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Schools and Real Estate Values

Excerpts from the WSJ:

It’s supposed to be a buyer’s market. Yet, for parents determined to buy in areas associated with top schools, those bargains may be harder to come by. When housing markets go south, “areas with exceptional schools tend to hold their value better than the market overall,” says Michael Sklarz, president of Collateral Analytics, a Honolulu-based firm that specializes in real estate data analysis.

Home prices have dropped in areas with good schools, but the declines are typically nowhere near the levels in their surrounding metro areas.  In Irvine, Calif., a city that regularly gets national attention for its quality schools, average price per square foot has fallen 18% since its 2006 peak, but prices in the greater metro area surrounding Irvine fell 33%.  In the brainy town of Andover, Mass., prices are down just 4%, versus more than 16% for the Boston metro division.

State assessments, independent ratings from websites like GreatSchools and Education.com and annual magazine rankings of America’s top high schools have not only made it easy for parents to factor school test scores and parent-teacher ratios into their buying decisions, they’ve cemented the relationship between home prices and school quality.

When Florida rolled out its statewide grading system in 1999, the real estate market took note. According to research by David Figlio, who is now a professor of education, social policy and economics at Northwestern University, an A-rated school in Gainesville added about $10,000 to the value of a home there versus a B school.  Once a school is graded, the gap often grows. Strong ratings lead to better community support, which in turn leads to better schools. Today, the difference between an A school and B school might easily be $50,000 on a $300,000 house, he says.

That phenomenon isn’t lost on residents of Bellevue, Wash., a Seattle suburb that is home to some of the best schools in the state. “I don’t think there’s ever been a school levy on the ballot here that’s been turned down,” says broker Michael Orbino. Even residents who don’t have school-age children tend to stand behind the schools. It’s not altruism; it’s economics. All things being equal, homes in the Bellevue school district fetch as much as a 15% premium to those just outside of it, he says.

“But there’s more to it than that,” says Mr. Orbino. “Because the land is worth so much more in Bellevue, builders tend to build more expensive homes here,” making the school district that much more expensive to begin with. By Mr. Orbino’s estimate, the prices for single-family homes are down about 10% since the market peak. “But it isn’t a catch-all,” he says. Prices for ultra-luxury homes and condos, which generally aren’t influenced by schools, are down 30% to 40%, he says. So while prices per square foot in Bellevue have fallen slightly more than the Seattle market overall, prices for more family-friendly abodes haven’t necessarily seen the same declines.

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Double-Dip Scoring

How are we going to know if we have a double dip?

What is a double dip?

Investopedia defines a Double Dip as: “When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth.  A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession.”

Let’s apply that to the real estate market.

Would 3-5 months of steady negative Y-O-Y numbers and heading for previous lows be considered double-dip-ish?  If we hit previous lows, or lower, we’re double-dipping!

It’s all local, but here are the SD County detached numbers so you can see what it’ll take to double-dip.  Sales tend to taper off around the holidays, so there is some seasonality to the numbers.

To be in double-dip territory, the SD County detached sales around year-end would be approaching those of late-2007 and early-2008, when they were under 1,000 per month for five out of six months (see below):

The pricing low spot was $209/sf, in March, 2009 (see below).  If we get into the low-$200/sf range again, we’ll be in the dip-a-roo zone.  If you want to apply it to your local area, compare to comps from the early-2009 era.

If both sales and pricing do the double-dip, we’ll call it full collapse.

Of the two, sales are the leading indicator.

This month’s sales look like they are going to be down substantially, there are only 1,308 detached closings so far with three business days to go (plus late-reporters).  But those are averaging $262/sf, which is 25% higher than last year’s low. 

There were 1,711 sales in June, 2007, and 1,748 in June, 2008 – the recent low spots for that month.  With the federal tax-credit wrapping up, we should exceed those, but not by much.

California’s $700 Million

Hit tip to Daniel for this scoop:

SACRAMENTO, June 23, 2010 – The California Housing Finance Agency (CalHFA) announced today that the U.S. Treasury Department has approved the Agency’s plan to use nearly $700 million in federal funding to help California families struggling to pay their mortgages. The plan is focused on assisting moderate income families, as well as military personnel, stay in their homes when possible and leveraging additional contributions from lenders and mortgage servicers.

“California’s twin problems of unemployment and declining real estate values have created a homeownership crisis for many of today’s California families,” said Steven Spears, Executive Director of CalHFA. “We will use these funds to help as many families as possible remain in their homes and, in so doing, stabilize neighborhoods that have been severely impacted by foreclosures.

Mr. Spears said that the plan includes three mortgage assistance programs as well as a separate program that will provide transition assistance to borrowers who simply cannot afford to stay in their homes after exhausting all other options.

The following programs have a goal of dollar-for-dollar contributions from participating lenders:

  • Mortgage assistance for unemployed homeowners who are in imminent danger of defaulting on their home loans.
  • Funds to help borrowers become current on their delinquent mortgages, with lenders matching any federal assistance.
  • Principal reductions for eligible borrowers with negative equity to prevent avoidable foreclosures and promote sustainable homeownership.

A fourth program offers transition assistance for families who decide that they are unable to financially afford a home and need assistance transitioning to other housing. This program would be used in conjunction with a short sale or deed-in-lieu of foreclosure.

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Castle Shopping?

We can compare castles now too!

Here are two (allegedly) castles that are both for sale.   There is a third, Tony Robbins’ old house in Del Mar, but not for sale.  The one in Solana Beach just lowered their price to $1.299 million! 

Double-Dip Feeling

Sellers, and their listing agents, have been manufacturing the double-dip experience.

Because the local real estate market had the illusion of being “healthier”, they figured it was time to push their list price to see what the market would bear.    A few got lucky and sold too, but the backlog has been building all year, especially on the higher-end. 

Buyers are paying close attention though, and you can see it in the trends below on the housingtracker.net graphs.  Look at the last year, the only part that might matter to buyers. 

Let’s be specific too – in the upper tier the graph shows that the median asking price was going down dramatically the second half of 2009, which could indicate that prices were actually going down, or that the mix of active listings was adjusting.  A review of the mix didn’t show any remarkable differences, so most of the decline must have been due to actual price reductions:

Look what’s happened since February, when sellers started getting (overly) confident again.  The collusion of higher pricing didn’t impress the buyers, and inventory has increased 30% since January, meaning that the number of wrongly-priced homes is rising:

Once the sellers (and their listing agents) who want/need to sell, begin to run out of hope and start lowering their price, it’s going to look and feel like the double dip.

A second note:  The inventory between May, 2009 and January, 2010 was practically flatlined, in a tight range of 11,500 to 12,013.  With list pricing adjusting steadily downward in the upper tier, we had fairly stable market, with listings exiting the system at an almost identical pace as they were coming on.  A good indicator to watch for the trend of pricing accuracy.

 

Canada Offers Good Example

Hat tip to Rick for sending this along, from the WaPo:

TORONTO — When he bought a home last week with a 40 percent down payment, lawyer Kevin Fritz didn’t see the transaction as particularly relevant to the debate over global financial stability.

But consider: With U.S. home sales and prices still shaky, Fritz bought in a Canadian market that already has rebounded beyond pre-crisis levels. Without the key tax advantages available to U.S. home buyers, he amassed as much as possible for the down payment, and he expects to pay off his 15-year mortgage with the same bank that gave him the loan — a rarity in the United States, where finance companies typically resell mortgages.

“Canadians are debt-averse,” said Fritz, an attitude that’s part cultural and part shaped by banking practices and regulations designed to keep people out of homes unless they can clearly afford them. “People here don’t leverage.”

Canadian tax law is neutral: Interest on mortgage payments is not deductible, a fact that encourages home buyers to make larger down payments and avoid withdrawing equity. The banks themselves expect to hold on to the mortgages they make and collect the interest. Most loans allow interest rates to be reset after five years, and most also carry prepayment penalties — rare in the United States.

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Shiller on Double Dip

Shiller starts at 1:45 of this video, and lays out two historical examples to counter the 2% to 3% improvements predicted by most professional forecasters:

Let’s look at the most recent stats for North SD County Coastal detached homes, under $800,000:

Status # of $/sf DOM
ACT 343 $329 61
PEND 183 $312 42
SOLD 86 $306 55
SOLD “09 85 $285 62

The solds are those that closed between May 24 and June 23, and include the double-dippers, those that could have qualified for both the state and federal tax credit. The actives-to-pendings ratio was most noteworthy, given that those not closed by now could miss out on both tax credits, yet it’s still better than 2 to 1.

Over $800,000 (ineligible for federal tax credit)

Status # of $/sf DOM
ACT 1,019 $639 108
PEND 186 $397 78
SOLD 99 $415 81
SOLD “09 78 $429 74

The above-$800,000 market is where the insanity continues, though the demand has been stronger than last year, comparatively. The silly season should be wrapping up over the next couple of weeks, and those sellers who really want/need to sell, will have to get off their price if they want to close this year.

Fed Tax-Credit Fraud

NEW YORK (CNNMoney.com) — More than 1,200 prison inmates, including 241 serving life sentences, defrauded the government of $9.1 million in tax credits reserved for first-time homebuyers, according to a Treasury Department report released Wednesday.

Treasury’s inspector general also found that thousands of people filed multiple claims or made claims outside the allotted time period. In all, more than $28 million was improperly doled out.  The Internal Revenue Service program at issue is meant to stimulate the housing market by giving tax credits of as much as $8,000 to qualifying first-time home buyers.

“Additional controls are necessary to address erroneous claims for the credit,” the report stated. “Further, fraudulent and questionable claims processed prior to implementation of controls will need follow-up action by the IRS.”

According to the report, 4,608 state and federal inmates filed for these tax credits, and that fraudulent refunds were doled out to 1,295 of them.  The inspector general’s report said the most “egregious” fraudsters were 715 prison lifers, including 174 who filed with the help of paid preparers. From this group, 241 lifers were awarded $1.7 million.  The problem was particularly bad in Florida: 61% of the lifers who got credits were incarcerated in the Sunshine State.

The homebuyer tax credit program was very specific about the time period in which homebuyers were allowed to participate, though this rule seems to be the most widely violated. The credit was for home purchases that happened after April 8, 2008, with a cut-off date that was eventually extended to May 1, 2010.

The report found that the IRS awarded $17.6 million to 2,555 filers who had bought their homes before the credit program kicked in.

The inspector general also identified 206 filers who claimed the credit for multiple addresses; these fraudulent filers were awarded a total of $1.4 million.

The report also found that improper filers included 34 employees of the IRS. This is in addition to 53 IRS employees that the inspector general identified last year as improper filers.

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