Despite the doom and gloom from Wall Street and the national real estate and mortgage markets that has permeated our collective psyche, the Pleasanton real estate market continues to be steady in the face of adversity. September saw pending sales increase to the second highest level of the year, with 55 pending sales, up from 50 in August. This is second only to April, which saw 67 pending sales. Inventory edged lower as well, with 236 single family homes on the market at the end of September, down from 264 at the end of August. (click on graph to enlarge)

So what accounts for this strong showing in the face of negative news? In my opinion, it is several factors

* Pleasanton remains a highly desirable community, with excellent schools, good commute access, strong job base, outstanding quality of life, clean, well manicured neighborhoods, and a charming downtown.

* We are still seeing a fairly consistent migration from the South Bay/Fremont to this area. Buyers are looking for good schools and safe neighborhoods

* The market here is more stable than many others in the outlying areas. Pleasanton has yet to be inundated with large increases in distressed properties for sale.

* Home values are attractive. While the market is certainly more stable than other areas of the East Bay, prices here have definitely dropped over the course of the last 2 years, and this creates opportunities for buyers to get homes in prime neighborhoods at great prices.

Inventory is down because some sellers have decided they don’t want to participate in the current market environment, where demanding buyers are extremely cautious and looking for prices that reflect the current reality. There is no getting around it… buyers demand value today, or they are just as happy to wait. But when a home is a great value, there is interest from buyers. And the more motivated sellers are willing to swallow hard and sell their homes at a price that is attractive to buyers.

The under $1 million market saw a sharp decrease in inventory, with 121 single family homes on the market at the end of September, down from 148 at the end of August. Pending sales were about the same, with 37 pending sales in September, down from 38 in August. (click on graph to enlarge)

The $1 million to $2 million market saw an increase in pending sales, with 15 pending sales in September, up from 9 pending sales in August. Inventory edged down to 78 single family homes on the market at the end of September, as compared with 83 in at the end of August. (click on graph to enlarge)

In the luxury home segment, inventory edged up, with 37 homes on the market at the end of September, as opposed to 33 at the end of August. Pending sales were basically flat, with 3 pending sales in September. (click on graph to enlarge)

Here’s hoping we can see some stabilization in the financial sector soon so we can see better days ahead.

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Now that our government has pledged almost a Trillion dollars to attempt to solve the continuing financial crisis, I thought it would be interesting to figure out what went wrong. Fortunately in the digital age we have access to an overwhelming amount of information that can be used to explain what the hell happened.

Check out this article from the New York Times originally published in 1999. It’s hard not to escape the conclusion that this whole mess was predictable. When you give loans to people who can’t afford them, you shouldn’t be surprised when they stop paying.

And check out this video on YouTube.

While it is produced by the Republican National Congressional Committee, it is nonetheless a stinging indictment of our politicians. And I’m willing to bet that plenty of lawmakers on the Republican side were getting campaign contributions from Fannie Mae & Freddie Mac.

Housing has been subsidized by the Federal Government for decades… it has always been considered important to have a large percentage of the population owning homes. It adds to the stability of our society since more people have a stake in the success of our system. It also creates lots of jobs. And while these are certainly worthwhile goals, something changed under the Clinton Administration, and subsequently the Bush Administration. There was a definite policy shift in Washington. Previously, Fannie Mae & Freddie Mac purchased loans based on sound and prudent underwriting. Loans were made on the basis of the borrower’s ability to pay. They even required (get ready for this one) downpayments from borrowers! But the politicians decided that wasn’t good enough. The rules were changed and political pressure was exerted to open up home ownership to more Americans, whether they could afford it or not. And a lot of people got rich doing it, creating a house of cards that is now tumbling down.

This writer from Edgelings.com hits the nail right on the head in my opinion:

From where I sit, the United States government has embarked on two pieces of social engineering in the last few years. One was to make oil expensive as expensive as possible to drive people to greater use of alternative energy sources - because anything less would be irresponsible and destructive to the environment. The other was to enshrine home ownership (i.e., easy-to-obtain mortgages) as a new American right - because anything less would be unequal and racist.

None of us voted on these decisions - indeed, neither was even spoken about directly, much less debated. But nevertheless, both became national policy? and both have sparked national, now international, crises. Then, once they became crises, both were blamed on ?greedy capitalism?, instead of what they really were: legislative interference into market forces.

Now our wonderful politicians have pledged a staggering amount of money to try to turn the tide. I guess time will tell if it works. Seriously, how do these people keep their jobs in Washington?

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At the risk of stating the obvious, the current financial situation for banks and mortgage lenders is dicey is at best. Credit markets are tightening. Banks are so reluctant to lend money that many of them are not even lending money to other banks. The mortgage market is kind of like climbing Mt. Everest… the higher you go, the tougher it is. We’re all hoping the Federal government can figure this mess out and soon so we can get to the stabilization point. One thing is for sure, we live in interesting times.

In terms of mortgage rates, the good news is that the conforming loan market is doing pretty well. Conforming loans are loans up to $729,750 (recently raised this year from $417,000) that conform to Fannie Mae & Freddie Mac guidelines. We all know how well those guidelines worked out, but I digress. For loans in this category, rates are still very attractive, mostly in the 6% to 6.25% range with 0 pts. There are slight adjustments for your FICO score. Borrowers with gold credit (i.e. high FICO scores) get a better rate. And you can still get 90% loans in this category, so as long as your credit is good and the loan amount is under $729,750, it is still relatively easy to get financing if your credit and income is good.

There are low down payment loans available as well. FHA loans up to $729,750 are at slightly higher fixed rates (6.625% range today) with 0 pts, although there is a Mortgage Insurance premium of 1.25 to 1.5 pts. The benefit here is that you can put as little as 3% down, so for buyers without large down payments the FHA program is the way to go. The other benefit is that there is no minimum credit score, so borrowers with lower credit scores can still get a loan with a low down payment.

It’s the market for loans over $729,750 where the market is struggling. The reason is simple - there are not many buyers for jumbo loans, and so the buyers demand more return (a higher rate) to entice them to take the risk. Right now on loan amounts over the conforming $729,750 loan amount the fixed rates are in the 8% range. And the buyer has to put more money down, with lenders typically demanding at least 20% down on loans up to $1 million, and 25% or more down on loans over $1 million. And underwriting guidelines and required credit scores have tightened as well. Gee, it’s as if the lenders don’t event want to lend the money. Most borrowers today in the jumbo loan category are moving towards interest only product, which is much more attractive. Right now on jumbo loans you can get a 5/1 interest only ARM (Fixed for 5 years, then turns into an adjustable rate loan) or a 7/1 interest only ARM in the 6.5% range. This is obviously a much more attractive alternative to the fixed rates available for jumbo loans.

Another common strategy in the jumbo loan market is to package a fixed and an equity line loan to finance the property. Let’s say the borrower wants to borrow $1.2 million and put at least 30% down. The borrower can get a conforming $729,750 first loan at say 6%, and also get an equity line of credit at 4.5% (prime rate minus 1/2%) today for the additional amount to bring the total loan amount to $1.2 million. The blended rate in this case would be 5.41%. Of course the equity line is a variable rate loan, and will adjust with the prime rate. But if short term rates are likely to remain low, this is not a bad option.

Other changes in the mortgage industry include:

* The jumbo conforming max loan amount is currently $729,750. However, this is set to expire at the end of this year. The current betting is that it will drop down to $615,000, although nothing is finalized yet.

* Credit underwriting has tightened up significantly. Income ratios have dropped, meaning lenders will allow less debt for every dollar of income. And credit scores have become very important in your ability to get a loan, and what rate you will pay

* Lenders have been requiring higher down payments, especially for investor loans and jumbo loans. Higher down payments can mean lower interest rates.

* FHA minimum down payments are expected to rise from 3% to 3.5% at the end of the year.

Overall, with the Fed pumping millions of dollars into the banking system to stimulate lending, there should not be significant upward pressure on rates. But the key question, especially in the jumbo loan market, is when are investors going to start buying jumbo loans again? Until there are more buyers for jumbo loans in the secondary market, the rates will remain high and the market will be volatile.

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The Pleasanton real estate market in August was slow but steady, which has been the trend for the past few months. Inventory dropped slightly, perhaps signaling the start of a seasonal trend downward after Labor Day. At the end of August, there were 264 homes on the market, down from 269 at the end of July. Pending sales for August were up slightly, with 50 pending sales for the month, as compared to 45 for the month of July. Recent rate declines with the Federal takeover of Fannie Mae & Freddie Mac might give the market a shot in the arm, and with some of the values in the marketplace now, some buyers are again sticking their toe in the water. It remains an excellent market for buyers, and especially for move up buyers, who admittedly will take their lumps on the sale of their home, but will be able to benefit from some of the values available today. (click on the graph to enlarge)

In the Under $1 Million market, inventory is actually up slightly, with 148 single family homes on the market in this bracket, compared to 146 at the end of July. Pending sales were up as well, with 38 pending sales in August, up from 33 in July. Indeed, this is the highest level of pending sales since April in this price range. (click on the graph to enlarge)

In the $1 million to $2 million market, inventory was down, with 83 homes on the market at the end of August, as compared to 87 at the end of July. Pending sales were flat, with 9 pending sales in August, which is down from 20 pending sales in April & May. There is some activity, there are still showings in this price range, but buyers remain value driven. (click on the graph to enlarge)

In the luxury home segment over $2 million, inventory dropped slightly, with 33 homes on the market at the end of August, down from 36 at the end of July. Pending sales have been identical the last 4 months, with 3 pending sales for the month of August. There is a 1 year supply of homes in this segment, and this price bracket remains slow. (click on the graph to enlarge)

Look for some buyers to jump into the market as we enter the fall, perhaps wanting to get a jump on the spring market and take advantage of some of the great values available now, which is smart. With the drop in rates, it is a great time to shop for a new home.

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I remember meeting with a seller who’s listing with another agent had expired. I asked the seller how the traffic had been. “Great!” the seller exclaimed. “We have had an open house every weekend, and we are getting tons of traffic!”. “How about showings by Realtors?” I asked. The seller looked puzzled. “Well… er… not too many” was the reply. “Okay, so what has the feedback been from the open house traffic?” I inquired. Here comes the puzzled look again. “Well, er, I’m not really sure. I think they all liked it”. “Then why no offers?” I asked. The seller had no answer.

In real estate, not all traffic is equal. Showings from brokers is the best traffic you can get. And Open Houses can be fools gold. They often trick a seller into thinking they are in the game, when in reality they may have no chance of selling. In fact, if you want to get a real read on where your house is in the marketplace, stop doing open houses.

The difference is this. In order to see a home that is for sale but not open on weekends, the potential buyer has to take some action. They have to contact the listing agent, or contact their own agent, or send an email, or take another step to arrange a viewing. And each step is a litmus test for the buyer’s motivation level. So as a seller, when you get a showing from an agent, at least you know there was some effort involved in the decision to see your home.

On the flip side, you don’t need to take any action to see an open house. You don’t even have to be in the market to buy, and many visitors are in fact not buyers. You don’t have to be qualified, have a down payment, or a credit check. Open house visitors can come in, wander around aimlessly looking at pictures, gathering decorating ideas, and just plain kill time. I am convinced that many people who come through open houses are just plain bored, and looking for an excuse to get out of the house. Not the type of viewings that are going to result in an offer any time soon.

The other compelling reason not to do open houses, but rather aggressively seek showings from agents, is that you get far better information and feedback from the agent showing. The listing agent has the opportunity to interact with the showing agent to find out what the buyer thought, what they liked, any concerns or negatives, and in general how your home ranks in the mind of the buyers. This is very valuable information. At open houses, even if you make a determined effort to solicit feedback from visitors as they leave, you are often greeted by blank stares or shrugs, or puzzled looks that seem to ask “why in the world would you care what I think about this house… I have no intention of actually buying this or any other house”. Not the type of market information that has any value. And asking an open house visitor to sign a guest register seems to be like asking them to fill out an IRS form. They scribble down illegible names and fake email addresses. In fact, just last month I discovered to my amazement that “Elvis Presley” and “Jimmy Carter” had recently visited my open house. Funny, I think I would have remembered them.

Okay. By now many of you are saying “yeah, but there are buyers who come through as well”. And you would be correct. However, if they really are buyers, and they have some level of interest in the house, and it is not being held open, they will take another action to set up an appointment to view the house. So they will see the house, and the sellers agent will actually have a chance to extract information and point out the benefits of the house to the potential buyer, either directly or via their agent.

So back to my premise. The seller is probably thinking if you stop doing open houses, you might not have any showings at all. My point exactly. If you are not getting showings from agents, then that is telling you something… namely, buyers are not interested enough in your home to take the minimal steps involved in setting up an appointment to see the home. You probably need to change something… price, condition, staging, etc. You are not getting dozens of visitors, but you are getting a real indication of how your home stacks up in the market. For example, I have a listing that has received 4 offers in the last 2 weeks, and we have not had one open house. I did receive a number of calls from people asking if it was going to be open. And I was able to set up appointments for a private showing with the serious parties, where I had an opportunity to actually show them the house and explain the many features and benefits without being interrupted by some random visitor saying “excuse me, do you know where they got this painting? I LOVE it!”

So if you want to get serious about selling your house, stop doing open houses. Unless of course you want to brag to your neighbors that “Robert Redford” came through.

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