So Cal Real Estate News

I’ve been going back on forth on the bailout bill since it was introduced, but I just finished a phone call that’s got me jumping onto the pro-bailout bandwagon.

I just got off the phone with an efficient but polite collections representative folks at legendary sub-prime EMC Mortgage. We were discussing a “short sale,” which is anything but short. Basically, it’s the sale of an “upside down” (over encumbered) property where the lender takes a reduced or “short” payoff to enable the sale. The seller is a client of ours, and reflecting on her situation gave me a renewed desire to see at least the core parts of the bill passed.

This borrower is now upside down due to both market declines and negative amortization. A change in her family situation has created major challenges, and there’s no way she’ll be able to make her payment once massive scheduled payment reset kick in down the road.

When she first called me a few months back, I referred her to “Trouble making your mortgage payment? 7 ways to get back on track.” I suggested she review that post, then contact her lender to try to work out a waiver of the negative amortization and reduction of her interest rate. After about two months, EMC told her they weren’t interested.

It seemed like EMC was just too busy dealing with people whose loans had already reset. They didn’t want to deal with borrowers whose reset is still months away. They basically told her they’d talk to her then, but she felt that if they wouldn’t make a commitment to reduce the principal balance and interest rate now, she’d be better off biting the bullet sooner than later.

That’s when we started on the short sale. Despite another short sale listing across the street and a new REO listing a few houses away, we now have a buyer in escrow and are awaiting approval from EMC Mortgage’s loss mitigation department.

Were the Mortgage Relief Bill already in place, I’m pretty sure the owner would have been able to keep her home, we’d have one less listing in a saturated market, and EMC’s loss would be lessened, and the home owner’s equity increased. Pretty much a “win” all the way around.

Under the provisions of the Mortgage Relief Bill, as I understand them, if EMC accepted a write-down of the loan to 97% of current market value, FHA would insure a refinance with at least 3% equity if the borrower actually qualified, which I’m pretty sure would be the case in this situation.

Some people oppose the “bailout” bill because they feel like it rewards greedy lenders and imprudent borrowers. In this case, however, the lender would still have to write down at least $100,000. The homeowner, a hard-working, honest first-time buyer who trusted her lender too much, has lost her original equity and has certainly learned from her mistake.

However, the bigger issue isn’t helping undeserving borrowers & homeowners, but cutting back on the oncoming wave of foreclosures to help our economy by stabilizing home prices and keeping more banks solvent.

Some have suggested that private initiatives could do the same. They might to some extent, but they sure haven’t helped any of the upside down sellers I’ve worked with so far. The truth is, the bailout bill itself is significantly limited in how many homeowners it would help.

From where I sit, on the front lines of the market crash, it sure looks like it will take both private and government assistance to get us out of this hole, or at least keep us falling into one unseen since the Great Depression.

The increase in sales indicates prices have fallen to a reasonably affordable level. But the oncoming wave of foreclosures is apt to drive prices even lower, resulting in even more foreclosures and a spiral downward only compounded by energy, interest, inflation, and manufacturing woes.

We’re all in the same boat, & I’m not in favor of letting it sink just because someone else kicked a hole in the bottom. Sometimes even the “innocent” have to help bail out the boat! Private and government initiatives alike.

I’m not in favor of bailing out anyone who can’t qualify for the new loan. No more “liar loans,” please! If I understand this bailout bill correctly, the FHA would only loan to homeowners who could qualify.

In this specific case, what my seller was trying to negotiate with EMC was similar to what the bailout’s proposing. I’m sure she’d make it work if her principal balance was down to 3% below market instead of $100,000 over market and if she had a fixed FHA loan at say 6.25% instead of an adjustable about to adjust to 13%.

There’s plenty not to like about the govt. bail out, but the basic concept of the lender writing the loan down to a little below market value in return for FHA rewriting the loan if the buyer qualifies should reduce the foreclosure onslaught somewhat. I think the Senate tends to produce better law then the House, and they did some significant changes from Barney Frank’s original bill. They got more of it right than I expected.

We’ve seen a price correction around 25%, which is enough to bring buyers back even in such a negative environment. If it weren’t for all the additional REOs in the pipeline we’d probably be nearing a price bottom, based on current activity.

But the decline of an additional 25% that some people are predicting due to the REO problem would trigger a whole new round of foreclosures–a downward spiral of doom that could be worse than the Great Depression. That would cost FHA and taxpayers more than reducing the flood by guaranteeing some loans to stem the tide somewhat.

To me, it looks like a “pay me now, or pay me later” sort of thing, regardless of whose fault it is.  And there’s plenty of blame to go around, believe me! (see “How we got into this mess“)

“The nation is in the throes of a housing downturn that is shaping up to be the worst in a generation,” according to Harvard’s State of the Nation’s Housing report, released Monday.

“The slump in housing markets has not yet run its full course,” according to Nicolas P. Retsinas, the director of Harvard’s Joint Center for Housing Studies. “Mortgage rates have barely responded to the aggressive easing of the Federal Reserve, the supply of for-sale vacant units continues to grow, and much tighter underwriting is locking many would-be home buyers out of the market.”

This is pretty much old news, but it’s a pretty accurate summary of what’s been going on both nationally and here in Southern California. Looking ahead, Retsinas says, “At some point demand will bounce back. Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability. It is difficult to judge how far away from these conditions we may be.”

We certainly agree with that last statement, as we’ve been saying since last November (see “How low will prices go?“). However, we think the significant drop in Southern California home prices coupled with a moderately strong local economy and lack of overbuilding in the coastal plain may well lead to a recovery beginning in the next 6 to 20 months.

For more details, see Harvard’s press release, for the full report, click HERE.

Remember, real estate is local, and projections for your neighborhood may vary, even if Harvard is correct. To see our latest projections post, check out So Cal home price bottom near?

The Southern California housing news has been coming fast and furious over the last week. May median prices drown dramatically from a year ago and modestly from last month, foreclosures up but maybe peaking, interest rates up, May sales volume the highest since last August but the lowest May since 1995.

The other day the Orange County Register’s front page screamed “Bottom Near?” The vast majority of readers responding to their poll screamed back “No!” by a margin of 3 to 1.

From our perspective, there are several hopeful signs, but we still don’t expect a bottom of prices in most Southern California counties until 2009 at the earliest.

The Good News:

Today’s low prices, down 20% - 35% from the peak in most So Cal communities, continue to attract buyers, despite slowly rising interest rates, high gas prices and rising unemployment. If a home is properly priced, staged, and marketed, we’re still usually able to get it into escrow within 30 days. (See “How to sell your So Cal home for top dollar in 30 days.”) On the other hand, today’s buyers are taking their time and waiting for the home and price that works for them. Plus, with tougher new lending criteria, some buyers aren’t able to obtain financing.

For example, we received multiple offers on our two newest listings within two weeks, but in each case it took us several additional days of negotiating to put the sale together, and part of the difficulties related to finding loans that worked. Another encouraging sign, a Bellflower condo we’ve been watching for some time just went into escrow after sitting for months. No major changes–other than the disappearance of lower priced competition.

Foreclosures in Southern California reached another record high in May. However, in Orange County homes starting the foreclosure process declined from April, so we could be nearing a peak in foreclosures, which is what we’ve been expecting.

The Big Questions:

There are several unknowns which are critical to prices in Southern California bottoming out:

1. The economy: Major job losses would trigger additional foreclosures and distressed sales and could lead us to yet another step down in prices. However, the weaker dollar should prove a boost to U.S. manufacturing. So far, the current recession (if it is a recession) has been relatively mild.

2. Interest rates: Mortgage rates have been moving up slowly but steadily for months. 30 year conforming fixed loans are now at 6.3%, up from 6.2% a week ago. Anything below 7% is historically low, but as rates rise so do payments.

3. Mortgage lending: Since last summer lending practices have gone from ridiculously loose (see “How we got into this mess“) to to overly stringent. Hopefully the pendulum will swing back to reasonable lending standards which will allow more buyers to qualify. If not, the current boomlet could run out of buyers and steam fairly soon.

Our Take:

We still agree with Freddie Mac’s Chief Economist Frank Northaft’s words at last fall’s California Realtor Expo: “We’re in totally uncharted territory. Nobody knows for sure what’s ahead.” (See “How low will prices go?“)

But we still love to at least take educated guesses. Although we still think the odds are that we’ll hit a price bottom early in 2010, we think the rapid decline in prices may lead to a bottom this coming winter instead. Overall, things don’t seem quite as gloomy as they did several months ago. Especially encouraging is the continuation of buying despite rising rates and the end of the traditional spring buying season.

What to Do?

We still think for most people their personal situation should dictate their real estate decisions (see”What to do when nobody knows what’s next“).

Buyers: The market may not be at a bottom, but it’s closer to one than it was a year ago. We think this coming December will be an excellent time to buy, but most people are just too busy with the holidays to even think about house hunting then. Which is why December’s almost always the best month to buy. No need to hurry, but if you find a home and a loan that work for you & you’ll be staying put for a long time and have good job security, maybe you should pull the trigger & start paying down that 30 year mortgage.

Sellers: If you need to sell this year, sooner’s better than later. Next year’s a dice roll, and prices may not be back to today’s level for several years. If you like to gamble, hold on for “as long as it takes,” but if you want to get on with your life, the market’s decent right now, but seasonal declines will probably be setting in soon. (See “Predictions 101: Our 2 market cycles“)

The one thing you shouldn’t do is make your decisions based on what your neighbor got a year or two ago. He won the lottery–you didn’t. At least not as big a prize as he got. But if you bought more than five years ago, you’re still in good shape.

“Upside Down Home Owners:” If you can make the payments & don’t need to move & the loan won’t have a major uptick soon, you can probably ride this thing out. But if you’re going down, it’s time to talk to your lender about serious loan modifications. For more, check out our post on “Trouble making your mortgage payment? 7 ways to get back on track.”

These are challenging times, but they are not bad times. If you need a little help putting things in perspective, click on “perspective” in the column to the right under “Categories” (you’ll need to scroll up from here).

As always, your comments are welcome. Stay tuned for more updates. And thanks for stopping by.

Blair and I have both worked for the same owners our entire careers: Bruce Mulhearn owns the firm, while Clint Roe owns & manages our office. Both were experienced brokers back when I first got my license in 1980.

Bruce and I have climbed Mt. Whitney & skied Mammoth together, usually competing against each other all the way. He’s an enthusiastic optimist, as are most successful entrepreneurs.

Bruce mails out an upbeat letter to all 800+ of his agents about twice a month. This week’s letter is entitled “A Proper Perspective–Past, Present, and Future.” Please understand–we’re not changing our basic market predictions (see “How low will prices go?“). However, we do think Bruce helps put the current downturn in perspective. Here are some excerpts:

The current financial morass is painful; however, it would be wrong to rank it with many of the past 100 years. The problem is we have a cultural rut of pessimism, according to Zachary Karabell of The Wall Street Journal. It drains our collective energy, blinds us to possibilities, and erodes our world leadership.

Consider our current situation:

1. Unemployment: 5%
2. Inflation: 4%
3. Economic Growth: 0.6%
4. Housing has delcined primarily in four states–by approximately 20% We conveniently forget that in these states property values increased over 100% in the previous five years.

Hardly statistics to celebrate, but a far cry from the real crises of the 20th Century.

Consider the Great Depression:

1. From 1929 to 1932 the Dow went from 380.33 to 41.22–a decline of 89%.
2. By 1933 unemployment was 24.9%; after seven years of the New Deal it was still 14.6%
3. 4,000 banks failed in 1933.
4. Not only did millions lose their homes, most of them became homeless and lined up at soup kitchens.

Or compare our current situation to the ’70s and ’80s:

1. 1977 unemployment 8.5%. 1982: almost 10%.
2. From 1973 to 1974 stocks dropped 46%, from 1067 to 560.
3. 14% inflation under Jimmy Carter, with odd & even days to line up for blocks to buy gas–at a higher percentage of consumer spending than today.
4. In 1979 I had over 20 offices and 500 agents; by 1982 I was down to 6 offices with 125 agents–but we survived.

Dave here, interrupting Bruce for a few paragraphs with an “Amen!” This market really isn’t all that bad, at least in terms of sales volume. The slowest market I ever say was in 1990 - 91 during the build-up to George H. W. Bush’s first Iraq war. For months there were virtually no buyers. I took listings off the market.

The Southern California defense bust housing crash of 1991-1995 was also much worse than today’s market, in terms of a slowdown in sales, but not in price declines. I remember a story told back then by Century 21’s CE0: When he flew in to Honolulu for a statewide C-21 rally back then, he was greeted by hundreds of cheering, shouting, horn-tooting, confetti-throwing, gold-coated C-21 agents. In the midst of all the hoopla, he heard a passing businessman remark, “Guess they finally found a buyer.” True story!

Today’s just not that bad! The last listing we took, which went on the M.L.S. just 3 business days ago, had two competing offers within 24 hours, although Blair was still negotiating both of them last time I checked (5803Hayter.com). Likewise, although it took a couple weeks, the listing we took prior to that one also had competing offers, despite being one of those troublesome short sales (AdwenStreet.com). While the strategies we discuss in “How to sell your So Cal home for top dollar in 30 days” will work in almost any market, they work better when more buyers are out there, and that’s the case right now. Now back to Bruce Mulhearn’s thoughts:

There were also tough times during the tech blowout at the end of the century.

Tech stocks dropped from 5,000 to below 2,000. Teal estate has never had that kind of downside. But there was also an upside due to technology, which led to invaluable innovation and welath creation in the USA and around the world. Hundreds of thousands became wealthy.

America has always been marveled at and envied. I believe that 95% of the world still wants to live here. At the start of the 20th Century Britain’s ambassador to the U.S., Lord Bryce, remarked about “the hopefulness of American’s people.”

While there may be strength in America’s self-criticism 100 years later, there is a fine line between self-criticism and defeatism. We need to snap out of our deep pessimism. Our fears put us at a disadvantage in today’s world.

I’ve been to both China and Dubai, where you can feel electricity in the air–the hum of activity, ambition, and sheer optimism about the future. It’s both a strength and a source of energy, even though the Chinese stock market was down almost 50% in the past months, and there have been severe real estate crashes in both Shanghai and the Persian Gulf.

We have a choice in life. We can view our circumstances through grime-encrusted lenses, or with more flexibility about our so-called weaknesses. I’m not suggesting rose-colored glasses, but a need to break this downward spiral. Let’s not have the world declare, “What happened to the American Spirit?”

This is the second of three posts on three homes that recently closed escrow on the same block in Lakewood, CA. The first was “A Tale of Three Listings: The probate seller’s big mistake,” and in a few days we’ll post the last, “The team that made it happen.”

I “flipped” my first house back in the late 1980s, before those cable networks that made “flipping” popular were even invented.

As an experienced Realtor who has advance access to listings & who can save on commissions, you might think that I’ve flipped scores of homes since then, but you’d be wrong. I’ve actually only flipped a handful or two of properties over the last 20 years. That’s partly because I’ve become more of a buy and hold investor, but it’s also because “flipping” is much harder than it looks.

In the early 90’s a colleague and former partner of mine began “flipping” homes as a business. He developed a model that worked well for him, with some unique means of acquiring the properties you won’t find at a seminar or on a DVD or TV show. According to him, the key to success was acquiring the property substantially below market. As he explained it to me once, “We’re basically pirates. The key is to steal the property.”

Each flip has to be carefully evaluated, but I want to pay at least 20% below market, preferably 25% - 30%. My colleague prefers more than that.

I have to laugh when I watch “Flip this House” and similar shows, especially the part at the end where they compute their “profits.” After spending way too much overdoing their improvements, some bright-eyed young Realtor is brought in to rave about the house & tell the flipper how much they’ll get for it.

These agents may be young, but they’re well schooled in the number #1 way to get a listing–tell the seller what she wants to hear (see ” Top 5 ways NOT to pick an agent“). They generally quote an unrealistically high price. Then on the screen the show computes the flipper’s mythical profit, completely ignoring costs of purchase, selling costs like commission, or holding costs like monthly mortgage payments.

Well, that approach to flipping may sometimes work when homes are going up by thousands of dollars every month because everybody and his dead dog can qualify for a loan (see “How we got into this mess“). But in a flat market, let along a down market, flipping calls for skills that even most Realtors don’t have.

As is illustrated by this sad story.

When this home hit the market last September, it was priced 5% - 10% below market. It was the classic case of the lazy seller and lazy agent. The home was occupied by a pack-rack tenant who also made it almost impossible to show. The correct remedy would have been to get the tenant out & do a quick & cheap fix-up, rather than drive down neighborhood values. Instead, they priced it low & sold it quick. It was the first home in the neighborhood to list below $400,00, and the agent who bought it negotiated the price down to $390,000. He opened escrow late in September and closed it mid November, according to the SoCal Multiple Listing Service.

I thought about buying it myself, but I knew prices always move lower as we move through the winter (see “Our Two R.E. Market Cycles“), and I expected the coming winter to be especially brutal. Plus, the selling price wasn’t near 25% below market.

Long story short, it was bought by an agent who bragged to me how he’d flipped 60 homes. I hope he banked his profits. He had the concepts down, but not for a down market. During the five months it took him to close escrow on his purchase, fix it up, and put it on the market, prices plummeted. He did a nice job of sprucing it up and staging it, but he was used to prices going up $5,000 or more a month. This time, they were going down.

After wasting a couple weekends trying to sell it by owner, this Realtor put the home in the Multiple Listings for $475,000 on February 8th. He eventually reduced it to $449,000, which he told me was what he needed just to break even. I guess he didn’t, because it was later reduced to $429,900. In mid April it went into escrow and it closed on May 21 at $428,000.

That was less than 10% over what was paid for the home, and resulted in a loss of over $30,000 by the flipper’s own projections. Four months of work to lose over $30,000!

In a normal market, let alone in the current down market, flipping is not for amateurs. In this case, it wasn’t for professionals, either!

Please bear that in mind next time you’re watching “Flip this House!”

In a few days, we’ll discuss the third sale on this same block, “the team that made it happen.”

Today we take a look at the first of three listings on the same block that closed escrow in the last few weeks. Two of the homes illustrate common but very costly mistakes sellers make. The other illustrates both pitfalls and strategies for success in today’s market.

Let’s call them “the probate seller who didn’t listen,” “the Realtor/flipper who didn’t think,” and “the team that made it happen.” Today we’ll take a look at . . .

“The Probate Seller who Didn’t Listen”

We first met “Sue” last fall, shortly after her mother died. Sue was the executrix, and wanted to talk to us about selling her mother’s home.

We met at the property in late September . The home had a lot of deferred maintenance, but Blair & I both thought the family would be wise to get the home on the market quickly. We were pretty sure that the market’s downward spiral would only be made worse by the approaching winter slow season (see “Predictions 101: Our 2 market cycles“).

We felt with a little intense effort the home could be in escrow before the winter holiday slowdown, and we were happy to do our part to help. That included advancing money for some needed work, assisting with several other things to speed things up.

We knew what needed to be done in the face of a market we knew was moving down quickly, and we were willing to devote “over and above” effort to make it happen. I’d rather spend a few hours moving furniture in October than days sitting a slow open house in December.

We also had another reason for trying to move things along. After years of handling probate sales, we’ve learned that closing the sale on the family home, while difficult, invariably helps the family turn a page and move forward. The family almost always thanks us for moving things along.

A Lesson from an Earlier Probate Listing

We’ve closed several such sales of family homes over the last two years, and invariably the family tends to drag things out while prices decline. For example, on one Long Beach sale the two daughter-in-laws wanted to spend an estimated six months sorting, boxing, and holding garage sales on the things their father-in-law had accumulated over fifty years in the home. We advised the family that not only would that prolong a painful process, but the home was almost certain to decline by thousands of dollars every month they delayed.

“You’ll waste six months of weekends, make a few hundred dollars on the garage sales, and lose tens of thousands of dollars on the sale of the home,” I advised them. “Do you really think that’s what Dad would want?”

Most husbands know it’s dangerous to get in the way of a wife with a plan. (I imagine wives experience the same issues with husbands with a plan, since all of us tend to be stubborn, but I can only speak as a husband.) The two daughter-in-laws had their game plan, but fortunately for everyone, the husbands took our advice.

It only took the family one weekend to get what they wanted out of the house. We’ve developed a lot of resources for situations like this, from wholesale auction houses to antique dealers to non-profit thrift stores like the Salvation Army and Food Finders that will actually clear out your cupboards for you. Not to mention painters, handymen, and rehab people. In fact, I’ve got to finish this post pretty soon so I can get over & check on a crew that’s refinishing floors and painting the inside of a listing we just took.

Amnyway, in about two weeks, that home was on the market, in another two it was in escrow, and our swift action saved the family at least $50,000 of their inheritance. By the time we were done, the whole family was glad they listened to us.

A Different Story This Time

Back to the seller who didn’t listen. To speed things up, we began some initial work right away, arranging for a garage sale and large item pick up to help with the staging as well as a termite inspection to identify what required corrections we might want to take care of in advance to improve marketability.

The seller wanted us to meet with her and her husband to complete the listing agreement, and we kept encouraging her to move things along, but other things kept coming up. First they were going to be out of town, then they had guests visiting, then it was something else.

October is generally a decent month for selling, but as you move into November things slow dramatically, and we knew this winter was going to be especially brutal. (DataQuick and other closing reports reflect this slowdown in the months when those sales close escrow, which is why January and February are normally bottoms for closings, as we explain in “Two big problems with DataQuick’s monthly median price reports“).

We were just trying to move things along in a timely fashion, but the Sue the executrix/seller just had other priorities. We knew that this wasn’t going to be as difficult as Sue thought, & we were ready to help expedite things to make it easier on the family.

There is a tendency for people to list with someone who just tells them what they want to hear. We were telling Sue that the winter holidays were breathing down our neck, and time was of the essence. We also felt some minimal cosmetic improvements would go a long way to maximizing the family’s proceeds. And we were willing to advance the money and arrange for the work.

Now, you can’t survive in this business for 28 years without learning how to be diplomatic, but sometimes people just don’t want to hear the truth no matter how diplomaticly it’s presented.

So Sue went out and found an agent who would tell Sue what she wanted to hear, and that was the last we heard from Sue.

Three months later, near the end of January, the home was listed with a fairly experienced local agent who apparently saw no time urgency nor any need for cosmetic improvements. By then, prices had dropped about $40,000 in the neighborhood. No painting, staging, or corrective work was done, another big mistake in our opinion, but not as big as the delay to market. A few months later the price was reduced by $40,000. Two months after that it went into escrow for $30,000 below that reduced price.

It finally closed escow in mid May for $320,000. I’m fairly confident that, had the seller followed our suggestions and time table, we could have sold it for around $425,000, with around $5,000 of painting and work. So in exchange for not having a “pushy” Realtor, Sue lost her and her two sisters about $100,000 and six months.

One Big Mistake

Sue’s main mistake was ignoring the advice of an experienced agent who knew what he was talking about. Instead, she listed for the most common wrong reason out there: Sue found an agent who told her what she wanted to hear (see ” Top 5 ways NOT to pick an agent“).

Disclaimer: I’m not saying experienced Realtors are infallible. (For example, in December of 2007 it appeared to me that the market had bottomed. That was based on an unseasonable December increase in sales and prices. Indeed, that pickup I noticed resulted in DataQuick’s reporting a peak last spring. But I didn’t see last spring’s increase in interest rates, and greatly misjudged the impact of the sub prime crisis. On that one, I relied on the input of the “experts” like DataQuick’s John Karevoll. A really big mistake!)

But I am saying that a thoughtful, honest, experienced table probably knows things the average seller doesn’t. His or her input is worth considering. It’s foolish to simply reject something you don’t want to hear. It’s even more foolish to pick an agent just because he tells you what you want to hear, no matter how enthusiastic he is in agreeing with you. But that’s much easier said than done.

Telling the sellers what they want to hear is the easiest way to get a listing, and almost every agent knows it. In this market, it’s also the easiest way to cost the seller money and to take a listing that expires.

Never make your decision based on the agent’s analysis–instead, check out the agent’s track record and experience, and talk to sellers that agent currently has listed (ask her to bring a complete MLS print-out of all their listings for the past two years. Then ask another agent to print out the same list and make sure the two lists match.)

In a difficult market, picking the right agent is probably the most important decision you’ll make. For more tips on agent selection, you might also want to check out “<a href=”http://socalrealestatenews.com/blog/top-10-ways-not-to-pick-a-listing-agent/” target=”_blank”>Top 10 ways NOT to pick a real estate agent</a>”.

So that’s the sad story of “the probate seller who didn’t listen.” Next is the case of “The “flipper” Realtor who didn’t think,” a home across the street and down from Sue’s, and how that home, like Sue’s contributed to the entire neighborhood’s decline in value.

Please feel free to add your thoughts or questions as a comment below.

UPDATE: Katelyn Elizabeth Newman checked was born at 3:16 a.m. Wednesday morning, 5/28, weighing in at 8 lbs 6 oz, 20 inches. Mom, Dad, baby, grandpa Dave & others all tired but doing well. Film or at least photo at 11. Hopefully.

Guess I’m getting a little first-hand help with that whole keeping real estate in perspective thing we’ve been posting about periodically. (See “A Memorial Day perspective on our housing market,” “A little perspective,” or “A little more perspective.”)

Although Blair & I had been expecting his wife & my daughter Beth to go into labor this week with their second child, I was still caught a little off guard when Kaiser checked her in after her weekly check-up this morning.

It’s now over 12 hours since they started the ptosin to induce her, & she might be working on it all night. Meanwhile, after visiting Beth at the hospital, moving cars, & taking care of some preparation work on a new listing this morning, good old “Papa Dave” has been providing day care for Beth’s two year old daughter & her almost two year old cousin.

So that promised “Tale of Three Listings” post is still in my head rather than on this blog. Sorry.

Don’t even have time to post about all the interesting real estate news today, although it’s pretty much what we’ve been predicting all along.

Hopefully we’ll have some posts up shortly. Maybe a baby picture too.

Just more evidence that, regardless of the market’s crazy cycles, life does go on.

And there really are things in life much more important than real estate.

Editorial note: This special Memorial Day post is part of our continuing effort to keep a proper perspective on material things in general and real estate in particular. For others, scroll down to “Categories” in the right hand column & click on “Perspective.” Our promised “Tale of Three Listings” post should be fairly soon, once Beth delivers her baby.

Warning: This post has a spiritual emphasis. You’re free to disagree or skip it but please don’t complain about it. There really is more to life than real estate.

Got up this morning to see my neighbor’s flag up for Memorial Day. Their son-in-law, Dusty, woke up this morning in Iraq.

He’s one of millions of Americans who have risked their lives so you and I could wake up this morning in a free nation. Since the Revolutionary War was fought 230 years ago, hundreds of thousands of America’s best have paid with their lives for things we too often take for granted.

These brave men and women certainly deserve a flag flying in front of every home and business today and a “Moment of Remembrance” as tokens of our gratitude.

A day like today helps keep our current economic woes in perspective, as do the recent tragedies in China, Burma, & Oklahoma. People have lost their children and their homes, & I’m upset about losing a little equity or the price of gas.

Yesterday in church Pastor Chuck spoke about how little regard we should really have for those material things that consume too much of our time. He thought St. John’s description of heavenly streets “paved with gold” helps put material “treasures” in perspective.

Reminded me of an old joke about the multi-billionaire who supposedly talked God into letting him to take some of his wealth with him after he died. When he met St. Peter at the Pearly Gates, he was pulling a huge trunk behind him which he had filled with gold.

“Sorry, you can’t take anything with you,” old St. Pete told the billionaire.

“Actually, I’ve got special permission,” replied the billionaire.

“Sounds fishy to me, but I’ll check it out,” said Peter, picking up his Verizon wireless Voyager [unpaid product placement].

After a minute talking to Central Processing, Peter put down the phone with an amazed look on his face. “I’ve never seen anything like this before, but you’re right–you can bring it in with you. Now I’m curious–would you mind showing me what’s in the trunk?”

Proudly, the wealthy old guy opened up his suitcase to show shining blocks of gold.

Peter looked at it & scratched his head. “Asphalt?”

In America, at least, it’s too easy to sacrifice things that really matter for temporal things that don’t. Many of us live as if money were our God.

Luke 16:13-15 reports an interesting discussion Jesus had with some money-loving fundamentalist religious leaders of his day.

“No servant can serve two masters,” he said, “for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.”

I’ll let Dr. Luke tell what happened next:

The Pharisees, who were lovers of money, heard all these things, and they ridiculed him. And he [Jesus] said to them, “You are those who justify yourselves before men, but God knows your hearts. For what is exalted among men is an abomination in the sight of God.”

Shocking, but true. When it comes to money, “What is exalted among men is an abomination in the sight of God.“

Jesus spent a lot of time teaching those who would listen to value God and people above all, and to trust God to provide our daily needs. (See, for example, Luke 12:13-34, where he really puts it all together.)

Blair and I hope you enjoy your Memorial Day. Put out the flag, spend some time with the family, & maybe take some time to recheck your priorities. With God’s help, we can all live lives that make a difference, and leave this life with more than a trunk full of asphalt.

There are some amazing opportunities for buyers right now. Two of them, “short sales,” and REOs, also involve some amazing incompetance by the same lenders that helped get us into this mess. (see “How we got into this mess“)

We saw both at work today at two homes about 100 yards apart in Downey.

Amazing opportunities for buyers:

This morning my colleague Blair and I were shooting a virtual tour for a new “short sale” listing we have (you can check out some of it at AdwenStreet.com). A “short sale,” which is anything but short, is a sale in which the lender takes a “short” or reduced payoff to facilitate a sale. The last one we closed, in Lakewood, saw the lender reducing their demand by well over $100,000.

Short sales present some unique opportunities for buyers who aren’t in a hurry if their agents are willing to do twice the work for a reduced commission. The downside is often a month or more of waiting to see if the seller’s lender will accept your terms. As part of the process, your agent generally has to agree to reduce his commission.

As a result, lots of agents and buyers just skip over short sales. But deals can be had for the patient. For example, at $347,777 our listing is currently the best priced home in the MLS in Downey, it’s in a good location, has a nice recently remodeled kitchen and big family room. The home across the street, also a short sale, just went into escrow at a record low price–but we’re now lower than they were.

As we were driving off, we noticed an open house being set up at a new “Bank Foreclosure” listing that isn’t even in the M.L.S. yet. Stopping in we discovered a home that was priced at $300,000–$50,000 below the two formerly lowest priced listings down the street.

When I got back to my home office, I checked the public records to see what similar homes were selling for when the market peaked. I found four comparable homes in the same neighborhood that sold in the summer of 2006 or early 2007 for about $650,000.

That represents a decline in prices of over 50%!

Now the foreclosed home needs a good cleaning and some yardwork. It’s back yard seemed small, and the floorplan a bit choppy. But it’s got three bedrooms and a bath and a half in a decent neighborhood that’s close to L.A., LAX, and the OC for $300,000!

I think the REO is priced below market, and will sell pretty fast, possibly above list. Still, it represents an excellent opportunity for someone who can act fast.

Because most agents don’t want to hassle with the double negotiations and pay cuts of a short sale, it may actually represent a better value for someone willing to come in with a low offer and wait a month or two. It’s in much better condition, has lots of upgrades, and has twice the garage & twice the back yard of the short sale.

What struck me, however, is that this is a market where the qualified buyer who can put together at least a 3% down payment rules. When the market does bottom, qualified buyers who wait on the sidelines for the market to drop further risk competing not just with the thousands on the sideline like them, but also with thousands more who currently don’t qualify but eventually will as lenders again relax their standards from the current overreaction to the market downturn.

Continuing lender incompetence:

The flip side of this good news for buyers is some bad news for homeowners and the economy in general, made worse by the continuing incompetence of too many lenders.

The owner of our new short sale listing called us a couple months ago to discuss her options. I referreed her to our post for upside down and troubled borrowers, “Trouble making your mortgage payment? 7 ways to get back on track.”

The family’s situation had changed since they refinanced, and she knew it would be impossible to continue making the payments once her mortgage reset. I suggested as a first step, and to avoid selling, that she try to negotiate with her lender for a reduction in both interest rate and principal.

Unfortunately, her loan was with well known subprime lender EMC, a subsidiary of Bear Stearns. They took 45 days to tell her they wouldn’t do anything until the actual reset hits in about a year. Kind of like a bank robber asking you to trust him. Pretty much left her no alternative to the short sale.

The REO was even worse. Foreclosed by GMAC mortgage, the home was listed about $20,000 too low, the agent didn’t even count the bathrooms right (missed a half bath!), & a $100 cleaning would raise the value even more. Besides missing a bathroom, the black and white flyer didn’t even have a price on it. And the agent was holding it open before even bothering to put it into the M.L.S., a typical tactic of unethical agents to shaft the seller in order to “double end” the listing by picking up the buyer. Typical of so many lenders that stick with a handful of often lazy out-of-area agents rather than take the time to find an honest, competent local agent–and there are plenty of them with time on their hands right now!

Two examples of how lenders are making things worse for themselves and homeowners everywhere because their loss mitigators and asset managers just aren’t doing their jobs. Sometimes it’s because they’re overworked, but there are plenty of underemployed Realtors and loan agents and processors out there they could easily hire & train.

Info for those thinking about buying:

If you’d like more info on either of these homes, or just want further information, you can call me (Dave Emerson) at 562.822.7653 or e-mail me at RealtorDaveE at msn dot com. (I wrote out the @ and the . to avoid spamming bots.)

Please understand: we think the absolute bottom’s still ahead, due to all the foreclosures just entering the pipeline (see “Oh-oh! We just passed a nationwide bottom!“)

But we also think nobody knows for sure what the future holds. (See “How low will prices go?“).

And we think that for many of us, there are more important things in life than market timing. (See “What to do when nobody knows what’s next.”)

When you can get a 50% discount, it may be time to think about buying.

Coming soon:

Thanks for stopping by. Please check back from time to time–we try to post our “news and perspectives from the SoCal real estate front lines” at least 3 to 5 times each week. On Monday we’re planning “A Tale of Three Closings” chronicling a “flip” gone bad, a seller gone mad, and today’s escrow problems on three homes that just closed escrow on the same Lakewood block.

It’s been pretty clear for a while that, in Orange County and Los Angeles County, at least, we passed the bottom for sales activity this past winter.  (”What’s next for Southern California housing?“)

It’s also growing increasingly clear that the bottom for prices is still ahead of us.  (See “Snapshot from the front lines: One bottom, maybe two.”)

But there’s another “bottom” that also recently passed us by.  Unfortunately, that’s the bottom for long term interest rates.

While watching the Dodgers beat the Angels in 100 degree heat on Saturday, Blair and I were discussing some mutual friends he was about to open an escrow with.  They were young teachers (like both Blair and I were once), and wanted to take advantage of some special first time buyer financing that was about to phase out.  Blair had placed another couple in a similar loan about a month earlier, and he remarked how the fixed interest rate on that program had gone up almost 1% in that month.

Now I’ve been aware that long term rates are going up, and warning about the consequences, but it really hit me between the eyes as I was filling up my 12 gallon Element’s tank at Costco yesterday morning:   The roaring return of inflation means long term interest rates aren’t likely to come back down any time soon.

Somewhat like sales volume and prices (see “Predictions 101: Our 2 market cycles“), mortgage interest rates tend to go down in the winter and up in the spring, possibly for the same reasons.  But this spring’s increase in rates is now accelerating due to the return of inflation, especially oil-related inflation.

The main causes of those oil price increases ?

1. Increasing oil demands from China, India, and the developing world.
2. The decline in the U.S. dollar’s value.

Reason #1 is cited as the main cause, and all the evidence is that so far we’re just seeing the tip of the iceberg as young industrial giants continue to grow.  U.S. oil usage is now just an ever-decreasing fraction of usage in these growing new economies.  That’s why we can expect fuel and other commodity inflation to only increase for the immediate and possibly long term.

Reason  #2 was largely caused by the Fed’s cuts in U.S. interest rates.  That further restricts the rate-cutting they’re able to undertake.  More significantly, the Fed only controls short-term rates; long term rates are determined by market conditions.  Those long term rates frequently move in the opposite direction when the fed makes cuts in short term rates.

Bottom line:  Long term mortgage and interest rates will continue rising for most of this year, although they may dip modestly next winter.  Only the onset of a very major recession is likely to reverse the upward trend.

That dramatically affects the cost of housing.  With the mythical 20% down on a $500,000 median OC home, the principal and interest payment on a 30 year fixed loan @ 6% is just under $2,400.  @7% that same loan payment rises over 10% to $2661.

In my 30 years of working with buyers, I’ve found that most view cost in terms of down payment and loan payment more than in terms of sales price.  To bring the loan payment in our example back down to $2,400 the loan amount would have to drop almost 10%.   That’s a 9% price drop if you allow for the reduced down payment to be added to the loan.

At this point most economists think the continuing flood of homes entering the foreclosure process in Orange County, Long Beach, and Los Angeles County ensure continuing price declines throughout the region (see “So Cal April Foreclosure Data Just In“).  Are you ready for another 10% decline on top of that?  Add that to ripple effects of the economic decline that may be just beginning, and the scenario gets downright scary.

Recommendations?

Market timing is nice, but you need to give primary consideration to your personal situation.  (See “What to do when nobody knows what’s next.”)  We believe it’s time to think of a house primarily as a home and primarily as a piggy bank or investment.

Potential Selllers: Before you panic, remember the words of Frank Nothaft, chief economist at Freddie Mac to last fall’s California Realtors’ Expo 2007, as he was discussing how low prices would go and when things would turn around: “We just don’t know,” Nothraft said. “We’re in totally uncharted territory.”  (See “How low will prices go?“)   Actions cause reactions, and nobody really knows how all this will unwind.  All we really know is that more surprises lie ahead.

That said, I just got off the phone with Blair trying to figure out a way to move up the time frame for getting a couple of our new listings onto the market.  We believe any seller who needs to sell in the next year or two should give very serious consideration to getting their home on the market now.

It’s still possible to sell for top dollar in 30 days.  (See “How to sell your So Cal home for top dollar in 30 days.”)   But you need an experienced, honest, diligent and competent agent who’ll tell you the truth, not what you want to hear (see ” Top 5 ways NOT to pick an agent“).   (BTW, my cell is 562.822. 7653.  If we can’t service your area, there’s a good chance we know or can find a good agent who can.)

Overencumbered (”upside down”) sellers: You have several options:  See “Trouble making your mortgage payment?  7 ways to get back on track” for starters.  There are tax breaks for sellers being foreclosed and participating in “short sales,” where the lender takes a discounted payoff so you can close escrow.   But as things stand now you won’t get those breaks if you close escrow after the end of the year.  Same if the trustee’s sale’s in 2009.  That may get extended, but I wouldn’t bet on it.  Again, we’re only a phone call or a “comment” away if you want to discuss your situation.

Potential buyers: Prices coming down as rates go up doesn’t really help with your payment.
We recently wrote a post discussing specific buyers who might benefit from buying in the current market (see “Time to buy?“).  Move-down and move-out buyers, among others, might find real benefits right now.

If you’re not yet in a position to buy, take advantage of the time you’ve probably got to get ready.  That means saving a down payment or at least closing costs, working on your credit score.  (Try annualcreditreport.com, a free service of the credit reporting firms.  Don’t use freecreditreport.com, which isn’t really as free as it sounds.)

Winter’s usually best for market timing if you’re a buyer. This year, lots of lenders will be trying to close sales by year’s end.  By fall we’ll have a better idea of if the bottom’s likely to be this winter, next, or later, so “stay tuned.”  An RSS feed’s not a bad idea, my 16 year old says it’s easy to do from this blog–if you don’t understand that, ask your kid.  If you do, maybe you can post a comment & explain it before I can get Nate to do so.  (Finals and all coming up.)

Perspective:

Every market presents challenges and opportunities.  These are times when you need experienced, informed, honest professionals to help you make the best decisions.  They are out there, hidden among the pretenders.  Hopefully we’ll have a post up soon on how to spot them.  In the meantime, you can check out “Top 10 ways NOT to pick a real estate agent,” or give me a call (562.822.SOLD).

The challenges we face in today’s market, while serious, are nothing compared to what thousands are facing right now in Burma and China.  Or thousands more in America who, like Ted Kennedy face serious diseases.

For an inspiring story from the pages of the OC Register about a handicapped young man overcoming challenges, you might want to check out “A little perspective.”   I also appreciate my pastor’s reflections on the classic Biblical book of Job.