Philly Living Blog

We’ve all read stories in the national press about how the real estate bubble has burst, there is a mortgage crisis, and prices are dropping. While this is true in some markets, it is important to remember real estate markets are local.  There are areas that will show significant growth and appreciation even while national trends are down.

Two weeks ago we got some hard numbers when we crunched the Q2 results for all of Center City.  We found that sales and prices up. (You can see the full Q2 report here.)  If you have been waiting for the market to fall further it might be time to rethink that as it looks like the market hit bottom and prices are beginning to rise.

Further evidence Center City’s real estate’s market strength was recently published by the Philly Inquirer.  One trend that has been dragging down prices is the subprime mortgage market.  Now subprime mortgages aren’t neccessarily bad things, but in certain markets they have been over used and are now defaulting at high rates.   Luckily this is not the case in Philadelphia where the Inquirer reports that Center City has an extremely low subprime mortgage rate of less than 4%.  See http://www.philly.com/inquirer/multimedia/The_Subprime_Landscape.html.  With low subprime penetration there is low risk of a market decline due to owner defaults.

Remember, real estate is a local business.  Market to market and even neighborhood to neighborhood can be different.  What is happening is that sellers are not able to simply tack on a healthy percentage increase on what a comparable home sold for the previous year as was the case the last few years here in Philadelphia.  Instead, they are taking a good look at the marketplace with their sales associate and determining what the proper price of their home should be.  I can’t emphasize enough how critical proper pricing is in this market.

Additionally, remember Econ101 - supply and demand.  If there is a healthy supply available, the consumer has the opportunity to shop around and choose the right home.  A healthy negotiation between buyer and seller then ensues.

While the media is focusing on dropping prices, it is important to remember that there is still appreciation going on.  And, in the historical context of how long you may have owned your home, appreciation has been substantial.  According to the Office of Federal Housing Enterprise Oversight over the last five years through June 30, 2006 existing homes in the U.S. have appreciated more than 56%.

Finally, we also need to be aware that not all of America had the white hot real estate market of the past few years.  For a lot of Americans, slow and steady appreciation was the norm.  These folks read about high appreciation, booming and falling markets, and scratch their heads because they’ve never had that in their market.

We are still hearing about the real estate bubble and no one seems to be able to answer the question of whether it has burst or not.  Here are a few things to consider:

1. First-time homebuyers (in particular) are naturally hoping that prices will come down.  They hear about this bubble and get a false sense of security that prices will automatically come down, so they remain on the sidelines.  I think that this type of “timing the market” is very bad.
2. There has never been a national real estate bubble since the National Association of Realtors began recording median home prices in 1968.  Freddie Mac has never shown a decline in national median prices since their record keeping began in the mid-50s.
3. In my terms, the definition of a real estate bubble is a massive oversupply of homes coupled with massive job losses.  We are just not seeing that.  In fact, the Brookings institute reported that the U.S. will need 40 million new residential housing units by 2030.
4. The Office of Federal Housing Enterprise Oversight studied 362 metro markets between 1978-2003 and found only 21 real estate busts which they described as a 15% decline in home prices over a 5-year period.  That means that only 2/10th of 1% of the markets studied over 25 years were busts and only 9 occurred after a real estate boom, which is described as 30% home price appreciation over a 3-year period.  Clearly, the idea that home prices go way up and then come crashing down is simply not true.
5. Except for catastrophic injury or illness, sustained loss of a job or other personal crisis, we will not sell our home at a loss.  A home is what we live in; it is not a stock or bond and cannot be bought or sold quickly.  A home purchase is a complex and emotional decision that is certainly not a routine event.

So what does this all mean?  It means that though some segments of the Philadelphia marketplace may see a bit of adjustment (see new construction condos for a good example), it is highly unlikely that we will see any substantial bursting of the bubble.

Selling a fixer-upper is not impossible, but buyers are going to expect it to be priced far less than comparable homes in good shape. Your strategy for selling a fixer-upper will vary depending on factors including the location, strength of the market and how much work is needed to get your home in shape.

Be Prepared - know what’s wrong with it
Many experts advise getting your own inspection before selling any home, and this is an especially good idea for a fixer-upper. That way, you avoid being surprised by problems that could sabotage a sale when the buyer gets his own home inspection. You have to disclose the faults in your fixer-upper, especially things like lead paint or plumbing problems, but at least the buyer will be confident that you’re not trying to hide problems that will be expensive to fix.  I always tell my clients to be wary of the disclosure statements that disclose nothing.

Spruce it up….maybe
Before you do anything, you need to decide whether you’re selling your fixer-upper as is, or if you’re willing to do some work that will more than pay for itself on the sale. Real estate experts say even cosmetic improvements like refinished hardwood floors or fresh, neutral paint can make a big difference when selling a fixer-upper.

You can get more people to look at your house — and thus increase your chances of selling your fixer-upper — with the minor remodeling of a key area, like the kitchen, or by replacing unsightly siding. According to a 2004 survey by Remodeling magazine, you would recoup an average of 93 percent of the remodeling costs, and even more in some markets.

So, why would you invest money if you’ll only recoup 93% of it?  It’s all about salability.  Remember that, from the buyer’s perspective, if they buy a completely remodeled house, they can buy the whole thing with mortgaged money.  However, if they have to put $50,000 into making a fixer-upper shine like a new house, that’s $50,000 out of pocket.  By appealing to the masses who can’t afford to outlay rehab money, you are widening the pool of perspective buyers and will significantly increase your odds of selling.

A common question that we get is some form of this: “I own my home but am interested in selling it and using the equity to upgrade to a larger home.  Should I pick out my new home first and then list my home, or should I list and then pick out the new one?”

The answer, of course, is that it depends on many factors.  However, most people who are asking this are doing so because they do not have the means to purchase a new home (down payment + closing costs) and to potentially carry both homes for very long.  Therefore, you should consider the following:

1. How much money do you have?  If you are trying to buy before you sell (or have an agreement on your current house), you can’t guess what your house is going to sell for and consider those proceeds as money that you can spend.  What if it doesn’t sell as quickly or for as much as you hope it will?  Can you still follow through on your new home purchase?
2. Homes take longer to sell these days.  If you pick out your new home, when will yours go under agreement?  Next week?  In three months?  A year from now?  Can you afford to carry both homes for an unspecified period of time?

At the end of the day, when you remove emotion from the equation, buying a home is a financial transaction and really is no different from buying your groceries.  When you go to check out, you only get your food if you (a) have enough cash to pay for it or (b) can borrow the money on your credit card.  Since most people are borrowing money to purchase real estate, it is imperative that you sit down with your agent to discuss the pros and cons of every approach.

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All too often we receive bids on properties that include little more information than the price that the buyer is willing to pay and a day that they would like to settle.  This is not a huge problem if, as a buyer, you are paying cash and not interested in having any inspections done.  In most cases, however, this is not the case.

As a listing agent, our fiduciary duty to the seller is get their house sold at the highest possible price.  So, what matters other than price?  Simply put, not all buyers are serious and not all buyers can realistically make it to settlement.

So how can you differentiate yourself from these buyers to let the seller know that you are serious:

1. Put all offers in writing such that, if accepted, the seller need only sign to execute the contract.
2. Provide ample financial information.  Pre-approvals are a must.  In addition to that, don’t hesitate to list salary information, real estate owned, credit card bills, etc.  If you work with a Realtor®, they can provide you with a Buyer Financial Information worksheet.
3. Be specific about your loans.  If you are doing an 80/15/5 piggyback from Chase, state that.  From the seller’s perspective, a buyer who doesn’t know who they will finance the property is a high risk.
4. Earnest money shows, well, how earnest you are.  You should put at least 5% in escrow, preferably more.
5. Quick closings are always the preference.  The seller doesn’t care that your lease isn’t up for four more months.  They have the property on the market because they want to sell now.

Lastly, the advice I give all of my clients: decide how high you will go before you start negotiating!

PhiladelphiaCityRealty.com is the brainchild of David Friedman, a real estate agent with Coldwell Banker Preferred in center city Philadelphia. Frustrated with the limitations on most websites available to his customers, David created PCR in order to give not just his customers, but all of Philadelphia, a great real estate experience.

The most differentiating aspect of PCR from the many other websites out there is simply that we make it easy to find the properties and information that you want. Our goal is to provide the most real estate information to the Center City community - even to those people who may never choose to use our brokerage services.

We don’t believe that you should have to fill out long registration forms just to find out what is on the market. Nor do we believe that just because you want to know how much that house down the street is listed for, you should be harassed by some agent you’ve never met and don’t want to talk to.

PCR is built around a belief in good customer service and non-pushy sales. To that extent, PCR has created a network of like-minded agents who help serve the PCR clients who decide that they are ready to buy or sell their home. Openness, honesty, and great customer service are the hallmarks of their practice.

In short, PCR is about having a great real estate experience, whether you are buying and selling, or just browsing to see what’s out there.