Real Estate Market Update, January 2010

I attended a market update seminar recently given by Bill Gray of the Arizona School of Real Estate and Business. It is always a real pleasure to hear Bill speak, and if you ever have the chance, go! Here are some excerpts from what he brought up:

Numbers recently released by a department of Arizona State University show that the market for less expensive homes continues to be strong, while the luxury market is poor. The conventional loan limit is around $417,000 while the FHA limit is around $350,000 so this defines the cutoff point.

Further, most sales are FHA or cash. It looks like around 40% of the market is investors, buying at the auction. Most of the rest is FHA (the new subprime).

So what are the rumblings? Some bad news for FHA buyers, maybe. There is talk of a 5% down requirement, and the mortgage insurance is likely to double, from 1.5% to 3%. Further, there is talk of a minimum credit score for FHA in the 620-640 area. None of this is written in stone, so don't panic yet.

For those of you who are not licensees, you might not think that residential real estate brokerage is a low margin business, but it is. The only people doing really well are the few agents who have high volume -- agents listing 100 bank owned properties at a time, for example. So the news that the State is broke and looking for new tax revenues is bad for us -- they want to add a state income tax on services. This includes real estate commissions, carpet cleaning, lawyer fees, you name it. The action of implementing this tax, in my opinion, will be a net loss in revenue.

2010 may be a year for more market declines for another reason: at some point, the "shadow inventory" of lender-owned homes has to come to the market. They will likely be released slowly, but the supply is so large that it is likely to strongly impact home prices.

Finally, interest rates are likely to start rising at some point. Personally, I'm thinking that treasury rates will rise because no one will want to buy them anymore. When this happens, rates will rise and fewer homes will sell. More downward pressure.

It is interesting to note that on the NAR website where they show the pricing and sales trends in major metro areas, they show Detroit as "NA". It was recently reported that the median home price in Detroit was around $7,500. I personally think that you can make data show anything you want -- and the NAR has a vested interest in showing better news. The Detroit info will skew the numbers for the rest of the country -- so leave it out!

Apartments are still suffering, if looking at the eviction notices means anything. When times are bad, apartments don't like to evict people, so they will tolerate late rent payments. When the market is good, it is easy to get another renter, so late payers get evicted. People can afford to rent single family homes right now -- because prices are low. So why rent an apartment?

You can also watch all the webinars about how to buy apartment complexes cheaply. Amazing!

My take on 2010? I think we will see falling asset prices, including real estate, and especially things like gold and oil. I think the dollar will strengthen. Right now there are people having gold parties -- someone organizes it, and you sell your gold earrings and such at the parties for cash. When something is THAT popular, it is probably at a price inflection point, or near it. I'm bearish on gold.

--PLH

Welcome to 2010: Digital Rights Management

This one is not about Real Estate. It is about HDTV. So skip it if you were hoping for the latest REO or foreclosure information. On that topic, there is a popular webinar going around about bulk REOs which I will write about later this week.

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My home TV setup involves a bunch of stuff, but mainly it is a flat TV, an amp, a TiVo, and a Blu-Ray DVD player. To be able to see everything in stunning HD, you must connect the components together either with component video (which involves some 5 cables), or with HDMI.

Component video is an analog solution; this means that there might be some slight loss of quality. In practice, I haven't seen it. But it is a pain to run 5 cables between each piece of equipment.

HDMI is a digital connection. However, it is more than that; it is also a communications protocol, and it supports something called DRM, or digital rights management; in particular, it supports several copy protection schemes, including HDCP, a copy protection scheme made for high definition content, like HD programs and HD stuff from DVD players.

Why does this matter to me? I noticed that sometimes my TiVo records a blank screen, or a screen with an error message, something about HDMI Not Permitted. So I started looking into the problem. I also started noticing it more when I added a second TV connected to the TiVo, through the component connection.

See, what happens is that the TiVo is connected via the "good" HDMI connection to the amplifier, and a bunch of other things are also hooked up, like the cable box, the DVD player, a CD player ...

For HDMI to work with the copy protection scheme, when the "protect" information is turned on from the source (like the cable company, or the DVD player), then your TV or amplifier is supposed to negotiate with the source and say "I'm only talking to a TV, not a recorder" or something close to that, and so the source device continues to play. However if there is no one at the other end of the HDMI connection, because the amp is powered on but connected to the cable box or the DVD player, then when the TiVo tries to talk to the amp, it does not get an answer and so it blanks the screen or puts up an error message. If you unplug the HDMI cable, everything works fine, of course. And, it doesn't just shut down the HDMI output. It kills the TiVo recording and the component outputs.

For those of you who think this is only a problem for people with TiVos, and amps, and other home theater setups, think again: tens of millions of televisions have been shipped which have HDMI connections but are NOT HDCP (copy protection) compliant. And some of the new DVD players can only be connected with HDMI; or they will only play HD through HDMI. And when you hook them up to your older TV, guess what: It Won't Work.

What to do? Well, there are a few options. There are some HDCP "strippers" out there, which convert HDMI digital signals to the component video signals, and at the same time tell the copy protection gatekeeper that everything is ok -- of course, these devices are probably illegal since they circumvent a copy protection scheme (Digital Millennium Copyright Act, thanks so much), or you might be able to find an older Blu-Ray player with component outputs.

I'm pretty upset with the solution the industry has foisted upon the public. Almost as angry as what they did when they did away with the analog TV signals (so now only urban areas can get over the air TV). I wrote about that in a previous post.

Of course, most programming is going to be arriving at your house through digital means, like the internet, in the future, so maybe it doesn't matter. Except you might not be able to see it because you might try to copy it and that would destroy the entire entertainment industry.

And in case you were wondering, one of the reasons that Windows Vista was such a dog, is that it was designed, to a large extent, in support of protecting premium content; in other words, a large amount of the processing power of the computers running Vista is devoted to checking for copy protection. Vista is one of the best things to ever happen to Apple. New versions of Windows and the Mac OS are likely to devote huge resources to copy protection, as well. Linux, anyone? And there are inexpensive programs, readily available, that allow the copying of DVDs, and the Blu-Ray copy protection scheme has been broken; so why copy a DVD by playing it? There is no point to HDCP. It is a real disservice to the average consumer, and only a minor irritation to those that would make illegal copies of things.

Even today you can buy an older digital VCR that will copy from component inputs (I have one); so I could hook up my TiVo to the VCR and tape whatever I want, in HD 1080i.

--PLH