What did the 2010 Real Estate Market look like?

At the end of each year, around the same time I’m working on those tedious tax preparations, I compile all the real estate sales data from Newport County and the bordering towns so that I can see the last year’s effect on the local market.

I had a hunch that 2010 would be different from its predecessors, and it turned out I was right.  When I took a look at the pages of analyses coming off my printer, I noticed a number of significant changes on Aquidneck Island in the last year.  According to the MLS records for all types of property being sold, both average and median sale prices are up slightly over last year.  The number of properties sold has inched up as well.  When I look at number of properties sold each year, it’s clear that the low point occurred in 2008, but the low price point seems to have occurred in 2009, which makes sense.  Sellers lower their prices after their property hasn’t received significant activity in a while.

There was also a change in the type of property that sold.  Single-family homes, which have always been our best seller, dropped a bit from 365 sales in 2009 to 360 sales in 2010.  At the same time, the number of condominium sales, which has slipped severely since its high in 2003, has risen almost 25% over last year’s number and is almost back to 2007 levels.  Multifamily homes, a very popular commodity in 2009, dropped 13 properties this last year

While any analysis or chart is just a snapshot of past reality up to a certain date, it is fun to imagine that it can give us insights into the future of the market.  What it can do is show us where we have been and what current market looks like.

I have additional graphs, which divide the market into price ranges: properties sold below $400k, in the $400k to $1 million range, and above $1 million.  These are the multicolor area charts below.  From the chart, “Aquidneck Island Number of Sales Distributed by Price”, it is clear that the number sold under $400k has dropped, while the middle range has taken up the slack.  An interesting view of the market is the comparison of this chart with the chart that follows showing the total dollars spent on the purchases in each category of home: the “Aquidneck Island Sales Dollar Distribution by Price.” In this chart, you can see that buyers in the middle and high categories spent almost the same amount of total dollars on their purchases and were only exceeded a little by the total dollars spent on properties sold for under $400,000.

To sum things up, we reached a marked sales bottom in 2008 and have moved up since then and we may have reached our low price point in 2009.  The middle part of the market that really took a hit in 2008 has reentered the game in the last year.  Condominiums are being recognized as a great value due to the pricing pressure they have felt in last couple of years, and sales reflect that. 

All in all, I suspect that 2010 will continue this trend.  In light of these indicated price increases (however slight), I would say that if you are thinking of buying a new home or investment property don’t wait!

Investment Real Estate vs. Home Ownership

“Owning your home is a smart investment.”

I hear people say those words all the time, and whenever I do, I think that whoever came up with that phrase didn’t really know what they were talking about.  A distinction needs to be drawn between investing in real property and home ownership. They are not the same thing!

A young acquaintance who analyses bonds for a living mentioned a discussion he’d had with his father recently.  Being a father myself, my ears perked up.  He said that his father was investing in gold.  I said, “What’s the problem with that?  Plenty of people invest in gold.”  He said that gold is not an investment because it doesn’t throw off an income stream; rather, it’s a hedge against inflation.  It occurs to me that owning your home might fall into the same category, with one major exception.  If you want to exchange gold for currency or another investment, it is a fairly easy matter.  If you want to exchange your home’s equity, it’s a much more cumbersome process.  You either need to sell it and find somewhere else to live, or refinance it and take on additional debt.

Investment is defined as: the investing of money or capital in order to gain profitable returns as interest, income, or appreciation in value.   The important part here is “in order to gain profitable returns.”  The only way to see a return on your home as an investment is when your home is liquidated, i.e. sold.  (If you mortgage or remortgage your home you can get cash out, but at a premium that must be paid back with interest.)

Case in point: a few years ago, some people were convinced that it was okay to purchase more home than they could afford because they viewed their home not only as shelter, but as an investment.  It seemed as if all property was constantly increasing in value, and that they would have a home that was always worth more than what they paid for it.  I think we’re all well aware of the consequences of that type of thinking! 

Most homes fall into the expense category; they usually are not income generators.  When you take out a home mortgage, you are paying both the interest to the bank plus some of the “principal” or cost of your house.  Over 20-30 years you will pay this amount fully, and by that point, your home will have a lot of equity.  So in a sense, your house is your “live-in” piggy bank, your mortgage as the savings mechanism that causes you to build equity.  During the time you’re paying it down, you have to earn money to pay taxes, insurance, utilities, repairs, and interest. Buying a home only really pays when you are able to retire your mortgage.  Then your cost of living goes down – but you still have to pay to live.

There is one situation that fits the “home as an investment” criteria.  Some people – often young people – will buy and live in a multi-family homes.  This makes the property more affordable, because the rental income is counted as additional income for their loan qualification.  Instead of buying a $150,000 single family home, they might be able to purchase a $250,000 two-family home.  Ideally, in a rising market, the rents rise and pay more of the home’s expenses, and the property appreciates in value.  Additionally, since the loan they are paying is larger, their equity grows at a faster rate.  Of course the downside to this is that in a declining market, rents can go down and ownership costs can increase.  This is why it is important to make sure that you plan and save so that you can handle the “rainy day” cash flow if things go wrong such as your mortgage rate or taxes increase, your water heater dies or your rents go down.

Over the long run, values and rents typically increase in good areas.  The first home my wife and I bought was a two-family home.  The rent we received on our first floor, one-bedroom apartment ended up paying most of our costs after a few years of ownership, which made our living expenses more affordable.  We also put a lot of ‘sweat equity’ into that home and increased its rental value.

This is an example of how your home can also be an investment.  Multifamily homes  bring with them the burdens of being a landlord, but they can really pay off in the long run.

HAPPY NEW YEAR TO OUR “AT HOME IN NEWPORT” READERS!!

Newport County - Where are We Headed?

A lot of you are no doubt wondering these days, "What is going on with the real estate sales in Newport County?" Where is the market headed?   Let's take a look.

I update a spreadsheet each week that looks back at the last 6 months' worth of sales data in Newport County, on Aquidneck Island, and in each of the towns separately.   I then graph these figures, which include all types of properties (single and multifamily as well as condominiums, land and commercial).   I've been doing this since the end of 2007, when it became obvious that the market was changing dramatically. Above is a graph of that weekly activity in Newport County since October of 2007.
 
In real estate, marketed properties are split into three categories: those that are currently on the market (Listings: the Blue Line), those that are under contract and awaiting close (Pendings: the Fuchsia Line), and those that have closed their contracts (Solds: the Yellow Line).  In my charts, each of the "Solds" points represents the prior six months of sales.  You can even look at my chart as representing the future (Listings), present (Pendings) and past (Solds) of the real estate business, much like an Ebenezer Scrooge story with a real estate bent. How appropriate at this time of year!

Let's look at some of the highlights: 
The Blue Line (Listings) shows that people tend to list their homes more in the summer months because of Newport's appeal as a seasonal resort and retirement destination.

If you look at the Fuchsia Line (Pendings), you can see a similar cycle that peaks in the spring around May and June.  You can also see the upward blip caused by the Obama homebuyer tax credit in October 2009.

With the Yellow Line (6 months' worth of Solds), you can see the number of sales clearly descending from their giddy highs from pre-2007, back when even the lowliest cottage was marketed at close to half a million dollars. The peaks and valleys echo the Fuchsia Line (Pendings) three months later, which is the time it usually takes to close on a property. If you average things out, the market appears to be quite even, steadily maintaining a historically low - but consistent - level of activity. 

What's also worth noting is that the height and depth of the seasonal peaks and valleys seems to be lessening, i.e. lower peaks and shallower lows.  This is an indication that buyers are looking year-round instead of just in the summer; there is a pent-up demand for good homes at the right price, and buyers are waiting to pounce if they see an attractive property.  I see some going even within the first week of listing.
The number of listings is far outpacing absorption by the market.  Using 1300 as an approximate average number of listings and 300 as the approximate average six months' sales, we currently have over two years' worth of inventory on the market in Newport County.

As I mentioned in my first post about the Newport County Market, the overall number of sales is staying consistently level year over year, not trending up or down, but listings are more affordable now because of low interest rates and substantially reduced prices.  According to the National Association of Realtors, the nationwide affordability index is better than ever, with qualifying incomes for a median priced home dropping from $52,992 in 2007 to $33,744 in October of this year.

Although our properties may require higher qualifying incomes, the increased bang for the buyer's buck holds true here as well.  If the current economy has hit you badly, you may not be in the market. But if you're looking to buy, you may not find a better time!

HAPPY HOLIDAYS TO EVERYONE AT HOME IN NEWPORT COUNTY!!

Choosing a Realtor to Help You Price it Right

 Is anybody out there a fan of the show “Antiques Roadshow?” Have you ever dreamed about showing up at one of those tables with some knick knack you’d had sitting on your shelf forever, only to be told it’s worth thousands and thousands of dollars? How would you feel, then, if a real estate agent came along and told you that your house was worth more than the market could bring you? Pretty great, right?

I wouldn’t be so sure…

Although it might sound great, believing this news - and making decisions based on it - can unfortunately lead you into trouble. Pricing your house is the most important part of listing your property, and pricing appropriately in a Buyer’s Market is critical if you want it to sell.

Here are some risks when overpricing your home:

Time is money – especially when it comes to marketing.  For every month your home remains unsold, you’re paying taxes, mortgage, insurance, heat, electric, and water bills, which in some cases can add up to thousands of dollars a month.  Sometimes, if you’ve already moved, you’re paying the expenses on two houses!  Even if you can get a higher price by waiting out the market, these holding costs mean that you usually end up netting less money than you would have if you’d sold right away at a reduced price.

The longer the house sits on the market, the more it will appear overpriced to buyers and their agents. This may be just a matter of perception, but it has proven true time after time.  Just like tired old merchandise, the house can develop a sense of being  “shopworn,” and price reductions later are not as effective as hitting the market at the right price initially.  Also, considering the market is still declining, the price you can get now will most likely be higher than the price you can get in six months.  So if you price too high, you can end up making reductions and still not sell because you’re chasing the market down! 

This may not sound encouraging, but it’s the reality of the current market. Accepting the facts will enable you to make smart decisions and probably save yourself a lot of heartache and money. It is important to get ahead of the curve.  Buyers right now are very particular about the houses they are buying, and they’re afraid of paying too much.  Make sure that you look at how your house will fit into the market alongside the current competition.  When prices are going up, it makes sense to price your home above the market, but when they’re going down, the opposite is true: you should price below the market.  This is because the comparable sales you are using to price your home are based on houses that went off the market some time ago - in some cases, more than six months!

Straightening up and preparing your home for showing after showing can be extremely wearing, stressful, frustrating, and otherwise draining.  If your house is overpriced, you will have to go through that many more showings before you get an offer.

Make sure that your realtor’s CMA (Comparative Market Analysis) makes sense to you.  Are the comparable properties the agent chooses in the same (or similar) neighborhoods, and are they the same general size as your house?  Are the comparables on lots of the same size, with similar amenities such as water views and a garage?  Make sure that you look at what buyers are paying for homes like yours, and not just what other homes (which have sat on the market for the last year) are asking.  Make sure that your realtor is experienced in creating CMA’s and has up-to-date data regarding the market and which way it’s heading.  Don’t be fooled by an agent who, while trying to compete for your listing, tells you what they think you want to hear, rather than giving you a true assessment of the market and what your house is really worth.  Some agents might even give you a higher price to get the listing, hoping that you will bring your price down once it has been on the market a while. As you’ve noted by now, this strategy is not in your best interests.

Your house will receive the most attention during the first few weeks it is listed.  There may be a pent up demand for a house like yours, and several buyers may be looking for such a property at your price point.  Don’t miss out on a possible multiple bid situation by pricing your property too high to start.  Remember, too, that your first offer is often the best offer you’ll get.

When you are comfortable that your property is priced close to the price that it will sell for (usually within 10% of your asking price), make sure that your house is in good order for showings.  More on this later…

Listing Representative vs. Buyer’s Representative: Who’s Looking Out for Your Best Interests When You’re Looking to Buy?

The other day, I was grabbing a cup of coffee and ran into an acquaintance who is hoping to buy soon. After some initial catching up, we got to talking about the market.

“I have to ask, Rick,” he started. “A friend of mine told me that rather than signing up with a Buyer’s agent, I should just work directly with the Listing agent for a property. She says I’ll get a better deal that way, because then there is only one agent involved and so the commission is less. I was wondering if you had any thoughts on that?”

I had a lot of thoughts on it.

At first, this mentality might seem like smart thinking. Who wouldn’t want to pay less of a commission? Working with just one agent simplifies the entire process, right?

It could. But when you really start to peel it apart and look at all the factors, there are some big red flags that pop up. I will explain in this blog how working with a Buyer’s agent can actually save you significant money in the end.

Side note: In order to comply with new RI state laws, I will now be using the term “representative” or “rep” for short, instead of “agent.” You can read more about it here: http://www.dbr.state.ri.us/documents/divisions/commlicensing/realestate/RE-Revised_Title5-20-6.pdf

With that bit of legalese out of the way, let’s begin:

At a real estate brokerage office, the commission for a property is set when the Listing representative takes on the property. The Listing rep agrees to represent the seller and to work to get the seller the highest price and best terms possible. (Did you catch that? I italicized it for a reason.) The Listing rep also agrees to split the commission with the co-broking Buyer’s rep. So the commission that the seller ultimately pays usually does not change, whether the Listing rep sells the property, or if they co-broke with a Buyer’s rep.

It’s true that there are some advantages for you, as a buyer, if you work with a Listing rep: they generally have more information and knowledge about the property and its location. They might have more of an incentive to push your offer to the seller, since their office would then receive the full commission. They also have greater insight into the seller’s needs, and might provide you with information you can use to make a more compelling offer.

Now I will list some advantages to working with a Buyer’s rep:

• The Listing rep is contractually obligated to work in the seller’s best interests. The Buyer’s rep is contractually obligated to work in your best interests, to help you negotiate the best price and terms that you can.
  
• The Listing rep is obligated to tell the seller anything that you tell them that could pertain to the purchase of the property, such as whether you are willing to move your offer up, or if you are under pressure and need to purchase something in a short time frame. The Buyer’s rep has an obligation of confidentiality to you.
  
• The Listing rep is required to be honest and fair to the buyer, but they are not required to point out the property’s limitations to you, the buyer (red flag!). A knowledgeable and experienced Buyer’s rep can save you a lot of heartache by pointing out possible problems before you buy, as well as recommending inspections that you should have performed.
  
• The Listing rep cannot do a comparative market analysis to help you determine an offering price for the property without the seller’s consent and agreement; a Buyer’s rep will help you with a market analysis and advice on what to offer.
  
• The Listing rep will be reluctant to suggest other properties that might work better for you because it would conflict with their duty to the seller. A Buyer’s rep can recommend several properties that might fit your needs, and schedule appointments to view those properties with different Seller’s representatives, saving you the time and hassle of having to make separate phone calls to set up property tours.
  

I said it to my friend in the coffee shop, and I’ll say it to all of you: if you’re new to town or new to purchasing real estate in general, I recommend finding a reputable, experienced, full-time real estate professional to represent you exclusively and guide you through the process. If you’re an experienced buyer who knows the town and has negotiated purchases of property before, you may be better prepared to deal directly with a Listing rep. Just don’t assume that working directly with the Listing rep is necessarily the right way to go.

Newport’s Real Estate Market: Not as Bad Right Now as You Might Think!

You hear it everywhere: the doom-and-gloom forecasts, “the market is the worst it’s been in a decade and only getting worse.” I have some good news to share: the Newport real estate market is not so bad after all! For buyers with cash or with good credit and a good down payment, there is a silver lining of opportunity around this dark cloud of economic downturn.

You may not have heard that real estate inventory in Newport County is close to the highest it has been in at least ten years. Inventory, which usually peaks in August, is about 100 units higher in 2010 than it was in 2009. Not only that, but we’ve had almost three years of a down market to dampen prices, so new homes being listed tend to be more realistically priced for today’s market (as opposed to the overinflated prices of the “bubble” days prior to 2008).

Another sign that things aren’t so bleak is that sales that are in contract and pending closing are higher this year than last; this is an indicator that market is turning back up again. It’s also an indicator that sellers are getting more realistic about the types of bids they’ll accept. Part of this increase is due to Baby Boomers coming of age and wanting to move to areas that are attractive for retiring or buying a second home: as we all know, Newport County is a big destination for that!

It’s really a great market for prepared and savvy buyers, for many reasons. Interest rates on mortgages are close to record lows. Consumer purchasing power is high. Right now, buyers who are sitting on cash can obtain a home that would have been out of their reach just a few years ago.

What are some of the main drawbacks to today’s market in general? If you’re trying to sell your home, the initial bids you receive might come in low. Loan requirements are stiffer and mortgages are more difficult to obtain in general. Across the board, appraisals are coming in lower, and foreclosures are causing certain areas to skew lower because of it. But the good thing about being in a resort area (like Newport) is that you don’t typically see as many foreclosures. Buyers who might expect a 50% drop in value while shopping in other markets are being unrealistic if they expect that here. Nationwide trends are not applicable to all areas, and Newport County is one of those places that, while certainly influenced, is still a desirable enough location to keep foreclosures at a low rate.

Sellers should remember that Aquidneck Island is just that – an island. There is limited space to build here, especially with historical restrictions. Waterfront property will always be desirable and rare, so waterfront homes have still been selling quickly over the last few years. In general, if a well-located property in good condition comes on the market, priced appropriately, it will go quickly. I am seeing some properties sell within the first week of coming on! I’m currently aware of a multiple bid situation on a three-family house and have heard of other multiple bid contests as well. This indicates that there is a pent-up demand for affordable homes in Newport County.

So the overall message is: the market is certainly not as bad as you think. It is thriving, but in a way that is more realistic and hopefully sustainable than prior to 2008. The pie-in-the-sky days of paying nothing down for your dream house or buying something dirt cheap and selling it two years later at an overinflated price are not here anymore, but opportunities abound for sensible buyers and for sellers who picked quality homes in nice locations. Times are great for buyers with down payments, a good credit history, and a job. There are also opportunities for buyers who have liquidated stocks, which will enable them to buy at depressed market prices.

Newport County sellers are lucky compared to sellers in many other parts of the country. If you are a seller looking to relocate, the losses you might see selling your home here could be ameliorated by the buying advantages you will find in other communities.

Check with your local real estate agent to discover what types of opportunities might be awaiting you.