Unfortunately it's time for me to write one of my boring statistical posts..... so I'll step out of character and keep it brief, or at least try too... 

I'm a numbers guy, numbers don't lie. If you can see the patterns in them and connect the dots you can find the answers to some very interesting things...or even find an answer to something you never thought to ask!

  This evening I was just browsing through the monthly market report published by my local Orlando Association of Realtors when I happened to scroll down past the first page to see the graph below.

  You can see it charts average monthly mortgage rates going back 3 years...and the pattern is pretty easy to distinguish (mortgage rates are relatively a national market with little variance from state to state, so this applies to more than just my market here in Orlando). Notice what happens to the mortgage rates from October to January EVERY year? Rates have dropped practically 1 FULL percent from peak to bottom every year around the holidays! Translated into money savings, a 200K mortgage at 6.5% is $1264/mo, that same mortgage at 5.5% is $1135/mo or $46,440 in lower payments over the life of the mortgage!

  Supply and Demand I think runs the show yet again when explaining this phenomenon. Mortgages are basically just money, and there is a fixed supply of people that are lending it (for the most part) and lending money doesn't stop just because it's the holidays or because it's cold outside. However buying and selling homes DOES. For you poor people up in the snow states I imagine it takes some motivation to get out on an icy day just to check out some houses, and I'm sure a lot of sellers take their homes off the market during the winter as well. Down here in the sunbelt our selling season is year round....but when there are holiday's every other week with family and friends coming to visit and get away from the cold, house hunting tends to take a back seat. Basically what I'm saying is there is a drop in demand for mortgages as people purchase fewer homes from October-January. Drop in demand with a stable supply of money means money gets CHEAPER; you can borrow at less cost (interest).

  So, in short, if you have the time and determination to buy a home when no one else is....save yourself a nice bit of dough and shop the last 3 months of the year. ;)

Let's hope! For those of you sitting under a rock the past year, if you haven't owned a home in the last 3 years you are eligible to receive $8,000 from Uncle Sam if you buy a home before November 30th 2009.

Thus far this program has actually be one of the most successful stimulus programs out there....more stimulative than cash for clunkers in my opinion even if it hasn't received as much press. If you've been working with me over the past 6 months as a buyer you would have noticed this too. Anything under 200K right now is selling like hot cakes (what is a hotcake anyway?). I've had several of my clients outbid multiple times on multiple properties...some bidding tens of thousands OVER asking! And the news is even starting to pick up on the increased sales volume and in some area's we've seen a slight uptick in prices.

But enough about the OLD. That credit is expiring in a couple months, so unless you start NOW, and don't look at short sales, you likely aren't going to close in time to get the credit (but we can still try...I didn't schedule a vacation in the next few months just for the last minuter's out there).

THE NEW news is that there are currently 5 bills sponsored in congress (maybe more by the time I write this) all dealing with Extending or Expanding the credit to further boost the housing market.

Direct from the Congress:

Senate Bill S1230 - the Home Buyer Tax Credit Act of 2009 - Home Buyer Tax Credit Act of 2009 - Amends the Internal Revenue Code to replace the current tax credit for first-time homebuyers with a one-time credit for 10% of the purchase price of a principal residence, up to $15,000. Requires repayment of credit amounts if the taxpayer sells or fails to occupy the residence within 24 months after the date of purchase.

House Bill HR 2619 Amends the Internal Revenue Code to allow until June 30, 2010: (1) a first-time homebuyer tax credit for all purchasers of a principal residence (not just first-time homebuyers); and (2) a refundable tax credit, up to $3,000, for the costs of refinancing a principal residence.

HR 2606 - the Home Buying Credit Expansion Act  Home Buying Credit Expansion Act - Amends the Internal Revenue Code to: (1) extend the first-time homebuyer tax credit to all individuals who purchase a principal residence (currently, only first-time homebuyers as so defined); (2) extend such credit and the waiver of recapture requirements for such credit through 2010; and (3) expand the election to treat a purchase of a principal residence as made in a prior taxable year for purposes of such credit.

HR 2801 - the Home Ownership Move the Economy (HOME) Home Ownership Moves the Economy (HOME) Act of 2009 - Amends the Internal Revenue Code to: (1) extend the first-time homebuyer tax credit to all individuals who purchase a principal residence (currently, only first-time homebuyers as so defined); (2) extend such credit and the waiver of recapture requirements for such credit through 2010; and (3) repeal the limitation on such credit based on modified adjusted gross income.

Finally, HR 2655 Amends the Internal Revenue Code to: (1) extend the first-time homebuyer tax credit to all individuals who purchase a principal residence (currently, only first-time homebuyers as so defined); (2) extend such credit and the waiver of recapture requirements for such credit through 2010; and (3) expand the election to treat a purchase of a principal residence as made in a prior taxable year for purposes of such credit.

As of Right now, NONE of these have gone further than being introduced by a congressman, so all of them have an equal chance of being passed or outright rejected. My gut says something will be passed before the current credit expires....definitely something that at least keeps the current credit in place as-is, but I doubt they will up the credit to $15,000.

To tell the Truth, I think HOME act of 2009 is going to be a winner for one reason and one reason only...it's catchy, like cash for clunkers. Face it, you know no one will remember to ask their congressman to pass HR-261849lglb27, but they can remember the HOME bill. In any event, be sure to contact your congressman!!! And ask them to support your favorite one (I like s1230 because it'll stimulate my wallet the most...but I'm biased) either way something needs to be passed. Housing led the economy down, it will likely have to lead the economy up too.
 

To find your local elected official http://www.congress.org/congressorg/dbq/officials/?lvl=L Don't be shy calling and writing them. They are there to serve YOU.

The Florida property tax system differs from many other states, and for you out of towners, understanding how to estimate the property tax on your Florida home can be confusing.

The simple formula for calculating taxes is:
(Assessed Value) X (Millage Rate) = Your Yearly Tax Bill.

Finding out a property Millage Rate (millage is just a fancy term for Tax) is relatively simple. All you have to do is go onto the counties property appraisers website and see what the number is. Typical properties throughout Central Florida have a millage rate of between 16 and 20 mils (most commonly 18 mils). The number of mills however must be converted into a percentage rate in order to plug into the above formula....to keep it simple just move the decimal place over ONE to the left. 16 mils is 1.6% and 20 mils is 2.0%. How's that for making something very simple as complicated as it they can! (Remember I only said it was RELATIVELY simple.)

The confusion comes when you start looking at all the ways a properties assessed value can change.

Assessed value in its simplest definition is the value of the property. The county the property resides in determines the value of every property within its borders every January 1st (or at least they are supposed to). The guidelines to determine these values follow similarly to your run of the mill appraisal; taking into account size, location, upgrades, and recent comparable sales. From year to year your value can rise AND fall based on if you add onto the size of your home, build a pool, or a sink hole swallows your neighbor's house. Now I mentioned before that the county is SUPPOSED to reassess your property every year as of January 1, but being as some counties have hundreds of thousands if not millions of parcels to assess, rarely is your one property re-evaluated every year. An automated system adjusts for value changes and the valuation work usually occurs in Sept, Oct, and Nov of the previous year. Since these re-assessments only change on January 1 of any year, the current owner's tax bill is always at least 1 year or more behind in values. This is why if you are looking to purchase a house today you cannot trust the current owner's tax bill.



For example, you find a house for sale at $200,000 and they say the last tax bill was $6,000 for 2008; this doesn't seem right at 1.8% does it? Well in this case, the house was likely worth about 330,000 when the 2008 tax bill assessed values where figured out (likely in October of 2007). Since the property is now obviously only worth at most $200,000 (that is what you are paying for it after all) you have a pretty air-tight case that when your 2009 tax valuation rolls around you can't be assessed at that same $330,000 value. You can estimate your new tax bill come January to be at most 200K x 1.8% or $3600. I say "at most" because in previous years the property appraisers office usually took the market value of the home and subtracted about 20% to arrive at their assessed values, now that the market has turned and budget short falls abound, I doubt you will be able to get your assessed value to less than 100% of market value....but you may get lucky

So that is how you estimate your
property taxes when purchasing a home here in Florida .....Oh wait, I almost forgot, here in Florida we also have something called a Homestead Exemption! There are several legal benefits to claiming a homestead, but we'll only be talking about how it affects your property taxes. First thing is first, a homestead exemption can only by claimed on a Florida property if it is your primary residence (defined as you using the property as your residence for at least 6 months and 1 day of the year). The exemption has two large tax benefits, first being a $50,000 deduction from the assessed value of your home. So if your property is assessed at $200,000 but have it homesteaded, the millage rate will only be applied to a value of $150,000. At a 1.8% tax rate a homestead exemption will save you about $900. The second benefit of the homestead exemption is the "save our homes" tax benefit becomes effective. What save our homes basically is, is a cap placed on the amount your taxes can ever be raised in any one year. The cap is 3% a year, and is yet another reason why you cannot rely on the current owner's tax bill as an estimate of what your taxes may be. If an owner purchased a property in 1985 and has had it homesteaded since then, their taxable value will likely be well below what would normally be assessed.

There is also a new aspect to Homestead Exemption with a "portability" benefit. Explaining portability in itself requires a new blog. But basically, if you acquire significant savings because of the 3% cap on taxes, you may actually be able to carry some of that savings to the next home you purchase.

To look up the most up to date tax bills on any property, to see what millage rates are effective on a property, and in some cases use an "estimate taxes" function, check out the local county property appraiser's office (the office that determines assessed values).

Orange County - Orange County Property Appraiser's Office Home(www.ocpafl.org)
Seminole County - SCPA index.html
Osceola County - Osceola County Property Appraiser's Office
Polk County - Home Page

This is an update to the first blog post I ever made back in late 2007. I've added in some updates for today's market (Dec 2008) in BOLD.

There are is a myriad number of factors that people claim steer the real estate market. Some of the factors I have heard of are area incomes not keeping pace with housing, rent to housing cost ratios, foreclosures, subprime loans, media scare tactics, over building, overpricing, unrealistic sellers, unrealistic buyers, unemployment rate, the overall economy, and the list goes on and on. While all of these factors are valid in one way or another (and I frequently write about each), they all go back to the simplest of economic theories that drives ALL of today's markets: supply and demand.

The law of supply and demand states prices is pressured toward an equilibrium point, where supply and demand meet, illustrated below with a typical Economics 101 Supply and Demand chart.

Simply put:     All other things being equal...

An increase in supply causes a decrease in price.

                  A decrease in demand causes a decrease in price

                        An increase in demand causes an increase in price

            A decrease in supply causes an increase in price

As of the end of November 2007, there were a little over 26,000 homes for sale in the Orlando market of Orange and Seminole Counties. In the same month there were only 963 properties that sold. Down from an average of 1,636 homes sold per month between November 2006 and August 2007; illustrating the sharp drop in demand most likely caused by the implosion of the subprime mortgage market in September 2007. There is currently a 27 month supply of homes.

As of November 2008, there are now 24,408 homes for sale in the same area, with 1078 properties sold. It is interesting to note there was a steady upward trend in home sales from March of 08 thru too October 08, showing over a 37% increase in home sales from the same month last year. For a moment, I had thought we had turned the corner! Then October hit, the other shoe dropped in the credit crisis, a $700B bailout and the stock market crashing 50%+ was all over the press....people got scared, and rightfully so. Sales in September had reached a more normal 1400 homes a month, only to pull back over 20% by November. On a positive note, inventory is down to a 22.7 month supply of homes,

To put these numbers in perspective, the monthly inventory between Oct.  2002 to Oct. 2003 was always between 7,000 to 8,000 properties with an average of 1,860 properties selling per month, representing a market in equilibrium with a 4.3 month supply of homes.

Doing the math, if there are zero net additional homes that come onto the market (supply freezes), and demand for homes comes back to a normal rate of about 1,700 homes selling per month, it will take 10.5 months to sell off the excess home inventory down to a normal 8,000 units. Once this occurs, historical equilibrium will be reached and prices will stop being pressured downward.

 Given the normal reasons for the rise in property supply; job relocations, growing or shrinking families, divorce, foreclosure, etc, more homes coming on the market should be expected. And while I personally believe the demand for homes must eventually come back to normal levels, there are still many buyers hesitant about buying in this market. Demand may remain at a low of only 1,000 units selling a month for the foreseeable future. These factors could mean prices will be pressured downward for some time, perhaps closer to 18-24 months.

Unfortunately my prediction is holding true, and the last 12 months have averaged about 1200 homes sold a month. There have of course been more properties put onto the market. There has been an explosion in short sale listings, plenty of bank owned foreclosures, and the normal everyday sellers....some which have been listed since before I first wrote this 12 months ago! Luckily sales have outpaced inventory and the levels have been going down, at today's' sales rate however (1200/mo on average) it will take 13 months to get down to "normal" levels of 8,000 units.

It should also be mentioned that November of 07' had ~1800 homes under contract, while in 08' that is up to 3326. This may be attributed to short sales as they can take 45-90 days to close, and over half of those may not get to closing, so add at least another 800 homes to the inventory number. There is also rumblings about Alt-A and Option ARM's re-setting in the next 12 months, causing a second wave of foreclosures over the next 6-12 months. These concerns are valid in my opinion, though I believe will be blunted by the fact many of these future foreclosures are today's short sales. We are still 6 months away from the earliest I projected we'd be out of the housing slump, unfortunately it looks like the groundhog got scared, and we'll be in for a longer winter. Don't look for a market rebound to occur for at least another 12 months.

Even with all of that, my colleagues and I are receiving more and more calls from real investors, with cash and an appetite for multiple rental properties. For the first time in MANY YEARS, these investors can make money renting single family homes. On many homes in many areas, it is now CHEAPER TO BUY than to rent, by a good margin too! I think when the bottom comes, it will bounce upward quickly. Today, only the amazing homes with the best prices and the marginal homes with amazing prices (foreclosures) are selling. The foreclosures are leading the market down in price and will continue to do so, but there is a LARGE pent up demand just waiting to buy, when that demand is released, I believe it will happen quickly. It will be interesting to see, and ridiculous deals will be made. Just know that the best homes will be sold in the blink of an eye. For the buyer in today's market it comes down to whether or not you want to wait and hope for an amazing deal tomorrow, or settle for a good deal today. For the seller, it's whether or not you want to sell today and not make as much as you wanted, or sell tomorrow and make even less.

All that being said the real estate market is extremely local in nature, sometimes down to a particular neighborhood or even particular home. Some areas have a different supply than others, and some have different demand. There are always areas that are more desirable than others, and at different price points sellers tend to be able to hold out longer for the price they set. This explains why some areas like Winter Park have seen very little if any depreciation since 2005, while others have dropped in value as much as 30%!

Winter Park has now seen a good amount of depreciation and other area's are down as much as 50%!

Only a local market evaluation, factoring your specific needs and time frames, can determine whether selling your home, or buying your next home, makes sense in today's changing market.  

You must ask yourself and your realtor some questions before making an educated, thought out decision......

Should you Sell today or wait until the market gets better?

            What is your motivation for selling?

            How long can you really "wait it out"?

            Will your home be worth more or less in 2,3,4,5 years?

Should you buy today, or wait for homes to come down more in price?

            How long do you plan to live in the home?

How much of your quality of life depends on the ownership of a home?

            How much will it cost you to rent vs. buy?

How much do you value stability; not having to move when landlords decide to no longer rent?

Can you comfortably afford your dream home today?

Will the perfect home you find today, still be available tomorrow?

When it is time for you to make your decision, whether selling or buying, I will be glad to offer my assistance, helping you determine what the market is doing in your specific neighborhood and whether it makes sense to buy now, or wait.

www.MyOrlandoHomeExpert.com

I had been pondering the effectiveness of one of the government's recent "bailout" plans called Hope for Homeowners after reading several articles and speaking with several mortgage professionals. Everyone was pretty unanimous in their opinions that the entire program has thus far been a failure. You can check out the details of the plan here http://portal.hud.gov/portal/page?_pageid=73,7601299&_dad=portal&_schema=PORTAL . Many have said it's a failure due to the restrictions placed on those who must qualify for the program; being only for primary residences, the need for the current lender to agree to a write down of tens of thousands on their loans without any incentive, mortgage insurance required above and beyond normal, and a "shared equity" payback of future home appreciation to the government should the homeowner ever sell.

                This blog isn't about why the program failed though, I was actually thinking about what idea's of the program were actually pretty good, and could have the potential to help the current housing market, and help curtail future lending abuses. Specifically I like the idea about a shared equity mortgage or SEM, and I'll tell you why.

                I can see an SEM as the mortgage of the future, or at least of the near future. In exchange for a lower interest for a home purchaser/refinancer, a bank could ask the homeowner to share a part of the future appreciation the house may see. The homeowner gets a below market interest rate of say 3% instead of 6%, making the home payments much more affordable, and the bank get's a potentially bigger payoff on the back end of the loan. On the surface this may look like it goes against the two sides best interest, (after all why would a bank want to shift getting paid on the front end of the mortgage to the back end, and why would a homeowner want to share in their good fortune with the bank?) but if you look deeper, the true benefits can be seen.

For the lenders it makes sense because they can offer rates lower than their competitors with such a mortgage, while still making a great profit over the long term. They would also have more incentive to hold their mortgages instead of sell them. Instead of having only the upside of being paid 6% for the next 30 years on a continually declining principal balance, they could be making half of the appreciation on the full value of the home. Meaning the way mortgages are currently set up, banks make less and less money the longer the mortgage is held, but with an SEM they would potentially be making more and more the longer the mortgage is held.

The example below explains what I mean:

Imagine a house with a purchase price of $103, and the buyer puts $3 down on his mortgage.

In Year 1, $100 is owed at 6%. The lender earns $6 of interest, and the owners' mortgage payment is $9

In Year 2, $3 has been paid off with $97 owed at 6%. The lender now earns $5.82 of interest

Skip forward to the final year of the mortgage and only $3 is owed and the interest rate is still 6%. The lender at this point is only earning $0.18 in interest.

What I'm basically trying to show is the diminishing returns for the bank. They make money on the front of the loan instead of the back. (not meant to be a 100% accurate representation of an amortization schedule)

Now let's look at a shared equity arrangement:

The same house is purchased for $103, and the buyer puts down the same $3

In year 1, $100 is owed at 3%. The lender earns $3 of interest and the owners' mortgage payment is now only $6. But to limit the banks risk at the beginning of the mortgage the bank keeps 100% of the equity including the $3 put down. On paper the bank is still making $6

In year 2, $3 has still been paid off (for the examples' sake) and $97 is owed at 3%. The lender get's $2.91 of interest, BUT the house has also appreciated 3% in value over the year before to a value of $106.09. The lender now has a 95% shared equity stake of $6.09 (the owner paid down $3 of loan and gets to keep 100% of that equity so the lenders' base is constant at $100), so on paper the lender has $2.93 in equity plus 2.91 in interest totaling 5.84, a higher return already in year 2 above than the example before.

Extrapolated out to year 30, $3 owed at 3% and the lender earns $0.09 in interest, but the home is now worth $242.72 (assuming a constant 3% gain a year) the bank only made half of what it would have otherwise in interest payments, but the home in that year has appreciated by $7.07 and the lender has a 50% stake in that appreciation, or $3.53. Big difference for the bank versus getting only 18 cents!

This of course is an over simplified version for example's sake, but doing the real numbers on a 103K purchase price with a 100K loan, the bank on a normal loan at 6% over 30 years would make about 115k in interest payments. The same loan at 3% would only make about 52K in interest payments but have a potential to make another 71K by sharing half of the homes appreciation (assuming 3% annual appreciation) totaling 123K; a return that could have only been reached by charging 6.3% on a normal loan. Admittedly this is not that great of an incentive for the lender to make their money on the back end instead of the front end, but with some FHA backing and insuring, I'm sure the banks could be convinced of the SEM's profitability.

For the homeowner it makes sense because they can get a much more affordable mortgage, in the example above it cuts the mortgage payments by 30%! This has the bonus of making the cost to benefit analysis of renting vs. own that much more convincing to own, especially at today's prices, and could help jumpstart buying in today's market. I don't know about you, but if I could receive the benefits of a much lower payment now in exchange for a possible equity sharing later, a payout that only happens IF my home appreciates and I make money too, I'll choose the latter every time!

Looking at a home as an investment, owners are limiting their upside potential by sharing future equity, but their downside risk in the short term is greatly reduced with lower payments, and further downsides could be mitigated with an agreement with the lender that shares potential losses on a sale as well. A serious investor looking to cash flow as many rental properties as possible should seriously consider such an arrangement as it relates to their investment goals.

Looking at a home as a home, a place to live, the SEM a no-brainer. If someone lives in their home for a long period of time, they can save tens of thousands in interest with the lower rate. Savings they can put into their retirement accounts or children's college funds today, instead of having that money locked up in their home.  There is also a greater incentive to own homes long term, under the H4H program 100% of appreciation is paid if the homeowner sells in the first year, 90% in the second, and so on, until after year 5 when the equity sharing stops at a minimum of 50%, so it makes sense that someone with one of these loans would want to stay in their home until they max out their ability to retain the highest portion of their equity they can. This also helps to keep people from thinking short term when it comes to owning real estate, speculating or flipping real estate doesn't make much sense if you will be giving away a large chunk of your equity in the first few years. For those that never plan on selling their home, the mortgage would be structured like a partnership. A partnership that ends either when they sell the house or the mortgage is paid off. In the event of a payoff, an appraisal is ordered and the lender's portion of equity is "frozen" until the eventual sale of the home. Bringing up another potential benefit, if home prices start falling, similarly to what has happened recently, those with the ability to pay off their mortgages will do so to freeze the lender's equity share. Thousands of homeowner paying off their mortgages at the same time....now that's a capital injection that would out rival anything we've seen from recent bailouts.

For those that wish to refinance, it's just trading one partnership for another, one must pay off the old partner their equity share, and the new partner starts from even establishing a new base line. Second mortgages can act the same way, the homeowner would simply be limited to taking out only their portion of equity.  Home improvements could get tricky, but at a minimum, any cash a homeowner puts into their home for upgrades would be credited to their portion of equity.

                For society as a whole it makes sense because lenders and borrowers will truly be partners in the ownership of real estate. Lenders will have more incentive to underwrite their loans to higher standards, and more people will be able to become homeowners with a stake in their communities' welfare. Plus in the short term it would really jumpstart the housing market, and give incentive to banks that hold loans that are upside down to modify them to a SEM with a starting principal down at today's values.

                Over the long term who knows if an SEM would prove profitable enough for lenders to offer, or popular enough with the public. I can see potential harm if another bubble is created by extremely low interest rates that may cause home values to spike, and when that bubble bursts and lenders run away from SEM's (they would no longer be making any appreciation on the back end), the burst could be even deeper than this one! These risks could be minimized however with the same cautions that could have minimized the current burst, lenders being diligent and conservative as to the real value of real estate vs. how much they will lend, and cautious underwriting (like qualifying the borrower as if they were paying a market rate of 6% even if they were getting an SEM at 3%).

In the end, I think we have nothing to lose by experimenting with this type of mortgage over the next 2-4 years. Lenders could establish logical underwriting guidelines with a little research, and the government can pioneer the first mortgages through the FHA and/or VA easily. It would cost very little to implement, and wouldn't be considered a bailout since anyone could qualify for such a mortgage.

What do you think?

Would you consider an SEM?

Well yesterday our monthly sales statistics were published by our local association, and for the first time in a long time there was a very solid silver lining for the housing market.

In Orange and Seminole counties the pace of sold homes increased a whopping 37% from the same month last year. From 970 homes sold in Sept of 07' to 1335 homes sold in Sept of 08'. In Orange County alone the sales number jumped 54%. And to top it off Osceola county, where the majority of homes are vacation rentals, the sales numbers jumped over 72%!

Inventory levels are slowly coming down from their highs which is a good sign, and it's good to see my personal experiences on the ground of seeing more and more buyers start to commit is being backed up by numbers from across the area. Demand is coming back....eventually that will take care if the supply.

Cognitive Dissonance

This is the feeling of uncomfortable tension which comes from holding two conflicting thoughts in the mind at the same time.

Dissonance increases with:

The importance of the subject to us. (like the largest purchase most make in their lifetimes)

How strongly the dissonant thoughts conflict. (Price vs. Value)

Our inability to rationalize and explain away the conflict. (lack of information and/or fear)

How this applies to selling your home...

            A buyer sees a home they like on the internet or from their broker. They like the pictures they see and think this house could be what they are looking for. The price seems a bit steep, but they beleive it is still worth a look. This is where the dissonance starts, They feel they may like the home but they don't like that price compared to other homes they've seen and especially in this market they are afraid they will lose money.

            So they come see your home thinking "ok for the price they are asking the home has to be PERFECT" and they start asking questions and looking very hard to make sure the home is PERFECT (which very few if ANY homes are).

            The buyer walks through the house, likes it.... BUT "The neighborhood has a little more traffic noise than I'd like, the yard is a little too small, the kitchen/bathrooms could use some updates, it's a little to far from the school." The home is NOT perfect, so the price is now way to high, no sale, and no offer.

            This happens several times, so the price dropping begins to try and compensate. If that buyer hasn't bought yet they should still be interested, right? Wrong!

            The dissonance is amplified by the brain to help justify eliminating a good home from the list. Now when they get that notification of new price the buyer remembers your home and is now thinking, "I remember that one! It had the really noisy neighborhood, the TINY yard, the kitchen/bathrooms that really needed work, and was way to far from the school. That's a nice price, but I didn't like the house in the first place." Even if it were the deal of the century, that buyer would not be purchasing that home because they have talked themselves into thinking there are things seriously wrong with the house. And they confirm their theory on the fact that no one else has purchased the house by now!

            Now let's imagine we priced the home appropriately in the first place. The same buyer walks in, likes the home "The neighborhood has a little more traffic noise than I'd like, the yard is a little too small, the kitchen/bathrooms could use some updates, it's a little to far from the school..... BUT it's a nice house and priced fairly. I'm sick at looking at homes already, I can get used to the noise (I don't spend that much time outside anyway) the small yard means less yard work, the kitchen/bathrooms aren't that bad, the extra mile to school won't kill the kids and they could use the exercise." Let's put an offer in! Hooray!

            In this instance the dissonance between value and price was much less if any, and the buyer's mind justified toward where they were already leaning on price vs. value.

            In short, When pricing your home in today's market, don't ever think I can list high now and see what happens then just lower the price later if it doesn't sell. ALWAYS PRICE IT RIGHT AND PRICE IT RIGHT THE FIRST TIME!

I recently heard this as a concern for many sellers today. I mean it makes sense, if homes in your area are being foreclosed on (practically every area has a few here in Orlando) and the banks are letting these homes go at "fire sale" how is the typical owner to compete? We all know buyers want the most for the least right???

There's no denying it, foreclosed homes are great deals! Many may only need minor cosmetic work like paint, cleaning and maybe some yard work. For a few thousand bucks and a little sweat equity buyers can get great discounts on perfectly good homes. All buyers have t do is compare the "cheap" foreclosure house to your house, add in a few bucks to fix up the foreclosure and they come out way ahead, the numbers don't lie.....so why buy your home??? Because, people looking for a home don't always go by the numbers!

I work with a lot of buyers nowadays; the majority of the serious buyers out there are still looking for the "finished product". They all express interest in foreclosures but once they see a few (even some of the ones in better condition) they opt to go with non-foreclosures that show better. They know full well they can get a much better price on the foreclosure and still have some savings if they fixed everything up themselves, but it doesn't matter to them.

Being a numbers guy myself I just don't get it, but nonetheless it's happening every day. Not ever letting things go at face value, I of course have to figure out why, and waste hours thinking about it, then writing about it for you sophisticated insomniacs that just can't get enough of my blogs :)

1. Emotions. Buying a home you are going to live in for a very long time is never just a numbers decision. It's a very personal and emotional decision. Not talking about the financial implications of the largest purchase of most people's life, it's also one of the largest decisions involving one's happiness. I mean who's going to buy a home they aren't 100% sure they are going to love? You're going to have to live in that home for the next 3-6 years, if you not happy living there, that's a pretty good chunk of your life! When someone walks into your front door they need to feel like they already live there. This is NOT a feeling anyone usually gets walking into a vacant, dirty foreclosure with no power on.

2. Risk tolerance. While buying a foreclosure isn't all that risky of a proposition, there is still more perceived "risk" buying foreclosure vs. a normal home. The fact that home isn't ready to move into, hasn't had anyone maintaining it for a long time, and the possibility of hidden defects caused by neglect or an upset former owner. (I'm sure some of you have heard the stories of people pouring concrete mix into toilets before being foreclosed upon!) Some people will just think of these potential problems and not be able to make the final decision to buy.

3. Perceived Discount. The main draw to many when it comes to buying a foreclosure is that you can get an AMAZING deal on all foreclosures. I'd imagine many people would be able to see through the above two reasons mentioned, but when it comes down to putting in an offer to the bank they don't realize the banks aren't giving these homes for sale and don't just accept the first offer that comes along. Many times they price their homes very competitively and are willing to wait for decent offers to come in. Many buyers out there think this market is so bad that buying for full asking price...and in some cases above asking price is a fool's error. So when a bank won't accept a price less than asking they balk. More often though the biggest factor, when it comes to price, with a foreclosure is when you get competition from another buyer. Here in Orlando well priced foreclosures are receiving more than one offer, buoying prices on foreclosed properties. Once another buyer bids higher than you, you can get yourself into a bidding war, and in this market, that can eliminate any savings offered by a foreclosure quickly.

4. Not always a deal. Contrary to common belief, just because a property is a foreclosure doesn't automatically mean it's a great deal! Banks are fallible just as much as anyone else. This is amplified by the fact that the person making the decisions on the sale of the property has never seen it, is 1000 miles away, and is simultaneously trying to sell 300 other properties. There are in fact many Overpriced foreclosures out there, and the banks don't always drop their price when they should!

So in short, sellers DON'T GIVE UP if your neighbor becomes a foreclosure! Price it well compared to other well maintained homes, go see the foreclosures that you may be competing with, and compare (with a buyer's eyes) the difference between how your home looks and the foreclosures. If your home is the "finished product" you don't have to compete directly with the foreclosures!

There are a myriad number of different factors that people claim steers the real estate market. Some of the factors I have heard of are area incomes not keeping pace with housing, rent to housing cost ratios, foreclosures, sub prime loans, media scare tactics, over building, overpricing, unrealistic sellers, unrealistic buyers, unemployment rate, the overall economy, and the list goes on and on. While all of these factors are valid in one way or another, they all go back to the simplest of economic theories that drives ALL of today's markets, supply and demand.

The law of supply and demand states prices are pressured toward an equilibrium point, where the supply line and demand line meet, illustrated below.

Simply put:    An increase in supply causes a decrease in price.

                    A decrease in demand causes a decrease in price

                    An increase in demand causes an increase in price

                    A decrease in supply causes an increase in price

As of the end of November 2007, there were a little over 26,000 homes for sale in the Orlando market of Orange and Seminole Counties. In the same month there were only 963 properties that sold, down from an average of 1,636 homes sold per month between November 2006 and August 2007; illustrating the sharp drop in demand most likely caused by the implosion of the sub prime mortgage market in September 2007. There is currently a 27 month supply of homes.

To put these numbers in perspective, the monthly inventory between Oct.  2002 to Oct. 2003 was always between 7,000 to 8,000 properties with an average of 1,860 properties selling per month, representing a market in equilibrium with a 4.3 month supply of homes.

Doing the math, if there are zero net additional homes that come onto the market (supply freezes), and demand for homes comes back to a normal rate of about 1,700 homes selling per month, it will take 10.5 months to sell off the excess home inventory, down to a normal average of  about 8,000 units. Once this occurs, historical equilibrium will be reached and prices will stop being pressured downward.

Given the normal reasons for the rise in property supply; job relocations, growing or shrinking families, divorce, foreclosure, etc, more homes coming on the market should be expected. And while I personally believe the demand for homes must eventually come back to normal levels, there are still many buyers hesitant about buying in this market. Demand may remain at a low of only 1,000 units selling a month for the foreseeable future. These factors could mean prices will be pressured downward for some time, perhaps closer to 18-24 months.

All that being said the real estate market is extremely local in nature, sometimes down to a particular neighborhood or even particular home. Some areas have a different supply than others, and some have different demand. There are always areas that are more desirable than others, and at different price points sellers tend to be able to hold out longer for the price they set. This explains why some areas have seen very little if any depreciation since 2005, while others have dropped in value as much as 30%!

Only a local market evaluation, factoring your specific needs and time frames, can determine whether selling your home, or buying your next home, makes sense in today's changing market.  

You must ask yourself and your realtor some questions before making an educated, thought out decision......

Should you Sell today or wait until the market gets better?

            What is your motivation for selling?

            How long can you really "wait it out"?

            Will your home be worth more or less in 2,3,4,5 years?

Should you buy today, or wait for homes to come down more in price?

            How long do you plan to live in the home?

            How much of your quality of life depends on the ownership of a home?

           How much will it cost you to rent vs. buy?

           How much do you value stability; not having to move when landlords decide to no longer rent?

           Can you comfortably afford your dream home today?

           Will the perfect home you find today, still be available tomorrow?

When it is time for you to make your decision, whether selling or buying, I will be glad to offer my assistance, helping you determine what the market is doing in your specific neighborhood.

-Greg Traub