Let’s Talk About Seattle Real Estate

The creative destruction of capitalism gives even as it takes way. Because house values have dropped in most areas in the U.S. (dramatically in Las Vegas, Phoenix, Miami), homes are now more affordable. This fact is now beginning to draw buyers who see the opportunity created by cheaper homes and historically low interest rates.

Lawrence Yun,* the Realtors’ economist, is conservatively optimistic about a housing market recovery starting in the second half of 2009; he has some interesting ideas about prospects for the economy.

Keep in mind that nobody really knows what the next significant economic event will be, nor what in turn will be its long-term effect. We can, however, detect general trends, and that is why we must put in place a prudent plan.

A plan is the result of a way of thinking, an agreement we make with ourselves to think long–term and to not react emotionally to the economic and governmental surprises that appear every day now.

Are we all working on our plans?

©2008/AllenJaworski

* Thanks to Realtor.org

We are all going to have to learn to live with the change coming our way.  The old method of valuing what we own, particularly real estate, has ceased to exist. I am not exactly sure what replaces the “old way,” but I have some ideas.

We first have to figure out what change is going to bring us, what our jobs, retirement plans and day-to-day spending patterns are going to look like in the new globalized economic environment, the “new normal.”

Idea #1: If we don’t learn to save, really save, as in money in the bank, we won’t make it.

Idea #2: If we own real estate, it had better be part our plan to not have any debt on it. Of course we have to have, most of us, a loan to buy a house, especially the first one. But the amount of the loan must decrease every year.

Therefore, Idea #3: Thou shalt not refinance your property, except in the case of life-or-death—literally. A vacation, a new car, remodeling—not life-or-death.

Idea #4: Learn about what is going on in the new economy and plan to change consciously and actively. Everything is going to be changing all around us. If we don’t plan to do with less, save more and eliminate debt, we will not successfully adapt to our new economic world.

Idea #5: Good judgment is going to be back in style. If we don’t accurately perceive what is before our eyes and exercise logical thinking and good judgment in our decisions, we will fail to resolve the stresses that change will introduce into our lives. Poor judgment will not be excused. Sound judgment will have survival value.

©2008/AllenJaworski

You may have heard of the phrase “live-work” applied to downtown lofts, commercial-industrial units that have a residential component as well as space (and zoning) that allows the owner to legally operate a business on the premises.

It happens that some alert developers have anticipated the needs of the next generation of real estate users, those people who are looking for better ways to deal with what I call the “new normal” economy.

Centrally located live-work townhomes are starting to appear on the market.  These are two-or three-bedroom townhomes that provide a first-floor commercial space, almost always with a bathroom. They incorporate what is called a “three-door system.” This means there is a separate exterior entrance for the “live” component and one for the “work” space, as well as an interior third door that can be locked between the two spaces.

Each space can be legally rented separately, and because both are sited in commercial-zoning, one should not experience the social hassles of running a business in a residential neighborhood. Pretty cool advantage.
The cost to build a live-work townhome can be cheaper than a regular, purely residential townhome. This fact combined, with other cost-efficiencies, allows builders to offer such units at a cheaper price.

I already live in a two-unit building, so it would be a natural transition for someone like me. A live-work townhome gives users flexibility, in both investment and residential use. Again, an advantage for the right owner seeking a legitimate way out of the “old normal” economy.

©2008/AllenJaworski

A builder-friend of mine told me this story today.

In September, as the economic melt-down started, he decided that people were going to be forced to start living within their means. He concluded that, what with all the large McMansion-type houses in foreclosure, there was going to be a buyer change-of-heart that would lead to a demand for smaller houses. Much smaller, he determined.

He had a small lot with just a garage on it. It was located in a rural area but close to a medium-sized town. The garage had a 500 square-foot footprint, so the living area he built above the garage had a size of…500 square-feet. One bedroom, a bathroom without a jetted tub, kitchen with no dishwasher (!), but otherwise a new, snug little home ready to make just the right kind of buyer happy.

My friend sold that house today, for just over $100,000, to a retired gentleman of 60 years whose grandchildren live in the nearby town. He paid cash. He had a plan to retire within his means, and he reached that goal. What’s your plan?

Next post: More Smaller, More Better: Live-Work Townhomes in Seattle

©2008/AllenJaworski

Our legislators, regulators and corporate executives started out by being in denial about the mischief they were creating, and then ended by lying about it. Finally last month Congress decided to take the cure and passed the $700 billion bailout legislation that the whole world is looking to for relief from the economic misery affecting the financial and real estate markets. We can only hope it will have the intended effect and calm the fears of those markets, as well as the anxiety of millions of American taxpayers.   Will it work to quickly improve the financial world most of us live in? And once we calm our anxiety, will you be able to determine how these developments impact your investments and financial planning?

In 23 years of selling real estate, I have never experienced this combination of cascading negative factors. In just a few months, everything changed. We are now faced with increased loan down payment requirements. Lenders demand much higher credit report scores.  Many banks as well as non-bank mortgage lenders (the institutions that are partially to blame for this mess in the first place) have disappeared, while those remaining drastically changed their underwriting standards. Finally, we have the problems of stagnant real estate values and the shrinking pool of buyers who can qualify for loans. This situation will correct itself…eventually. When will the logjam break? How will all of these factors impact you and your investments?  And what does this all mean when you seek to answer the question – does the real estate I own still serve the purpose for which it was originally intended?

The situation will stabilize itself, but for years nothing will be the same. What will these changes mean to you and your investments?  We know that from now on, having excessive debt on real estate will be toxic. People with a plan will strive to reduce their loan amounts to close to zero, particularly if they intend to use their real estate as a part of their retirement.  There are many questions to be addressed and most of the answers will need to consider not only current market factors, but also the plans you put in place to protect yourself for the next 5, 10 and 20 years. It is now time to do the hard work, to make those plans.

What the United States is going through is a reversion to the mean, back to a historical long-term rate of appreciation of asset value. What we are experiencing, painful though it may be, is not a global economic collapse. Rather, it is the shock of America and its citizens being taken in to the global economy. We should get used to it, because it will be the new normal. And we as individuals will be able to adapt successfully to what the global economy will require of us, as long as we realize it is happening, and make plans to deal with it. What’s your plan?

Next post: Big Dream, Good Plan, Tiny House, Retired

©2008/AllenJaworski