Between raising a young family and operating at capacityon purchase, listing, and refi transactions, it comes to mind I have not loggeda market update in a while. Then again,not much has changed since I really had something important to say. The political and banking sound bites dujour have changed with the wind, but the basic kick-the-can-down-the-roadstrategy seems to have put us all in the same boat… whether we were draggedinto it kicking and screaming… or have begged, borrowed, bribed, or stolen a seat aboard.
What is also becoming increasingly apparent if notsomewhat humbling, is that when asked for my take on the market, most folks arereally just seeking the parts of my outlook that validates what they werethinking anyway.
But every now and again, I get challenged and inspired todistill my outlook into conscious thought, and with a green light from a valuedclient, Dennis, I am pleased to post for your review an exchange of thisnature. Following is a snapshot of thepart of my day shared in conversation with a sophisticated investor, who kicksthe tires of a vehicle he plans to use to get a job done:
[read bottom up]
From: Seth Chalnick
Sent: Thursday, December 01, 2011 5:17 PM
Subject: RE: reply from seth
Thanks Dennis, for thethoughtful validation. Me too (lunch)… and it seems I’ll need to stickwith water if I’m going to keep up with you 🙂
I look forward to helpingKeith find a killer location that blows the doors off similar but inferiorproperties, when it comes to long-term appreciation, by focusing on thefactors, which may seem today like nuances or subtleties, but will compoundover the 20-year resale trajectory.
Sent: Thursday, December 01, 2011 4:52 PM
Subject: Re: reply from seth
Thanksfor the response.
It seemslikely we will see some band aids as the banks fight for time.
Thepeople I speak with in big and small banks are shitting bricks. I am notsure the end game might be quicker than you think. We both know the inevitabilityof mark to market. I am therefore as worried about commercial and retailcenters.
Regardingthe use of funds, this is less than 1% of funds I am personallyinvesting. As the father I am not typical. I am locking in theridiculously low rate I can make on a mortgage to my kids. I gift themthe payment plus the balance of the 26,000. Therefore price is importantbut location and a 20 year horizon are my objectives.
I have asimilar investment with my daughter in Chicago: 750 to 1 mil keeps it even. She has three kids on 529 funds Keith 1.
Post thisemail exchange it will be good to work through Keith with a CC to me. Iwill definitely enjoy having lunch with you one of these first days. Thanks Dennis
re: Appreciation/value…historically speaking, homes located west of I5 location have commanded thegreatest premium, have been the last to suffer downturns, and the first torebound. This trend was amplified in the following areas (listed fromhighest to lowest): Rancho Santa Fe, Del Mar, Solana Beach, Cardiff,Encinitas, Carlsbad. Add a 10%-15% premium for homes with a view of theOcean or Lagoon or location within a block or two of the beach.
I look forward to helpingKeith and you identify this level of value on a micro level when you activelybegin searching with me.
re: Banking… foreclosureswill pick up the moment the influence of all of this intervention let’s up…unless and until we inflate our way out our debt problems first… which willtake a decade or so. The fed and the government and the banks haveconspired to plug up a cracking dam for four years now, and I am frankly amazedthey have been able to kick the can down the road this far. You are quite rightabout the supply and demand of liquidity. But the banks were basicallyinsolvent after the subprime fiasco… and then they scratched “mark-to-market”accounting principles and boom- they were back in action.
I am convinced there will beno end to the magical things the fed, banks, and government will do to kick thecan down the curb. I don’t know if any other real estate professionalwill admit this, and I don’t even know if I should give many of them credit forknowing this in the first place… but I have consistently gone on record inpublic forums stating that real estate prices should continue to go down untilfolks can afford the payments with rates that are normalized (i.e. withoutintervention)… and until there is an answer to all the homes that make up theshadow inventory… and until there is an answer for what will happen when allthe 5 yr I/o loans currently in existence re-set back to principal andinterest.
So should the systemself-destruct? From a fundamental standpoint, probably… yeah. Butit is impossible to make rational predictions while the market is being manipulated. In other words, the hypothetical outcome of life without intervention is notthe question. The question we should be asking is this: what willhappen with continued intervention? Because this is our new normal. I don’t know the answer to this question, but if I had to guess, I suppose theultimate result will look like one of two things: We will either haverampant inflation and dilution of capital… in which case it will circle backaround to real estate valuations on steroids… and the 4% rates we see todaywill seem like free money in a few years. Or it will all go to shit… inwhich case I suppose I would rather own property than anything else because itis a tangible asset that will at least retain inherent value even in the worstcase scenario.
I see the opportunity ofbuying today as an opportunity to leverage cheap money. I don’t want totalk myself out of a commission or anything, but if it were me, I’m not sure Iwould put all cash down on a home in coastal North County today with all thispotential downward pricing pressure… unless it wasn’t for purely investmentpurposes… or unless I could afford to allocate long-term resources withoutdisrupting the balance of the rest of my portfolio. I see the opp toleverage cash right now as buying $325k homes in inland Carlsbad, Oceanside,and San Marcos. These homes are much closer to their empiricalbottom. ROI is pretty turnkey for renting them. The replacementcost is not much less than the purchase cost. People could afford thesehomes with 20% down. They are the types of homes that people will need tomove to if they get displaced from higher-end homes. But then you missthe longer term appreciation… which I don’t see happening within the next 3-5years. So therein lies the tradeoff.
Sent: Thursday, December 01, 2011 3:16 PM
Subject: Re: reply from seth
You knowwhat historically causes properties to hold or build value in this area whatare those attributes?
Tosimplify banking my question. It is simply a money supply and allocationquestion. If bank balance sheets weaken and reserve requirementsincrease will foreclosures pick up or lending criteria change. If soanyone dealing with the banks should find borrowing or refinancing moredifficult. That should weaken the market.
We arenot trying to market time the exact bottom.
re: Downgrades… thefundamentals should continue to drive prices lower, but with all theintervention, who knows if this will happen and when? I resist thetemptation of timing markets, and simply focus on whether or not it is theright time to buy/sell for each client’s unique scenario. We may,in fact, be far from an empirical bottom, but then again it could be the besttime ever to leverage other people’s money if you buy right. Or it couldbe a bad time to buy from a pure cost basis perspective. The downgradeshave little impact in my book, because the ratings firms lost credibility whenthey failed to see what a lowly agent like me saw five years ago. True,lots of folks care what the media says, but the media is constantly offsettingitself with conflicting reports, such that only hindsight will be the judge.
re: Your question aboutincluding the “used to be price”… sorry if my response last time you asked wasnot clear. For easy reference, here is a more direct answer:
The alerts do not come from“my” system… they come directly from the MLS. It would be helpful if theMLS system automatically displayed the price reduction amount within the emailalerts, but they do not. However, if you click the link provided in thealert to view more info… then find that property in the list… and then clickfor details… you will find a field called “Orig.Price”. This shows wherethe list price started. It does not break down the increments of multiplereductions, but it does at least show how much they dropped the priceoverall.
To get the actual historyand increments of multiple price drops, you can visit “my” website here and then enter the propertyaddress in the ‘keyword’ search box… then on the profile page that displaysnext… locate the “price changes” link, where I intentionally had my guys codethis from scratch to fill in the gap of what I would agree is an MLSshortcoming.
Or you can simply shoot methe MLS number of listings you like and I will give you the history.
As far as my “favorites” go,I take a hands on approach to providing uncensored opinion about each home Ivisit in person with each valued client. I avoid sharing subjective viewsbeforehand, because anyway I slice it… it comes across as “selling”something. I have a large book of business and the criteria important toeach respective client varies greatly. Rather than dissipate focusattempting to be everything to everyone, I mindfully help folks when they aremost receptive. When Keith and I start physically looking at homes, heand you will very quickly see how I help laser onto what you like and avoidwhat you don’t. That said, if you share your short-list of potentialcandidates, it will be a pleasure to review each one and reply back with thepro’s, con’s, and ranking of each one.
I do not specialize inmanaging rentals, but the broker of my firm does. He has successfullymanaged a large stable of properties for over 20 years. I look forward tomaking an introduction as the need arises.
I look forward to helpingKeith find a great home.
Sent: Thursday, December 01, 2011 8:43 AM
To: email@example.com; ‘keitheck2’
Subject: Re: “encinitas” listings from seth for Dennis foundon Thursday, December 01, 2011 3:04 AM
How willthe bank downgrade play in to this?
From herecould you include the used to be price when we get a price reduction.
We wouldbe curious as a professional at this how do you rate the properties. Youcould put that under the tab on your site called favorites. Value,location, move in quality and rental would be a few of our criteria. Wehave stated before a desire to be within walking of school and the beach.
I spokewith Keith and he will flesh out his wish list a bit more.
Wediscussed this again and are serious at near the bottom.
Torestate it would be cash with a quick close.
Finally,does your firm manage rental situations for clients?
From: Seth Chalnick <firstname.lastname@example.org>
To: deck43, keitheck2
Sent: Thu, Dec 1, 2011 3:57 am
Subject: “encinitas” listings from Seth for Dennis found on Thursday,December 01, 2011 3:04 AM
Here is a link to new listings and/or status changes that match our”Encrinites” search criteria.
New Listing $775,000 240 Cereus St
4 Bedrooms, Status: Active. Residential
New Listing $629,000 1751 Whitehall Rd
3 Bedrooms, Status: Active. Residential
As always, please call anytime with any questions.
Broker, Realtor, Buyer’s Advocate, Registered Mortgage Advisor
Pacific Coast Homes
2093 San Eliot Avenue
Cardiff by the Sea, CA 92007