Washington Dc And Global Real Estate Newsletter Winter 09

IN THIS ISSUE: > Selling Considerations > Inventory Trends > Buying and Investing > Median Sales Trend > Regional v. Distressed

Market Statistics

DEAR NEIGHBOR, It is almost certain we will look back on this economic cycle as the catalyst for the most significant transfer of wealth in our lifetime. Our retirement accounts have probably lost much of their value. Home values are certainly not what they were. Each of us has a friend or neighbor that has lost a job. Deficit spending has taken on a very brisk pace and is likely to accelerate. There is no question we will see equity and real estate values surpass their previous highs...it’s just a matter of time...perhaps a long time. In the short term, what goes up and what goes down will be influenced by spending initiatives as much as by fundamentals. Government stimulus programs will guard against systemic failure, but eventually, we will return to an economy where markets determine value. Today’s challenges are also opportunities. Everything is on sale. If we stay positive, understand the facts, plan thoroughly and execute with resolve, we will survive and prosper.

> Lending

WHAT IS DRIVING THIS CYCLE? Many believe there will not be sustainable recovery until such time as residential home values stabilize and the value of collateral for existing mortgage loans is restored. The “Troubled Assets Recovery Program” (TARP) was originally presented as a plan to purchase “toxic assets” (non performing residential mortgages) to clean up a bank’s balance sheet and thus restore liquidity. Mortgages acquired with TARP funds would then be evaluated for “loan modification” with the goal of keeping the homeowner in the property rather than foreclosing and adding to already excessive inventory.

Lou Muscarella Realtor 6641-A Old Dominion Drive McLean, VA 22101

Office: 703-556-4222 Cell: 703-405-3019 [email protected] www.c21nm.com

703-556-4222

Instead, the taxpayer funded program provided capital to failing banks without acquiring the problem loans. Loan modification activity is minimal and foreclosure rates are accelerating. While helping select financial institutions, the “toxic assets” remain toxic and will need to be resolved before sustainable recovery can occur. What started as a “sub-prime” crisis is now impacting every family’s balance sheet and causing some to choose alternatives which were not even remote possibilities a few years ago. We, as real estate professionals, encounter situations on a daily basis where a family has no choice but to sell and owe more than market value. These families are not speculators that made a bad bet with an exotic loan product. Rather, these are families that pay their bills, encounter some life altering event, and simply don’t have the means to wait out this cycle. When these owner occupied properties become a “short sale” or foreclosure, a lender is now the decision maker and selling from a distressed position. The institutional sellers adopt a pricing strategy designed to sell the asset quickly rather than incur additional carrying costs. In markets where the majority of inventory is bank owned, properties are now offered below reconstruction cost. Even solvent owners are losing motivation to continue making payments on an asset whose value has diminished so significantly. The stigma associated with losing, or just walking away from a home, has diminished as well. Recovery could be speeded by incentive, or penalty, to lenders which will make foreclosure a secondary rather than primary alternative. Loan modification is a complicated proposition but is the means which will keep responsible people in their homes and inventory off the market. One of the more compelling recent considerations is empowering bankruptcy courts to modify mortgage loans; lower principal balances, extend repayment terms, lower interest rates. Some feel it would level the playing field for homeowners and might motivate lenders to work with families rather than risk being bound by what the court might decide.

REAL PROPERTY IS A COMMODITY. Home values are established by the pool of ready, willing and able buyers; not Seller’s, not REALTORS®. To be a

successful seller in today’s market requires knowledge, thorough analysis, a valid strategy and most of all, commitment. Getting it wrong can be catastrophic. The property detailed on the opposite page is a very specific example of what a tentative or misguided approach to selling a home can lead to. In a two year period, this property lost 69% of it’s market value. Even more troubling is the realization that when this home finally sold, every home in the area, for sale or not, will now be valued by comparison to this property. The property was initially priced at $430,000, by the seller, in effort to sell the property with sufficient net proceeds to cover selling expenses and clear all liens. According to our analysis, the market value of this home at that time was in the $250,000 range. Over the next six months, the seller worked with his lender to pursue a “short sale” and reduced the list price in substantial increments to as low as $219,000. Unfortunately, that was too little, too late. The listing expired and the home was foreclosed upon in February of 2008. Had the seller and lender agreed to offer the property at fair market value in September of 2007 ($250,000 rather than $430,000), the property would likely have sold and netted the lender almost double the proceeds. Instead, the pricing decisions cost the lender $125,000 plus whatever the legal and carrying costs were to complete foreclosure. While this level of loss is sustainable for an institution, a similar result for a private seller is simply devastating. SALES VELOCITY - LOCAL AND PRICE POINT CONSIDERATIONS

Inventory Vs. Sales Velocity 14,000 12,000 10,000 8,000

Normal Pattern

Inventory Sales

Inventory Swells

6,000 4,000

Sales Decline

2,000 0

Values will continue to feel downward pressure until such time that the relationship between Inventory and number of Homes Sold return to more normal levels. The graph to the left reflects a broader regional market and considers all price ranges. The nearer a property is to the beltway, the less pronounced the imbalance. The gap between inventory and sold properties is certainly broader in property priced above $500,000 than those priced below. If you were to only consider those properties listed under $200,000, you would find a very competitive marketplace for those trying to buy a home. Multiple offers are now common on property offered at this level.

VALUE TREND - REAL ESTATE VALUES REMAINS LOCAL

Median Sales Price Regional Vs. Distressed

In the graph to the right, it is clear that the Regional value trend is lower. Median values in the Metropolitan Statistical Area (MSA) have returned to levels last seen in 2004. In a market heavily weighted toward distressed property, the values are now back to 2002 levels. While values in Chevy Chase, MD may have remained flat or even appreciated slightly, a homeowners in Manassas, VA may have watched their homes decline in value by upwards of fifty percent. As values continue to slide, more risk develops. Families that would have stayed the course lose motivation. Those with adjustable rate resets have negative equity, cannot refinance and find themselves at risk of losing their home. The top box details a Distressed market segment while the lower pertains to a Regional perspective. The data reports actual results for the month of December and compares 2007 to 2008. The numbers tell the story: In the distressed market, median sales price declined over 40% in one year. At the new value, more than twice as many homes sold in 2008 compared to 2007. Unfortunately, the majority of properties that sold were “short sale” or foreclosure listings. Another key indicator is the ratio of owner occupied to investor purchases. In the lower price ranges, first time buyers are finding it difficult to compete successfully with investors. The seller, likely a bank, prefers selling to an investor paying cash or putting 20% down, rather than a first time buyer with a modest down payment. The first time buyer is also obtaining FHA (government insured) financing, which adds another layer of scrutiny to the property’s condition. The Regional market median sale has dropped by only 22% year over year, but if the value trend continues, we will see a higher percentage of distressed sellers surface. The lower values go, the more likely it becomes that Institutions will be the only sellers that can afford to sell.

$600,000 Regional $500,000

2004

Dist ressed

$400,000 $300,000 $200,000

2002

$100,000 $0

2008

2007

$201,028,850

$137,458,129

46.25%

Average Sold Price:

$201,836

$336,907

-40.09%

Median Sold Price:

$165,000

$309,945

-46.76%

996

408

144.12%

$248,076/$150,774

$396,725/$256,125

-37.47%/-41.13%

Total Sold Dollar Volume:

Total Units Sold: Detach/Attach Average Sold: Average Days on Market

% Change

107

143

-25.17%

Average List Price for Solds:

$222,835

$383,065

-41.83%

Avg Sale Price as a percentage of Avg List Price:

90.58%

87.95%

2008 $638,238,018

2007 $652,219,723

% Change -2.14%

Average Sold Price:

$422,674

$543,970

-22.30%

Median Sold Price:

$340,000

$437,500

-22.29%

1,510

1,199

25.94%

$563,063/$332,342

$737,099/$446,586

-23.61%/-25.58%

Total Sold Dollar Volume:

Total Units Sold: Detach/Attach Average Sold: Average Days on Market

92

103

-10.68%

Average List Price for Solds:

$464,447

$594,877

-21.93%

Avg Sale Price as a percentage of Avg List Price:

91.01%

91.44%

THE SILVER LINING. There are now specific areas within our market that have endured the distressed sales cycle. Within specific price ranges, property values have stabilized and are even showing signs of modest appreciation. Cost of funds for qualified buyers are at forty year low’s. For buyers standing on the sidelines, the timing may never be better.

Today’s values are what they are. We are all accustomed to a systematic approach of investing in our qualified plans but don’t necessarily consider the same approach to acquiring real property. There exist “pockets of opportunity” within our market in which values are now compelling. Having the security of a tangible asset under our control can be reassuring. A strategy of “dollar cost averaging” is not limited to Stocks and Mutual Funds. An Investor acquired the property detailed below. After making an initial investment of approximately $30,000, their monthly debt service including principal reduction, interest, taxes and insurance is in the $750 range. The property is now rented for $1,400 per month, or a positive monthly cash flow of $650. When rented at this rate, there is a return on the equity investment ($30,000) in excess of 20% ($7,800) annually. The investor may feel there is potential that property values could improve and result in a capital gain at some point in the future. They paid $125,000 for a property that sold for $399,000 two years ago. Many would consider the downside risk to be minimal at this entry point. ACQUIRING OR SELLING REAL ESTATE, as an Owner Occupant or as an Investor, is more complex in terms of process than at any time in the recent

past. Both sides of any transaction need to weigh an enormous amount of information in order to gain the confidence to commit. Once the transaction is framed by the REALTOR®, the Buyer, Seller, Lender, Appraiser, Title Company, Insurance Agent and Attorneys each need to do their job well and on time, to get the transaction to the settlement table. Tax consequences can be a significant consideration depending on the client profile and transaction. When representing clients in any real estate transaction, we recommend they consult their CPA or Tax Attorney to determine how a transaction might impact them specifically.

September 2006

This property sold for $399,900 . The purchasers financed 100% of the purchase price.

September 2007

The property was listed for sale for $430,000. It was subsequently reduced in increments to the $219,000 price, but did not sell and expired in February of 2008.

March 2008

Now a “Bank Owned” property, the home came back on the market at $165,000, was subsequently reduced to $130,000 and sold in October 2008 for $125,000.

December 2008

The Investor took possession of the property, painted, replaced carpet and replaced appliances. It then rented in 15 days for $1,400 per month.

The team you can count on! That’s Us! That’s us!

For Your Mortgage Needs Betty Connell Loan Officer 1st County Mortgage, LLC 540-349-1221 Betty.connell@ firstcountymortgage.com Jim Preuss Loan Officer 1st County Mortgage, LLC 540-349-1221 Jim.preuss@ firstcountymortgage.com

A PERSONAL PERSPECTIVE We are in uncharted territory. Some believe that a “hands off” approach by government is most appropriate and markets will self correct. Others are looking to Government intervention as being the only way to avoid some level of systemic failure within our financial system. Either way, life has changed. Never before have concerns on Main Street been so conflicting with the needs of Wall Street. Taxpayers resent what they consider a “bailout” of those perceived to have profited from the cause of the problem; bad loans. Wall Street sees the “stimulus” as what is needed to restore stability; first to Wall Street, then to Main street. Whether Stimulus or Bailout, there will be unprecedented amounts of taxpayer dollars directed at resurrecting a healthy economy. The new administration pledges to act swiftly, prudently and with integrity. They have the incredible challenge of balancing the needs of taxpayers trying to make ends meet while keeping the Auto Industry viable and Banks in business. To a great extent, the winners and losers will be chosen. The stakes have never been higher. As Real Estate Professionals, we have a unique opportunity to experience the human side of enterprise. We find great reward in helping families realize the American Dream of Homeownership. Too often now, we are watching that dream come apart and witnessing the trauma associated with a family losing their home. Who is to blame? Is it the homeowner that bought too much home or chose a loan product that offered little security? Is it the lender that made the loan with little regard for the borrower’s ability to repay? Is it our Legislators who mandated lending to individuals who didn’t qualify for home loans using traditional guidelines? Is it all of the above, or does it even matter? Likely not. Those of us who grew up with Depression Era parents recall the wisdom of our fathers. I think our country has changed and has moved in a direction more in line with the principles they taught us. Dave Ramsey likely has this right...the new status symbol is the paid off home mortgage and the BMW is no longer a priority.

SUMMARY If you are considering a real estate transaction, thorough analysis and competent representation are essential. We are in a transitioning market. There is potential for profit, as is there risk of loss. If we understand the underlying facts, we can continue to make good business decisions; logically and without emotion. I am a real estate professional and accept responsibility for keeping my friends, neighbors and business community informed as to all aspects of things affecting the real estate portion of their holdings. If you are currently listed for sale, this is not a solicitation. If you have a real estate question, I will be happy to answer it, or find the answer. If you have a real estate need, I will appreciate an opportunity to compete for your business. As a CENTURY 21 Company, I can help you with real estate needs here, or anywhere in the world. Our team is very good at what we do...our results demonstrate that. Don’t settle for less.

Lou Muscarella

Sincerely,

Realtor

Office: 703-556-4222 Cell: 703-405-6494 [email protected]

Lou Muscarella Lou Muscarella Realtor

www.c21nm.com

©2009 NM Management, Inc. Equal Housing Opportunity. Each Office Is Individually Owned and Operated. Information contained herein deemed reliable but not guaranteed.