Lehman Brothers, Wall Street, and Real Estate

Well, so Lehman Brothers could not find a buyer in the 11th hour and filed for Bankruptcy. No big surprise - we've been saying "Garbage in - Garbage out" for a couple decades now...In this case, we're not talking about computers. The "garbage in" is the ridiculous loans that have been made.

You can always expect this kind of thing when people are making big money without having to be smart.

Think about it. During the height of the real estate boom, my phone was ringing off the hook with people identifying them as "real estate investors." They were always looking for property where they could borrow 103% and cash flow with a tenant in the house. Never once did I take a bite of the tempting fruit of the out of state "investor." Californians were amazed at how cheap homes are here in Georgetown (or the Austin area) and would buy anything. I heard stories of investors buying up city blocks of new construction.

Perhaps this is how Lehman Brothers ended up with $60 Billion (with a "B") in bad loans (according to the news report I heard on the radio today).

Does this remind anyone of the tech bubble in the stock market? I remember people going nuts on day trading. And with everything going up and up and up, it was easy to look like a genius. This is the same phenomenon that happened with real estate investing in more recent years.

The truth is that the acquisition costs are prohibitive to cash flow...unless you find a steal of a deal. And if you're being pitched a "steal," then why isn't the agent buying it?

Anyway, it was this mentality (manifest in different ways) that is driving the crisis in our financial industry right now.

So what should we expect next? More of the same. But I have to say, it is a good time to buy!

• Buyers will be even more tentative, as question marks continue to hit us from all sides. Gas prices, stiffer loan underwriting (focused on responsibility), and fears about the stock market will give buyers pause.
• When buyers do commit to writing offers, they will be looking to protect themselves from future problems, and will offer low. Many an agent is writing several lowball offers before one sticks...really this started a few months ago. Lehman Brothers' situation will just exacerbate this.
• Wall Street's mortgage poolers will continue to promote "risk based pricing" on home mortgages. This means that the better your credit score, the better interest rate you'll be able to get, and the less you'll be required to put down on a home.
• Essentially, every area where the pendulum can swing back to a sense of responsibility, it will. This is a good thing, but it will continue to be painful in the interim.

Thankfully, Austin continues to outperform the nation. Where Austin has seen the most pain has been in the luxury market, where months of inventory has been very high, and price drops are coming in big chunks.

In Georgetown, we have the same story going on. In Georgetown, I'd place the "luxury market" at anything above $500k. At the time of this post, Alamo Title Company is reporting 33.88 months of inventory in the $500-750k range in Georgetown's west side. It is a GREAT time to buy if you are shopping in that price range. However, supply and demand are MUCH more in balance in the $100k-200k market. Here's the grid:

GTW
Price Range	# of Solds	Avg Sales Price	Avg DOM	Current Actives	Avg. # of Solds	Months of Inventory
< 100,000	6	$80,258		5	0.50	10.00
100-149,999	116	$134,769	10.37	44	9.67	4.55
150-199,999	203	$173,706	17.13	77	16.92	4.55
200-299,999	267	$240,416	14.42	152	22.25	6.83
300-399,999	97	$349,229	19.05	96	8.08	11.88
400-499,999	43	$443,401	29.09	65	3.58	18.16
500-749,999	22	$577,134	20.45	62	1.83	33.88
750-999,999	4	$859,475	57.00	20	0.33	60.61
> 1 Million	4	$4,011,420		14	0.33	42.42
Total	762	$263,373	16.15	535	63.50	8.43

The idea behind "months of inventory" is basically to provide a simple answer to this question: How long would it take to sell off the current listings at the rate we've been selling over the previous 12 months if no new listings were added to the market. You can see, we have a lot of high end inventory here.

No analysis of Georgetown would be complete without a look to what is east of the interstate:

GTE
Price Range	# of Solds	Avg Sales Price	Avg DOM	Current Actives	Avg. # of Solds	Months of Inventory
< 100,000	32	$74,313	12.59	7	2.67	2.62
100-149,999	118	$127,112	8.80	40	9.83	4.07
150-199,999	103	$170,405	12.42	50	8.58	5.83
200-299,999	32	$232,772	34.91	28	2.67	10.49
300-399,999	9	$347,044		14	0.75	18.67
400-499,999	3	$444,063		2	0.25	8.00
500-749,999	1	$675,000		7	0.8	87.50
750-999,999	1	$991,587		4	0.8	50.00
> 1 Million
Total	299	$162,207	12.83	152	24.92	6.10

Most of the higher price range properties in GTE will be rural homes with acreage or restored Victorian homes in "Old Town." The lions' share of what trades on the east side are homes priced at $300k or less. Generally, land on the east side has been cheaper for developers to acquire. This allows them to price lots at a lower price, and ultimately you have more affordable homes. That said, the east side offers some great value, as well as convenience, proximity to the park and downtown.

Well, I suppose I'm packing too much into this blog, so I'll go ahead and use this as my stopping point.

Russell Phillips can be found at www.GeorgetownRealEstateExpert.com/blog.