The author, John Talbott, is a former Goldman Sachs investment banker, author and financial advisor.

“I have been waiting for more than five years to offer this advice. It is now time in most cities across the country to buy a new home or refinance your existing home with thirty-year fixed rate mortgage debt. And this from the author of The Coming Crash in the Housing Market published in 2003 and my 2006 book, Sell Now! The End of the Housing Bubble. Let me explain why.

Home Prices Relative to Peak Prices During Bubble
Home prices are off anywhere from 10% to more than 60% in cities across the country. There is no reason to believe that prices were “fair” during the bubble as we have seen they were largely caused by loose and aggressive lending by banks and non-banks. But, it is always better to buy at a discount rather than at a historical peak, and these seem like awfully big discounts. And by my calculations, in most cities across the country, real prices adjusted for inflation have just about come into line with where prices were in 1997, before all this crazy bank lending started, so there should be little additional downside risk by buying today. There are still some neighborhoods across the country that have not seen very dramatic declines in price, many of them very wealthy and expensive enclaves, but given the distribution of incomes lately heavily weighed toward the wealthy, these areas may never see a really large home price decline.

Home Prices Relative to Construction Costs or Replacement Costs
Homes in many cities across the country are now selling for as little as $60 to $70 a square foot. Depending on the quality of construction and the underlying land value, this represents a 50% to 65% discount to the costs you would incur if you tried to build a similar home today in these cities. While there is no guarantee that there will be a strong rental market in the short run, in the long run it just seems to make sense to buy if you can acquire assets at half or less of the cost of building them.

Home Prices Relative to Incomes and Rents
During the peak years of the housing bubble, entire cities like San Diego were seeing their homes priced on average at 11 times the area’s median family income. Such prices financed primarily with debt are by definition unsustainable. Now, because banks have pulled back on their lending formulas, homes in many cities are changing hands at three to four times average family incomes. Similarly, at the peak, houses traded at such large multiples of possible rents that it made the projects uneconomic from the start. Now, with homes trading at more reasonable multiples of rents, houses and condos can be purchased that are immediately cash flow positive in year one and enjoy all the upside of any appreciation that will occur as inflation returns.

Home Prices in Real Terms, Not US Dollar Terms
We still talk about home prices in dollar terms, which is silly because the dollar has lost 98% of its purchasing power relative to a more stable asset like gold over the last fifty years. If instead of pricing houses in dollars, we look and see what a home would cost in ounces of gold, we see that houses today are a real bargain. As a matter of fact, this graph shows that average homes, measured in the number of gold ounces it would take to buy them are now trading at forty year historical lows.

You might argue that this is because gold is priced highly today. I would argue that gold’s purchasing power has changed very little over time, it is the dollar that is depreciating and thus giving the appearance that the price of gold is rising. Actually, gold is quite stable relative to other assets and commodities and it is the dollar that is highly volatile and declining in value due to the US funding its deficits by printing dollars.

The Real Bubble – US Treasuries and Future Inflation
The real bubble out there is longer US Treasuries and 30-year fixed rate mortgages for homebuyers. With US debt equal to its GDP and equal to more than four times our government’s total tax revenues and with annual deficits of $1.3 trillion and growing, it is amazing to me that people will lend to the US for thirty years for less than 3.0% a year. Even more amazing is that individual homeowners can borrow at 4.0% (around 3% after tax) for thirty years on a fixed rate basis, some 300 basis points better than Italy which has a lot more people and makes much better shoes. Homes may not appreciate greatly in real terms over the next twenty years, but they don’t have to if inflation comes back, which is the only way the US and Europe are going to get out from under the huge debts on their countries and their banks. You may not make a lot in real terms on the house, but if inflation returns, you could make a killing on your investment as your thirty year debt becomes worth less and less in real terms. Run the numbers, but if inflation and interest rates go back to say, 7% to 8%, you could easily make eight to ten times your equity investment on the house because you locked in your borrowing costs and home appreciations historically have always correlated well with unanticipated inflation.

So, run, do not walk to your neighborhood banker and either finance a new home purchase or take out the maximum amount of money he or she will lend you on a home equity loan and buy hard assets, not financial securities, with the money. When inflation comes roaring back the only perfect hedge is to be a borrower, not a lender or investor. Shakespeare said “Neither a borrower nor a lender be,” but they didn’t have huge government deficits and the risk of future inflation back in the Bard’s time.”

What bothers me the most as a real estate professional? Two things:

1) When I see buyers or sellers choosing to associate themselves with a real estate agent who has little or no experience and/or who fails to adequately represent their client…. and then the buyer/seller continues to work with that agent. I hear stories about this all the time and they usually have a bad ending. Buyers and sellers should thoroughly interview the agents they are considering – this person will represent you in what could be the largest business transaction of your life. Do you really just want to pick that person from their picture on the internet??? Or simply trust a referral from a friend??? Make sure that you “click” with your chosen representative.

2) When a buyer or seller decides to work with a specific company. The real estate business is about the agent that you work with and not the company they work for. Yes, the company provides some basic support services, but the knowledge, experience, negotiating skills, etc. that buyers and sellers depend on are all provided by the agent – the company has nothing to do with that.

One of my goals is to provide the very best customer service. I want (and get!) repeat business from my clients and I want (and get!) their referrals. I see it as my duty to represent clients and help them negotiate the best price and terms that the market will bear.

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My accomplishments in 2011:
- For the second year in a row, I was named a Five Star Real Estate Professional by Westchester Magazine; fewer than 4% of real estate agents were chosen.
- My office was #6 for listings taken and properties sold in the Empire Access Multiple Listing Service – that’s the top 1%!

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2011 was a mixed year for the Westchester real estate market. There were pockets of strength, notably Larchmont, Rye and Scarsdale. Of the areas I cover, Edgemont was the weakest (number of sales down 26%, average selling price down 27%). What is not reflected in the numbers is the amount of activity; I was in more than a dozen bidding wars in 2011, especially early in the year. Even though the actual number of sales was down in most areas, the best homes attracted more than their share of interest, which partly explains why average and median selling prices were up.

As compared to 2007 (the peak of the market) and three stock market benchmarks, you can clearly see (BELOW) that prices are down quite a bit. Only Larchmont/Mamaroneck and Rye City have higher median selling prices. If you had bought the QQQ at the beginning of 2007 and sold at the end of 2011, you would be up almost 33% but we all know that that came with a tremendous amount of volatility.

While qualifying for a mortgage (or a refinance) can be challenging, interest rates are so low that upper tier buyers are buying. In fact, the $2.5 million – $3.5 million market segment had 18.6% more sales 2011 vs. 2010 (51 vs. 43)!

In 2011, almost 21.5% of sales were for properties over $1 million; a historical look at the number of single family sales greater than $1 million:
- 2011: 21.50%
- 2010: 21.08%
- 2009: 17.06%
- 2008: 22.80%
- 2007: 25.30%

Total Single Family Sales

September 2011 – 358 closings
September 2010 – 323 closings
September 2009 – 329 closings

Single Family Sales Less Than $1 Million

September 2011 – 236 closings
September 2010 – 186 closings
September 2009 – 230 closings

Single Family Sales Greater Than $1 million

September 2011 – 43 closings
September 2010 – 33 closings
September 2009 – 44 closings

Inventory continues to be low; at the end of September, there were about 4,800 single family homes for sale. That compares favorably to 5,200+ for sale in September 2010 and just over 5,000 in September 2009. Pricing generally continues to be weak; for 3Q2011, median and mean single family sale prices were down 6.3% and 4.4%, respectively.



Serious buyers continue to shop for homes; I have been involved in several multiple bid situations over the past few months. The buyers that I have encountered are motivated by several factors, including low interest rates and favorable pricing. The main reason I hear, though, is that people are just tired of waiting; they want to move on with their lives and buy the house they’ve always wanted.

For those of you who are happy in your current living situation, I hope you’ve looked into refinancing. Interest rates are very low and you might be able to save a lot of money by lowering your monthly payment.

The only price points that did not show a decline in the number of sales was $1 million – $1.5 million and $2.5 million to $3 million. In the $500,000 – $1 million range, which had the highest number of sales, volume declined by 21.5%. In fact, the Board of Realtors just reported that 24% of single family sales were at prices above $1 million, which is a high number historically (20% in 2010 and 17% in 2009).

Here is some good news for June 2011: Westchester County, Harrison, Rye, Scarsdale, White Plains (10605,10606) average and median selling prices were higher than last year!

I continue to speak with buyers who are reluctant to purchase – there seems to be a belief that prices will continue to fall, and steeply. Here are two points to consider:
1) On October 1, 2011, loan limits will be dropping from $729,750 to $625,500. If a buyer needs to borrow more than that, they must take out a jumbo loan, which carry higher interest rates and often more strict lending criteria.
2) At some point, interest rates will go up. From 2006-2010, 30-fixed interest rates averaged 5.7%; that is nearly 1% higher than the current interest rate.

While these are valid reasons to worry, you have to separate the purchase price from the cost of ownership. Yes, prices could go down a little bit more…. But the major cost of owning a home, your mortgage, could soon be a lot more expensive. And qualifying for a mortgage could become more difficult. Further, if today’s buyer plans to own the house for several years, it is quite possible that prices will have increased over the length of ownership.

How Much Lower Can Interest Rates Go?

Notice that the number of expired listings (homes that failed to sell during the time they were listed for sale) jumped almost 30% county-wide; Edgemont, Harrison, Larchmont/Mamaroneck and White Plains all experienced more than a 30% increase in the number of expired listings. Some of those sellers will not come back on the market, though many will.

Though this could hold down future price appreciation, the longer-term view is that this is a great time to buy real estate (as detailed in last month’s blog post). Even famed hedge fund manager John Paulson recently said:

“If you don’t own a home, buy one. If you own one home, buy another one. And if you own two homes, buy a third and lend your relatives the money to buy one.”

This is the same guy that made billions shorting subprime mortgages – he now sees a buying opportunity in real estate.

It is very interesting to see at which prices those purchases took place.

Notice that homes priced $1 – $1.5 million, $2 – $2.5 million and $3+ million experienced jumps in activity. The rich are buying, setting themselves up for long term gains and locking in low mortgage rates.

The second round of the federal housing tax credit required a signed contract by April 30, 2010. The closing had to occur by June 30, 2010. Since people rushed to close in order to qualify, there were many more sales in June than July. Put simply: demand shifted to earlier in the year as people shopped early in order to qualify for the tax credit.

Banks and title companies were unable to keep up with the spike in transactions (they were also swamped with refinance applications), so the government extended the closing date until September 30, 2010. What I expect will happen is that there will be more closings than usual in September, followed by a drop in October closings.

To keep this in perspective, note that through the end of August 2010, the total number of sales in Westchester County had actually increased over 2009. Why would people want to buy now? The Wall Street Journal recently came out with “10 Reasons To Buy A Home.”

http://online.wsj.com/article/SB10001424052748703376504575492023471133674.html?KEYWORDS=brett+arends

To summarize:
1. You can get a good deal
2. Mortgages are cheap
3. You’ll save on taxes
4. It’ll be yours
5. You’ll get a better home (than if you rented)
6. It offers some inflation protection
7. It’s risk capital
8. It’s forced savings
9. There is a lot to choose from
10. Sooner or later, the market will clear

That all works well if you are a buyer…. But what if you are a seller?

1. If you sell, where will you move to? This is a great time to be a “move-up” buyer, i.e., to purchase a more expensive property.
2. Mortgage rates are near all time lows; since most buyers need financing, this is a great time to sell because a lower interest rate means that more buyers can afford to purchase your home. Once rates start to rise – AND THEY WILL! – that might not necessarily be a good thing for prices and it will decrease buyers’ purchasing power.

The most common thing I hear from buyers is: “Why aren’t there any good houses for sale?!?” I am currently working with several qualified, serious, ready-to-transact buyers who are looking in White Plains, Mamaroneck and Scarsdale. If you own a property in these areas and are thinking about selling, call me first…. I would love to make a match!

When I tell people that I am a full time real estate agent, I am met with sympathy. People want to know how bad the market is, why nothing is selling, etc. Here is the truth: throughout Westchester County and through the end of July 2010, there were:
- Over 2,400 single family sales
- 580 condo sales
- Over 850 coop sales
- 211 multi-family sales

As you can see from the graph below, Westchester real estate has been a decent investment compared to the S&P 500. The current median selling price is at 2004 levels, though interest rates are obviously much lower. Also, price volatility is much lower with real estate than in the equity markets.

The picture is a little different when you look at it from the peak:

Despite negative news reports, the real estate market continues to serve buyers and sellers. Business is happening and banks are lending…. And if you have not refinanced your mortgage – do it now while interest rates are very close to all time lows!