I THOUGHT THIS WAS A BUYER'S MARKET!  WHAT GIVES??
by James Frangella
Updated Saturday August 16, 2008 7am PT

I’m amazed. Weeks ago, I call my investor client at 8am to inform him about this cute 2 bedroom 2 bath house with bay views in a really nice neighborhood. Just came on the market that morning. I show it to him by 10am. We write it up and offer a grand more. It doesn’t do us any good.

By 4pm, the listing agent had received six other offers and one of those offers for more than the list price of $235,000 and all cash. It sold for $255,000!! I don’t get it. I thought this was a buyer’s market. Shows you what little I know … must have been under-priced! It sold too quickly.

I remember this property when it first sold two years ago for about $600,000. It was really cute as a bug’s ear, clean as a whistle, oozing with charm and all the other descriptions one can use. It sold in the later part of 2006 as the market was just beginning to turn nasty (bet you the sellers were wiping the sweat off their brow with a smile!). Sure enough, not quite 2 years later and this house hits the bank-owned bandwagon by early spring of 2008. And now multiple offers??

So … what’s going on?? Why are there multiple offers in today’s entry-level market? It seems that if the properties are priced right, they will receive lots of interest and interest leads to offers. As a matter of fact, I know of a couple of homes in the upper price ranges in other cities of the Peninsula that are receiving more than one offer.

Even with banks tightening their requirements, buyers are still able to obtain the loans. But now, the loans are tied to the buyer’s actual * income. If the income can service the monthly payment, then the buyer gets the loan. What a concept! This is what the affordability pricing idea is all about.

The price of the property factors into the equation too. That’s probably why we are seeing multiple offers. For an example, I know of a bank-owned house priced at $300,000, which received 10 offers. The buyers were either investors, FHA buyers or 20% down buyers.  Why is it making sense for them?

Let’s use the 20% down buyer. They happen to have $60,000 in savings (they never bought a house during our hot market and saved money instead). Their loan will be $240,000 at 5.99% fixed rate (maybe even lower) for 30 years. Their monthly payment will be $1,437.38 plus $340 for property taxes and insurance for a total of $1,777.38. It’s what some folks almost pay in rent!

A working couple with a little bit of credit card debt, maybe one (reasonable?) car payment and a pretty good credit score should qualify for this monthly payment with a combined yearly income of about $75,000. So now, all of sudden we are seeing more of these types of buyers as the prices of homes become affordable. Now throw in a couple of investors in the market place and we have multiple offers on properties that make sense.

Speaking of investors … why are they in the mix? First of all, the rental market is becoming stronger as previous homeowners become renters. Now, suppose an individual has $300,000 cash sitting in the bank paying, say, 3.5% interest. That’s a relatively safe $875 per monthly income with no headaches. But many investors would prefer the headaches of being a landlord for a 5% return on their money (rent of $1600 per month less expenses of taxes and insurance of $350 = $1,250) and still own a piece of the Monterey Peninsula. They know what goes down eventually goes back up! Historically, that seems to happen.

So when this same house was selling for $600,000 back in 2004, investors wouldn’t touch it with a ten foot pole. Rent was still only $1600 a month!! Why spend more than half a million to make a piddly $1600 and that’s before expenses. It just didn’t make sense (or is that cents?).

Interestingly enough, sales of single family dwellings have been somewhat brisk. CLICK HERE to download my most recent Sales Activity Report for most of Monterey County.  Guess which city on the Peninsula has the highest sale ratio for single family dwellings? 

A majority of those under contract also received multiple offers.  I know of a listing that received 23 offers!!  Does that mean that 3 out of 10 homes that are under contract are priced right and the other 7 are over-priced?  I bet that one or two of those 7 probably have received offers but are waiting for a response from the seller (bank, if its bank-owned).

Keep in mind that as long as the present income levels of buyers match their buying power, prices are not going to drop much further than where the prices for entry level homes are now. Otherwise we wouldn’t see multiple offers. And yes, list prices are going to drop on those houses with market times of more than 90 days.  But only because they were over-priced in the first place, which is why they've been on the market for so long!

* As in real honest-to-goodness income supported by tax returns and pay stubs