The Tranzon Auction Leader

Quarterly Newsletter - Fall 2006

The Tranzon Auction Leader is published quarterly by Tranzon LLC, national experts in accelerated marketing and auction sales. This E-newsletter focuses on trends, auction highlights, and expert analyses on how a professionally marketed auction may maximize an asset's value.

Returning to Normalcy

The latest reports on new and existing home sales confirm the cooling off of the hot residential market, which we forecasted last year. In fact, for the first time in 11 years, prices of existing homes dropped from year-ago levels, and the pace of existing home sales nationwide fell for the fifth straight month. In addition, the number of unsold existing homes on the market rose 1.5% to almost four million units, representing a 7.5-month supply, the highest since 1993. Sales of new homes in August fell 17.4% from the same time last year. The current inventory of new homes on the market, about 570,000 nationwide, represents a supply of 6.6 months.

Clearly, as we have stated before, the residential housing market is returning to normalcy after several years of unprecedented unit growth and price appreciation. Still, not all markets are acting in concert. The areas undergoing the largest slowdowns are the ones that experienced the biggest booms over the past few years, namely the major East Coast and West Coast markets, most of Florida, and previously hot markets away from coasts such as Phoenix, Las Vegas and Denver. Assets under pressure in these markets include existing homes, new homes, condos, vacation homes and residential investment property.

On the other hand, the residential markets in such areas as Dallas, Houston, Charlotte and Raleigh-Durham have held up relatively well due primarily to population and job growth, and we continue to find pockets of stable housing markets throughout the country as certain areas benefit from advantages in location, demographics and employment growth compared with other parts of the country.

What does all of this mean for the auction market? In short, it means that sellers in previously hot markets are beginning to accept the return to normalcy and are slowly becoming more realistic when valuing their properties for sale. It also means more unease among many homeowners who stretched when securing their mortgages with variable-rate loans, no down payments, interest-only loans and negative amortization loans. Some of these owners will be forced to sell in the coming months as loans reprice to market rates and they will be more likely to consider an auction sale due to the speed of the process, normally about six weeks from the time of the listing agreement to the auction date.

Buyers More Confident

We have noted that in recent weeks buyers seem to be regaining confidence and are coming back into the market. The current real estate environment is obviously a good one for buyers. This combined with abundant financing available will keep interest in upcoming auctions at a high level in many markets. Lenders are aggressively marketing loans to buyers to attract customers and keep volumes up. An exception to this is the investor market where we are seeing lenders tighten up lines of credit to investment buyers of single family or below investment grade properties. We have seen some pullback in demand from this segment. However, with interest rates steady on the short-end and declining modestly on the long-end of the maturity spectrum, buyers in general appear to be willing to come back into the market. They are no longer paying up for assets but they are quite willing to pay prices that would be considered good historically.

Over the next few quarters, we believe we will continue to see the convergence of lower seller expectations along with increased buyer confidence and a greater willingness to purchase, a climate which should allow most areas in the U.S. to experience a relatively soft landing versus a true crash in the real estate marketplace. It is important to remember that there is still tremendous interest in real estate ownership in this country, and that participation in the industry through direct ownership of real estate assets is likely to increase in the coming years.

As noted above, not every area of the country is experiencing the same real estate market environment. Here are select observations on various markets around the country from our member companies:

In New England, New York and eastern Pennsylvania, most areas have been red hot in recent years and as a consequence they are experiencing weakness today. This is manifest in declining prices and reduced volumes.

Existing home sales in the Washington D.C. area have declined about 10% in the last year. It is interesting to note that about 40% of the Washingtonians who have left the area since 2004 have migrated north toward Baltimore, where the average price of a four-bedroom single-family home is about $275,000 compared to double that in the Washington area.

Florida's markets are seeing lower pricing and higher inventory across the board due to soft demand and overvaluation (particularly in Naples, which a recent Bloomberg report deemed the most overvalued market in the nation). At a homebuilders' forum in Florida recently, builders were advised that the frail market they've been experiencing would stretch into 2007, with a possible rebound in 2008. Like in many areas of the South, Florida has the advantage of strong job-creation and high in-migration, which help to bolster residential construction and new-home sales. Additionally, the state passed new legislation this summer, which provides tax incentives to builders who construct affordable housing in Florida's coastal regions.

Florida's condo market is mixed. In some areas condo sales have maintained stability while others are at a veritable standstill. The Miami-Ft. Lauderdale market posted impressive gains in the first half of 2006, but the median condo sales price in that area, at about $221,000, is still slightly below the national average.

North Carolina, having avoided for the most part, a boom, is now avoiding a bust. Recent market analyses contend that home prices in North Carolina will continue to rise, particularly in the Raleigh-Durham area where sales prices are predicted to increase approximately 8% in the next year. However, the dissipation of job opportunities in the furniture manufacturing industry, a result of factory outsourcing to China, has had a minor but noticeable effect on the housing markets in the Winston-Salem/Greensboro/High Point areas. In North Carolina's coastal areas, most markets have weakened considerably following significant price appreciation in recent years.

Virginia's major markets also are mixed. Northern Virginia's red-hot market has cooled considerably and the slowdown has affected all residential property types. The Richmond area has seen a slowdown but the area has been attracting solid job growth from major corporate relocations, which has helped prop up the market considerably, particularly at the high end of the price spectrum. In the Norfolk/Virginia Beach area, inventory is up sharply, sales are down, and pricing on the high end of the market is weak.

New Homes and Vacation Homes

An ongoing softening in the new construction and new-home sales market across the U.S. seems to have eluded the South to some degree; housing starts and new home sales remain strong, especially in the Atlanta area, and the industry is seeing fewer builders pulling out of projects in Georgia than elsewhere. The continued stability in Atlanta's already competitive housing market is largely due to steady job growth in the region, combined with a high influx of retiring baby boomers and second-home buyers.

Throughout the East, there is a consensus among industry professionals that the condo market has cooled considerably, with many investors reverting back to rentals. In many metropolitan areas, a flooded market has led to many developers tabling or even canceling projects altogether. Others are addressing the stalled market by offering buyer incentives like eliminating condo fees or absorbing closing costs. Again, not all markets are acting the same. Charlotte "is as solid as a market can be," according to one Tranzon professional in that area, "and condo construction should continue at a strong pace provided that job creation stays at the same levels as it has in recent years." The metropolitan Washington D.C. area is suffering from an oversupply of condo units, and sales are dwindling.

According to the NAR, 30% of vacation home buyers hail from the South, and an even higher number of investment homebuyers are from the South, at 38%. However, second-home sales in this region have not eluded the market slump completely. In Florida, prices have clearly taken a tumble in areas where the market relies heavily on second-home sales. Similarly, waterfront homes in the Charleston area are considered overpriced for today's market conditions, with the majority being sold by owners. Tranzon professionals in that area predict that it will be another six months to a year before "seller reality" settles in.

Midwest and West

In the Midwest, a no-boom no-bust environment has been keeping the market relatively steady, although cities such as Chicago and Minneapolis are seeing weakness following relatively strong price appreciation in recent years. Continuing difficulties at the major U.S. auto manufacturers and their key suppliers will remain a problem for all residential property types in the region as thousands of both blue-collar and white-collar jobs are eliminated over the next few years.

Texas generally has been immune to many of the problems facing the residential markets in other areas of the country. Dallas, Houston and Austin continue to flourish in terms of population and job growth, and while some market erosion has occurred, the area is poised to experience a very soft landing due to vibrant economies overall as well as the successful performance of the oil and gas industries in recent years.

The Denver, Las Vegas and Phoenix markets are experiencing significant corrections which should continue for the foreseeable future. In most instances, seller expectations simply remain too high and major price adjustments are needed to in order to begin to balance market forces.

Although Southern California has not experienced significant price declines, overall activity is down substantially, creating weakness throughout the market. In Northern California volumes have declined and in some markets, pricing is quite soft. The same can be said for the areas Tranzon operates in the Pacific Northwest, although the Seattle markets appears to be defying weakening trends.

Overall, we believe the West Coast is behind the East Coast in terms of the adjustment of seller psychology to the weaker pricing environment. We are not seeing sellers, in general, begin to moderate pricing expectations anywhere near the extent to which is necessary to entice buyers back to the market in a big way.

Commercial Market Strong

For some time now, the commercial real estate market has been firing on all cylinders and no let up is occurring, nor do we believe one will occur in the foreseeable future. There seems to be an insatiable appetite for quality, income-producing commercial properties among both private and public real estate companies, as well as by wealthy individuals, and it is present among all asset sectors, particularly apartment, office and industrial assets, and developable farmland. We do, however, continue to see some pressure on more speculative properties such as vacant buildings, properties with issues affecting cash flow, and lower quality raw acreage and farm land. Overall, cap rates are remaining steady or are rising only slightly, and they remain at very low levels compared with just a few years ago.

Although commercial lenders are beginning to tighten lending standards a bit, affecting the marginal buyer, financing opportunities remain plentiful for financially strong purchasers of quality, income-producing assets as well as solid development projects, and this abundance of liquidity seems unlikely to dry up soon given the performance of the commercial real estate market over the past few years. As we have said before, this environment is an excellent opportunity for owners to sell commercial property and land at auction.

Looking farther forward, the commercial market is going to hit a rough patch, the only question is when. Lending standards and underwriting criteria have loosened materially which combined with high, “no-room-for-error” pricing, is going to lead to borrower issues. The increase in short-term rates engineered by the Fed, while arguably over for this cycle, has not necessarily been fully reflected in the debt service of many greener loans. In addition, any slowdown in the economy that impacts property cash flows could cause tight debt service coverage to tip over to the danger zone. Given these considerations, we feel that 2007 will mark an inflection point in the commercial markets and see a general weakening beginning sometime next year. Again, the huge amount of liquidity in the markets combined with the appetite for real estate investment will probably limit any adjustment to a modest correction. But on an individual property level, we expect some of the tighter deals to land hard.

Tranzon Auction Highlights

Tranzon Fox was recently employed as the Sales Agent for Donald F. King, Chapter 7 Trustee, in the sale of the assets of IPIX Corporation, a publicly traded company with a previous market capitalization of $100 million. The assets consist of patents, trademarks, and other valuable intellectual property and equipment.

Tranzon Giving Back to the Community: Tranzon Fox's Stephen Karbelk and Suzy Stegmaier recently visited a 4th grade class to do a math lesson about auctions. The children had a great time as they counted their fun money, practiced the auctioneer's chant and bid on toys.

Tranzon Moving High-End Properties in Slower Markets: Tranzon Driggers had success in selling a high-end home in the Fort Lauderdale, FL market recently. The property marketing efforts generated 165 inquiries. The competitive bidding among the five registered bidders resulted in a contract price of over $1.8 million. This sale is testimony to the auction method of marketing and the ability to generate a lot of interest and competition for a high-end residential property in a slow market.

Bidding Trends: A recent auction in Florida may be a harbinger of trends in bidding venues. The auction had bidders at the property participating at live auction, on the internet participating in the on-line bidding component of this auction, and on the phone. So three different avenues of communication were used to maximize competitive bidding at one auction!

Bidders, Bidders Everywhere: You would never know there was a slow down in the real estate market by attending a recent Tranzon Fox auction in the metropolitan area of Richmond, VA. A property in Chesterfield County had 74 bidders at the live auction. That's 74 bidders, not just attendees. Wow! And the results for the seller. Well let's just say it again...Wow!

The New England office of Tranzon Auction Properties proudly sold at ballroom auction in June 2006 "The Red House" located on Monhegan Island, Maine. The oceanfront property with panoramic views of Monhegan Harbor and the Atlantic Ocean had been made famous by artist, Jamie Wyeth, who portrayed the house in one of his most sought after paintings. With live bidding, on-line bidding and telephone bids, the property sold for $973,500 to a couple living in Germany. Tranzon reaches buyers on an international stage.

New Faces at Tranzon

The member companies of Tranzon welcome the following new associates to the premier real estate auction team in the country!

Brecht Palombo (Tranzon Auction Properties)
Robin Nixon (Tranzon Bippus)
Bob Brittain (Tranzon Driggers)
Tim and Cathy Jennings (Tranzon Fox)
Suzy Stegmaier (Tranzon Fox)
Jeremy Wiens (Tranzon Theurer Auctions)
Lori Waller (Tranzon TPC)
Marlane Ricks (Tranzon TPC)
Tobin Newman (Tranzon TPC)
Brian Hackethal (Tranzon TPC)

About Tranzon

Tranzon is a unique organization in the real estate industry. We are a real estate auction group founded on the premise that combining the powerful auction selling process with a highly professional organization with national resources, and regional member companies having local market knowledge, offers a compelling value proposition to sellers of real estate desiring to sell their property for the highest price possible in the shortest time possible. The member companies of Tranzon have experience in selling virtually all types of property and our staff includes the most respected names in the industry with backgrounds in finance, law, and accounting to name just a few. Tranzon member companies auction over 1,000 properties every year. Since our founding in November 2000, we have conducted auctions in 46 states and the District of Columbia generating over $700 million in sales proceeds for our clients.

Tranzon member companies are independently owned and operated. References to "Tranzon" refer to Tranzon, LLC, and its member companies collectively.

We are excited about our business and would welcome the opportunity to speak with you directly about our company and capabilities.

CLICK HERE to send an email to request more information on Tranzon or to have Jeffrey D. Levin contact you.

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THE TRANZON AUCTION LEADER is published by Tranzon, LLC., 7204 Glen Forest Drive, Suite 105, Richmond, VA 23226. Our toll-free number is 866-TRANZON.

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