Mar 09

Volume 4, Issue 1 March 1, 2009

Nicholas French, Broker Associate, CRS

Quarterly Review Selling? … Patience is a Virtue

Nicholas French Broker Associate, CRS 369 S. San Antonio Road Los Altos, CA 94022 650 773 8000 (cell) 650 247 2999 (office) 650 947 3099 (fax) [email protected] www.realtornickfrench.com

Inside this issue: Selling? … Patience is a Virtue

1

Client Testimonial— Cooper/Yang Family

1

BLOGGING

2

Property Notes/ Dashboard

2

Humpty Dumpty

2

Humpty Dumpty (cont)

3

Stimulus Aid—Will You See It?

3

Updated Neighborhood Statistics

4

Property Taxes Due Apr 10— Temporary Relief

4

Share The Newsletter

4

There’s no silver bullet or blue pill to remedy the current economic climate, so if you are planning to sell your home the first piece of advice is to be patient. It has taken many quarters of my newsletter to get where we are in 2009. I went back through my archives (which can be found on my website) to review my various articles about the changing market. The signs were getting closer and not all parties wanted to acknowledge the changes, but now it is staring us all in the face. A good example was an offer I made last year – we knew the market was changing and our offer reflected the climate, but in the eleventh hour another agent brought an offer over fifteen percent higher than ours. I told my client the seller would not take our offer and the comparable value was not there, so we let the property go. The moral of the story is that the other party didn’t recognize the changing market and aggressively pursued a property paying fifteen percent more than the next closest offer. I’m sure the seller smiled ear to ear all the way to the bank. Unfortunately for sellers those buyers are not currently in the market. We have now shifted to a new stage in the cycle – a buyer’s market. Until recently it could be argued that a few zip codes were still holding their own, but now pretty much every zip has come down or is in the process. From Atherton to San Jose, I do not see any region that is immune. So if you are planning on selling what is the best strategy? First and foremost it is crucial to have representation that understands market conditions, consumer rational and works well with people. During the boom I would hear people tell me all Realtors are the same, or I find my own houses, or I can just put it on the internet because everything is selling with multiple offers. Selling a home takes careful negotiating, understanding pitfalls, financing, consumer confidence, risk management, the list goes on. You may think your house is sold when you have an accepted offer, but nothing is certain until the green dollars are in the bank (and hopefully a safe one). You may think you have negotiated the price, terms, conditions, but in this kind of market there may be post-ratification negotiating and a quality agent can help mitigate these issues and often recognize them before they occur. The coming quarters should bring continuing uncertainty amongst our marketplace, specifically the higher end areas. The lower range of Santa Clara County has already experienced a significant decline, which in turn is facilitating transactions because of the new price point. As the higher end market slows there will be a give and take from all sides to find the equilibrium. Some may feel a house in Cupertino should sell for fifty percent under asking because the Mercury News says homes in San Jose are selling for fifty cents on the dollar, but the reality is we have to know each market and make decisions accordingly. As we progress it is important to accept the market shift and understand our goals and strategy to best facilitate the sale of a property.

Client Testimonial—Cooper/Yang Family Nick helped us buy an investment property in the South Bay. He showed us a number of areas and zeroed in on the property we thought was best. Nick guided us through the offer process and we are really pleased with the outcome. He even helped us prepare it for rental and find a tenant!

Quarterly Review Page 2

Nick French is BLOGGING With my new website comes my new BLOG. I am working to keep clients up to date with my thoughts on the market, financing, and other important info: www.realtornickfrench. com I am continuing my leadership role as a State Level Director, so I will keep you updated on the issues from the state and national levels This video should be a must-watch in schools: www.crisisofcredit.com

Property Notes/ Dashboard There’s a great new website created from a friend of mine that empowers users to track and make notes on specific properties across the multitude of websites such as: mlslistings, ziprealty, redfin, zillow & trulia It connects users and agents for better communication:

www.myfonz.com

Humpty Dumpty Many of you may be asking yourself whether or not to jump into the market at this time. It is a legitimate question and not necessarily a simple answer. It is easy to sit on the fence and wait for the dust to clear, but what opportunities will be missed by waiting? You may be one of many out looking, but unconsciously finding reasons not to buy. This article is intended to speak to those considering buying a home or investment property and not sure if now is the right time to buy. During the boom times the most common reason I heard for buying a house tomorrow was that people felt they would get priced out. Even at that point I counseled my clients to find the right property and not feel trapped by the hype of the moment. During this period some paid ridiculous prices for homes that even to this day have not been reached and this market was fueled by a false belief that values never decline. In my March 2007 newsletter I discussed the cycles in our local market and how even the best areas have periods of decline. Today the feeling of invincibility has vanished and we may have been the kryptonite. Prices are down but are they at the bottom? The reality is that no one knows this answer, but I think we can make educated decisions based on the data, market conditions and confidence. I think one of the best buyer scenarios in the current climate is a first time buyer, currently renting, income $70,000-$100,000+, good credit and looking for a good neighborhood. In some instances you can suggest simply closing your eyes and buy a house. The neighborhoods for this range will typically have a market correction of approximately twenty to forty percent from the peak and you will find yourself paying about the same amount for home ownership as you were paying for renting a similar property. There are parts of the county that are experiencing prices up to seventy percent off the peak, but needless to say the neighborhoods may not be the kind that you want to call home. Even if the prices are down thirty percent you may ask yourself why not just wait because what if it continues another thirty percent. Another legitimate question but considering the attributes of our region such as demand, number of available housing units, education and industry it is unlikely that we will see another thirty plus percent drop. Even if the market has not bottomed and we experience additional decline the strategy is to have our purchase price reflect an additional market decline. By hedging the market we can leverage the emotional climate and have a great property for a long term investment. Especially now any buyer should have a time horizon of 7-10 years. The equilibrium of real estate is the point which renting and owning is equal. This stage is historically shortlived because people find value in home ownership as a long term investment and to maintain a certain lifestyle. In some circumstances it is not only equal, but actually cheaper to own than rent which is a specific point in the cycle. Urgency does not exist in the current climate, so the fence is getting filled with people sitting and watching. One point I make to clients is that even though there is a glut of inventory available, when you start looking at the actual homes many are not that exciting: poor location, condition, floor plan, and neighborhood. There may be plenty of choices but when people get off the fence the choices may be the scrapings. When you go to the 75% off sale at Macy’s what is left—the wrong sizes and clothes that are out of style. It is similar with real estate: most of the deep discount properties are those in the wrong location or the homes just don’t work for you, so I suggest looking at properties on sale (maybe not the final sale) but at least you should have better options than the going out of business prices. I’ve learned that buyers don’t necessarily want the best value, but a property that works for them at a good value. My point is that you may see a house that is a super value unequivocally, but if it doesn’t work for your family you will not buy it. We are looking for an investment, but also a home so every day when you drive home from your busy job you have a sense of comfort and satisfaction. “My friends tell me I can’t get financing.” This is partially true; financing is difficult to obtain and for some people practically impossible, but for qualified income with good credit under $800,000 it is

Volume 4, Issue 1 Page 3

Humpty Dumpty (cont) fairly easy. The good news is many people aren’t trying because they think it’s not available or worth the trouble, but that is the time you want to take advantage of it because many people are doing the opposite. What many people don’t know is that lending institutions currently have an approximate three percent risk premium spread where historically the spread is about one and a half. This means banks are making twice as much on a loan for their perceived risk. As the index rates increase and confidence grows we should see this spread revert to historical figures, but we will see. If you are borrowing one million plus loan then yes, you have to give your DNA before getting qualified. This is one of the reasons I mentioned last year that the higher end markets would see a decline in 2009, which the Mercury News is now mentioning. You may not get a loan for free like the golden days, but rates are low and you can get financing with low down payments for owner-occupied properties. I had Wells Fargo put some numbers together for financing a home with 3.5% down making $83,000 per year and a credit score of 620:

Price $432,124 Down Payment $15,124 Loan Amount $417,000 Interest Rate Wells Fargo Fee

5.13% $4,170

Monthly Costs Mortgage $2,270 Property Taxes $450 Insurance $55 Mortgage Insurance $185 Tax Savings What would you say is a healthy return on your investment? I’m sure many of ($850) you are receiving about one percent in a money market and up to three per- (deductions) $2,110 cent in online deposits. What if I suggested a 6-8% return on a local real estate investment plus the future growth of your asset? I think another real estate purchaser in this market should be investors. Your $300,000 investment is currently returning about $750 a month taxable income. What if instead you received about $1,500 and had paper losses to offset the income? These are the kinds of strategies I’m helping clients achieve that are taking advantage of the opportunities and adding to their portfolio. The prices may not be at the bottom but it makes investment sense if the rental income can offset most or all of the expenses. Almost daily I am seeing and hearing about more investors coming out of the wood work to accomplish just this. Fortunately, for my clients we are picking up the few good properties where most of the distressed properties are in the same neighborhoods. For example, East San Jose transactions have really been picking up and selling with multiple offers, albeit prices are flat. They have reached a price-point where it makes sense to buy and investors are picking them up. However, instead of buying an East San Jose home for $350,000 as an investment you can spend the same money in a different neighborhood and obtain the same return on your investment with hopefully a better vacancy rate; this is my strategy and I am employing it with my clients. The issue is that there are only a limited number of properties in the more desirable areas so once the bus loads of investors come to the market it will be more difficult to accomplish. You may get a property cheaper but it will not necessarily be a better property. Let me help you make a strong real estate investment with a good property this year. I think you will look back (maybe not for a few years) and see it was a good value and time to buy even if not at the bottom – time will tell. I anticipate the market to have continued uncertainty with many buyers finding reasons not to buy and sellers thinking they are selling too cheap. The higher end markets like Atherton, Palo Alto, Los Altos, Cupertino and Saratoga should see a year of fewer transactions because these regions have only recently felt the slow down caused by individual portfolio meltdowns, financing issues, job losses and confidence. We will see more of the high end properties having distressed sales because of financing and some will go back to the bank. The median prices should continue to fall because the continued sales and transactions in the lower price range will overpower the statistics. We should see the antithesis of the boom—during the boom some buyers would arbitrarily pay more for a house such as 10% over the last sale and rational buyers just couldn’t compete with this emotion and now I am starting to see the opposite – buyers taking a random percentage off of a comparable sale or just a number out of thin air because “the market is slow”. This is the reality and I am working with Buyers and Sellers to help facilitate parties through this market. I mentioned last year that cash is king; I think we will continue to see the value of cash through 2009 since inflation has buried its head in the ground. We will have to watch the market closely because with the amount of liquidity that has been pumped into the economy, once it actually gets out into the streets we will need to be careful of inflation at which time owning real estate should be a great hedge.

Stimulus Aid— Will You See It? We are now at approximately $3 trillion dollars worth of bailout and growing and yet the government is still considering additional taxes

to small businesses and the higher income bracket taxpayers (i.e. mortgage interest deduction for incomes over $250k). From bank nationalization conversations, a frozen Wall Street and continuing disappointment from corporate earnings, this year should be full of drama and emotional swings — pull out the popcorn and enjoy the show

Page 4

DON’T FORGET PROPERTY TAXES ARE DUE APR 10 Santa Clara County Assessor Proactively Lowers 45,000 Homeowners For the previous tax year Larry Stone, Santa Clara County Tax Assessor, proactively temporary lowered property taxes to approximately 45,000 homeowners by $75,000. Most of these adjustments were in North, East and South San Jose, Gilroy, Milpitas. Very few were in Cupertino, Los Altos, Palo Alto, etc. They anticipate an increase this year. Remember the reduction is based on assessed value, not market value

Updated Neighborhood Statistics City

Year Qtr

No. of Closed Sales

% of List Price

Median Price

Average Price

DOM

Campbell

2008 Q4

43

96.55

725,000

770,930

87

Campbell

2008 Q3

56

97.45

775,000

785,344

58

Campbell

2008 Q2

44

97.82

729,500

786,472

60

Cupertino

2008 Q4

33

96.42

1,035,000

1,125,732

68

Cupertino

2008 Q3

95

98.47

1,180,000

1,221,998

41

Cupertino

2008 Q2

112

100.76

1,218,000

1,255,704

36

Los Altos

2008 Q4

38

97.85

1,605,000

1,758,841

42

Los Altos

2008 Q3

68

99.04

1,950,000

2,017,432

48

Los Altos

2008 Q2

98

99.52

1,722,500

1,977,578

25

Los Altos Hills

2008 Q4

6

93.81

1,762,500

1,769,166

53

Los Altos Hills

2008 Q3

18

94.23

2,425,000

2,743,647

78

Los Altos Hills

2008 Q2

26

95.36

2,587,500

3,227,576

148

Los Gatos

2008 Q4

39

93.55

1,200,000

1,617,761

69

Los Gatos

2008 Q3

76

95.71

1,265,000

1,577,520

74

Los Gatos

2008 Q2

93

97.38

1,400,000

1,640,783

57

Menlo Park

2008 Q4

59

97.46

1,010,000

1,155,194

49

Menlo Park

2008 Q3

77

98.88

1,340,000

1,385,125

53

Menlo Park

2008 Q2

108

100.75

1,637,500

1,776,388

35

Monte Sereno

2008 Q4

5

86.58

1,850,000

2,479,000

75

Monte Sereno

2008 Q3

8

96.75

2,505,000

2,768,000

74

Monte Sereno

2008 Q2

11

96.25

1,780,000

1,888,181

65

Palo Alto

2008 Q4

67

98.89

1,350,000

1,473,550

37

Palo Alto

2008 Q3

99

101.10

1,700,000

1,793,510

32

Palo Alto

2008 Q2

124

101.38

1,550,000

1,780,321

30

Saratoga

2008 Q4

30

94.77

1,600,000

1,714,317

75

Saratoga

2008 Q3

72

96.41

1,676,500

1,938,044

57

Saratoga

2008 Q2

74

98.57

1,656,944

1,814,243

53

Sunnyvale

2008 Q4

90

98.31

656,500

712,863

47

Sunnyvale

2008 Q3

175

99.43

875,000

835,940

47

Sunnyvale

2008 Q2

175

100.20

905,000

914,567

35

Please Send This Newsletter to Your Family and Friends If you know someone who would like to receive this newsletter I would like to send it to them. Please either have them contact me or provide me their information and I will make contact. My goal is to have this newsletter add value and be an information source for my clients, family and friends. Please do not hesitate to contact me if I can help you with any real estate questions, strategies or if you are seeking quality representation.