September 2008 Quarterly Newsletter

Volume 3, Issue 3

Nicholas French, Broker Associate, CRS

September 1, 2008

Quarterly Review $$ Cash Is King $$ Inside this issue: $$ Cash Is King $$

1

Client Testimonial— Coelho Family

1

$$ Cash Is King $$ (cont)

2

90 Day Snapshot

2

Real Estate Clarity— Knowing Thyself

3

Previous Newsletters

3

Updated Neighborhood Statistics

4

Share The Newsletter

4

Nicholas French Broker Associate, CRS 4906 El Camino Real #2 Los Altos, CA 94022 650 773 8000 (cell) 650 961 2338 (office) 650 961 5238 (fax) [email protected] www.realtornickfrench.com

These few simple words will be rolling off the tongues of many in the coming months. I am already hearing it from financial advisors, investors and the media. In this time of troubled financial markets where having a heartbeat will no longer qualify you for a loan and practically the other extreme of having similar odds to being hit by lightning exists, consumers find themselves in a predicament as to the best strategy for financial security and home ownership. With foreclosures and defaults at a historic high and individuals literally sneaking out of their homes by night I ask the question, what is the opportunity? I have been a proponent of patience being a virtue and buying the right property and location. Over the past few years I may have advised you against buying a property for one reason or another while others have had the green light. Well, there was a good reason for that madness; while some communities have been solid and even up (desirable neighborhoods, good schools, etc) there are other areas that have come down locally (north, east, south San Jose, Milpitas, Gilroy, etc) even as much as fifty percent in the past two to three years. You heard me correct – granted that extreme of fifty percent is typically in some of the less desirable areas. It is very important to note that these properties had spiked to unrealistic prices almost to the point of Campbell. The characteristics of these purchases typically included: 1) purchases between 2004-06, 2) no down payment, 3) aggressive loan programs, 4) low income, 5) similar communities. I can look at a distressed property and practically write the unfortunate story, but with this does come opportunity. Let’s face it, banks do not want to be property managers and quite frankly are doing a very poor job managing their current inventory of bank owned properties. It is becoming a fire-sale across the country and even in our counties banks are dumping their inventory of mainly less-desirable properties to investors and my favorite bottom-feeders. But is it the right time? I am of the mind that for these communities the worst is not over. I come to this conclusion for a number of reasons including the fact that those buyers that drove the market to unrealistic levels can no longer obtain financing because 1) they lost their last house to the bank for non-payment, and 2) they don’t have the 20-30% down payment and income levels to qualify. That leaves us with an important question - who will be buying these homes from the bank? That is where we investors will be watching on the fence for the good properties and opportunities to pick up a few investment properties. It sounds much easier that it truly is and I’ve been sharing my strategy (cont pg.2)

Client Testimonial—Coelho Family We met Nick after interviewing several Realtors and both of us instantly liked him. My wife liked the way he truly listened and vibed with our ideas and wants, and I was impressed with the homework and knowledge he brought to our very first meeting. Nick has a great way of understanding and adapting to each person's needs and helping prompt them with his knowledge without being pushy about it. We were first time home buyers and he helped not just with the basics of house hunting but also has great knowledge of neighborhoods, schools, brokers and financing, inspections, plus other considerations like upcoming city zoning and parks and recreation and so on. He managed to make this intense experience fun - we shared jokes, restaurant tips and philosophy. Would absolutely recommend Nick and use him on our future transactions.

Quarterly Review Page 2

Annual Percentage Change (MSA– SF/Peninsula) 30

25

20

15

10

5

-10

Year

Source: http://www.ofheo.gov

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

0

-5

1993

Opportunities are there if we are willing to take them. Will the market jump up dramatically in a short time? Not likely, the typical market includes plateaus and valleys, not sharp transitions. Save money and be patient watching looking for positive cash flow and a decent neighborhood. Feel free to contact me anytime about investment property and if you are interested in buying investment property in the coming months/years please let me know because I have a special list for investment clients and will have specific communication about the opportunities.

1992

Solvency issues for the mortgage giant with US government injecting capital into organizations. Dramatic changes likely to occur in the coming days which may include an equivalent of a government takeover or significant capital injections over the coming months

Opportunities are out there but we need to go after them. Our area typically doesn’t allow for investment properties to have positive cash flow upon purchase except at the bottom of the market. We are getting to a point where you can have positive cash flow on a property with thirty percent down. You no longer have to go out of state to buy low price property with positive cash flow; you can own a property that you can drive by and manage yourself. We are in a climate where: 1)homeowners are walking away from their home and becoming renters, 2) home prices are in decline while rents are going up creating positive cash flow, 3) financing difficulties where Cash Is King! Until the standards change and adjustments are made which may include softening lending restrictions allowing higher-risk borrowers to obtain financing, less inventory and more buyers and cash flow properties we will be seeing this transitioning market.

1991

Fannie Mae & Freddie Mac

1990

Sep 4 - 11,220.96

1989

Jul 15 - 10,962.54

Some of the short sale properties are getting multiple offers because the price is so low, but the banks are either to slow to respond or the delta of debt to price is too great and they let it go to foreclosure. Either way, the market that we are experiencing includes multiple offers of some properties because the prices are too good to resist with a climate only allowing certain individuals the ability to purchase.

1988

May 30 - 12,638.32

1987

Stock Market Rollercoaster

1986

9 FDIC-Insured banks closed this year

1985

First Heritage Bank

1984

•

1983

First National Bank

1982

•

1981

IndyMac Bank

1980

•

I do not think the worst is over for the distressed properties for the points I mentioned previously, but mainly because of the current inventory and history. From defaults to foreclosures and short sales, we Short Sales Real Estate Owned (REO) have seen rocket-type increases and there is still a large amount of property Active Sold Active Sold that must be absorbed into the market. 2004-05 0 203 0 112 The statistics below include properties in 2006 2 97 0 74 MLS Listings and show a high number of 2007 253 406 27 174 short sales still in the market and these 2008 4841 1994 929 1231 Current are properties where the owners are Inventory 4806 928 unable to make the payments. These are Source: MLSListings Inc properties mostly likely in default that will go back to the bank within the next three to six months and should come back to the market as REO properties thereafter.

1979

(bank closures)

1978

FDIC Shopping Spree

1977

Sept 2: $109.71

1976

July 11: $147.27

with some of you over the past few years. I have been adapting my approach based on how the market is adjusting while maintaining the premise of buying investment properties for the next real estate cycle. Again, it is not as easy as it sounds and we want to make sound and timely purchases. There are many people out today buying up the distressed properties for investment and most likely doing fine. I have heard some that almost blindly pick up properties with the understanding that in the future will be worth more. But I want my clients to be more informed! There is definite risk when owning investment property such as having a tenant that doesn’t pay rent or damages the property, but we want to conduct a thorough analysis to verify the property makes sense from a financial position.

Percentage Change

Crude Oil Speculation

$$ Cash Is King $$ (cont pg.1)

1975

90 Day Snapshot

Volume 3, Issue 3 Page 3

Real Estate Clarity - Knowing Thyself With all of the doomsday about real estate you may be asking yourself whether or not to buy a home for your family. This is a legitimate question and not answered without knowing your situation. It is easy to say generically that the market is down and don’t buy, or sell for that matter. That is just as easy as when people were saying just a few years ago to buy at any price, just get into a house because you will be priced out of the market. Well, we know that outcome all too well. The reality is that with every situation there are choices. One of the largest issues this year in areas like Saratoga, Los Altos, Menlo Park and the like have been low inventory. Not very surprising given that when you turn on the news you hear the market is horrible and you assume that includes your neighborhood. Many sellers have chosen not to sell at this time or rent out their homes limiting the amount of inventory available as many buyers still eagerly seek a home in certain communities creating frenzy purchases where a buyer purchases for 3-10% more than the next buyer. Thus far price adjustments have not been the largest issue in our marketplace. But again, it is about patience and finding the right property that fits your needs. The approach of educating yourself on the market, your needs and negotiating a good property are the same whether in a hot or slow market and that is how I can help clients get the right property and price. If this is your first real estate cycle experience in the bay area I’d like to suggest going to my website at www.realtornickfrench.com and read my previous newsletters which discuss the market that we are currently experiencing even back when some thought it would never happen in our area. While the California Association of Realtors currently shows that home sales are up year over year 43.4 percent while median prices down 40.3 percent across the state, how must we employ this information? We want to know whether or not to buy or sell and for that we will need to consider many variables. Should I buy/sell or wait for the market to provide clarity? Let’s briefly look at whether or not to sell and then focus on buying. Selling is an easier answer – you will most likely ask yourself questions such as whether you need the equity from the home to purchase your next property, keep your property and rent out as an investment, capital gains benefits and some others. It is a financial question and we can review your financials to determine the best strategy for your family. Buying is a bit more involved including secondary factors like interest rates, available inventory (homes you would consider purchasing) and emotional factors like varying opinion from popular demand. What I have found is when purchasing a primary home you want certain features not just three bedrooms, two bathrooms and a two-car garage. You want a certain neighborhood, yard size, direction, floor plan and the like. This is not a simple task given our communities are not new track homes in a sub-division where every house is practically the same. Our homes have some character, uniqueness, and let’s face it – people don’t move out of the best areas very often. With these realities mean we have to be realistic; if we plan to buy a home for everyday living we will need to educate ourselves on our preferences and then ask several questions knowing that either direction will include strong representation and negotiating skills from me so that you get the best value and home for your family. Interest Rates vs. Purchase Price – Banks have been losing historic amounts of money and will most likely continue that trend for the next few quarters and once bottoming will attempt to make up some of the losses. Lending practices have tightened and rates are floating generally the same. Earlier this year the government issued a temporary increase to the conforming rate limit to $729,750, which has been confirmed to decrease on Jan 1, 2009 to $625,500. Typically the confirming rate is lower than jumbo thus making this a purchase consideration. You may watch the market and wait for certain home prices to adjust, but may have issues obtaining financing

Previous Newsletters Did you know I have my previous newsletters online at www.realtornickfre nch.com Revisit my old articles such as Mar 07 for specific information about this market as discussed years prior. Know the signs and how to evaluate a market. There is no crystal ball, but there are indicators to protect yourself and make sound decisions. Each of my newsletters has a valuable article about the market. I hope you enjoy the information.

Job Stability – the latest unemployment figures show a five year high of 6.1 percent, according to national data. This raises the concern to many of a recession warning and instills uncertainty with investors. The stability of your job is a main consideration prior to purchasing and is mainly a concern with single-income families Desirable Homes – this category is often overlooked when initially deciding to wait or buy. In the down markets typically the best homes are not available and when they are we have enough willing buyers to purchase. If you have a very particular taste or need certain home features, I generally suggest looking over a longer period of time because it may be necessary to find the house you like. This may be a very important category for your family especially if you plan on living in the home for a long time. If you are fortunate enough to like every home you see, then you can have more flexibility on timing

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Updated Neighborhood Statistics No. of Closed Sales

% of List Price

Median Price

Average Price DOM

Q2

112

100.76

$ 1,218,000.00

$ 1,255,704.00

36

2008

Q1

52

100.34

$ 1,185,000.00

$ 1,271,490.00

45

Cupertino

2007

Q4

80

100.98

$ 1,155,000.00

$ 1,192,545.00

45

Los Altos

2008

Q2

98

99.52

$ 1,722,500.00

$ 1,977,578.00

25

Los Altos

2008

Q1

46

100.11

$ 1,892,500.00

$ 2,020,065.00

31

Los Altos

2007

Q4

63

100.13

$ 1,750,000.00

$ 1,938,176.00

40

Los Altos Hills

2008

Q2

26

95.36

$ 2,587,500.00

$ 3,227,576.00

148

Los Altos Hills

2008

Q1

11

95.90

$ 2,900,000.00

$ 2,924,909.00

112

Los Altos Hills

2007

Q4

12

96.61

$ 2,462,500.00

$ 2,694,916.00

63

Los Gatos

2008

Q2

93

97.38

$ 1,400,000.00

$ 1,640,783.00

57

Los Gatos

2008

Q1

51

97.83

$ 1,595,000.00

$ 1,651,725.00

82

Los Gatos

2007

Q4

48

98.0

$ 1,450,000.00

$ 1,662,901.00

75

Menlo Park

2008

Q2

108

100.75

$ 1,637,500.00

$ 1,776,388.00

35

Menlo Park

2008

Q1

55

99.67

$ 1,535,000.00

$ 1,787,681.00

48

Menlo Park

2007

Q4

72

98.47

$ 1,255,000.00

$ 1,435,278.00

40

Monte Sereno

2008

Q2

11

96.25

$ 1,780,000.00

$ 1,888,181.00

65

Monte Sereno

2008

Q1

7

97.06

$ 1,820,000.00

$ 2,039,285.00

141

Monte Sereno

2007

Q4

8

96.24

$ 2,125,000.00

$ 2,459,375.00

147

Palo Alto

2008

Q2

124

101.38

$ 1,550,000.00

$ 1,780,321.00

30

Palo Alto

2008

Q1

65

100.13

$ 1,617,500.00

$ 1,977,301.00

20

Palo Alto

2007

Q4

88

104.06

$ 1,583,500.00

$ 1,861,633.00

24

Saratoga

2008

Q2

74

98.57

$ 1,656,944.00

$ 1,814,243.00

53

Saratoga

2008

Q1

61

98.43

$ 1,565,000.00

$ 1,674,203.00

67

Saratoga

2007

Q4

71

98.29

$ 1,550,000.00

$ 1,754,963.00

54

Sunnyvale

2008

Q2

175

100.20

$ 905,000.00

$ 914,567.00

35

Sunnyvale

2008

Q1

94

100.36

$ 893,133.00

$ 893,744.00

52

Sunnyvale

2007

Q4

109

101.43

$ 900,000.00

$ 898,608.00

34

City/Area

Year Qtr

Cupertino

2008

Cupertino

Please Send This Newsletter to My 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.