So Cal Real Estate News

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Good News:

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

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

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

The Big Questions:

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

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

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

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

Our Take:

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

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

What to Do?

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

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

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

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

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

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

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

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

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

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

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

Consider our current situation:

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

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

Consider the Great Depression:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As is illustrated by this sad story.

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

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

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

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

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

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

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

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