IN THIS ISSUE: DEAR NEIGHBOR,

> Selling Considerations It is almost certain we will look back on this economic cycle as the catalyst for the most significant
transfer of wealth in our lifetime. Our retirement accounts have probably lost much of their value.
> Inventory Trends Home values are certainly not what they were. Each of us has a friend or neighbor that has lost a job.
Deficit spending has taken on a very brisk pace and is likely to accelerate.
> Buying and Investing There is no question we will see equity and real estate values surpass their previous highs...it’s just a
matter of time...perhaps a long time. In the short term, what goes up and what goes down will be in-
> Median Sales Trend fluenced by spending initiatives as much as by fundamentals. Government stimulus programs will
guard against systemic failure, but eventually, we will return to an economy where markets determine
> Regional v. Distressed value.
Market Statistics Today’s challenges are also opportunities. Everything is on sale. If we stay positive, understand the
facts, plan thoroughly and execute with resolve, we will survive and prosper.

> Lending
WHAT IS DRIVING THIS CYCLE?
Many believe there will not be sustainable recovery until such time as residential home values stabi-
lize and the value of collateral for existing mortgage loans is restored. The “Troubled Assets Recov-
ery Program” (TARP) was originally presented as a plan to purchase “toxic assets” (non performing
residential mortgages) to clean up a bank’s balance sheet and thus restore liquidity. Mortgages ac-
quired with TARP funds would then be evaluated for “loan modification” with the goal of keeping the
homeowner in the property rather than foreclosing and adding to already excessive inventory.
Instead, the taxpayer funded program provided capital to failing banks without acquiring the problem
loans. Loan modification activity is minimal and foreclosure rates are accelerating. While helping
select financial institutions, the “toxic assets” remain toxic and will need to be resolved before sustain-
Lou Muscarella able recovery can occur.
Realtor What started as a “sub-prime” crisis is now impacting every family’s balance sheet and caus-
ing some to choose alternatives which were not even remote possibilities a few years ago.
6641-A Old Dominion Drive We, as real estate professionals, encounter situations on a daily basis where a family has no choice
McLean, VA 22101 but to sell and owe more than market value. These families are not speculators that made a bad bet
with an exotic loan product. Rather, these are families that pay their bills, encounter some life altering
event, and simply don’t have the means to wait out this cycle.
Office: 703-556-4222

Cell: 703-405-3019
When these owner occupied properties become a “short sale” or foreclosure, a lender is now the deci-
sion maker and selling from a distressed position. The institutional sellers adopt a pricing strategy
Lou.m@c21nm.com
designed to sell the asset quickly rather than incur additional carrying costs. In markets where the
www.c21nm.com majority of inventory is bank owned, properties are now offered below reconstruction cost. Even sol-
vent owners are losing motivation to continue making payments on an asset whose value has dimin-
ished so significantly. The stigma associated with losing, or just walking away from a home, has di-
minished as well.
Recovery could be speeded by incentive, or penalty, to lenders which will make foreclosure a secon-
dary rather than primary alternative. Loan modification is a complicated proposition but is the means
which will keep responsible people in their homes and inventory off the market. One of the more com-
pelling recent considerations is empowering bankruptcy courts to modify mortgage loans; lower princi-
pal balances, extend repayment terms, lower interest rates. Some feel it would level the playing field
for homeowners and might motivate lenders to work with families rather than risk being bound by what
703-556-4222 the court might decide.
REAL PROPERTY IS A COMMODITY. Home values are established by the pool of ready, willing and able buyers; not Seller’s, not REALTORS®. To be a
successful seller in today’s market requires knowledge, thorough analysis, a valid strategy and most of all, commitment. Getting it wrong can be catas-
trophic.
The property detailed on the opposite page is a very specific example of what a tentative or misguided approach to selling a home can lead to. In a two year period,
this property lost 69% of it’s market value. Even more troubling is the realization that when this home finally sold, every home in the area, for sale or not, will now be
valued by comparison to this property.
The property was initially priced at $430,000, by the seller, in effort to sell the property with sufficient net proceeds to cover selling expenses and clear all liens. Ac-
cording to our analysis, the market value of this home at that time was in the $250,000 range. Over the next six months, the seller worked with his lender to pursue a
“short sale” and reduced the list price in substantial increments to as low as $219,000. Unfortunately, that was too little, too late. The listing expired and the home
was foreclosed upon in February of 2008.
Had the seller and lender agreed to offer the property at fair market value in September of 2007 ($250,000 rather than $430,000), the property would likely have sold
and netted the lender almost double the proceeds. Instead, the pricing decisions cost the lender $125,000 plus whatever the legal and carrying costs were to com-
plete foreclosure. While this level of loss is sustainable for an institution, a similar result for a private seller is simply devastating.

Inventory Vs. Sales Velocity SALES VELOCITY - LOCAL AND PRICE POINT CONSIDERATIONS
14,000

Normal
Inventory Values will continue to feel downward pressure until such time that the rela-
12,000
Pattern
Sales
tionship between Inventory and number of Homes Sold return to more nor-
10,000 Inventory mal levels. The graph to the left reflects a broader regional market and
8,000
Swells considers all price ranges. The nearer a property is to the beltway, the less
6,000
pronounced the imbalance. The gap between inventory and sold properties
Sales
is certainly broader in property priced above $500,000 than those priced
Decline
below. If you were to only consider those properties listed under $200,000,
4,000

2,000 you would find a very competitive marketplace for those trying to buy a
0 home. Multiple offers are now common on property offered at this level.

VALUE TREND - REAL ESTATE VALUES REMAINS LOCAL Median Sales Price Regional Vs. Distressed
$600,000
In the graph to the right, it is clear that the Regional value trend is lower. Me- Regional

dian values in the Metropolitan Statistical Area (MSA) have returned to levels $500,000
Dist ressed
2004
last seen in 2004. In a market heavily weighted toward distressed property, $400,000

the values are now back to 2002 levels. While values in Chevy Chase, MD $300,000
may have remained flat or even appreciated slightly, a homeowners in Manas-
sas, VA may have watched their homes decline in value by upwards of fifty $200,000

percent. As values continue to slide, more risk develops. Families that would $100,000 2002
have stayed the course lose motivation. Those with adjustable rate resets
have negative equity, cannot refinance and find themselves at risk of losing
$0

their home.

The top box details a Distressed market segment while the 2008 2007 % Change

lower pertains to a Regional perspective. The data reports Total Sold Dollar Volume: $201,028,850 $137,458,129 46.25%
actual results for the month of December and compares 2007 Average Sold Price: $201,836 $336,907 -40.09%
to 2008. The numbers tell the story: Median Sold Price: $165,000 $309,945 -46.76%

In the distressed market, median sales price declined over 40% Total Units Sold: 996 408 144.12%
in one year. At the new value, more than twice as many homes Detach/Attach Average Sold: $248,076/$150,774 $396,725/$256,125 -37.47%/-41.13%
sold in 2008 compared to 2007. Unfortunately, the majority of Average Days on Market 107 143 -25.17%
properties that sold were “short sale” or foreclosure listings. Average List Price for Solds: $222,835 $383,065 -41.83%
Another key indicator is the ratio of owner occupied to investor Avg Sale Price as a
purchases. In the lower price ranges, first time buyers are percentage of Avg List Price:
90.58% 87.95%

finding it difficult to compete successfully with investors. The

2008 2007 % Change
seller, likely a bank, prefers selling to an investor paying cash Total Sold Dollar Volume: $638,238,018 $652,219,723 -2.14%
or putting 20% down, rather than a first time buyer with a mod-
Average Sold Price: $422,674 $543,970 -22.30%
est down payment. The first time buyer is also obtaining FHA
(government insured) financing, which adds another layer of Median Sold Price: $340,000 $437,500 -22.29%
scrutiny to the property’s condition. Total Units Sold: 1,510 1,199 25.94%

The Regional market median sale has dropped by only 22% Detach/Attach Average Sold: $563,063/$332,342 $737,099/$446,586 -23.61%/-25.58%

year over year, but if the value trend continues, we will see a Average Days on Market 92 103 -10.68%
higher percentage of distressed sellers surface. The lower Average List Price for Solds: $464,447 $594,877 -21.93%
values go, the more likely it becomes that Institutions will be the Avg Sale Price as a
91.01% 91.44%
only sellers that can afford to sell. percentage of Avg List Price:
THE SILVER LINING. There are now specific areas within our market that have endured the distressed sales cycle. Within specific price ranges, property
values have stabilized and are even showing signs of modest appreciation. Cost of funds for qualified buyers are at forty year low’s. For buyers standing
on the sidelines, the timing may never be better.
Today’s values are what they are. We are all accustomed to a systematic approach of investing in our qualified plans but don’t necessarily consider the
same approach to acquiring real property. There exist “pockets of opportunity” within our market in which values are now compelling. Having the security of
a tangible asset under our control can be reassuring. A strategy of “dollar cost averaging” is not limited to Stocks and Mutual Funds.
An Investor acquired the property detailed below. After making an initial investment of approximately $30,000, their monthly debt service including principal
reduction, interest, taxes and insurance is in the $750 range. The property is now rented for $1,400 per month, or a positive monthly cash flow of $650.
When rented at this rate, there is a return on the equity investment ($30,000) in excess of 20% ($7,800) annually. The investor may feel there is potential
that property values could improve and result in a capital gain at some point in the future. They paid $125,000 for a property that sold for $399,000 two
years ago. Many would consider the downside risk to be minimal at this entry point.
ACQUIRING OR SELLING REAL ESTATE, as an Owner Occupant or as an Investor, is more complex in terms of process than at any time in the recent
past. Both sides of any transaction need to weigh an enormous amount of information in order to gain the confidence to commit. Once the transaction is
framed by the REALTOR®, the Buyer, Seller, Lender, Appraiser, Title Company, Insurance Agent and Attorneys each need to do their job well and on time,
to get the transaction to the settlement table. Tax consequences can be a significant consideration depending on the client profile and transaction. When
representing clients in any real estate transaction, we recommend they consult their CPA or Tax Attorney to determine how a transaction might impact them
specifically.

September 2006
This property sold for
$399,900 . The purchasers
financed 100% of the pur-
chase price.

September 2007
The property was listed for
sale for $430,000. It was
subsequently reduced in
increments to the $219,000
price, but did not sell and
expired in February of 2008.

March 2008
Now a “Bank Owned” prop-
erty, the home came back
on the market at $165,000,
was subsequently reduced
to $130,000 and sold in
October 2008 for $125,000.

December 2008
The Investor took posses-
sion of the property, painted,
replaced carpet and re-
placed appliances. It then
rented in 15 days for $1,400
per month.
 A PERSONAL PERSPECTIVE
The team you can We are in uncharted territory. Some believe that a “hands off” approach by government is most appropriate
count on! and markets will self correct. Others are looking to Government intervention as being the only way to avoid
That’s Us! some level of systemic failure within our financial system. Either way, life has changed.

That’s us! Never before have concerns on Main Street been so conflicting with the needs of Wall Street. Taxpayers re-
sent what they consider a “bailout” of those perceived to have profited from the cause of the problem; bad
loans. Wall Street sees the “stimulus” as what is needed to restore stability; first to Wall Street, then to Main
street.
For Your Mortgage
Needs Whether Stimulus or Bailout, there will be unprecedented amounts of taxpayer dollars directed at resurrecting a
healthy economy. The new administration pledges to act swiftly, prudently and with integrity. They have the
incredible challenge of balancing the needs of taxpayers trying to make ends meet while keeping the Auto In-
Betty Connell dustry viable and Banks in business. To a great extent, the winners and losers will be chosen. The stakes
Loan Officer have never been higher.
1st County Mortgage, As Real Estate Professionals, we have a unique opportunity to experience the human side of enterprise. We
find great reward in helping families realize the American Dream of Homeownership. Too often now, we are
LLC
watching that dream come apart and witnessing the trauma associated with a family losing their home.
540-349-1221
Who is to blame? Is it the homeowner that bought too much home or chose a loan product that offered little
Betty.connell@ security? Is it the lender that made the loan with little regard for the borrower’s ability to repay? Is it our Legis-
firstcountymortgage.com lators who mandated lending to individuals who didn’t qualify for home loans using traditional guidelines? Is it
all of the above, or does it even matter? Likely not.
Jim Preuss Those of us who grew up with Depression Era parents recall the wisdom of our fathers. I think our country has
changed and has moved in a direction more in line with the principles they taught us. Dave Ramsey likely has
Loan Officer this right...the new status symbol is the paid off home mortgage and the BMW is no longer a priority.
1st County Mortgage,
LLC SUMMARY
540-349-1221 If you are considering a real estate transaction, thorough analysis and competent representation are essential.
We are in a transitioning market. There is potential for profit, as is there risk of loss. If we understand the un-
Jim.preuss@ derlying facts, we can continue to make good business decisions; logically and without emotion. I am a real
firstcountymortgage.com estate professional and accept responsibility for keeping my friends, neighbors and business community in-
formed as to all aspects of things affecting the real estate portion of their holdings.
If you are currently listed for sale, this is not a solicitation. If you have a real estate question, I will be happy to
answer it, or find the answer. If you have a real estate need, I will appreciate an opportunity to compete for your
business. As a CENTURY 21 Company, I can help you with real estate needs here, or anywhere in the world.
Our team is very good at what we do...our results demonstrate that. Don’t settle for less.

Lou Muscarella Sincerely,

Realtor

Lou Muscarella
Office: 703-556-4222
Cell: 703-405-6494 Lou Muscarella
Lou.m@c21nm.com Realtor
www.c21nm.com

©2009 NM Management, Inc. Equal Housing Opportunity. Each Office Is Individually Owned and Operated. Information contained herein deemed reliable but not guaranteed.