site (6 percent). Three percent found their agent through the agent’s farming material, 3 percent through referral from friends and relatives, and 2 percent found their agent through “for sale” signs.

Tip 11: Since most first time buyers depend on an agent to guide them through the buying process, assembling buyer packages that include 1) a checklist of items needed by a lender, 2) the basic steps of the buying process, and 3) an explanation of the various inspections and reports typically used in a home purchase, may come in handy.

When selecting their agents, first-time buyers considered their agent’s responsiveness and aggressiveness as their most important factors. • Those who selected their agents because they believed the agent would be the most responsive remained unchanged at 44 percent in 2008 for first-time buyers. More than half (56 percent) of all first-time buyers considered the agent’s response time an “extremely important” factor in deciding which agent to use. • Twenty-two percent of first-time buyers selected their agent because he or she appeared to be the most aggressive on their client’s behalf, as compared to 23 percent in 2007. • Twenty-one percent of first-time buyers selected their agent because he or she was the most qualified, a slight increase from 17 percent the previous year. • Those who chose “first agent to respond to inquiry” as the most important reason for selecting an agent dropped from 35 percent in 2007 to 4 percent in 2008. As was discussed earlier, being the first to respond was still important in the agent selection process, but it was not the primary reason why an agent was selected for most first-time buyers. First-time buyers’ expectation level on their agent’s responsiveness remained high after the selection process.

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• Twenty-four percent of first-time buyers expected an instant response from their agent, a slight increase from 22 percent in 2007. • First-time buyers who expected a response from their agent within one hour or less increased from 68 percent in 2007 to 73 percent in 2008. • Ninety-six percent of first-time buyers expected a response from their agent by the end of the day or sooner, an increase from last year’s 94 percent. When asked to rate their agent’s ability to meet expectations on response time on a fivepoint scale, with 5 being “well surpassed expectations” and 1 being “fell way below expectations,” first-time buyers rated their agent a mean of 3.4, a drop from last year’s 4.2. Satisfaction levels of first-time buyers regarding other aspects of the home buying process also declined as their expectation levels continued to stay at a high level: • On a scale of 1 to 5, where 5 is most satisfied and 1 is least satisfied, the satisfaction level for the overall process of finding a home for first-time buyers declined from 4.6 in 2007 to 3.2 in 2008. • The satisfaction level for the overall agent’s performance dropped from 4.5 to 3.3. • The satisfaction level for the value received for what the buyer paid their agent declined from 4.3 to 3.5. Tip 12: With first-time buyers’ satisfaction levels declining, it is important to start on a solid note. Practice filling out the Purchase Agreement (C.A.R. Form RPA-CA) regularly, to remain proficient on this form. C.A.R.’s publication “Your Guide to the California Residential Purchase Agreement” (available at www.store.car.org) may be a helpful reference tool. The share of first-time buyers continued to decline among Internet buyers and remained virtually unchanged as a share of traditional buyers. The percent of Internet buyers who purchased a home for the first time in 2008 decreased from 31 percent in 2007 to 22 percent. The share of first-time buyers among all Internet buyers has almost dropped in half since it peaked in 2006 at 41 percent, but it was still double the share in 2002 when it was 11 percent. Meanwhile, the share of traditional buyers who were first-time buyers increased slightly from 6 percent in 2007 to 7 percent in 2008, considerably below the recent peak of 18 percent achieved in 2005. The drop in the proportion of first-time buyers was due primarily to tighter underwriting standards. First-time buyers, in general, have less equity, lower income, and carry a higher risk of default than repeat buyers. With lenders tightening their underwriting standards and requiring a larger down payment from borrowers, many first-time

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buyers who had already been facing affordability constraint due to high home prices in California, found it insurmountable to qualify for a home loan. As long as the turmoil in the real estate finance arena prevails, many first-time buyers will have difficulties acquiring a mortgage at a reasonable rate, and the share of first-time buyers will likely remain at a low level. Fortunately, actions to restore confidence in the credit market have already taken place at both the government and the private sectors. Results will hopefully be seen in the not so distant future.

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CONCLUSION Affordability for first-time buyers has improved in recent months as home prices have adjusted downward and as mortgage rates have remained at attractive levels. However, problems in the area of real estate finance continue to limit access to capital on the part of all buyers, including first-timers. Because of tighter underwriting standards, there is a smaller pool of would-be first-time buyers now compared to years past. Even if they qualify for a loan, they must often come up with a larger down payment than in the past. Moreover, because of problems in funding loans because of the liquidity crunch, there is no guarantee that the loan will actually be funded. Buyers in 2008 cited concerns about market conditions and agent responsiveness as two general areas that they would change about their home buying experience. Firsttime and repeat buyers alike cited a need to better understand the direction of the market and a need for escrow to close on time. Beyond that, they sought better negotiating and faster response times as areas of improvement for their agent. Both assessments reflect the uncertainty of the market in recent months and frustration with that uncertainty.

Tip 13: In this market, knowledge regarding buyers’ expectations and desires will help you focus on types of activities and how you may need to shift your business to meet their needs. Additional market information may be obtained in the economics section of www.car.org or by visiting www.rebsonline.com

Appendix

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Questionnaire & methodology

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METHODOLOGY One thousand six hundred surveys were conducted via telephone interview. The sample consisted of 1,249 Internet homebuyers and 351 traditional homebuyers who had purchased their homes in the second half of year 2007. Internet buyers were those who responded “yes” to the question “Did you use the Internet as an important part of your home buying and selection process?” Traditional buyers were those who responded “no” to the question. Instead of drawing results from a sample with equal number of Internet buyers and traditional buyers like how it was done in prior years, survey results from this report were collected from a sample of home buyers selected on a random probability basis, in an attempt to mirror a true mix of buyers who used the Internet in the general population. Survey results are subject to a maximum sampling error of +/-3.5% at a 95% confidence interval.

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Research Reports from the CALIFORNIA ASSOCIATION OF REALTORS® are produced by the industry’s experts on California’s housing market. C.A.R.’s team of economists and research analysts conduct in-depth surveys about trends and issues impacting the real estate industry. To learn more about each of these research reports visit www.rebreports.com.

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