Market Observations – John Dixon & Associates

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Market Observations

Market Shift: Becoming a Seller’s Market

The real estate market seems to be shifting to more of a seller’s market, and that means it’s a good time for investors and others to market their property through one of our Multi-Seller Auctions. Carl Carter and I talked about these changes, and about what sellers can expect when they consider selling in a John Dixon Auction.

Investing by headlines can lead to bad decisions

I’ll confess that I get frustrated at times with the way media cover financial news. I wouldn’t mind if it were just a matter of sensationalism, but it’s not always that simple. At times, media show such a lack of perspective that stories convey the exact opposite of what is really the case.

Take this headline from a recent Wall Street Journal:

Home-Price Growth Slows Sharply, Case-Shiller saysIndex Says Year-Over-Year Growth rate is Lowest Since February 2013

Sounds horrible, doesn’t it? And I’ll say at the outset that the facts in the story are basically correct. But let’s look more closely. Just what does it mean to “slow sharply,” anyway? It sounds almost like home prices are crashing and burning. But right there in the second sentence, it tells us that the S&P/Case-Shiller index of home prices in 20 major cities shows home prices rising 9.3%. That doesn’t exactly sound like a “batten-down-the-hatches” storm to me.

If our homes appreciated by 9.3% every year, we’d all be in high cotton. So why the hysteria? Because economists had been expecting prices to rise by 9.9%, which would still be down from 10.8% the previous year.

In truth, even a growth rate of 9.3% is probably unsustainable. After all the pain we’ve been through in recent years, the last thing we need is an overheated market. Rather, what we need is a good, healthy market for real estate owners – whether homeowners or investors – to prosper. And I’m seeing a lot of signs that we have just such a healthy market. Despite some bumps coinciding with international turmoil and the default of Argentina on its debt, the stock markets have continued their long term bull market.

It’s also good to note that people are paying their bills. The S&P/Experian Second Mortgage Default Index shows that the default rate on second mortgages is holding steady at a low 0.57 percent, having remained well under 1 percent for more than two years. When you consider that 4.35 percent were defaulting on their mortgages five years ago, I’d say we’re in pretty good shape by comparison.

This, of course, is important because when we’re investing in rental properties, we naturally want to make sure people can pay the rent – or qualify for mortgages on properties we’re selling.

This translates into a good environment for us, because the current environment is positive for both sellers and buyers. And in a John Dixon & Associates auction, you don’t have to worry about whether you’re getting a fair price. The competitive nature of the auction takes care of that!

Assessing the various auction types

There are a lot of ways to do an auction these days, and various auction companies tend to favor one or the other. This can be confusing to someone who wants to sell, whether it’s a single property or an entire portfolio.

To touch on the ultimate question of which is best, the answer is that it depends. Let’s walk through the major ones one by one and consider the various advantages and disadvantages. While all of the methods can be used for either real estate or other assets (such as personal property or machinery), I’m going to focus on real estate, because that’s our main business at John Dixon & Associates.

Before I describe the various approaches, let me say that regardless of the one you go with, you need to make sure that your auction company meets several criteria:

  • Up to the marketing challenge. Use one that will actively market your property and provide detailed information to bidders. No matter which format you use, it’s critical to remember that people buying real estate always need to see the property and do their “due diligence” research, even if they’re buying online. That means you need to use a company that will make provisions for inspections and provide the necessary documents. The property needs to be presented favorably with good photography, of course, and bidders need to be properly qualified to ensure the integrity of the process.
  • Properly equipped. Ensure that your company has the right tools for the format it is using. For example, if you’re doing an Internet-only auction, you’ll need to make sure the company has a proven, secure, user-friendly system for displaying your property, qualifying bidders, and taking bids. If it’s a live auction with simulcast, ensure that the audio, video and connectivity are reliable, and that the bid assistant communicating with the online bidders is qualified to handle any questions that come up, whether technical or related to the property.
  • Properly licensed. License requirements for auctioneers and real estate brokers vary from state to state. Make sure your company is properly licensed for your sale.

Now, let’s move on to some of the auctions available.

Live Auction
Before we move on to the various types of auctions involving the Internet, it’s important to note that even today, the live, public-outcry auction continues to be the heart and soul of the auction industry. This is where my roots are, and even when we make use of the Internet, the overwhelming majority of our sales involve a live auction, where people gather into a room and enter their bids while a bid caller conducts the sale. This is also a favorite for most of our bidders and is most assuredly the most fun!

Timed Internet Auction

When it comes to auctions using Internet technology, this is probably the format with which most people are familiar, because it bears similarities to the format on EBay. Your property is shown with full information, photos and other critical information, and bidders may enter their bids within a defined timetable. This timetable can be for weeks or just a few days, but lately, more auction companies seem to favor shorter time periods.

Here are some of the advantages of a Timed Internet Auction:

  • Bidders may choose any time to enter their bids within the allotted time frame.
  • A bidder may enter a maximum bid, with the system raising the bid up to that amount as needed.
  • Costs may be lower because the auctioneer may not incur the costs of a live auction.

A common concern, of course, is that many feel that the more relaxed time frame and the absence of a live auctioneer can reduce the urgency and ability to get the highest possible price.

Timed online followed by live auction

In this hybrid arrangement, an online Internet auction is conducted in the days leading up to the live auction, then the high bid serves as the opening bid for the live auction. Its use for real estate appears to be declining, but there are still a number of companies using it. It’s still very common in auctions of personal property. Since we rarely sell personal property, we’ve had few occasions to use it.

One reason often given for using this method is that it caters to both the bidder who prefers an online format and the one who prefers to participate in a live auction. Since most serious bidders are going to want to participate up to the very end, most would probably participate in the live event regardless of whether they had entered online bids, which would seem to make the online unnecessary. However, the online portion might provide a “security blanket” of bids going into the live event.

Live auction with simulcast

This is the format we use most commonly at John Dixon & Associates, because it allows bidders to be either live in the room or bidding via the Internet, depending on which they prefer. (Older bidders seem to prefer live bidding, while younger ones are more likely to bid online.) Either way, they compete head to head, at the same time, for the same properties.

It’s common for us to sell 30, 40 or even 50 percent of our properties in a major portfolio auction to online bidders. This can vary widely, of course, depending on the number, type and value of assets being sold.

Whatever you do, make sure it’s done well

There are more possibilities and twists, but these are the major ones. Ultimately, the most important thing is to do it well, and to work with a company that has a strong track record for professionalism, integrity and solid results.

We’ll be talking about these and other options in a webinar on May 8, from 3 to 4 p.m. Eastern. You can register here.

Meanwhile, we can have a dialogue without waiting until we can meet in real time, so I invite you to offer your comments on this post.

The price is still right but for how long?

I don’t know of anything that’ll get a person in trouble faster than overpaying. In the mid and early 2000s, that nailed a lot of developers, builders, real estate investors and individuals who chased real estate at insanely high prices fed by easy credit and lax lending standards.

Any seasoned real estate investor will tell you that you make your money when you buy the property. And for the people who bought at the wrong prices, the music stopped. Credit dried up in the crash of 2007, and those who’d gotten carried away were under water on their mortgages. Foreclosures followed by the thousands, and at John Dixon Associates, we’ve been selling those properties ever since – at a fraction of the previous prices.

Now I think we’re looking at the flip side of this cycle. Foreclosures have dried up to a trickle, and those inventories of bank-owned properties are shrinking fast. That means a window of opportunity is beginning to close for developers, builders and individuals alike.

It’s a double-sided opportunity, really. Just as the supply of foreclosed property is beginning to diminish, demand is set to surge. Unemployment has dropped from its 2009 peak of 10 percent all the way to 7.3 as of the August numbers. When people have jobs, they start wanting houses, and we’re seeing just that: Sales of existing homes in August were at their highest level since … 2007.

Aah, 2007. The Crash. Even now, almost every headline about the economy includes the words “since 2007.” Highest home sales … since 2007. Strongest stock prices … since 2007. You get the idea.

We’re still haunted by it. And that’s not an entirely bad thing, as long as we learn the right lesson: Buy at the right price. A price you can afford. One that gives you some “headroom” to make money. A price at which you’ll still be OK if interest rates blip up, or if the market hits an unexpected snag.

There’s still good property available at the right price. Homebuilders are confident – but not dangerously so. The National Association of Home Builders/Wells Fargo builder sentiment is at 58 (anything over 50 is positive), and it’s been steady at that level for about a year.

Meanwhile, interest rates keep ticking up. But they’re still extremely low by historical standards.

Conditions are good, and improving. Prices are still a fraction of what they were … before 2007. But it’s easy to see a time coming when the supplies will get short again, just as more families are ready to build or buy. When that day comes – and I suspect it’s not so far off – folks will be wishing they’d loaded up at today’s prices.

We’ll be selling scores of home sites, as well as other residential and commercial properties in Georgia and North Carolina, in our Oct. 9 in Gainesville, Ga. Then on Oct. 22-23 we’ll have about 100 offerings in Alabama, Florida, and Georgia.

As auctioneers, we’ll be trying to get the highest prices we can for these properties, but I expect the properties will still sell at levels that will put the buyers in a good position to make future income and profits in the near future.

Auctions an effective tool for REITS, hedge funds, other institutional investors

There are a lot of reasons to sell real estate. During the last few years, we’ve sold thousands of homes, restaurants, stores, subdivision lots and other properties for banks who acquired them either through foreclosure or through mergers and other transactions with other institutions.

For lenders, it’s generally an easy decision to sell, because they’re not in the business of owning properties in the first place. For other institutions, including hedge funds, pension funds and Real Estate Investment Trusts, the answer isn’t quite as simple.

To deal in the quantities required to be a meaningful part of their portfolios, these large investors often acquire entire portfolios or groups of properties, so not everything they end up owning was hand-picked to suit their investment objectives. Over time, they face the challenge of selling the assets that don’t fit. That can be slow, expensive and time-consuming.

The auction process provides the liquidity that is so critical to the management of an institutional portfolio, and a the options are endless. Properties can be sold one at a time, or dozens at a time. The auction can be online or live, or a combination. The marketing can be aimed at individuals, small investors or other institutions. The focus can be local, regional, nationwide or international, depending on the asset.

We have experience with every conceivable type of real estate, in all sorts of situations.

I usually advise portfolio managers to begin with an open mind. Tell us what you need to sell, and what your expectations are. That way, we can recommend a strategy based on our vast experience.

Strength in home prices is impressive, but there are still great values out there

Here’s the top-line news: U.S. home prices gained 10.2 percent during the year that ended in the first quarter of 2013. That number, as measured by the widely followed S&P/Case-Shiller index, is good news for a lot of folks — especially homeowners, banks, investors and real estate professionals.

A lot of factors are contributing to the stronger home prices. Mortgage rates remain near record lows. The National Association of Realtors reports that the number of previously owned homes on the market is the lowest it’s been since March 2000.

One thing that jumped out at me was the comment by Robert Shiller, co-founder of the index. Shiller argues that prices are already at what he considers “normal” levels adjusted for inflation. (It’s worth noting that Shiller feels that the downturn in recent years just took prices to where they would have been without the real estate “bubble” that preceded the crash.)

Still, it’s impressive to see the persistence of the home price increases. The March numbers mark 12 straight months of solid increases. And while there’s a lot of variation (with properties rising 2.6 percent in New York and 22.5 percent in Phoenix), all 20 cities scored gains for the first quarter. Our headquarters city of Atlanta was particularly strong, at 19.1 percent, and we were able to clearly see the improvements in our Georgia auctions.

Is it too good to last? It’s hard to say. Certainly, we aren’t yet approaching the price levels we saw in 2005. And that means there are still a lot of homeowners who are under water.

Obviously, home prices can’t continue to rise 20 percent a year for long without creating troubles down the road. But I think the direction is obvious. It’s just a matter of how fast prices move up. For now, I think we’re at a good “buy-in” point for investors, with lots of room for growth.

And it’s worth noting that prices on commercial properties, subdivision lots and many other types of properties remain very low. Investors who buy at these levels will no doubt enjoy better returns than those who wait and buy at higher prices later. Rising demand for homes is beginning to spark a healthy rise in new construction. Investors who’ve been loading up on home sites at recent John Dixon auctions can expect some handsome profits as construction moves into full swing.

Accumulate assets now for the better times ahead

If the sun seems a little brighter lately, there may be a reason for it. For the first time in well over five years, the Dow is finally back above the 14,000 level, where it was in October 2007, just before our economy hit the biggest air pocket since the Great Depression. During the crash, assets of all types seemed to go into a free fall — stocks, homes and commercial properties. People watched as their retirement accounts fell to a fraction of their former value.

But just in the last few weeks, we’ve seen the Dow climb back above 14,000. I don’t want to overstate the impact of that, because the Dow isn’t the best indicator of where the economy is. But it has a major psychological importance, because it’s still the indicator the press mentions most. And getting above a barrier like 14,000 can give folks a lift. After well over five years — at least by that measure — we’re finally clear of the horrendous downturn.

And we’re seeing positive signs in the real estate market, too. In January, home prices — as measured by the Case-Shiller Index — showed the biggest year-over-year gain since before the crash. The National Association of Realtors reports that sales of vacation homes were up 10.1% in 2012, and the median price of a vacation home rose by 24%. When people get scared, luxuries like vacation homes get hit first. So when beach homes and condos start to recover, it means people are feeling pretty good about things.

As I’ve noted recently, we’ve been seeing signs of the upturn in our auctions. Our series of five auctions in late March demonstrated the strengthening economy in a dramatic way, as we had capacity crowds and vigorous bidding all over Georgia. Ultimately, the total reached $17.5 million, as hundreds of bidders purchased homes, commercial properties and land to position themselves for a stronger economy.

The economy is notoriously difficult to predict, so it’s hard to tell what’s ahead. But all the momentum seems to be positive right now, and there are a lot of opportunities ahead. Our buyers know that those who prepare now by accumulating assets will be miles head in the months and years to come.

Good end-of-year news as home prices show consistent improvement

There’s a lot to be said for a little good news as we prepare to enter a new year. And we got a good dose of holiday cheer the day after Christmas, when the S&P/Case-Shiller Home Price Indices came out.

There are several things I look for when I’m trying to get a handle on economic data — especially statistics regarding real estate. Obviously, I look at the raw numbers themselves, but even more important is consistency of direction. A choppy sideways market — up one month and down the next — doesn’t tell me much. But an established trend can be useful, because it give us a better idea of where things are going. Finally, I like to see some geographic breadth. If properties in one or two areas seem to be catching fire (or going in the tank, for that matter), it may not reflect the broader market.

I was particularly glad to see the latest batch of Case-Shiller Index numbers — which cover October — because they contained good news by almost any measure:

  • The annual returns for Case-Shiller’s 10-city and 20-city indices showed healthy growth (3.4% and 4.3%, respectively). So I have to be pleased with the direction.
  • The trend looks good too, with the 12-month rate of change in home values rising 10 months in a row. That number has not only been positive, but improving steadily since December of last year.
  •  In 19 of the 20 cities, the annual returns were higher for October than they were for September. All but two of the 20 cities showed positive annual returns. (Chicago and New York were down.) Score one for geographic breadth.

Happy New Year!

Current real estate prices plus strengthening economy spell opportunity

When it comes to investing in real estate, the folks in Chicago get it. And those who turned out for our two-day FDIC Chicago auction got some great deals on homes, condominiums, office condominiums and other real estate that should produce excellent returns in the next few years. 

Over two days, we had about 240 attendees, including 122 who came to bid in person. Another 36 participated online.  We sold 79 out of the 81 properties offered. Most of those — 74, in fact — were residences and commercial properties. As I’d noted when we first announced the auction, this sale consisted heavily of improved residential and commercial properties.

Across the board, the properties sold for prices that afforded the bidders with some excellent values. While many real estate prices have been firming up for several months, they’re still at levels that enable investors to earn excellent returns, and we had a number of properties that were ideally suited to the needs of smaller investors, who figured prominently in the auctions.

Let’s face it: When it comes to any investment, half the battle is buying at the right price. For a smaller investor, that means finding a property within your means. But whether you’re investing $50,000 or $5 million, it also means investing at a level where the rental income provides a suitable rate of return, or at which you’ll be able to make a profit down the road. 

Our auctions of bank-owned properties during 2012 have presented just those types of opportunities. Bidders have been acquiring properties at prices that won’t last forever. At the same time, crowds at our auctions have been growing, resulting in solid results for the financial institutions and others for whom we’re helping reduce inventories.  

We’ve had great year, and it’s given me a lot of satisfaction to help our sellers reduce their holdings while providing avenues for investors to build portfolios that will make them a lot of money. I have every confidence that 2013 will bring more of the same.

Latest numbers on home stats underscore market strength

One of the frustrating things about trying to get an accurate reading on economic trends is that numbers tend to bounce around from one month to the next. So when we get a series of numbers that all point in the same direction, it’s a good idea to pay attention.

That’s the case with the S&P/Case-Shiller Index, which has become the leading measure of U.S. home prices. The national composite was up 3.6% compared to the third quarter of 2011, and 2.2% compared to the second quarter of this year.

Not that I was surprised. I’ve been saying for a while now that the real estate market was recovering, and the new numbers are convincing:

  • Breadth. A recovery in one or two hotspots doesn’t mean much. But of the 20 cities tracked, 17 were above their levels from a year ago.
  • Persistence. Both on a month-to-month and year-to-year basis, we’ve seen steady progress. The 10-City and 20-City Composites have risen month-over-month for six straight months.

 From the investor/buyer perspective, this is really good news. Real estate is still a great value, especially compared to the prices we saw before the credit crisis in 2007-2008, so there’s a lot of room to grow. Yet, the upward trend is well established, showing that the market has stabilized and begun to gather steam.

That means, of course, that our upcoming two-day auction of 100 properties for the FDIC in Chicago will offer some excellent possibilities. We have an especially strong lineup of residential properties, many of which are concentrated in the Cicero area. We’ll start at 11 a.m. on Saturday, Dec. 8, and 2 p.m. Sunday, Dec. 9. I look forward to seeing you there.