James Yoakum

The $8,000 tax credit for first-time homebuyers ends soon! You must close on your home purchase before 12/1/09 to be eligible, so if you're considering taking advantage of this great program getting started now is essential. Check out this video for more info and contact me if you'd like to get started on the home-buying process!

I attended a conference this week at the Wharton Lauder Institute focused on the financial crisis. I heard several distinguished professors and business leaders discuss a wide range of topics, and many of them touched on real estate as a key part of the current crisis. Professor Joseph Gyourko of Wharton's Real Estate Department discussed his recent research that points to some U.S. Housing markets being at or near a bottom (namely Phoenix, Vegas, and Miami).

In these markets, according to Gyourko, land and buildng permits are readily available so housing prices tend to be closely tied to physical construction costs over the long run (because land values and builder profits remain relatively constant as a percentage of construction costs). During the boom, prices rose far beyond construction costs and builders earned excess profits for a time. Now prices have fallen back to their long-term trend level and should stabilize there, possibly after a period of downward overshoot.

The picture is more complicated in land-constrained, and harder-to-build-in coastal markets, including Philadelphia. In these markets house prices are much more dependent on land values than on construction costs and land values are dependent upon demand which is mainly driven by employment. Therefore, again according to Professor Gyourko, you can't know what will happen to home price in a market like Philadelphia unless you know what will happen in the local employment market.

My personal sense is that Philly isn't done losing jobs, but we haven't experienced the unemployment extremes of some other markets. I also do not expect many more large layoffs, just gradual attrition for a few more quarters. This, along with other evidence, points to a Philadelphia real estate market that is at least approaching a bottom, and has potential to resume price growth if employment starts to pick up. I'll be keeping a close eye on local employment figures to get a sense of where the local real estate market is headed.

For buyers in this market the key to remember is that in a real estate purchase you don't need to worry about whether the entire market is at a bottom, just whether or not you've negotiated a 'bottom-level' price for your transaction.

Just when I thought that Florida's condo developers had learned their lesson, I came across this article about a new twist on condo living. 'Seniors' (55+) can now buy condo units on a cruise ship that has all the amenities of a typical, land-based Active Adult Retirement Community (AARC) and can transition them right through to the enhanced medical services of a Continuing Care Retirement Community (CCRC) as they get older.

Now I have to admit this is a somewhat novel idea, and as a huge Jimmy Buffett fan I can appreciate the appeal of living on a ship, but I don't know if the condominium ownership structure makes a lot of sense for these retirees. They tie up a big chunk of cash of front to buy the ship-board 'condo' (initiation fees from $259,000 to $499,000) plus pay monthly dues to cover all the standard ship-board expenses. In exchange they get to live in a "typical cruise ship size stateroom" which to me means cramped bedroom with one porthole and no kitchen. I hope they don't get tired of the martini bar and all-night buffet because a home-cooked meal isn't really an option. They also have no say over where their 'home' goes from day to day - would you buy a house that some guy in a hat could decide to move to Mexico overnight? To me a nice beachfront home near top-notch medical facilities and a savings fund to cover a cruise or two per year would be a more reasonable use of retirement funds for 99% of folks.

What this really sounds like to me is a sneaky way for ship-builders to get early sales commitments for their ships, albeit in small increments, in order to secure financing to build them. If cruise lines aren't going to buy ships why not sell them to retirement community operators who can then condo them out to retirees. It's the same 'pass-the-buck and take a fee' financing mentality that got us in trouble with all sorts of securitized lending. It reminds me a lot of the old condo-hotel scheme of a couple years ago used to raise capital for hotel-building. Most of those developments worked out very poorly, especially for the condo-hotel unit buyers. Let's hope this cruise ship scheme has smoother sailing.

As prices come down across the board many seasoned real estate investors are migrating to larger properties where they can achieve greater economies of scale. This is leaving fewer professional investors in the market for duplex, triplex, and fourplex properties. As the investor community moves away from 2-4 unit properties it leaves the bidding wide open for owner-occupants and first-time buyers who want to buy a home that doubles as a savvy investment.

The best thing about buying a 2-4 unit property as your primary residence is that you can get FHA financing for up to 96.5% of the purchase price with interest rates currently as low as 5.0%. Since FHA loans also allow you to take up to 6% seller's assist towards closing costs you can often buy these properties for just a few thousand dollars out of pocket. The key is that you need a good credit score and solid, verifiable income to qualify for the FHA loan and you must live in one of the units yourself.

Not only are professional investors moving away from these smaller multi-unit properties (decreasing demand), but many owners of 2-4 unit buildings have recently lost much of their wealth in the stock or real estate markets and feel great pressure to sell quickly to generate cash (increasing supply). For both these reasons the prices are quickly coming down to meet the first-time buyer market. In Philadelphia there are opportunities to buy duplex or triplex properties that will generate enough rent from the extra unit(s) to cover most or all of the monthly mortgage payment. Combined with low-down-payment FHA financing this means a buyer can potentially own and live in a multi-unit property for just a few thousand dollars down and little or no out-of-pocket monthly expenses. For a first time buyer this is a great way to build equity quickly - especially if you consistently save or invest the money you would otherwise be paying for your personal rent/mortgage.

Owning and living in a multi-unit property is also a great way to gain experience in property management. You'll quickly learn how to screen and deal with tenants, scrutinize leases, and handle the routine maintenance issues associated with investment property ownership. Buying and occupying a multi-unit property can not only pay financial dividends, but the property management experience you gain will be invaluable should you ever pursue more advanced forms of real estate investing.

If you'd like to explore the 2-4 unit FHA option please give me a call or email today.

University City is one of my favorite neighborhoods in Philadelphia. One reason is the concentration of great cafes and coffee shops that make it so easy to meet up with old friends over brunch, read a Sunday paper while sipping a cappuccino, or just grab a cup of joe on your way to catch the trolley. The community newspaper, The University City Review, recently published a nice summary of the neighborhood's various coffee shops and cafes which you can read here. I have to wonder if there's anywhere else in the world where you can find such a variety of cafes in such a small area. Within a 10x10 block area there are authentic Cuban, Ethiopian, Parisian, and Mediterranean options as well as independent and local, regional, and national chain coffee shops such as Satellite Cafe, Green Line Cafe, Metropolitan Bakery, and Saxby's respectively.

UCReview's article is a great resource for anyone who is new to the neighborhood, or long time residents who need a reminder of all that their community has to offer. This article should also be required reading for all new Penn and Drexel students to let them know that there's a whole world of cafe culture right in their backyard. No need to go to all the way to Paris to find a great place to work on that novel you're writing, just head over to Green Line Cafe or Kaffa Crossing and get to work. You may even catch me there working on my next blog entry.