This article is an attempt to inject a bit of real estate knowledge into your portfolio and update you on the recent activities that have been taking place in the real estate market. I am often asked, “what’s the market doing?” If I answered, “nothing, the sky is falling and we’re all doomed — pack your personal belongings, abandon your worthless homes, and start chanting Kum Ba Ya,” I’d be misinforming you. It’s actually quite the opposite.

The real estate market has changed dramatically compared to a year ago. Many properties in Petaluma, especially homes priced below $400,000, are receiving multiple offers and selling above asking price. Does this mean the real estate market is back to the chaos of that “oh so inflated” market in 2005 – leading the way to another economic meltdown in four years from now? The answer is an emphatic “NO!”

By now we’ve all heard what the peak of the market was like back in 2005 — when sellers had lottery fever, buyers were signing their names with the alias “Ponzi” (no relation to “The Fonz” from ‘Happy Days’) and many homeowners were re-financing and pulling out equity faster than the ATM machine in their coat closets could spit out Benjamin Franklin’s — the current market is quite different.

For example, obtaining a mortgage loan in the current market is much more sensible (simply breathing no longer gives one the right to obtain a mortgage loan). Buyers actually have to prove they have a realistic and non-inflated income and verification of employment, credit scores need to be closer to a 700 FICO score (in some cases above 700), assets need to be verified, and down payments need to be at least 3.5 percent or more.

Most loans that are originated with less than a 20 percent down payment are subject to PMI (private mortgage insurance) and impound accounts that require money in reserves to pay for property taxes, hazard insurance, and PMI — increasing buyer closing costs and helping to insure that buyers have a monetary stake in their housing investment, which, in theory, will make it more difficult to walk away from. Another significant difference is the fact that inventory is low, interest rates are historically low and the demand for housing has increased – all signs that point to some sort of recovery in the housing sector. The demand for low-cost housing is definitely greater than the current supply of inventory. Many properties are receiving multiple offers – anywhere from two or three offers on a particular property to more than 20 offers on a single property.

Where are the buyers coming from?: Many buyers who felt they were priced-out of the market in 2005 are taking advantage of low prices, tax credits, and interest rates. Investors are looking for a place to park their cash (prices make sense, as investors are buying properties and able to realize a positive cash-flow), and move-up buyers who didn’t want to take on hefty property tax bills due to inflated prices in 2005 are taking advantage of lower home prices coupled with lower property taxes.

How does one compete in this market? The answer is not simple – you may have to write a dozen offers or more before your offer gets accepted. Buyers need to be patient, prepared, and pre-qualified (pre-approved with an underwriter if possible). I am also often asked, “are we at the bottom of the market?” While we do not have a crystal ball or control what the real estate market is doing, it seems as if the market is at, or close to the bottom and much more stable. It’s a good time to buy real estate: prices are low, interest rates are low, you’ll gain a tax write-off and pride of ownership, and hopefully in the future a return on your investment.

Posted By: Doug Hecker