Simon says: "Sellers beware of over-pricing and under-pricing your properties-- and use a local agent."

Simon says: "Sellers beware of over-pricing and under-pricing your properties-- and use a local agent."

Back in 2004 you could price a home too high and people would come and see it. Sometimes, to everyone's surprise, these places would sell. Buyers weren't as worried about over paying because values had been increasing at double digit rates for several years. With a 20% annual increase in property values, a buyer was pretty safe overpaying. All that really mattered was that they liked the home.

You could also under-price your property and not risk selling it for too little. In fact, many properties that were under-priced were able to achieve higher prices than what they would have received if they had been over-priced. The exposure was tremendous for an under-priced property. People would come in droves. As an agent, I would be sitting at an open house and people would be crawling through the windows, cracks in the floorboards, causing 405 freeway type gridlock around the block-- it was an intense atmosphere. One of my colleagues cleverly noted that you had more time to think about buying a new pair of shoes than a million dollar house. There was a real mania happening in the Los Angeles real estate market.

All of that is over now and Sellers need to get back to basics. Pricing needs to be as spot on to what the market will bear or you will lose exposure, be on the market longer and likely lose money. In order to price a property correctly you will need the expertise of a local Realtor. When I say "local" I mean someone who helps people buy and sell in your neighborhood on a consistent basis. If your agent does 80% of their sales in your neighborhood, then you are in good shape. Try to avoid agents who work all over the city. It is impossible for them to have the in depth knowledge of your local sales history and competition. Many of them won't have the respect for your neighborhood that an agent who specializes and/or lives in your neighborhood will have. This will rub-off on prospective buyers.

Many listings listed with out-of-area agents end up being priced too low. This is generally because the agents don't know the area or the sales history. Comparable sales to yours often look better on paper than they did in person. The ad copy agents write in the MLS leaves out the flaws a property has. An agent who specializes in Beverly Hills isn't going to know what the houses that sold a few months ago in Santa Monica looked liked. Additionally, agents who have to drive a long distance to do a showing will avoid the commute or have their assistants do the showing. If someone needs a 6 PM showing, your agent in Hollywood isn't going to want to cross town during rush hour. Make sure the agent you hired to sell your property actually does the selling.

The reason why it is so important to price your property accurately is because the majority buyers will see it in it's first two weeks. For the eight weeks leading up to you putting your home on the market, buyers whose search criteria matches your home have been building up. These people will see your property in it's first two weeks on the market. After that, you will have to wait for new buyers to begin their real estate search. Later on in the listing period, agents and new prospects will see your property as a "stale" listing, and it's negative qualities will become amplified.

Now more than ever it is important to price your home correctly and to hire an excellent salesperson. Buyers need to have confidence in your agent and your price. The market is more challenging these days, but if you do things right, you will be able to achieve your goals.

Simon Salloom is a REALTOR with Coldwell Banker who specializes in Santa Monica and Brentwood Real Estate
Go to www.SantaMonicaSimon.com for comments and or learn more about local real estate.

Why did this “mortgage meltdown” happen and how does it affect us on the Westside?

Why did this “mortgage meltdown” happen and how does it affect us on the Westside?

Written by REALTOR Simon Salloom for the Santa Monica Daily Press. Sources for information taken from interviews with senior members of the mortgage industry.

Despite what most people think, most mortgage lenders have a relatively small cash reserve. Their ability to lend money to a borrower is directly related to their ability to sell the rights to collect on that loan to the secondary market. When a homebuyer borrows money from a bank to buy a house the bank will often make their profit on this service by selling the loan to an outside investor. After the bank has sold this loan, the bank recoups their initial investment with profit and sells the money again to a new borrower.

These lending banks have two sources of liquidity, or sources of cash for them to sell the loans that a borrower buys. One is Freddie Mac and Fannie Mae, federally backed organizations who buy loans from companies like Wells Fargo and Countrywide. Fannie and Freddie only buy conforming loans—this means loans that are under $417,000.

The majority of mortgages in Los Angeles require dollar amounts greater than $417,000. So the majority of lenders have to sell most Los Angeles based loans to alternative investment groups such as mortgage backed securities and institutional investors. This is not easy to do at the moment.

Up until a few months ago, there was a large secondary market for mortgage backed securities. Now, due to a considerable amount of borrower defaults of both sub-prime and mainstream loans, the demand from the secondary market is practically zero. This can’t last forever, but for now, most lenders are waiting to see what happens after this “shakedown” ends. In order to avoid being stuck with a lot of mortgages no one wants to buy, banks have tightened lending standards and raised interest rates.

With lenders not knowing what the secondary market will pay for their loans, they have little choice but to raise interest rates to mitigate their risk. At Countrywide, a non-conforming loan used to sell about .25% higher than a conforming rate. That difference is now .5%. Wells Fargo has increased their 30yr fixed mortgage from 6.875% to 7.875%. It is important to note however that every lender is reacting differently to this situation. Most mortgage professionals are quoting rates that are about .5% higher than what they were selling at earlier this year.
There are also banks with large enough cash reserves that they hold onto the loans they make and have no need to sell them in the secondary market. However, there are not enough of these types of institutions to slow down a rise in interest rates or slow down a move towards more conservative lending practices. At the end of the day, this will lead to greater stability of our financial markets. At the same time, the opportunities for people not yet in the real estate market, without the equity most homeowners have or large cash reserves, the potential for buying a home has drastically diminished.

What lead up to this current situation?

As the U.S. housing market gained strength over the past five years, demand for domestic mortgage backed securities grew. The banks made more money by selling more mortgage based products to secondary investors. In order to take advantage of this demand the banking industry loosened its lending practices, creating a significant amount of higher risk loan products. Now that the housing market in most of the country isn't what it used to be the party is over and a good number of people are having a difficult time paying their mortgages.

On the Westside, one could guess that the part of the market that will be most influenced by the current mortgage situation will be properties affordable by first time buyers. For the most part, this means houses and condos under about $850,000. The advent of loans that gave 100% financing on stated income and not great credit scores gave many first-time buyers the ability to buy.In the past five years, around 65% of purchases by first-time buyers on the westside were 100% financing or 5% down. Loans that provide 100% financing no longer exist and ones that accept 5% down have very high interest rates right now. This shrinks an already small buyer pool even more. Not many young people have $80,000 in the bank.

At the end of the day, what will inevitably change property values in Los Angeles is the ratio of supply vs. demand and the cost of renting vs. owning your home. The mortgage on an $800,000 property with 20% down at 6.375% is $3,922 while the mortgage on the same property at 6.875% is $4,204. If the value of a property was directly related to cost of mortgage debt service then the value would drop 7%. If the price of a mortgage stays at these levels, the increase in demand should mitigate a drop in value.

If you account for an increase in values of anywhere from 3-10% a year, values could go anywhere from a 4% drop in value to an increase in value of about 3%. Since the 1950's real estate values have increased at an average of 9% a year in California, particularly along the coast. If there is a drop in value due to increases in the cost of a mortgage, it likely won't be anything drastic, but a slowing in appreciation is likely.