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North County San Diego real estate scoop

By Seth Chalnick- (619) 251-8803 | Broker in 92024

Market Outlook, December 2011

Between raising a young family and operating at capacity on purchase, listing, and refi transactions, it comes to mind I have not logged a market update in a while.  Then again, not much has changed since I really had something important to say.  The politician and banking sound bites du jour have changed with the wind, but the basic kick-the-can-down-the-road strategy seems to have put us all in the same boat... whether we were dragged into it kicking and screaming… or have begged, borrowed, bribed, or stole a seat aboard.

What is also becoming increasingly apparent if not somewhat humbling, is that when asked for my take on the market, most folks are really just seeking the parts of my outlook that validates what they were thinking anyway.

But every now and again, I get challenged and inspired to distill my outlook into conscious thought, and with a green light from a valued client, Dennis, I am pleased to post for your review an exchange of this nature.  Following is a snapshot of the part of my day shared in conversation with a sophisticated investor, who kicks the tires of a vehicle he plans to use to get a job done:

[read bottom up]

From: Seth Chalnick 
Sent: Thursday, December 01, 2011 5:17 PM
To: 'DEck43'
Subject: RE: reply from seth

Thanks Dennis, for the thoughtful validation.  Me too (lunch)… and it seems I’ll need to stick with water if I’m going to keep up with you :)

I look forward to helping Keith find a killer location that blows the doors off similar but inferior properties, when it comes to long-term appreciation, by focusing on the factors, which may seem today like nuances or subtleties, but will compound over the 20-year resale trajectory.


From: 'DEck43'
Sent: Thursday, December 01, 2011 4:52 PM
To: seth@sethchalnick.com
Subject: Re: reply from seth

Thanks for the response. 
It seems likely we will see some band aids as the banks fight for time. 

The people I speak with in big and small banks are shooting bricks.  I am not sure the end game might be quicker than you think.  We both know the inevitability of mark to market.  I am therefore as worried about commercial and retail centers.

Regarding the use of funds, this is less than 1% of funds I am personally investing.  As the father I am not typical. I am locking in the ridiculously low rate I can make on a mortgage to my kids.  I gift them the payment plus the balance of the 26,000.  Therefore price is important but location and a 20 year horizon are my objectives. 
I have a similar investment with my daughter in Chicago: 750 to 1 mil keeps it even.  She has three kids on 529 funds Keith 1.

Post this email exchange it will be good to work through Keith with a CC to me.  I will definitely enjoy having lunch with you one of these first days.  Thanks Dennis

In a message dated 12/1/2011 4:22:06 P.M. Pacific Standard Time,seth@sethchalnick.com writes:

re: Appreciation/value… historically speaking, homes located west of I5 location have commanded the greatest premium, have been the last to suffer downturns, and the first to rebound.  This trend was amplified in the following areas (listed from highest to lowest):  Rancho Santa Fe, Del Mar, Solana Beach, Cardiff, Encinitas, Carlsbad.  Add a 10%-15% premium for homes with a view of the Ocean or Lagoon or location within a block or two of the beach.

I look forward to helping Keith and you identify this level of value on a micro level when you actively begin searching with me.

re: Banking… foreclosures will pick up the moment the influence of all of this intervention let’s up… unless and until we inflate our way out our debt problems first… which will take a decade or so.  The fed and the government and the banks have conspired to plug up a cracking dam for four years now, and I am frankly amazed they have been able to kick the can down the road this far. You are quite right about the supply and demand of liquidity.  But the banks were basically insolvent after the subprime fiasco… and then they scratched “mark-to-market” accounting principles and boom- they were back in action.

I am convinced there will be no end to the magical things the fed, banks, and government will do to kick the can down the curb.  I don't know if any other real estate professional will admit this, and I don't even know if I should give many of them credit for knowing this in the first place… but I have consistently gone on record in public forums stating that real estate prices should continue to go down until folks can afford the payments with rates that are normalized (i.e. without intervention)… and until there is an answer to all the homes that make up the shadow inventory… and until there is an answer for what will happen when all the 5 yr I/o loans currently in existence re-set back to principal and interest. 

So should the system self-destruct?  From a fundamental standpoint, probably… yeah.  But it is impossible to make rational predictions while the market is being manipulated.  In other words, the hypothetical outcome of life without intervention is not the question.  The question we should be asking is this:  what will happen with continued intervention?  Because this is our new normal.  I don’t know the answer to this question, but if I had to guess, I suppose the ultimate result will look like one of two things:  We will either have rampant inflation and dilution of capital… in which case it will circle back around to real estate valuations on steroids… and the 4% rates we see today will seem like free money in a few years.  Or it will all go to shee-it… in which case I suppose I would rather own property than anything else because it is a tangible asset that will at least retain inherent value even in the worst case scenario.

I see the opportunity of buying today as an opportunity to leverage cheap money.  I don’t want to talk myself out of a commission or anything, but if it were me, I'm not sure I would put all cash down on a home in coastal North County today with all this potential downward pricing pressure… unless it wasn't for purely investment purposes… or unless I could afford to allocate long-term resources without disrupting the balance of the rest of my portfolio.  I see the opp to leverage cash right now as buying $325k homes in inland Carlsbad, Oceanside, and San Marcos.  These homes are much closer to their empirical bottom.  ROI is pretty turnkey for renting them.  The replacement cost is not much less than the purchase cost.  People could afford these homes with 20% down.  They are the types of homes that people will need to move to if they get displaced from higher-end homes.  But then you miss the longer term appreciation… which I don’t see happening within the next 3-5 years.  So therein lies the tradeoff.

From: 'DEck43'
Sent: Thursday, December 01, 2011 3:16 PM
To: seth@sethchalnick.com
Subject: Re: reply from seth

You know what historically causes properties to hold or build value in this area what are those attributes? 
To simplify banking my question.  It is simply a money supply and allocation question. If bank balance sheets weaken and reserve requirements increase will foreclosures pick up or lending criteria change. If so anyone dealing with the banks should find borrowing or refinancing more difficult.  That should weaken the market. 
We are not trying to market time the exact bottom.
Thanks Dennis

In a message dated 12/1/2011 2:35:38 P.M. Pacific Standard Time,seth@sethchalnick.com writes:

Hi Dennis,

re: Downgrades… the fundamentals should continue to drive prices lower, but with all the intervention, who knows if this will happen and when?  I resist the temptation of timing markets, and simply focus on whether or not it is the right time to buy/sell for each client’s unique scenario.   We may, in fact, be far from an empirical bottom, but then again it could be the best time ever to leverage other people’s money if you buy right.  Or it could be a bad time to buy from a pure cost basis perspective.  The downgrades have little impact in my book, because the ratings firms lost credibility when they failed to see what a lowly agent like me saw five years ago.  True, lots of folks care what the media says, but the media is constantly offsetting itself with conflicting reports, such that only hindsight will be the judge.

re: Your question about including the “used to be price”… sorry if my response last time you asked was not clear.  For easy reference, here is a more direct answer:

The alerts do not come from “my” system… they come directly from the MLS.  It would be helpful if the MLS system automatically displayed the price reduction amount within the email alerts, but they do not.  However, if you click the link provided in the alert to view more info… then find that property in the list… and then click for details… you will find a field called “Orig.Price”.  This shows where the list price started.  It does not break down the increments of multiple reductions, but it does at least show how much they dropped the price overall. 

To get the actual history and increments of multiple price drops, you can visit “my” website here and then enter the property address in the ‘keyword’ search box… then on the profile page that displays next… locate the “price changes” link, where I intentionally had my guys code this from scratch to fill in the gap of what I would agree is an MLS shortcoming.

Or you can simply shoot me the MLS number of listings you like and I will give you the history.

As far as my “favorites” go, I take a hands on approach to providing uncensored opinion about each home I visit in person with each valued client.  I avoid sharing subjective views beforehand, because anyway I slice it… it comes across as “selling” something.  I have a large book of business and the criteria important to each respective client varies greatly.  Rather than dissipate focus attempting to be everything to everyone, I mindfully help folks when they are most receptive.  When Keith and I start physically looking at homes, he and you will very quickly see how I help laser onto what you like and avoid what you don’t.  That said, if you share your short-list of potential candidates, it will be a pleasure to review each one and reply back with the pro’s, con’s, and ranking of each one.

I do not specialize in managing rentals, but the broker of my firm does.  He has successfully managed a large stable of properties for over 20 years.  I look forward to making an introduction as the need arises.

I look forward to helping Keith find a great home.


From: 'DEck43' 
Sent: Thursday, December 01, 2011 8:43 AM
To: seth@sethchalnick.com; ‘keitheck2’ 
Subject: Re: "encinitas" listings from seth for Dennis found on Thursday, December 01, 2011 3:04 AM

How will the bank downgrade play in to this? 
From here could you include the used to be price when we get a price reduction. 
We would be curious as a professional at this how do you rate the properties.  You could put that under the tab on your site called favorites.  Value, location, move in quality and rental would be a few of our criteria.  We have stated before a desire to be within walking of school and the beach.
I spoke with Keith and he will flesh out his wish list a bit more. 
We discussed this again and are serious at near the bottom. 
To restate it would be  cash with a quick close. 
Finally, does your firm manage rental situations for clients? 
Thanks Dennis

-----Original Message-----
From: Seth Chalnick <seth@sethchalnick.com>
To: deck43, keitheck2 
Sent: Thu, Dec 1, 2011 3:57 am
Subject: "encinitas" listings from Seth for Dennis found on Thursday, December 01, 2011 3:04 AM
Hi Dennis,

Here is a link to new listings and/or status changes that match our "Encrinites" search criteria.
Click here to view more information about the properties below.
New Listing $775,000 240 Cereus St
4 Bedrooms, Status: Active. Residential
New Listing $629,000 1751 Whitehall Rd
3 Bedrooms, Status: Active. Residential
If you wish to unsubscribe from this property update, unsubscribe here.
Search Name: encinitas.

As always, please call anytime with any questions.

Speak soon,
Seth Chalnick
Broker, Realtor, Buyer's Advocate, Registered Mortgage Advisor
Pacific Coast Homes
2093 San Eliot Avenue
Cardiff by the Sea, CA 92007
m: 619.251.8803
f: 858.630.4086


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