May housing stats cause some hand wringing

Are we doomed to see a second dip in housing? Although the number of closings continued to increase in May, some of the future indicators for sales dropped on a month to month basis which had many financial pundits forecasting that lagging home sales could weigh on the broader economy.

That said, we continued to see some positive trends in Cincinnati that bodes well for the rest of the year. Some of the key statistics include:

• Closings were up 25.43% on a yearly basis.
  
• Inventory to sales dropped to 6.8 months. This is the lowest we've seen since 2006.
  
• The average sales price increased to $159.1K
  

(see the latest May charts for Cincinnati)

On the national front, the items causing the most commotion were new mortgage purchase applications, adjusted existing home sales, and new home sales. Existing home sales raised concern when the "seasonally adjusted" month over month figures showed a 2.2% decrease from April when most expected an increase. The rate was still 19.2% over May of 2009.

(June 1 update: the latest release for May's pending home sales illustrated that buyers have gone back into wait mode as the rate fell 30% in May from April, and even fell 15.9% on a year over year basis.)

Mortgage purchase applications continued to fall even as rates are at the lowest since 1970. In the latest weekly update, purchase applications decreased another 3.3%

The hardest hit area continues to be new construction. New home sales were at an all time low to an adjusted rate of 300,000 even as builders continue to make adjustments in pricing and home size. Construction is likely to lag historical norms until inventory balances with "new household formation" (i.e., the need for new homes due to population growth, new buyers entering the market, etc.). Not surprisingly, new home formation has fallen sharply during the recession (between 2008 and 2009, the rate fell to an estimated 398,000 for the year from over 1 million in previous years).

On the plus side, the latest Case-Shiller price index continued to show a slight gain which was perhaps a bit of surprise to many. If nothing else, this suggests that while sales may be off for the next few months, we may not see significant further deterioration in pricing while the market rebuilds.

Smart meters come to Cincinnati. Will you benefit?

Duke Energy has started to roll out implementation of smart meters throughout the Cincinnati metro area. Terrace Park was a "pre-deployment" site in December 2009, but installation began in earnest this year and will move out to the suburbs over the next few years.

• See the Duke deployment map here

Much has been made over the past couple of years about smart meters and the smart grid (the meters being just a small component towards the smart grid). One of the overarching goals being more effective management of electricity usage and distribution. From the utility's perspective, use of smart meters will help predict when they will need to purchase electricity from another provider to meet demand and defer the need to build more generation plants. Presumably, the ability to better manage overall distribution and usage will help control costs in future years.

From a consumer's perspective, the smart meter should allow you to better monitor your usage throughout the month and perhaps make adjustments to reduce your bill. Other touted benefits include the ability to identify and target outages more quickly.

• See the Department of Energy's discussion on smart grid technology.

While not part of the current deployment, a controversial aspect of the smart grid is that it will prompt some variation of "dynamic pricing" based more directly on supply and demand rather than simple flat rates. For example, utilities may have higher prices for electricity used during a hot summer day when AC usage causes the greatest demand. The idea being that consumers and businesses will move non-essential power needs to other times of the day - such as running a dishwasher at night rather than during the day. Some utility companies such as Pacific Gas & Electric (PG&E) have already conducted pilot efforts and are beginning to sign up business customers on approved programs.

In a coordinated move, manufacturers are looking at the development of "programmable" appliances and equipment. Some scenarios where this could occur might be a washer and dryer that only operates when the cost of electricity is at "non-peak rates" or your thermostat automatically adjusts if rates go above a certain amount. This would require two-way communication between the utility and the home which is possible today, but will likely take a few years before it moves beyond the development and test stage.

So, bottom line? We probably won't see any immediate savings. The most likely scenario is that electricity costs will rise more slowly than in years past - perhaps running less than the overall inflation rate. Should dynamic pricing be implemented, those who are willing to modify their behavior and adapt usage to non-peak periods should be able to benefit the most.

Are you getting a housing bargain or bad advice?

Have you heard the so-called "financial gurus" that suggest making offers on homes that are 60% or 75% or whatever figure they choose relative to the asking price? And then tell you to just keep shopping for a home until someone accepts your lowball offer? Sounds like a good way to get a bargain, right?

Well - maybe. One of the biggest reality checks I received after working real estate full time is how pricing really works and the true meaning of market value. I admit that before I became an agent, I thought that 75% rule was a good one for investing in property even though that might not work for a house that you really liked and wanted to live in.

Here's the problem: if all houses were priced according to their true market value, then that 75% rule would work fine. But if you offer 75% of the asking price for a home that's way overpriced, then what have you got? Probably about what the house was really worth anyway. Secondly, even for investment property, can you make that lowball offer for a foreclosure that's priced to sell and expect to get it? Not likely. Even in today's market, foreclosures that are priced correctly can get multiple offers within days of being listed and often go over the asking price. Many banks and investors have learned how to move 'em quickly.

The makings of an offer

Price is ultimately what most people think about on a house, but that's far from the only component of an offer. I'll sideline other issues for the moment and focus on market value. One very telling statistic that I get as an agent using the MLS is what a house sold for relative to the asking price. In the Cincinnati market, the average sales price to list price is around 94%, with the expected bell curve around that figure.

Here's the kicker though - that's relative to the LAST listing price, after all those price reductions a seller goes through to reach the asking price where they should have started to begin with. Market value really boils down to what homes have been selling for in a particular area relative to their condition - asking price is what gets buyers in the door.

This is one area where an agent should really be earning their money for you. When you decide to make an offer on a house, your agent should provide you with information about comparable sales in the area so that you can get a feel for the price range you want to offer and whether that particular area is trending up or down. Other factors such as condition of the property, whether the seller will pay closing costs, even the seller's motivation (if it can be determined) may be part of your calculation.

Does this mean that you can sometimes offer full asking price and still get a bargain? Absolutely! But knowing whether it is requires good, solid analysis of the local market as opposed to basing decisions on some arbitrary percentage. Frankly, I won't work long with someone who just wants to throw out lowball offers until they strike gold. It's simply a waste of my time and theirs.

All that said, part of negotiation is still an art form. Other components of an offer like home warranties, owners title policy insurance, inspections and other contingencies can be critical in reaching an agreement. Especially in today's market where buyers feel they have leverage to ask for a low price and then beat the seller up on everything found during a home inspection. If the seller isn't in financial position to make corrections on the house, or you lost all goodwill while driving hard to get the lowest price possible, the deal you thought you had could come apart when an issue comes up. If it's truly a house that you want, then be prepared to let your agent work for you in helping reach an agreement that works for all parties.

Next month I'll discuss pricing your house correctly and what makes a comparable property, along with some common mistakes sellers make that ends up costing them.