So Cal Real Estate News

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 “flipper” Realtor 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.

It sounds like the Senate may once again prove the more statesmanlike chamber. Word is now breaking that Democrat Senator Chris Dodd and Republican Richard Shelby, with help from their respective Senate leaders, have bridged the gap between the parties and dramatically reduced the projected cost of the Senate’s version of Barney Frank’s massive Foreclosure Relief Bill.

The Senate version is projected to cost a little less than 1/3 of the projected $1.7 billion price of Frank’s bill, according to Forbes.com’s post, which is the most detailed I’ve found yet.

The New York Times quotes Senator Chris Dodd as saying “The bill addresses the root of our current economic problems — the foreclosure crisis — by creating a voluntary initiative at no estimated cost to taxpayers which will help Americans keep their homes. The bill also establishes a new fund that will help create more affordable housing for millions for Americans.”

From where we sit in on the Los Angeles and Orange County line, the foreclosure crisis may be at least as much branch as root (see “How we got into this mess“).

This more modest version may be the best we could expect, but I still have several concerns. By itself it’s hardly enough to get us out of the mortgage mess Congress, the Fed, and a cast of thousands got us into. (see “How we got into this mess“).

It’s also a great example of our ongoing mantra, “It’s impossible to know what’s going to happen next.” (See “How low will prices go?“)

Ironically, as Senators Dodd and Shelby were announcing their foreclosure progress, April DataQuick numbers indicated increasing sales but dropping prices, as we recently predicted (See “Snapshot from the front lines: One bottom, maybe two“).

It may be that what we’re seeing is the market finding it’s own bottom, as banks price their REOs at prices that are attracting buyers. Unfortunately, inflation seems to be driving interest rates up, which will put more downward pressure on prices, especially combined with all the foreclosures still in the “pipeline.” (See “So Cal April Foreclosure Data Just In.”)

There are a number of things we like in the Senate version of the housing relief bill. On the whole, it seems like a good move that will help.

However, the new challenge to housing, which we think is potentially more damaging than the foreclosure problem, is ongoing increases in long term mortgage rates (see “Oh-oh! We just passed a nationwide bottom!“).

We still think Congress would do the housing market a bigger favor if they worked to reduce the huge deficits that inevitably drive up interest rates. We’d love to see our three Senator/Presidential Candidates work together on a bill to eliminate congressional earmarks and give the next president a line-item veto.

Now that would be real “straight talk,” real “change we can believe in,” real “solutions for America,” and real foreclosure relief!

Today the Wall Street Journal reported that Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and his committee’s ranking Republican, Sen. Richard Shelby of Alabama have reached an “agreement in principal” that could lead to senate approval of their own version of Barny Frank’s $300 billion dollar mortgage relief bill.

You may recall our post ten days ago about Ben Bernanke’s seeming support of such a bill.

While we are supportive of some of the many things included in Frank’s bill, there are huge problems which we hope our Senators are wise enough to correct.

1. It makes no sense to bail out loans that never should have been made and that will ultimately fail regardless of temporary bailouts. There’s plenty of blame to go around for the subprime crisis (see “How we got into this mess“), some goes to borrowers who lied about their income, other to lenders willing to make no down home loans to borrowers with Fico scores so low I wouldn’t have accepted them as renters, let along borrowers. In either case, there’s no sense in putting off the inevitable for borrowers who never should have become homeowners.
2. It makes no sense to reward and encourage irresponsibility. It’s really up to the borrower to read and understand the loan documents, not to just “trust our agent,” who probably hasn’t read them either.
3. Let’s not punish tens of millions of responsible homeowners who are also taxpayers by forcing them to shoulder billions of potential losses to bail out less responsible homeowners.

In fairness, many subprime borrowers were duped by mortgage brokers who were often also real estate agents, eager to make a commissions for both the sale and the loan. I’ve heard tales of some agents employing full time “signers” to supply signatures on loan applications and documents. Many others simply trusted agents who spoke their language to correctly explain the various English documents. The documents are indeed overwhelming. I usually scan loan docs that I sign, but rarely do I read every word of every page.

The other day as Barb & I were out for an evening stroll we passed a home which had recently been foreclosed and then sold. The buyers paid about $200,000 less than the former owners had paid almost three years ago. They had moved in, and we noticed new kitchen cabinets stacked in the garage, no doubt waiting installation.

This was not a subprime loan gone bad, just a case of a buyer who bought at the peak and then decided to accept a job transfer as prices were declining. They picked a really friendly Realtor whose child was on the same soccer team as theirs (see”Top 10 ways NOT to pick a real estate agent“).  The agent allowed them to overprice the home, then chase the market down, then take it off the market and rent it until their considerable equity was gone.

Sad for the borrower, sad for the lender, good for the buyer.  Kind of a cleansing and a fresh start, ultimately for everyone.  Not the end of the world.  Nobody died.  The sun’s still coming up.  Lender and  borrower made their choices and lived with the consequences.  And the American taxpayer didn’t have to bail anyone out.

Worse things could happen.  Rep Frank’s bailout bill, unless modified by the Senate, might be one of them.

Default Research, Inc. just released their April foreclosure data for most California counties, and the news is not good. In some ways, however, it may not be all that bad, either.

DRI reports primarily Notices of Defaults, which usually occur 4 - 6 months before the actual foreclosure auction is held on the courthouse steps or some other public venue. It can take 2 - 6 additional months after the auction for the bank to bring the property to market. While not all notices of default result in the home actually being foreclosed, the trend is an excellent forward-looking indicator.

In most Southern California counties, DRI’s numbers set new records for this millennium. Orange County, which hasn’t been hit as badly as it’s neighbors, had the worst monthly So Cal increase this April, up 20% from March, and 280% from April 2007. San Diego County, which entered the foreclosure cycle much earlier than Orange county, was still up 18% from March and 187% from a year earlier.

In the Inland Empire, year over year numbers were terrible, but month over month increases were minuscule, at least in Riverside County. There N.O.D.s were up just a half of a percent from March, but a whopping 450% from 4/07, a possible indication a bottom may be nearing there. San Bernardino County was up 475% from April 2007, and also up 12% from March.

As of this writing, Los Angeles County’s numbers were not yet in, but you can check back later by clicking this link to DRI.

What’s it mean? Well, as we’re fond of saying, there are so many variables nobody can say for certain what’s ahead, but that doesn’t stop us from making our best projection.

While the increases were larger than we expected in some areas, this tends to confirm yesterday’s post: We think we’ve passed the bottom for sales in most of Southern California, but not for price (See “Snapshot from the front lines: One bottom, maybe two,” where we have more specifics listed).

The good news may be that such rapid increases in foreclosures combined with the year’s rapid drops in prices may get us through this correction faster than originally projected. We certainly are seeing increased buyer activity.

The question is, how long will it last–especially with interest rates creeping up.

Stay tuned.

Foreclosures are up, sales are up, closings are tougher, and rental vacancies are down.  And one of the smartest investors I know is making offers again, even as he puts his own home on the market.

That’s what we’re seeing from both sides of the Los Angeles County and Orange County lines.

Total Southern California homes available for sale, from Santa Barbara to San Diego, stands at about 163,500, which is down about 3% from the 169,000 we peaked at about three months ago. In less built-out Orange County, inventory is down more dramatically.

David Haas, our favorite local property manager says his vacancies have declined, largely due to an influx of former homeowners vacating after foreclosure and/or short sale.

The managing partner at the real estate office we work out of reports new escrows for April were the best in about nine months, before the subprime crisis. April’s numbers were modestly better than February’s, with March serving as a trough in between. This is actually fairly typical in real estate–many agents tend to get one or two deals into escrow, then focus on closing them before opening new escrows.

However, escrows remain difficult to close, for several reasons. The reason you hear about most has to do with the difficulty qualifying for a loan, and who can blame lenders for tightening up, given their current onslaught of foreclosures. Of course, sub-prime loans have pretty much dryed up, and most lenders are looking for at least 10% down and good FICO scores for no-verification loans. In problem areas with lots of foreclosures, FHA is requiring 5% down, rather than the traditional 3%.

Some escrows are harder to close because they’re “short sales,” where the current lender must accept a discounted, or “short” payoff in order to facilitate a sale and avoid foreclosure. It’s not uncommon for these to fall out of escrow, either due to the lender refusing to accept the discount, making unreasonable demnads, or just taking too long to respond.

However, enough sales are falling out right now that we’re starting to put in “back up” offers on occasion.

As discussed in our prior post, DataQuick’s latest Orange County medians indicate a modest increase in prices as well.

What’s it all mean? Well, the increase in pending sales & prices is pretty typical for springtime (see “Predictions 101: SoCal’s 2 market cycles“), so that doesn’t prove anything in itself.

However, with the ever increasing number of foreclosed homes hitting the market, stabilization in prices is a good thing.

Have we hit a bottom? In number of sales, we’re pretty sure we have. In price, we’re not so sure. The dramatic and rapid decline in home values is bringing buyers back into the market, but continuing foreclosures are keeping the inventory high. As we move into fall and winter, the number of buyers normally decreases, but most indicators are that foreclosures will continue strong through November at least (See “SoCal defaults up: What it means“).

Two key factors are mortgage interest rates and the economy. Were rates to decline, that could bring in more buyers, but long term rates are slowly moving up. Rising inflation will probably continue that trend, at least over the short term.

As for the economy, it’s hard to say, but interest rates and economic indicators move in opposite directions, so there’s some automatic self-correction there. If the economy continues to falter, longer term rates are apt to decline. If the economy starts picking up steam rates will go up. Probably a wash over all, although a return to “stagflation” (stagnant economy with inflation), a possible worst-case scenario, can’t be ruled out.

Ironically, a return of inflation would eventually push home values higher, but would push them down short term.

There are still so many variables, we’re not ready yet to depart from our mantra, “We’re in unprecedented territory, and nobody can really know what’s ahead.”  (See “How low will prices go?“)

Here are the things we’re relatively confident of:

• Long term interest rates will continue to climb slowly for the time being.
• There’s still time for potential buyers to begin saving a down payment, but they do need to start now.
• So Cal homes are unlikely to return to their peak prices in this decade.
• If you buy a home with a 15-year fixed mortgage and do not refinance or add a HELOC or 2nd, you will own it free and clear in 15 years.
• Most of us aren’t as smart as we think we are, so if a home you like makes sense  for you with a fixed loan, and you’re not planning on moving soon, you should seriously consider buying.  We probably aren’t at the bottom, but we may be close, and nobody will know for sure until a few years after it’s passed.
• By the same token, it makes no sense to hold off on selling until you can get the ridiculous price your neighbor got at the insane peak.  If you can do most of what you want to with what your home will net today, go for it–NOW.    The next month or two might be your best opportunity for a while.
• By the same token

Friday update: The DataQuick OC median numbers discussed below came in this morning, and my predictions yesterday (see post below) came out real close to the actual numbers. Wish I could say the same for my predictions for the Duck in the playoffs. Oh well.

The interesting news is that in every category, DQs actual numbers were stronger than I predicted. What’s that mean? Read on. . . .

OK, here’s my call for tomorrow’s “DataSlow” OC house sales update, which I should be for the 4 weeks ended about 4/21. (We’re still a week away from “DataQuick’s April Median numbers, one of the “Two problems with DataQuick’s median prices.”)

Sales (closings) will be up a decent amount from the prior 4-week period but way down from the year before. Right around 1900 total, off about 40% y-t-y. Continued gradual improvement, typical for deals going into escrow in February.

BTW, April closings, when they get released around 5/15, will be up about the normal amount from the very low March closings (but way below last year). It looks like May will do even better on sales.

Price is another matter. Especially median price. Down a small tad below 20% from a year ago, and up a small tad from the last DQ reported median of $506,000. Maybe $508,000.

However, if you look the details, like in the last report, I think you’ll see the new construction pulling down the overall index with both prices and sales down more than for resales. Resale SFRs and even condos aren’t doing as badly as new construction.

What it means is subject to interpretation. I think if long term mortgage rates (not to be confused with short term fed funds rates) started coming down further, we might have passed the bottom, especially with the activity Steve Thomas and I both are seeing in new escrows.

However, rates are already moving up, and instead of passing fiscal restraint issues to push long term rates down, our beloved Congress continues to try to borrow their way out of this mess with massive bailouts from Bear Stearns to folks who lied to get loans on home they never should have bought or refinanced.

With the interest we’re seeing from buyers, I really think if Congress passed long term fiscal reform, we could put the worst behind us. Things like a line item veto for the next president, cancellation of earmarks, a gradual move to a balanced budget with mandatory across the board cuts and tax increases to force discipline on our free borrowing legislators.

That would be a real mortgage relief bill!

I’ll post links to DQs numbers when they’re available, & you can see how we did.

I’d also like to get a more detailed post up about our thoughts about real mortgage relief. Trouble is, I’ve got to get to work on my real job so I can pay my mortgage. Because I really don’t want Barney Frank forcing my grandkids to eventually pay it for me.

Friday 5/9 postscript: DQs actual numbers (click here for OC Register blogger Jon Lansner’s  DQ graphs & comments for today) indicate even greater strengthening than I expected. Still having some optimism left in my troubled soul, I’d like to hope this means we really have reached a bottom.

In fact, I’ll go so far as to say that if long-term mortgage rates dropped 1% instead of continuing to go up, and if lenders adopted more reasonable underwriting standards, I’m pretty sure we could call last winter as the bottom for both prices and sales.

But I doubt either of those will happen soon. Instead, I think rising mortgage rates (not to be confused with the fed’s overnight, short-term rate) will combine with continuing over-reaction by investors and lenders with tougher than necessary standards to cut this party short. The large pool of homes entering foreclosure is also a negative indicator.

It looks to me like we have passed the bottom in terms of sales activity, but the bottom in terms of price probably (or should I say “maybe?”) still lies ahead this coming winter or next.

DataSlow’s lagging and confusing median prices will continue to improve for another 2 - 5 months, but we’ll see price month-over-month price declines kick in later this year, even as the year-over-year percentage drops decrease.

Overall, I’m beginning to become more optimistic, and am willing to admit that the bottom may, indeed, be past. But only if mortgage rates come back down, which I really don’t see happening.

Bottom line: We’re not deviating from our November post, “How low will prices go?” Nobody can really know what’s next.