Sam's Place

DOESAN  INCREASE IN VOLUME SIGNAL A TURNAROUND IN TAOS REAL ESTATE?

Before we get all gushy about a blowout quarter and a 30% increase over Q3, let’s take a look at Q4 numbers for 2010 and 2009.  It sure seems like a seasonal bump to me.  Also, a significant development should be noted in Red River, the old mining town in the north of Taos County. Several high-priced closings occurred which may have been broker assisted private sales and entered into the MLS.  The sales show brief marketing times and the involvement of only one broker.  Red River is a very small town and is thinly traded most of the time.  I think it’s somewhat of an anomaly.  That said, it means that our volume may have been lower than expected.  Go to the Market Stats button to see the 2011 year end volume figures for Taos County and the Moreno Valley real estate.

 The time is so ripe for a home purchase in Taos, New Mexico that I‘ve chosen to make my case with bullet points only. So, here goes:

–The second home market is dead. Baby boomers who’ve collected houses all over the world are trying to figure out how to retire comfortably, rather than lavishly. They are cutting back, sizing down, and bailing out. Taos homes have been discounted so much that, in some cases, they sell for less than purchase price of six or eight years ago.

–Prices have dropped about 30-35% from the 2006 peak. With homes selling for less than replacement cost one has to ask himself, “How much lower can prices go?” The only sellers for whom prices can still drop further are the nondiscretionary sellers such as banks. They must sell regardless of what the market is doing. They do cut their prices until the properties sell. Typically their sales are reported as distressed sales and are not used in future appraisals. However they do drag the market down, to a point. Most discretionary sellers (those sellers who have a lot of equity in their homes) will usually pass on lowball offers. Discretionary sellers are maintaining the floor in our market.

–Money is tight, but cheap if you qualify. We will, someday, sit our grandchildren down and tell them about the 3.5% mortgages we locked in. 3.5% approaches the rate of inflation. This is almost free money. It’s a no-brainer to borrow at these rates. Interest rates are exorbitantly low.

–Skittish buyers worry about future appreciation, or rather the lack of it. It is a valid concern. Keep in mind that Taos, New Mexico is a very small real estate market by any standard. That is not so important, except that homes are so far below replacement cost that we will see very few new homes come to market for quite a long time. This means that prices will firm up quickly when our markets do turn around. In the last 30 years, every time there has been some sort of cataclysm in other parts of the U.S. such as riots in L.A., hurricanes, earthquakes for example, our tiny market gets a bump. Sudden appreciation could happen here before other markets.

Third quarter volume shows a 15% drop from same quarter as last year, while total dollar volume registered a drop of 33%. The figures are not a one time fluke, because the data for first and second quarters reported similar slumps. Last year we thought it couldn’t get worse, but we were wrong–big time. The interesting part of all this is that some brokers are reporting rosy outlooks and brisk activity. I use MLS data to glean my sales volume data. So Realtor fluff could only be possible if the sales they are bragging about are actually not reported through the MLS. Would Realtors keep their sales a secret? Almost never, unless instructed to do so by their buyers and sellers.

As someone with contrarian tendencies I look skeptically at the values of many foreclosed homes. “They’re so cheap!” is the common refrain. I contend they’re cheap for a reason. Here’s why: for the ex-owners of these homes, their deal went sour and they left under less than happy conditions. Often these homes are trashed, appliances missing, windows broken, plumbing ruptured and electrical systems fried. In most cases an aura of sadness and anger hangs over the house. No longer a home, the accumulated materials that comprise it, are worth little more than scrap value. The labor that built the structure has usually been discounted severely. Even the land’s value is compromised because of the “mess” that sits on top of it.

The questions you must ask are: first, how much money and labor will be required to make this house a home again? However, determining how much refurbishment will cost can be tricky because of hidden problems. If you need help, consult a builder or handyman. Get bids BEFORE you make an offer. If the answer is a number that, when added to the purchase price, is still less than market value, the house should not be purchased.

Second, try to get an idea of where prices will go. Purchase price plus refurbishment costs must be equal or less than future market value. This is where you need the help of your real estate agent–in helping you determine the future value of a home that, once refurbished, is ready to be marketed. In our current economic landscape, future estimates of value are very elusive. For example, if a home had been previously marketed for $400,000 and is now offered at $200,000, it may seem attractive. It does not necessarily follow that a simple $100,000 in refurbishment will yield a $400,000 house again.

Thus, when considering the purchase of a foreclosed property, you need to give yourself the best possible chance of recouping your investment. The oldest principles of real estate should be strictly followed. Perhaps the oldest principle is that of location. Picking a foreclosed home in a topnotch location is the best way to ensure that you’ll recoup your initial investment and fix up costs. The location may even be more important with a foreclosed home than one that is not. Location, location, location. The real estate world may be upside down, but that principle is more true than ever.

The Taos real estate market mimics the national market in many ways. Currently only a handful of homes are under construction, expensive custom homes for wealthy transplants. Nationwide home construction is a trickle as well. The news yesterday was all about housing starts being down. I acknowledge that this is not good news for the overall economic picture, since it is more evidence that jobs, of any type, are not being created fast enough. But I think it’s good news for the national real estate markets. Here’s why:

We need 500,000 new homes per year just to replace homes that burn down, blow down, flood out or become abandoned. Amazing fact. Wish I could remember where I read it. So, if we build that many every year, the housing supply should theoretically remain constant. However, we are still recovering from the hangover of building too many homes for several years. A huge vacant inventory stands available with more coming on every day through foreclosure. X-out the 500,000 replacement homes. If no new homes are built for a couple of years, it might be a good thing. During the Great Depression homes were bulldozed to eliminate excess supply.

As you know, I take somewhat contrarian views of real estate trends. You’ll recall I’ve complained about exorbitantly low interest rates being one of the roadblocks to banks making more loans, certainly a contrarian call. I think this is a great time to buy real estate unlike others who think real estate should be avoided. I don’t think prices will go much lower. I’m contrarian on both accounts. Now when I see home starts sinking lower, I’m heartened. The biggest problem we have in real estate is too much inventory, not to mention the shadow inventory of pent up seller’s demand which will hang over us for years. We desperately need the jobs from a robust housing spurt. I could even get excited about lots of snazzy new homes to sell–if only we weren’t having such a hard time selling the ones we have.

If that’s what you need, look no further. This home site is so well-located and well-equipped that it’s almost frightening. The photos show off the views to the north and west, as well as the land cover which are native pinon and juniper trees. They provide natural landscaping and a sense of privacy like no other landscape in the Taos real estate market. At a full 3.145 acres there is plenty of room for a sizeable home, such as those of the neighbors, and for outbuildings such as garages and a guesthouse. The subdivision comes with restrictive covenants that ensure a beautiful and conforming neighborhood forever. And the best feature is that all utilities including natural gas and town water are at the lot line. Truly a special lot, as one can see, and priced right at $227,400.

It’s really so simple, Sellers of Taos real estate will be taking less money for their real estate than they think it is worth. The proof is everywhere. And the accompanying graph from the St. Louis Federal Reserve Bank underscores it. You see that personal consumption (blue line) diverged in 2001 from the historic levels(red line.) A gap appears for several years. What was happening during that gap? Homeowners were refinancing their homes and take cash out of them to spend, to resume their sluggish consumption levels. Finally consumption levels caught up with normal levels in 06-07. What happens when someone refinances his home and takes cash out for a new pick-up? Essentially he has sold the home back to himself for a quick profit.

Real estate prices must drop to reflect that big dip in consumption levels shown on the chart. One can see that it is well below the red line. Buyers simply don’t have the dough to resume the levels of consumption they once had. There are fewer buyers. So sellers will take less money for their homes and land. Or they fall in love with the homes again and stay put. It’s that simple.

“If a friend or family member asks you 15 years from now to describe this recent economic turndown and how it ended up impacting your finances, investment style, and lifestyle, what do you think you would say?” The question came as part of a poll of their customer base.

Here’s how I answered: It was the worst economic downturn of my entire life, but we all came through it by first delaying our retirements, taking on small subsistence type jobs and even learning new ways to save and cut back on expenses. We stayed invested in dividend paying stocks and made new investments in the worst segment of the economy, real estate. Houses were on sale for half price, and we borrowed the money to buy them at unheard of interest rates–as low as 3-4%. We basically stole the real estate we bought and financed it with free money.

That’s it. That’s how I answered. Regular readers of this blog have heard it all before. In one blog I predicted that we would sit our grandchildren on our knees and tell them about the half prices houses and exorbitantly low interest rates. Interest rates are pretty much the same everywhere these days, and they are even trending slightly lower. And every day I see Taos real estate and Angel Fire real estate that is half priced. In the end, this too shall pass. And we will move forward by staying the course–and of course, by buying real estate.

The 1944 film “Lifeboat” starring Tallulah Bankhead and William Bendix contains one of the great lines of motion picture dialogue ever. As a last resort Tallulah Bankhead’s character offers the starving lifeboat survivors her diamond bracelet in order to make a fishing lure. When they fall to bickering and fighting over the necklace, the necklace falls overboard and disappears into the icy water. The men collapse in stunned silence.   Their last best hope for catching a fish is gone. Bankhead glares around at them.  “What now, little men?” she asks.

How does this relate to Taos real estate? Or any real estate? If you’ve been watching Congress dither, bicker, argue, whine, complain, and most of all bluster about raising the debt ceiling while our economic recovery limps along, then you know how this relates. I’m perfectly comfortable in the Tallulah Bankead role. However, calling people names and thus contributing to the blaming, shaming and self-righteousness will have negligible effect. Still, if you’re a regular reader of this blog, you’ve heard me say over and over what a delicious time this is to buy a home. Once again, do not be concerned with what is going on in the national economy. Focusing on debt ceilings, Greek defaults, Casey Anthony or even toe cleavage will not get you a piece of Taos real estate. Shop now for best prices in a decade.