So Cal Real Estate News

Got into a little “discussion” today on Jon Lansner’s O.C. Register Real Estate Blog about why prices are dropping faster inland than on the coast. Thought it might be worth repeating here.

Here’s the initial question, posed in a comment by “Jimmy:”

How bizzare. While you are all looking for a bottom in inland real estate, I am still waiting for a price decline in CdM (Corona del Mar). This is so unusual that it should be a real concern. You have to be concerned about making any real estate investment until someone explains why CdM and NB(Newport Beach) seem to be hanging on while some inland locations plummet.

Here’s our response:

There are at least 4 reasons the Coast & the I.E. are on different tracks:

1. Tons more new construction in the I.E. Unsold inventory, possible overbuilding, & lots more recent purchases near the peak being foreclosed. Plus lots more subprime home loans. Last time I checked, the I.E. offices of the firm I work for had hundreds of unsold REOs in their listing inventory.
2. Lots more equity near the coast. These are prime, move-up, destination neighborhoods. People buy there and stay put. And they generally put money down–lots of money–from the home they’re moving out of. CdM and NB ain’t exactly “starter” neighborhoods. And the folks who do start out there usually have a big chunk of change to put down anyway.
3. Supply and demand. There’s still dirt to build on in the I.E.
4. Gas prices. Not to mention traffic. Who wants to live on the 91 with gas this high & heading up?

There is a theory out there that a dropping tide will eventually lower all ships. I suspect that’s true, but if it does come don’t look for as big a percentage drop on the coast as inland.

Hope that helps.

I remember back during the last big slump, in 1994 when you could hardly give a home away in the inland parts of South Orange County. Bach then there was more new construction there–it was a bit like the Inland Empire was today, but South OC was a lot closer to being built out. South OC prices jumped dramatically during the last boom, and today they’re not down nearly as sharply as the I.E.

We’re still thinking prices throughout So Cal will probably be lower this November and December, but nobody knows for sure, as we keep saying.

The best time to buy is just before the bottom.

When REOs in the I.E. are selling for less than the cost of land, it may be a good time to buy, or at least to write some lowball offers. Auctions can be another thing (see “Foreclosure Tips“)

I actually had this post planned before I awoke to find Moses staring at me from the L.A. Times’ home page this morning. But that fiery look in the late Charlton Heston’s eyes did made me get right on it!

Now if you’re wondering what Moses has to do with Southern California real estate, the thoughts behind this post were born while I was writing about the causes of the current economic crisis (“How we got into this mess“). Think of it as kind of a prequel to that post.

Because if any of the players in the food chain had attempted to practice #1 or #9 or #10 or even maybe # 8 of Moses’ 10 rules, let alone all 10, this mess would have self-corrected several years ago. In fact, if President Clinton had paid more attention to Moses’ rule # 7, he might have not been too distracted to pick up Bin Laden when Sudan offered him up.

As I wrote in that post, “Greed, stupidity, and a lack of integrity got us into this mess,” and at least two of those three are addressed by Moses himself.

As you probably recall from either the movie or the Book, part of the process of turning a huge throng of liberated slaves into a nation almost 3,500 years ago involved establishing laws, a common culture and a common morality. These laws and this culture were pretty much summed up on the two tablets of stone Moses brought down with him from the mountaintop. They were Gods’ commands to his people.

I wonder how many of those 10 commandments you can name without looking? Very few can get all ten, I’ve discovered.

Here’s a clue: The first four (sometimes called “the first tablet”) all deal with our relationship with God. The last six (“the second tablet”) concern our relationships with one another.

Here’s another clue: 3 of the first 4 and 5 of the other six are pretty much “shalt nots.”

OK, class. Time to correct your own work. I’ll refrain from the King James’ English, however.

1. Don’t worship any Gods besides me. (Put God first)

2. Don’t make or worship idols. (Anything besides God will ultimately disappoint. Even real estate!)

3. Don’t take in vain (misuse) the name of the Lord your God. (Don’t try to use God–let Him use you!)

4. Keep the Sabbath day holy. (Take one day a week to rest and refresh yourself spiritually.)

5. Honor your father and mother. (Give them respect and material support when needed.)

6. Don’t murder.

7. Don’t commit adultery. (Be faithful to your spouse.)

8. Don’t steal. (Don’t take advantage of others, including unsophisticated buyers.)

9. Don’t testify falsely against your neighbor (more broadly, tell the truth).

10. Don’t covet. (Enjoy & be content with what you have.)

(from Exodus 20: 1 – 17)

How’d you do? Most folks miss # 10 at least. In fact, I’m not sure I’ve ever even heard a sermon on coveting, but that’s a huge part of how we got where we are.

Of course, Moses–and God–were much more interested in people keeping those ten rules than memorizing them. And keeping them is the hard part–but knowing them isn’t a bad first step.

About 1,500 years after Moses gave the rules a young itinerant rabbi without any formal theological schooling was asked which was the greatest commandment. His answer basically summarized the two tablets:

“You shall love the Lord your God with all your heart and with all your soul and with all your mind. This is the great and first commandment. And a second is like it: You shall love your neighbor as yourself. On these two commandments depend all the Law and the Prophets.” (Matthew 22:34-40)

There’s a reason those ten rules have been around so long. There’s a whole lot of wisdom packed into them. Personally, I think they’re inspired.

If we, as a culture, had heeded those rules, we wouldn’t be in the mess we’re in today.

And if we don’t start paying attention to them, we’ll never really get out.

The good news is, if even significant a minority of the people live up to those rules, they can have a cleansing effect on the whole culture. (Matthew 5:13 – 16)

So, ultimately, we can’t complain about others moral failings until we start living up to God’s standards ourselves. And, frankly, that really takes God’s empowering, because we just can’t do it on our own.

Fortunately, God is still willing to help us when we ask. (John 6:35-38) I can’t speak for you, but I sure know I need His help every day–even in the best of markets.

I used to try to avoid Jury Duty; now I figure it’s just part of being a good citizen. However, being self-employed, I try to limit the amount of days I have to put in.

It’s always an interesting experience. As a bonus, I usually take some things back that relate to real estate.

After getting up early to write our April Fool’s Post, I spent last Tuesday at OC’s “West Justice Center.” This time it confirmed some of my suspicions about the difference between lawyers and Realtors.

Shortly after checking in & donating my felt tip marker to the officer at the door, I was sent up to a courtroom to be in a jury pool with about a hundred of my new best friends.

After instructions from a bemused bailiff we were given our numbers & sworn in by the court clerk. Then we all rose so the judge could come in.

His honor told us this was a criminal case that would take 5-6 days of our lives if we ended up on the jury. I had figured a day or two was about all I could do, but it sounded like this judge wasn’t going to buy that. “Jury duty is like military service,” he said. Guess he hadn’t heard that the military draft was abolished decades ago. “Unless this would cause a life-altering hardship,” the judge continued, “you need to serve.” Wow–life altering!

Then we got a summary of the case from the judge and each of the two attorneys. (I thought there were 3 attorneys, but one turned out to be the defendant.) There were 3 charges–assault with a gun, endangering a child, & something else like making terrible threats.

The defendant’s attorney said his client was a wonderful guy with a PhD from Stanford. He turned out to be a 60-something guy who I thought was another attorney.

What actually happened, the defense lawyer told us, was some slimeball got some road rage and was banging on this poor old guy’s window, flipping him off, & yelling terrible things. When the slimeball went back to his car, the poor old Stanford PhD, who felt his life was threatened, decided the best way to protect himself was to find something to confront the slimeball with.

I would have thought the best way to protect myself would be to just drive off, but I don’t have a PhD from anywhere, so that shows you how much I know. Anyway, this poor old guy looked in the back seat of his car for something to protect himself with. According to the attorney he was looking for a flashlight, but instead decided on a BB gun that looked exactly like a 22 rifle.

I don’t make this stuff up. I think you need a law degree to do that. Or a PhD from Stanford.

Then the prosecutor said she thought it was probably a real 22, but even if it was a BB gun it was still a firearm. (From the questions she later asked potential jurors the gun somehow had disappeared.) That child endangerment charge was about a kid in the back seat of the slimeball’s car. (She didn’t call him a slimeball, but from the questions she asked prospective jurors about gang members having rights you could tell he probably was.)

At this point it looked to me like this whole thing should have been settled out of court and somebody was just wasting our time & our tax dollars.

In one regard lawyers & realtors basically have the same job–settle a difference of opinion between two parties. A big part of my job is negotiating an agreement between a seller who wants top dollar and a buyer who wants to pay as little as possible. We work hard to try to find common ground and differences that allow us to come up with a “win-win” resolution that works for everybody.

Over my 30 years in real estate, I’ve had lots of opportunity to be in court (probates, divorces, etc.), to interact with lawyers, and be deposed a few times myself. I’ve concluded that most lawyers, who are generally paid by the hour, have a financial incentive to drag things out. So it’s not in their best interest to get a deal done, which is really court hearings come in.

Realtors, on the other hand, are paid by the job, so we try to get the deal done as quickly as possible.

I think if lawyers were paid by the job, like realtors, most cases would be settled in record time and very few would go to trial.

I was pretty sure that we were looking at a simple traffic dispute that should never have gone to trial. Two jerks got into an argument, the police were called & arrested one of them. Then the D.A. threw the book at him expecting him to plea bargain down to something more minor. But somebody’s ego got in the way & the deal never got done. So now I and 100 of my new best friends were wasting a day so somebody could prove a point. Probably not the attitude an impartial juror should have.

At this point the first 18 prospective jurors were called up to be questioned by the judge and the attorneys. Eventually about half of them were “thanked and excused” by either the judge or one of the attorneys.

After a ten minute potty break another 9 were called up, same drill, & this time maybe 7 of them were “thanked & excused,” along with one or two of the remaining 9 from the first group. Almost a wash.

Lunch break–and we were warned to be back at 1:30 sharp. Went home to do some work & eat simultaneously, got back a few minutes late, then waited 10 minutes for them to open the courtroom. Apparently punctuality is more important for jurors than for judges. I’m guessing here–I don’t have a law degree either.

Same drill again, but they kept most of them this time. By now they had 12 jurors and 1 alternate, & only needed one more alternate. Maybe 30 of us remained in the pool, & my odds were looking pretty good.

But I got called up third of the final 6 to be examined. 1 in 6–pretty good odds, I thought.

When the hardship question came up, I explained that I was self employed, sole source of income for the family, and dealing with some health issues with my 87 year old mother as well. I could tell that wasn’t going to fly. Since the defense lawyer had implied that the case might take longer than six days, I stated that it was extremely difficult for me to be away from my job for 6 days, & if the case went longer, I wasn’t sure I could remain objective, which was a true statement. How did the judge know how long these guys would talk, or how long the jury would take, anyway. He was probably giving us a best case scenario.

“The time frame I gave you is correct,” his honor responded, & at that point I wondered if I might be held in contempt of court. I guess they teach you how to predict the future in law school, too. I should have asked him when the housing market would hit bottom, but it didn’t look like I was going to get a chance to ask any questions.

Then we got to “Is anybody in your family or any close friends in law enforcement or lawyers?”

“No,” I responded, “but over my 30 years in real estate, I’ve developed some strong feelings about lawyers that could bias my view of this case.”

The judge asked for an explanation, so I told him my theory that attorneys just drag things out and that this whole thing never should have gotten this far. I heard some positive mummers from the jurors behind me, & kept going. “In fact,” I said as I looked at the attorneys, “I’d almost guarantee that the judge has already told you that.” From their reaction, I’d guess I was right.

Wow–venting to two attorneys & hopefully getting myself “thanked and excused” all at the same time. Does it get any better?

Later I wished I’d added that I thought at least one of the lawyers and/or the defendant had no regard for wasting a day out of the lives of 80 potential jurors, nor a week out of the lives of the 14 jurors & alternates selected, let alone the court’s time. Somebody at those two tables had a pretty big ego. Maybe three somebodies.

Not all that different from today’s sellers who reject a reasonable offer because his neighbor got more two months ago. Except those sellers aren’t wasting 80 innocent people’s time.

Well, the defense attorney now started to hammer me about if I could be impartial to his client. A regular cross-examination. I actually went to Biola University on a debate scholarship, so I kind of enjoy this sort of thing.

“Can’t you set aside your beliefs to give the defendant a fair trial?”

“My convictions are part of who I am.”

“But can’t you simply consider the case on it’s merits?”

“I will consider the case based on my life experiences.”

“But. . .” yadda, yadda, yadda. . . .

“I believe we’re here because someone’s being a jerk and not settling, and once I figure out who that person is, I will not have a very positive view of their case.” That was the truth, but I also figured it should get one of the two attorneys to “thank and excuse” me.

“Well. . .” yadda, yadda, yadda. . . .

“Sir, if your client is innocent, he has nothing to fear from me.”

The judge actually gave this guy extra time to cross examine me. Go figure. I don’t even own a bb gun.

Well, when all the dust settled, nobody objected to any of us 6.

Fortunately, the judge took the first guy called up of our group, and all the rest of us got to go back to the jury waiting room. By the time I got there they were letting everyone go home.

Wednesday, I was almost tempted to show up in the audience to see what the real story was. For about 25 seconds.

Sellers, you should be aware that after escrow closes your buyer will probably get several friendly letters from lawyers checking to see if there were any problems they could help clear up.

Under California law, I’m told you are not only responsible for errors and omissions you make in the sale, but also for any committed by your agent. Another reason to look for an honest, experience agent (see “Top 5 ways NOT to pick an agent“). Maybe even one who’s spent some time in jury duty.

April 10 update: In the week since writing this post, the roller coaster ride of hopeful and negative news has continued unabated.

One thing that concerns us is this week’s release of California’s Foreclosure stats for March, however (see “So Cal Defaults Up Again & What it Means”). has got us reconsidering. But there are a couple hopeful possibilities we’re also keeping our eyes on. We’re watching to see what Congress might do next, and keeping another eye on the ever-surprising Fed.

So stay tuned for further developments. In the meantime, we still think this is as accurate a description of where we’re at & where we’re going as we can write. For now.

We concluded our last post (“Two Problems with DataQuick’s Median Prices,” with our observation that the actual drop in So Cal home values from top to current bottom is about 25 – 30% (less in higher end areas, more in condos, starter areas, and areas with lots of new construction).

The obvious question is, “How Much More Should So Cal Prices Have to Correct?”

25 – 30% may well be about the right amount of correcting–nobody knows for sure, as we keep saying (see “How Low will Prices Go?“).

But the market will almost certainly overcorrect, especially with all the current negativity, all the foreclosures still in process, and the difficulties getting mortgages continuing.

Ben Bernanke, the Fed Chairman, thinks governmental actions already in place will begin to kick in later this year, and things will slowly begin improving from there. He hopes, but he’s not sure. (See “Bernanke predicts bottom later this year” for excerpts from his Wednesday testimony with our English “translation”/summaries.) Remember, however, that part of his job seems to be keeping an optimistic spin going.

But UC San Diego’s Nobel Prize winning economist, Clive Granger, thinks the U.S. economy has already been in a recession for about four months. He expects the current recession to last an additional 2-6 months, depending on what occurs in the housing and financial markets. Like Bernanke, that puts the bottom later this year.

Slightly more pessimistic is Freddie Mac Chief Economist Frank Nothaft. (He was also the panelist from last October’s CAR Expo who formed the basis for our belief that nobody knows what will happen next with his remarks that “we’re in uncharted territory.”) (Obviously, that belief hasn’t stopped us from making our best guesses at what’s next.)

Maybe Dr. Nothaft now thinks the picture’s becoming a bit clearer. Last week he told a lunch audience that he expects that life should begin to return to the housing sector late this year or early next but says prices may not recover significantly until 2010.

Then this morning DataQuick released figures for OC showing prices were still dropping but sales volume is continuing to rise, as we’ve been predicting (see the Register’s R.E. blog for details). (Also bear in mind what we said yesterday about DataQuick’s numbers being several months behind, among other things.

Then this afternoon the Register blog put up another post quoting a South OC Realtor who does a lot of number crunching saying what we basically said a month ago, that activity’s picking up.

Now remember what we said about those two So Cal real estate market cycles on Wednesday. Annual cycle: up in the spring, down in the fall. Add in these predictions that the economic cycle may be nearing a bottom, and what do you get? Could it be we’ll hit bottom this winter, not a year later as we had been thinking?

Maybe, but what about today’s increase in unemployment to 5.1%, with economists particularly worried because the drop was so broadspread, no longer limited to housing and construction.

This morning I spoke with one broker I’ve known for 30 years about activity in his office. Yeah, he said, sales (opening of escrows) were up in February, but then they dropped a bit in March, and the last few weeks have been especially slow. The March slowdown he attributed to actual competition for houses, citing one agent who had presented 8 offers for one buyer who needed help with closing costs. There were enough competing offers and enough buyer activity that the sellers were no longer making those concessions.

The cause of the slowdown over the last two weeks , however, was harder to figure out. “Dave, there’s just so many cross currents,” he told me. “The market’s just in flux.”

That flux may mean that we’re nearing a bottom. Or it may mean the mini-upturn we saw in February and March is turning down.

Or it may just mean it’s still too early to tell what’s going on.

This post was intended to update our projections. So I looked up our most recent forecasting post, March 24′s “What’s Next for Southern California Housing.”

Here’s what we said in summary back then:

“We continue to expect a window of opportunity for sellers for the next several months, followed by opportunities for buyers through this winter. We still thing there’s a significant chance (20%?) of a major price collapse of an additional 15 – 25% , but there’s also a possibility that the worst is behind us.”

“Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something. up”

Looks like there’s not a whole lot to update, although there are some things I might tweak:

• That window of opportunity for sellers may already be starting to close.
• An additional price decline of 5% – 10% through this winter is probably the most likely scenario, but by no means a certainty.
• There’s a significant possibility that the market will bottom this winter, but it’s still to early to really know.
• There’s also evidence that real estate’s woes may spread through the economy and pull prices down much further, into a recession that might last for years.
• Washington is becoming increasingly proactive, which could be good. . . or bad, depending on what specific steps are taken.
• One thing hasn’t changed at all:

Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something up.

What to do? Guess it’s time to again refer to our December 1 post, “What to do when nobody knows what’s next.”

Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something up.

We’d love to hear your thoughts, especially what you see happening in your corner of So Cal.

April 10 note: As of this morning, we’re beginning to think the bottom’s probably at least 20 months off, rather than the 8 we’ve been hoping for recently. Those foreclosure stats we mentioned really have us concerned, but we may be overreacting to one item. Because you never know for sure what’s going to happen next!

In about ten days, there will be much media noise as DataQuick releases their So Cal median price figures for March.

We expect sales will be up from February, but down from March ’06. Some analysts will be surprised. Prices will be down from a year earlier, but not down nearly as much as expected from a month earlier. In fact, the median price for Orange County might actually be up slightly from February.

But it’s not really news. And it’s not even what you think it is.

It’s not news because they’ll be reporting what took place back in January and early February, when those homes that closed in March actually went into escrow, as we explained in “Market Predictions 101: Our Two Real Estate Cycles.” By the time “DataSlow” reports them, they’ll be almost 3 months old.

“DataSlow’s” median price numbers aren’t what you think because any average, median or mean (for you mathematicians), can be skewed by shifts between market segments, as was so clearly pointed in a recent statistical study by Zillow’s number-cruncher.

For example, let’s say DataQuick started reporting “median grocery prices” at your local Vons. In November, when lots of people are buying expensive items like turkeys, that median would go up. Now the prices of things might actually be down (at least in our hypothetical, if not in the real world right now. Turkey might be cheaper than it was a month earlier. But because more people were buying turkeys instead of hamburger, the median price would still go up.

Same thing in the real estate market. When there are more first time, low end, buyers the median goes down. When there are more high end buyers, it goes down.

That’s why through most of 2006 DataQuick’s median price kept moving up, even as prices in most neighborhoods were dropping. As subprime loans stated to dry up, activity was switching from the low end to the middle and higher prices. So the median average moved up, since more of the sales were in higher priced neighborhoods, even as the prices in those neighborhoods fell.

More recently, there’s been an increase in lower end sales as lenders foreclose on many subprime borrowers in starter homes, then quickly unload the property at whatever price the market will bear. Meanwhile, most high end homeowners moved up and put a substantial down payment into their home, so there are far fewer foreclosures and distressed sales in the higher neighborhoods. Instead, those homeowners for the most part have decided to just wait out the current down turn.

In 2006, DataQuick’s median price was going up while actual prices were dropping in most neighborhoods. Lately, DataQuick’s median has been dropping faster than actual prices in most neighborhoods. We believe the actual drop in So Cal home values from top to current bottom is about 25 – 30% (less in higher end areas, more in condos, starter areas, and areas with lots of new construction).

In our next post, which should be out soon, we’ll combine that last little nugget of information with our Bernanke post and our Predictions 101 post to update our own predictions.

In the meantime, your thoughts and questions are always welcome. If there isn’t a “Leave a Comment” box below, then click on the “0 comments” or “2 comments” comment-counter just below this paragraph on the right. Make up a “Name” or just use your first name, as that will be public. Your e-mail will remain entirely confidential, but we can use it for a confidential response if requested. Thanks for visiting!

Talk about being out in front of a story!

Early April 1, before I went to the Westminster Justice Center for a day of Jury Duty (details later this week), we put up our most popular post yet, “Major Housing Breakthrough Near?”

“It looks like our leaders may finally be setting aside their egos and personal agendas to work together for the common good,” we wrote two days ago.

“Behind-the-scenes discussions between Congressional leaders and the Bush administration may be about to bear fruit. And that fruit would be a pragmatic Housing Relief Act of 2008 which combines the best ideas from partisans of all stripes to provide both immediate relief and long term reform.”

So guess what’s the top story on Los Angeles Times‘ website this morning? “Senate advances mortgage relief plan.”

Here are the first two paragraphs of today’s Times’ article:

WASHINGTON — Senate Democratic and Republican leaders reached agreement Wednesday on a multibillion-dollar package to address rampant foreclosures and other problems stemming from what may be the worst housing slump since the Great Depression.

The compromise measure, placed on a fast track by the election-year desire to mollify voters, could be approved by the Senate as early as this week. It would be the first significant intervention by federal lawmakers to aid victims of the mortgage crisis.

Looks like you heard it here first!

Now, we’re pleased with our reputation for honesty. Really (see Redfin’s post, “A Realtor We Can Trust“). So we’ll also have to disclose that we got a couple of “minor” details wrong near the end of our April 1 prophetic post.

Like Congress eliminating earmarks and passing a line-item veto and Bush cutting back on Iraq spending to help fund the bill. And the AARP agreeing to support a one year suspension of social security’s cost of living increase. And McCain picking Obama as his running mate in the midst of all the bipartisan unity.

But it was posted on April 1.

By that we mean, it took a couple of days for all the details to come out. Right?

Shoot, our first report on a pending bipartisan breakthrough on housing was posted on March 31 (“Pragmatic White House Ready to Help Out?“).

“We think it could be a major step in the right direction–or a major disaster. As always, “the devil is in the details.” We just hope & pray that our employees in Washington (yup–we pay their salaries!) will finally put special interests, dogma, and party politics aside long enough to work for the common good, ” we wrote back then.

Who knows, maybe they were listening in Washington.

So maybe that post coming out on April 1 was just a coincidence? What are we going to do if we get some unbelievable, hot info on April 1? Sit on it until April 2, and let the big boys get ahead of us?

In any case, the devil is still going to be in the details, which range from federal mortgage relief bonds to tax breaks for homeowners, builders, and people who buy and occupy foreclosures.

There’s still time for partisanship to kill the bill, with hearings in the house scheduled for next week. Wouldn’t it be nice if our representatives will use that time to make the bill better for the nation as a whole, rather than to grandstand or advance partisan interests.

Otherwise, the joke might just be on us.

Only we wouldn’t be laughing.

Excerpts from his prepared remarks to Congress today, with my attempts at decoding and summarizing in italics preceding each segment:

We’re not out of the woods yet:

Although our recent actions appear to have helped stabilize the situation somewhat, financial markets remain under considerable stress. Pressures in short-term bank funding markets, which had abated somewhat beginning late last year, have increased once again.

It’s harder to get any loan because of all the losses due to the mortgage mess:

Credit availability has also been restricted because some large financial institutions, including some commercial and investment banks and the government-sponsored enterprises (GSEs), have reported substantial losses and writedowns, reducing their available capital. Several of these firms have been able to raise fresh capital to offset at least some of those losses, and others are in the process of doing so. However, financial institutions’ balance sheets have also expanded, as banks and other institutions have taken on their balance sheets various assets that can no longer be financed on a standalone basis. Thus, the capacity and willingness of some large institutions to extend new credit remains limited.

Even “conforming” loans (Fannie Mae & Freddie Mac) have gotten pricier, and non conforming loans are almost non existent:

Another market that had previously been largely exempt from disruptions was that for mortgage-backed securities (MBS) issued by government agencies. However, beginning in mid-February, worsening liquidity conditions and reports of losses at the GSEs, Fannie Mae and Freddie Mac, caused the spread of agency MBS yields over the yields on comparable Treasury securities to rise sharply. Together with the increased fees imposed by the GSEs, the rise in this spread resulted in higher interest rates on conforming mortgages. More recently, agency MBS spreads and conforming mortgage rates have retraced part of this increase, and conforming mortgages continue to be readily available to households. However, for the most part, the nonconforming segment of the mortgage market continues to function poorly.

The housing market remains weak, and that’s hurting everyone:

These developments in financial markets–which themselves reflect, in part, greater concerns about housing and the economic outlook more generally–have weighed on real economic activity. Notably, in the housing market, sales of both new and existing homes have generally continued weak, partly as a result of the reduced availability of mortgage credit, and home prices have continued to fall.¹ Starts of new single-family homes declined an additional 7 percent in February, bringing the cumulative decline since the early 2006 peak in single-family starts to more than 60 percent. Residential construction is likely to contract somewhat further in coming quarters as builders try to reduce their high inventories of unsold new homes.

Things are worse than we thought, but we think they’ll start getting better later this year. But nobody really knows. [We've been telling you that since November!]

Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

We think inflation will start dropping later this year, but we’re not really sure about that either:

We expect inflation to moderate in coming quarters. That expectation is based, in part, on futures markets’ indications of a leveling out of prices for oil and other commodities, and it is consistent with our projection that global growth–and thus the demand for commodities–will slow somewhat during this period. And, as I noted, we project an easing of pressures on resource utilization. However, some indicators of inflation expectations have risen, and, overall, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully in the months ahead.

We think we’re finally on the right track, and expect to turn a corner during the second half of this year. (“Things will turn out fine in 2009?”)

Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year. I remain confident in our economy’s long-term prospects.

At least, that’s what I think he said. Click here for Bernanke’s complete prepared text.

Click here for the L.A. Times’ report on Bernanke’s remarks.

And feel free to use the “comment” option to express your opinion, but in relatively polite language, please.

We sure hope he’s right. Could be.

Note: Most of our market predictions are based on So Cal’s two market cycles: the annual cycle and the broader economic cycle. It’s basic stuff, but if you understand both cycles, you’ll be miles ahead of 90% of the population and 50% of the agents in trying to figure out what’s going to happen next.

Yesterday Peter Viles had an interesting post on who’s buying in So Cal today in his L.A.Times’ blog. That got me thinking about writing a post on “Time to Buy?”

But I’m going to save that post for the near future. Instead, I’m going to “set the stage” for that with the first post in our new “back to basics” Real Estate 101 series.

1: The “Economic Cycle”

In any real estate market, there are at least two basic cycles. We’ll call the longer cycle the “real estate economic cycle” It roughly corresponds with the boom-bust-boom-bust business cycle we’re all too familiar with. 20 years ago I used to say these cycles generally take about 4 – 7 years. In other words, it usually takes 4 – 7 years to go from bottom through peak back to new bottom.

Well, the current So Cal real estate “economic cycle” last hit bottom around 1995, so it’s already gone about 13 years. But we were heading for a bottom before the Fed began their “life support” intervention after 9/11 in 2001 (see “How We Got into this Mess”). That would have been about an 8 – 9 year cycle, at least.

2: The Annual Cycle

We’re not going to insult your intelligence by telling you how long the annual cycle lasts, but we will say it’s much more predictable then the longer “economic cycle.”

All things being equal, the annual cycle has both prices and activity bottoming in December, then gathering steam through the winter, peaking in late spring, leveling off in summer, and heading down in fall.

In what we used to consider a “normal” market, prices only went down in the fall about half as much as they went up in the spring. As we near the peak of a booming economic cycle, prices go up year round, but they go up faster in the spring and slower in the fall. Outside events, like the Fed lowering rates on 9/12/01 or Bush I invading Iraq in 1989 impact both cycles.

By “activity” we’re talking about homes going into escrow, which is what the average Californian means when she says “Our house just sold!” (Not that the average Californian is saying that much right now. But she would if she’d read our post on “How to Sell Your So Cal Home for Top Dollar in 30 Days in Any Market.”)

DataSlow’s median pricing statistics report homes closing escrow, which is usually about 30 – 60 days after they opened escrow. And DataSlow reports those stats about a month after the median closing date, so it’s 2 – 3 month old “news” when you read it in the paper. So DataSlow’s charts would indicate that prices peak in the summer, but that’s just the homes that went into escrow in the spring closing in the summer.

Why . . .

do prices usually peak in the spring and drop in the fall here in So Cal? 3 reasons:

1. Income taxes. Many buyers are brought into the market each year when they have their taxes done and realize they need more tax shelter, and that begins early in the year as those with simple returns file in January. For other’s, buying a home becomes a new year’s resolution.

2. Honey Do Lists. Many sellers also make a new year’s resolution to sell and move up or down. But all it takes for a buyer to “get on the market” (start looking) is to stop at an open house or get online (see “A Better Way to Search for Home Listings“). And first time buyers usually one to get into that home of their own by summer.

But it takes a lot of work for most sellers to get on the market! Work they’ve been putting off for years. And if it ain’t happened in the last decade, it ain’t gonna happen real fast now. For most sellers it takes 4 – 7 months to realize they’re not going to get everything done and call a Realtor for advice on what to do & who to hire. So must sellers are getting on board the real estate train right when most buyers have already gotten off. That affects supply and demand, which affects price.

3. School, Vacation, Weather & Holidays.

O K, that’s really 3 – 7, but we’ll lump them together. Buyers with school age kids want to get into their new home before school starts in the fall, and they want to have it in escrow before school gets out in June. That’s so they can get their kids signed up at the new school before the staff takes off.

Once summer hits, buyers have other things on their plate the rest of the year. Summer vacation, back to school, then Thanksgiving and Christmas. (Despite the weather, Christmas in California begins in September or October. As my pastor, Chuck Smith of Calvary Chapel Costa Mesa, says, “When you see those Christmas decorations going up in the stores, you know Halloween is just around the corner.”)

So buyers are pretty much too busy to buy from when the kids get out of school on. Sellers, however, tend to be at least one generation older than their buyers. They’re less apt to have school age kids, they take their vacations off peak, & they’re often just getting their home ready to put on the market when summer hits, as we said.

Selling a home is frequently a less discretionary decision than buying. Divorce, death, foreclosure, and job transfers occur at a fairly consistent pace all year round. (Actually, death tends to occur in the winter after Christmas, but you really didn’t log onto this blog to hear about my college days working at the Westwood Village Mortuary as a resident manager.)

Local Variations

The annual cycle varies by region somewhat. In areas with brutal winters (which to us is pretty much any place north of Fresno), things continue to drop until the snow starts melting. In resort areas, prices tend to peak during peak seasonl–winter in the desert & in ski areas, summer in most other vacation meccas.

How to Figure Out What’s Next

These two cycles are not synchronized, but they do influence each other. When the economic cycle is in a major downward move, prices may just level off in the spring, or even drop some. But if the downward cycle continues, they’ll drop even faster in the fall.

Our understanding of the annual cycle enabled us to predict the increase in activity that DataQuick and the Association of Realtors reported for February closings. It’s why we think closings will also be reported as up when March figures are released in about a week.

The question is, will the impact of the overall downward cycle overpower the normal seasonal uptick. Remember, it’s still early in the annual cycle: March closings mostly went into escrow in January and early February. Our best guess is that sales will be up but prices down for March closings, but by April or May prices may also be modestly up.

Part of the problem with prices is that DataQuick uses median prices, which can be skewed by differences in which price ranges of home are selling (see Jeff Collin’s summary of a detailed study that proves what we’ve been saying about this for years.)

Well, now you’ve got one of the basics of predictions down. Give it a shot, & see if you can impress your friends. Or shoot us a comment or question, so we can explain it better or add whatever we may be missing.

Good morning! April 1st is over, so I guess we’d better get back to the business of sharing our thoughts and insights about the wonderful world of Southern California Real Estate.

Today we’re kicking off a series on real estate basics. with a post on “So Cal’s Two Real Estate Market Cycles.”

I was working on that post I googled the famous Vince Lombardi football quote above. I was so taken by the story I decided to devote this separate post to it.

The setting was the first day of the Green Bay Packers’ Training Camp, many years ago. Their coach, Vince Lombardi was already a living legend.

I’ll let Bob Kimbrell tell the rest, quoting from his Book on Management:

All the players knew that at the first team meeting, the legendary coach would waste no time getting straight to the point. Many of the men, half Lombardi’s age and twice his size, were openly fearful, dreading the encounter.

The coach did not disappoint them, and, in fact, delivered his message in one of the great one-liners of all time.

Football in hand, the great coach walked to the front of the room, took several seconds to look over the assemblage in silence, held out the pigskin in front of him, and said, “Gentlemen, this is a football.”

In only five words, Lombardi communicated his point: We’re going to start with the basics and make sure we’re executing all the fundamentals. . . .”

We believe a major problem with real estate today is that it’s gotten away from the basics. That certainly was the case for most agents, lenders, and buyers over the last five years. Not to mention the Fed, mortgage bankers, & federal regulators.

Back on St. Patrick’s Day, we posted “When Market Chaos Strikes, Get Back to Basics.”

Today we’ll follow up by “kick offing” our series of “Real Estate 101″ posts on some of the neglected or forgotten basics of So Cal real estate. We begin today with “So Cal’s Twp Real Estate Market Cycles.”

Please let us know what you think.

Disclosure (added 4/2/08) : To fully understand this post, you need to read through to the end. But it’s best to resist the urge to scroll down there now. Begin at the beginning, but if you decide not to read it all, then scroll down to the disclosure near the end before you leave this post.

“Enjoy:”

Sometimes you just get lucky. Or “blessed,” as my mother says.

Maybe this time we all did.

In following up on yesterday’s post, “Pragmatic White House Ready to Help Out?” we stumbled across what could portend, at long last, really good news for the housing and credit markets.

It looks like our leaders may finally be setting aside their egos and personal agendas to work together for the common good.

Behind-the-scenes discussions between Congressional leaders and the Bush administration may be about to bear fruit. And that fruit would be a pragmatic Housing Relief Act of 2008 which combines the best ideas from partisans of all stripes to provide both immediate relief and long term reform.

The comments off the record are almost unbelievable: “The collapse of the American housing and lending markets is an impending crisis that compels us to lay aside partisan differences and work together,” one Senate leader has discovered. “Ultimately, we’re all in the same boat, and if it sinks, we all drown!” she continued.

“We need to recognize that we are all on the same team,” according to a key administration figure. “We need to stop acting like the Shaq and Kobe Lakers and start acting like this year’s UCLA Bruins. You don’t see Collison and Love fighting for the ball!”

The details are still being finalized, but they involve major concessions and some unique innovations from both sides of the aisle.

Both sides apparently understand that runaway federal spending must be controlled. “We can’t borrow our way out of a borrowing crisis,” as one Democrat put it. “The government can’t continue unfettered spending. No more blank checks–not even for Iraq,” said an administration spokesperson.

Amazingly, Democrats have agreed to end Congressional earmarks and authorize a Presidential line-item veto. In return, Republicans are offering deferred automatic increases in some corporate and individual taxes when deficit targets are exceeded.

And the politicians seem to be succeeding in persuading their allied special interest groups to join the bipartisan parade to national unity for the common good!

The AARP has agreed to back an automatic one year suspension of the annual Social Security cost of living increase when budget targets are exceeded by 10% or more. “This will unite our Seniors to control runaway spending.” Meanwhile, the pharmaceutical industry has agreed to back drug imports from Canada. “Competition is the American way,” their spokesperson told us off the record.

Even the presidential candidates seem ready to climb aboard this “Friendship Train.” “There are things more important than me being elected President,” Hillary Clinton is said to have remarked. Talks are underway between the three camps for a “national unity ticket” with Obama running as McCain’s Vice President.

We know. “Wait just a minute!” you’re thinking.

OK, we don’t really expect to see a McCain/Obama ticket this fall–but we really don’t see why our leaders can’t work together a whole lot more and fight a whole lot less. After all, we’re the ones who pay their salaries!

As we said on our “history lesson” on the mortgage crisis (“How We Got Into This Mess”), stupidity and greed got us into this mess. And selfishness, partisan fighting, and greed sure won’t get us out of it!

Maybe you think we’re the April fools for suggesting that those in power could learn to work together for the good of the nation.

But we think they are the greater fools if they don’t.

And “we, the people” may be the greatest fools if we don’t start insisting they need to begin now, and reinforcing our words by our own unselfish deeds.

Time to lead by example.

“If we don’t hang together, we’ll all hang separately!”

–Benjamin Franklin

“I dream of things that never were, and say, ‘Why not?’”

–J.F.K.

Disclosure # 2: If you briefly scanned this article, or are reading it on or after April 2, make sure you noticed the day it was originally posted.

Then check out “So Maybe It Wasn’t an April Fools Post” to see how much of this is coming to pass, and what we think about it.

Now you may want to scan the postscript to see what we do on “normal” days. (As if there have been any “normal” real estate days in this millennium!)

Postscript: For several reasons we’ve gotten a lot of new visitors today. The above post is sort of a once a year thing, if you get our drift.

What we normally try to do here is to give you our “front line” perspective on what we see taking place in the market. We also try to lend a historical perspective that comes from Dave’s over 30 years involvement in real estate.

Here are a few of our more typical posts:

“How We Got into this Mess:” Our summary of events and human foibles that led to the current mortgage and real estate melt-down.

“How Low Will Prices Go? ” We wrote this last November, & the events since then have pretty much borne out what we said, but it’s probably not the answer you’re expecting.

“Top 5 Ways NOT to Pick a Listing Agent” The most common reasons sellers end up with the wrong agent. Reason #1 is a technique that works for the agent almost every time, if he decides to use it.

“How to Sell Your So Cal Home for Top Dollar in 30 Days:” A course we’ve been teaching for about 20 years, adapted to today’s market, buyers, and technology.

“What to Do When Nobody Knows What’s Next:” Our thoughts on balancing market timing with real life priorities in a turbulent market.

“So Cal’s Real Estate Cycles:” A new post that help you make your own predictions about what’s likely to happen next in So Cal Real Estate. The first in our new “Real Estate 101″ Series, along with “Gentlemen, This Is A Football.“

We also think you might find our direct link to the So Cal M.L.S. useful, located near the top of the column to the right (a fair amount of scrolling at this point). For tips on how to get the most out of your search, check out “A Better Way to Search for Home Listings“

We’re pretty new to this blogging thing, and really appreciate your thoughts and comments, even requests for input. Blair and I both share backgrounds in Education (even Masters’ Degrees, mine being from the school that’s been to the Final 4 3 years in a row), and we consider this an electronic extension of the educating & prognosticating we’ve done for years with our clients, via Newsletters, and through classes.