So Cal Real Estate News

(7/30/08) Back on April first of this year, while debate was raging on the bill, we wrote a post titled “Major housing breakthrough near?“  It included the following:

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.

We meant it as an April Fool’s post!

Turned out, the joke was on us, & we’re glad!

While the bill’s far from perfect, it includes a lot of positives, from increased oversight of the mortgage giants Fannie, Freddie, to tax credits for first time buyers for a limited time.

What’s especially significant is the numerous compromises it took to get the bill through Congress.  For example, that first time buyer tax credit ended up being an interest free loan that has to be paid back over fifteen years.  Stimulus for housing now, partial payback for the taxpayers later.

Many housing bears are eager for values to fall more, even if it does ruin the nation’s economy and banking system.  Their hatred for this bill might be evidence they fear it just might work.

We think it’s a step in the right direction.  Maybe several steps.  The bottom of this crash is at least a little closer today than it was yesterday.  On our latest projections post, we increased the probability of a bottom within the next seven months by 5% directly as a result of this bill.  Hopefully, we’re being conservative.  (That post also lists some of the additional beneficial features of the bill.)

Thanks to those leaders in D.C. that finally realized that ultimately, as Americans, we’re all on the same team!

(July 30, 2008)  At 9 A.M. Eastern Standard Time, on the last Tuesday of every month, McGraw-Hill’s Standard & Poor’s Unit releases the  Case-Schiller Home Price Index for the previous month, just like clockwork.

The news media love it:  “Breaking news” on housing they can schedule into their calendar months in advance, just like DataQuick’s monthly median home sales price reports.

Conversely, Case Schiller must love the media. If it’s the last Tuesday of the month, Case-Schiller will on the radio,  be all over the internet, in the networks’ evening news, and in the next day’s paper.

There’s one thing to love about the Case Schiller Home Price Index, and at least two problems.

About Case-Schiller, In S & P’s Own Words:

Let’s start by getting an overview “straight from the horse’s mouth:”

The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States.

These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.

The S&P/Case-Shiller Home Price Indices are calculated monthly and published with a two month lag.

Looks like we may have just given away one of those problems, but before we get into that, let’s see exactly how these folks come up with their numbers, again taken from their own website (links at the end of this post).  The key to their method is a tool Karl Case and Robert Schiller came up with back in the 1980’s.  According to S & P:

They developed the repeat sales pricing technique, still considered the most accurate way to measure this asset class. [even if they do say so themselves!] The methodology measures the movement in price of single-family homes in certain regions.

This is done by collecting data on sale prices of specific single-family homes in the region. Each sale price is considered a data point. When a specific home is resold, months or years later, the new sale price is matched to the home’s first sale price.   These two data points are called a “sale pair.” The difference in the sale pair is measured and recorded. All the sales pairs in a region are then aggregated into one index.

Sales pairs are carefully screened for any data points that would distort the index. These factors include foreclosures, non-arms length transactions (sales between family members) and suspected data errors where the order of magnitude of the change is substantially different from other sales pairs in the region.

Once the “sales pairs” have been screened, they are weighted:

The indices are designed to measure the change in the price of homes that have not undergone significant positive or negative changes in quality. Sales pairs are assigned weights to account for fluctuations in price that can be attributed to factors like extensive home remodeling, adding a home addition, or extreme neglect.

For example, the indices assign smaller weights to sales pairs with large change in sales price relative to the community around them. The assumption is that this change is due to remodeling or neglect. Sales pairs are also weighted based on time intervals between sales.  Sales pairs with longer time intervals are given less weight than sales pairs with shorter intervals to account for the probability of physical changes.

In other words, Case-Schiller compares sales of the same property, trying to eliminate sales where changes in value could be influenced by neglect, upgrades or sales between family members

What’s not to like about that?

All indices have strengths and weaknesses.

Problem # 1:  A bigger lag than you think!

One of Case-Schiller’s weaknesses seems pretty obvious:  a two month lag.  However, as the infomercial salesperson says, “but wait, there’s more!” Again, from Case-Schiller themselves:

The monthly indices use a three-month moving average algorithm. Home sales
pairs are accumulated in rolling three-month periods, on which the repeat sales
methodology is applied. The index point for each reporting month is based on
sales pairs found for that month and the preceding two months. For example, the
March 2008 index point is based on repeat sales data for January, February and
March of 2008.

OK, time for a pop quiz.  Exactly when was that “March 2008 index” released?  The last Tuesday in April!

We’re not just looking at a two month lag here–we’re looking at a two-month lag on stats averaged over three months.  Using the middle of that three month range, we’ve got a three and a half month lag, with a five month lag on the oldest stats!

Let’s use a more current example.  I’m writing this on Wednesday morning, July 30, 2008.  Yesterday, July 29, Case-Schiller released their report for May, which was actually a composite of March, April, and May closings.

“But wait, there’s more!”

When did those March, April, and May closings go into escrow?  Here in Southern California, the “average” escrow is about 45 days, although lending problems often stretch that out, especially in the current chaotic mortgage market.  In the current market, it often takes about a week of negotiation before escrow is actually opened.  Some agents wait even longer, until the buyer has a physical inspection completed and repairs negotiated.  So those deals that closed in March, April, and May were actually negotiated during January, February, and March!

Yup, that’s right.  The price drop the media breathlessly hailed yesterday took place on sales that were negotiated five to seven months ago.  Now that’s what I call a lagging index!

Bet you didn’t hear those little details on the news last night!

Other problems:

Case-Schiller tells us they try to “carefully screen” the matched pairs they base their report upon, but a computer can only do so much.  They can spot changes in square footage between sales, but tax records in California rarely reveal anything about most kitchen remodels, let alone “neglect.”   Sales between family members are easy to spot if everyone has the last name, but that’s only the case some of the time.  And what if the last name is as common as Smith, Rodriquez, or Nguyen?

Random note: I just misspelled “Nguyen,” and Firefox’s spell check caught it!  I’m impressed.  If you’re still using Internet Explorer, maybe it’s time for a free download!

Besides an amazingly long lag and probelms in screening the “matched pairs” of sales, other problems  include the use of broad regions. Real estate trends can vary dramatically between adjoining zip codes, school districts, and even condo projects; painting with a broad brush obscures significant details.

Since Case-Schiller reports an index, not actual prices, it gets even harder to interpret.  Does a 23%  drop in the index really indicate a 23% drop in prices?  Does anyone really know what it actually indicates?  If you’re a CPA or statistician, you might want to follow the links at the end of this post deeper into C-S’s explanations and let us know your conclusions with a comment.  In any case, with an “index” we’re an additional step away from actual prices.

Finally, for now at least, Case-Schiller doesn’t tell us anything about sales volume–it just gives us a cryptic but supposedly well though-out index of price.

So What’s to Like About Case-Schiller?

For all its flaws, Case-Shiller is an index that seeks to get beyond averaging medians (see “Two big problems with DataQuick’s monthly median price reports“).  It gives us useful data from a different perspective that can be helpful looking back.  But the time lag makes it problematic for forecasting or even for evaluating forecasts.  It’s hard to figure out what’s going to happen next, when you don’t yet know what’s been happening over the past three months.

So What Do We Make of Case-Schiller’s Latest Numbers?

As one would expect from a lagging index, they tend to confirm what we already know:  Prices were down dramatically earlier this year.  In fact, for the Los Angeles and Orange County regions, home prices last winter were down about 25% from a year earlier.  That’s the crux of yesterday’s C-S report.

The big mistake we see right now is the impression that this is a new, record-breaking drop.  It’s just old news about the record-breaking drop that was occuring in the market last winter, and that DataQuick when they released their their closing data for the spring months. Old news.

C-S’s latest report certainly doesn’t change the opinion of where the market’s headed that we posted last Friday.  Nor does it change our basic recommendations of what potential sellers and buyers should do in uncertain times like these.

Today’s unusual real estate market presents unusual opportunities along with some risks.  For buyers, the risks have been dramatically reduced from a year and a half ago, as Case-Schiller’s most recent numbers document.

For more information:

Link to Case-Schiller’s monthly Home Price Indices

Standard & Poor’s own description of their Case-Schiller index

Making Sausage: S & P’s own description of how the Case-Schiller indices are compiled

Wikipedia entry on the Case-Schiller Index (Not Wikipedia’s best article–disappointing and confusing)

Living in Earthquake Country

(July 29, 2008)  I experienced my first Southern California earthquake as an infant almost two years of age.  It happened at night, and my parents rushed in to check on me.  I guess we California natives just come wired for these things:  I’m told I was perfectly calm, lying in my crib singing “Rock-a-Bye Baby!”

I’ve experienced dozens of earthquakes here in the Los Angeles basin since then.  To me, they’re kind of fun, as long as nobody gets seriously hurt.

While quite a few of those earthquakes provided a real “E-ticket” ride, only a few of them were very significant.

Perhaps most memorable for me was the 1971 San Fernando Valley quake which I rode out on the top floor of UCLA’s Rieber Hall dorm one morning.  As we swayed back and forth seven stories above the gound I quickly figured out that a bookcase over a dorm bed isn’t a real good idea in earthquake country.

We were living in Lakewood when the Norwalk quake struck nearby.  It wasn’t a big one, but it was close enough to knock a lot of things off of shelves and damage a few chimneys and walls.  It struck in the morning as I was about to go out the door for a jog.  I stood in the middle of our kitchen, pushing cabinet doors shut and trying to keep things from raining onto the floor.  Our elementary-school aged daughter did what she had been taught and stood under a doorway, and then called upon me to do likewise.

That Norwalk quake went on for a fairly long time and knocked out the power, but never got real violent.  Still, it panicked one of our friends, who ran out into the middle of her street half-naked.

Earthquake Preparedness:  No time like the present!

Ironically, I had just printed up about 500 “What to do in an Earthquake” flyers to pass out in my “farm.”  (A “listing farm” is a specific neighborhood a Realtor, known as a “farmer,” cultivates with regular flyers, gifts, and notepads.)

So, as soon as I figured out how to get into the vault-type garage when the electricity to the opener’s off, I went on my jog and passed out the flyers as I went.  Back then it took about a week to get a good flyer printed up, so folks wondered where I got the inside tip about the quake.  The response was so good that for a while I just kept an earthquake flyer ready to pass out after the next one.

Maybe “Mother Nature” provides us these modest tremblors to spur us to do the needed preparation should that legendary “Big One” ever hit close to home.  In any case, now’s a good time to check your earthquake preparedness.  Some steps are real easy, and they might not be the ones you’re thinking of, either:

• Do you have comfortable shoes, a blanket, flashlight, some first aid supplies, and an extra half gallon of two of water in the trunk of each car?  (Some granola bars aren’t a bad idea, but lack of water’s a much bigger threat for most of us than lack of food in an emergency.)
• Got a working flashlight and sturdy slippers by every bed in your house?
• Is anyone in your home sleeping next to a bookcase, heavy wall hanging, etc.?
• Does everyone know how and when to shut off the gas and is a shut-off tool or large wrench wired to your gas meter?
• Is your water heater strapping up to current standards?

Additonal Online Information:

California Dept. of Conservation on “What to Do Before, During, and After an Earthquake,” with additional links.

L.A. Fire Dept. Emergency Preparedness Guide

Los Angeles Building Dept. has an pdf file on steps to strengthen your home structurally .

Please feel free to suggest helpful links you might have found by adding your own comment at the end of this post.

How Big a Risk?

I much prefer living with earthquakes than the floods, hurricanes, and tornadoes that plague other regions of the country.  Not to mention the humidity or the cold.  A little preparation goes a long ways to minimizing the risks.

But if you’re going to worry (which is never a good idea), chloresterol, fat, and bad drivers are far bigger risks than earthquakes.  Actually, worry’s a greater threat than an earthquake!

So shake it off and get on with your life!  Right now it’s about 2 p.m. and a blamy 77 degrees with a pleasant breeze, and the Angels have beaten the Red Sox six games in a row.  Why on earth would I ever want to live any place else?

(July 25, 2008)  Let’s start off by reiterating that this is risky business. There are lots of variables that could change in the months ahead, from interest rates to employment to the international scene. That’s why we continue to insist that nobody can predict the bottom with absolute certainty, as Freddie Mac’s chief economist Frank Northaft told us last fall. (See “How low will prices go?“)

Be that as it may, everybody wants to take their best guess at what’s coming next, and recent developments are making us think it may be time to update our projections.

The Housing Relief Bill

A big reason for our increasing optimism is President Bush’s pragmatic decision this week to accept $3.9 billion for cities to buy up and fix foreclosed properties as a trade-off for federal guarantees for Fannie Mae and Freddie Mac which should calm both the stock market and stabilize lending.

Although the additional deficit spending the bill may create will put some more upward pressure on interest rates, we do think it will go a long ways to reducing the glut of foreclosures.  On the whole it seems to be a surprisingly good example of well-crafted, bipartisan legislation.

Besides the money to buy up foreclosures, other features in the bill that we like include:

1. A permanent increase in loan limits for Fannie, Freddie, and FHA to $625,000 in the highest cost areas like much of Southern California.

2. A “tax credit” (which is repaid over fifteen years interest free) of  up to $7,500 for first time buyers who close escrow between 4/9/08 and 7/1/09.  (Although the credit phases out for joint filers with income over $150,000 and individual filers over $75,000, Blair & I think this will increase demand significantly, especially early in 2009.   In fact, we’ll break with our normal procedure here and actually recommend first time buyers contact us now so we can set them up with a personalized “web portal” which allows them to search, save, and categorize properties on the SoCal Multiple Listing Service.  562.822.SOLD.)

3. $11 billion in tax free municipal bond authority for states to set up low interest loans to first time buyers.

4. It tightens regulations to avoid future repeats of the recent mortgage meltdown.

5. Making FHA mortgages more available, especially for “work outs” of over encumbered (”upside down”) borrowers who qualify and whose lenders will participate by writing down the loan to 90% of the home’s current market value (details in the article below).

6. The complex but intriguing arrangement that encourages loan workouts instead of foreclosures or “short sales.”  The lender reduces the loan amount to 10% below current market value in exchange for getting the loan off their books.  The borrower agrees to share that 10% and future equity with the taxpayers.  And we the taxpayers (also known as the government) guarantee the new loan through FHA, provided the buyer can qualify.

The total revised package is expected to sail through the Senate and Bush has now promised to sign it.  While dangers of inflation and unemployment still threaten, we think the housing bill will have a more positive impact than we originally thought.  Combine that with the fact that the market seems to be finding a bottom in terms of price, and we’re hopeful the positives will outweigh or at least neutralize the negatives of the normal summer slowdown, foreclosures, and shaky employment.

With that in mind, we’re now revising our projections as follows:

Our Current Best “Guestimate”

40% chance: Bottom sometime between now and the end of winter:

We think the limited time offer of $7,000 tax credits for first time buyers will provide a significant stimulus to a market where we’re already seeing multiple competing offers on well-priced bank REOs.  At the same time, cities will begin bidding for some foreclosures, and others will see favorable workouts with the lenders which the bill makes possible.

Some of the bills provisions don’t kick in until October, but the tax relief is retroactive.  We think the bottom will most likely coincide closely with our normal seasonal cycle, which bottoms in December or January.  (We’re talking about escrows that open in December or January, which would close in February or March be reported by DataQuick a couple weeks later.  See “Predictions 101: Our 2 market cycles” and “Two big problems with DataQuick’s monthly median price reports.“)   However, it’s possible that the bottom may actually come earlier.

Of course, nobody will know for sure it’s a bottom until prices start rising in the months following.  Then we’ll be wondering if it’s a false bottom through the following winter.

Which So Cal County will bottom first? All real estate is local, and we think Southern California’s Coastal Plane will hit the bottom first, followed by the desert and Inland Empire areas possibly a year later.  This is due to the impact of gas prices on outlying areas plus overbuilding and more foreclosures there.  Of the larger So Cal counties, we expect Orange County home prices to bottom first because it’s the most built-out and has the lowest percentage of starter homes.  We expect either Los Angeles or San Diego County home prices to hit bottom next, followed by Riverside and San Bernardino Counties.

Of the smaller counties, Santa Barbara looks like it’s already bottomed, with June foreclosures there hitting a 14 month low.  Ventura County homes may be nearing a price bottom, while the smaller inland counties are largely in the same boat as the Inland Empire.

The other 60%: There are at least three challenges to a bottom this winter:

1. Inflation pushing interest rates up and reducing affordability.
2. The economic slowdown that we seem to be entering, with major job losses in automotive, construction, finance and real estate.
3. The continuing onslaught of foreclosures and resulting REOs.

40% chance: Bottom next winter. If the economy stabilizes and foreclosures slow down by year’s end, we could hit a bottom this winter. This is still the most common pick by most economists–recovery sometime in 2010, and has been consistently for the past year. We think the recent sharp decline in prices may speed things up. What would help even more would be a resumption of safe oil drilling offshore and in Alaska, with an excess profits tax being used to spur energy alternatives industries.

Again, we’re talking about the Coastal Plane areas of L.A. Orange and possibly San Diego Counties, with the Inland Empire and desert regions bottoming sometime in the following 14 months.

20% chance: Bottom later than next winter. Either a lengthy recession, or a bottom late winter of 2010-2011.

What to Do?

We still think market timing shouldn’t be as important as your personal situation in making housing or maybe even investing decisions. (See “What to do when nobody knows what’s next.”)

Sellers: Act now or be prepared to wait–maybe several years.

Buyers: There’s a significant chance that what we’re seeing now is as low as prices are going to go.  But we’re saying there’s an equal chance that the bottom won’t hit until a year from this winter.  And we’re also saying nobody can know for sure.

If you’re in a position to buy, start looking now & if you see something that works for you, make an offer at a price you can afford.  You can use the MLS links in the right hand column to directly access any MLS in Southern California.

As a minimum, buyers should start saving your down payment (new concept, I know–check out wikipedia or google it) and get your credit in order (another new concept for some of us, but necessary now.) Do your Christmas shopping & card writing now, & see how the economy’s doing in November–it may be time to start writing lowball offers. Or to wait another year.

Although predicting a 40% chance of a bottom in the next five months hardly echos NAR’s “buy now!” theme, it’s dramatically more optimistic than we were just a few weeks ago.  Of course, new developments could reduce or encourage our optimism.   Stay tuned, & we’ll keep giving you our best projections based on what we’re reading, what we’re seeing on the front lines, & our experience of over 30 years in this amazing, interesting, and unpredictable business.

What Would Really Help

The “Housing Bailout Bill” seems like a pretty good example of Congressional give-and-take for the common good.  We think there are two logical but somewhat radical additional steps our politicians need to take now to protect our economy and our way of life:

1.  Modest steps to federal deficit reduction, specifically, reducing “pork.” I’m thinking of wasteful spending to get Legislators re-elected, like Alaska’s famous “Bridge to Nowhere.” Passing a bill eliminating such Congressional “earmarks” and also giving the next president a line-item veto would be a very simple step in the right direction.  I’d also favor a mandatory deficit reduction bill that would impose across-the-board spending cuts and tax increases if our politicians couldn’t come up with budgets that meet a long term schedule to reduce the federal deficit.  Taxing our great grandkids is the ultimate in “taxation without representation,” which our forefathers rightly considered tyranny.

2.  Reduce the trade deficit by allowing careful new drilling for oil, but with a catch.  The U.S. is sitting on more untapped oil reserves than any country in the world. I say use the revenue from that oil to create the best clean, renewable energy industries in the world.  Open up more areas for safe drilling but dramatically increasing leasing fees on federal lands. Then split the billions in increased federal revenue between federal deficit reduction and renewable energy innovations.

That would undoubtedly strengthen the dollar, stimulate the economy, reduce the trade deficit, and lead  to a cleaner environment.  In the case of Alaska’s Arctic refuge, drilling would sacrifice less than .01% of ANWR to actual exploration in return for a $137 - $327 billion reduction in our trade balance (see Wikipedia, “Artic Refuge drilling controversy.”)   We can keep sending our the money to the Saudis, or keep it here and use it for high paying jobs, deficit reduction, and energy innovations.  Seems like a no-brainer to me, but I am a Realtor. . . .

We welcome your questions or comments

(July 24,2008)   This morning’s news provided more evidence that this spring’s buying surge is subsiding, as we predicted.

The National Association of Realtors released their statistics for existing-home closings in June:  Sales were off 2.6 percent from May, at a seasonally adjusted annual rate of 4.86 million units in June, down from a pace of 4.99 million in May.  That’s 15.5 percent lower than the relatively hot 5.75 million-unit rate of June 2007, when the market was just beginning to slow.

Home inventory (available listings) rose 0.2 percent to 4.49 million existing homes available for sale, an 11.1.-month supply at the current sales pace, up from a 10.8-month supply in May.  Inventory is a better indicator of future sales than closings.  Given the ongoing influx of foreclosures, and the normal seasonal trends (See “Predictions 101: Our 2 market cycles“) we were surprised that inventory didn’t grow faster.

To us, this modest increase in inventory is good news, and may actually be an indicator the tsunami of foreclosures may be nearing a peak. On the other hand, the slowdown in June closings would indicate the market started slowing way back in April, since that’s when June closings started going into escrow. That’s real cause for concern.

NAR’s data is less useful than DataQuick’s for several reasons:

1. It’s nationwide, and the smallest breakdown is into 4 national regions (see below)
2. It excludes most resales, FSBOs (”For Sale By Owner) and other transfers that didn’t use a Realtor or were not listed in a local MLS, such as exclusive listings.
3. It’s released about a week later than DQ’s numbers for the same month.

Regular readers already know our complaints about “DataSlow, which also apply to NAR’s medians:”

1. Closings lag actually lag sales by about 45 days, making it “old news.”
2. Median prices area easily skewed by shifts in what price homes are selling, making it hard to read the tea leaves.
3. Most news outlets rarely explain DataSlow’s flaws, so the general public seems to think the numbers reflect actual values in the current market.  (For details on DQ, see Two big problems with DataQuick’s monthly median price reports“

NAR’s stats for the western region are actually more positive, with sales rising 1.0 percent in June to a pace of 1.03 million, only 6.4 percent lower than June 2007.  That’s more in line with what we were seeing locally in April, although the traditional post-spring slow-down has set-in since.  The median price in the West was $288,400, which is 17.2 percent below June 2007.  Medians in most SoCal markets are down about 25% from a year ago, based on DataQuick’s June numbers.

NAR spinmeister and chief economist Lawrence Yun, put his usual positive spin on the numbers.  “About four in 10 homes are purchased by first-time buyers, which frees existing owners to trade up,” Yun said. “With many potential first-time home buyers on the sidelines, a first-time buyer tax credit would have a significant positive impact on both housing and the economy. Combined with permanent increases to mortgage loan limits and enhancing the FHA loan program, the housing stimulus package working its way through Congress would go a long way toward helping consumers and boosting the overall economy.”

While we’re not sure the housing relief bill that passed the House yesterday will go a “long way” towards helping us, we do think it’s a big step in the right direction, and it tends to reinforce our projections in our last post, “Home price bottom near for Orange County?“  In fact, we’re thinking about actually making our numbers there a bit more optimistic due to Bush’s announcement that he will sign the housing bill.

The biggest downside of the housing bill is that it pushes up the federal deficit even further, which will put even more upward pressure on interest rates.  What Congress & the Administration really need to work on is a Deficit Reduction Bill, which would work to eventually reduce the deficit by eliminating “earmarks,” giving our next president a line item veto, and forcing a combination of mandatory budget cuts and mandatory across-the-board spending reductions if certain deficit reduction targets aren’t met.  Don’t hold your breath on that one.

We still believe our economy also needs is a serious effort to reverse the massive outflow of American dollars to OPEC.  We think the envirornmentalists among us need to allow for low risk drilling in Alaska and off shore, as well as safe nucleur power.  Conversly, the U.S. needs to charge market value for new oil, not give it away free to the oil companies.  That would provide billions of dollars to divide between deficit reduction and alternative energy research and development.

All of which would create millions of good jobs, stabilize the dollar, reduce our balance of payments deficit, reduce federal deficit spending, bring down the price of oil, reduce interest rates, and provide real relief for American homeowners and even banks.

Click here for more June sales info from NAR.

For today’s details on the “Federal Housing Finance Regulatory Reform Act of 2008″ and what’s next, click here.

Updated late 7/23 with our own concrete region wide projections.

(July 22, 2008) The good news is, according to one formula, Orange County’s home price bottom may be closer than most of us thought.   On the other hand, the same formula projects that prices may still need to fall more than many of us thought.

Nobody really knows for sure, it seems like everyone has a theory about when home prices will hit bottom.

It’s Local

One thing we can be pretty sure about is that the bottom will come at different times in different locations.  We expect prices to bottom last in areas like the Inland Empire and the desert regions, which are more affected by new construction, foreclosures, and the high price of commuting.

Conversely, prices should bottom sooner in Southern California’s Coastal Plane in neighborhoods less impacted by foreclosures, new construction, high gas prices and economic slowdowns.   That might make Orange County a strong candidate for the first Southern California county to hit bottom.

An Interesting Formula

According to the calculations of one Orange County prognosticator, that bottom may only be a few months away.

“Seeking Alfalfa” is a common participant in the Orange County Register’s lively real estate blog, Lansner on Real Estate (linked in our blog roll in the right column).  From what we can tell, he’s got a fair amount of experience in the lending field.  He recently came up with a formula for predicting when the market might bottom, based largely on common underwriting standards for home loans along with median prices and income levels.

What’s nice about Alfalfa’s prediction calculator is you can modify it however you wish.  As he says, it’s “a rule of thumb calculator and should be entered onto an Excel program.”   What’s also nice is that he gave us permission to reproduce it here.

Alfalfa’s basic calculation for Orange County is as follows:

MONTHS TO THE BOTTOM
Household Income: $72,600 Median
Underwriting Ratio: 36% Allowable for Housing
Annual Housing: $26,136
Monthly Housing: $2,178
Loan Constant: 0.005735 Based on FNMA 30 year Fixed Rate Loan, currently about 6.1%
Supportable Loan: $379,773
Down Payment: $75,955 Assume 20% including move-up’s
Supportable Demand: $455,728
Median Price: $500,000
Differential: $44,272
Percentage: 9%
Change Rate Up or Down: -2.9% Varies by Location, make sure to use Current change rates, not Historic
Months to the Bottom: 3

Bottom line: Based on current trends and lender standards, this formula indicates Orange County home prices should bottom after falling another 9%, which should take about three months.

When I first saw this formula, I thought of several objections, but after a while I realized most of my concerns tended to cancel each other out.  Overall, it’s as accurate and logical as anything I’ve seen so far.

Of course, there are lots of variables in the formula that could change over the next three months, from interest rates to household income.  But that’s exactly why we continue to insist that nobody can predict the bottom with absolute certainty.  (See “How low will prices go?“)

Our Current Best “Guestimate”

30% chance:  Bottom this winter:  We  think the bottom will coincide closely with our normal seasonal cycle, which bottoms in December or January for escrows that close in February and are reported by DataQuick in mid March.  (See “Predictions 101: Our 2 market cycles” and “Two big problems with DataQuick’s monthly median price reports.“)

So, instead of calling a price bottom for OC in 3 months, which would be late October, we’d use Alfalfa’s formula plus our take on the annual cycle and push the bottom back to this coming December, which DataSlow will report after those sales close in February.  But they won’t know it’s a bottom until prices start rising in the months following.

If OC actually bottoms this winter, L.A. and Ventura Counties might not be far behind, with San Diego next, then the desert and Inland Empire areas bringing up the rear a year later.  (We’d expect Santa Barbara to actually bottom ahead of the OC.)

The pick-up in sales and multiple bids on REOs indicates that if interest rates don’t go up (a big “if”), current prices may well have corrected enough and OC prices could be bottoming now, which is why we give a 30% chance of a bottom this winter.

The other 70%: There are at least three challenges to a bottom this winter:

1. Inflation pushing interest rates up and reducing affordability.
2. The economic slowdown that we seem to be entering, with major job losses in automotive, construction, finance and real estate.
3. The continuing onslaught of foreclosures and resulting REOs.

40% chance:  Bottom next winter. If the economy stabilizes and foreclosures slow down by year’s end, we could hit a bottom this winter.  This is still the most common pick by most economists–recovery sometime in 2010, and has been consistently for the past year.  We think the recent sharp decline in prices may speed things up.  What would help even more would be a resumption of safe oil drilling offshore and in Alaska, with an excess profits tax being used to spur energy alternatives industries.

Again, we’re talking about the Coastal Plane areas of L.A. Orange and possibly San Diego Counties, with the Inland Empire and desert regions bottoming sometime in the following 14 months.

25% chance:  Bottom later than next winter. Either a lengthy recession, or a bottom late winter of 2010-2011.

5% chance:  Bottom before this winter. The foreclosure relief act and Fannie/Freddie stabelization are steps in the right direction, and the economic stimulus of Bush and Congress compromising on a drilling bill that would finance a “Marshal Program” of energy alternatives, things could pick up immediatly.

What to Do?

We still think market timing shouldn’t be as important as your personal situation in making housing or maybe even investing decisions. (See “What to do when nobody knows what’s next.”)

Sellers: Act now or be prepared to wait–maybe several years.

Buyers: Start saving your down payment (new concept, I know–check out wikipedia or google it) and get your credit in order (another new concept for some of us, but necessary now.) Do your Christmas shopping & card writing now, & see how the economy’s doing in November–it may be time to start writing lowball offers. Or to wait another year.

Just trying to pass on our thoughts and those of others from here on Southern California real estate’s front lines.  We’d love to hear what you think.

July 21 update: Yesterday the “The Housing and Economic Recovery Act of 2008” was passed by the House by an overwhelming 272-152 vote.  It’ now goes back to the Senate where prompt approval is expected.  Meanwhile, the Bush administration has dropped their opposition to the bill’s $3.9 billion in grants for local governments to buy and rehab foreclosed properties, as a trade off for propping up Freddie Mac and Fannie Mae.

Other provisions of the bill in it’s current form include:

• Permanent increases Fannie, Freddie, and FHA loan limits to $625,000 in the highest cost areas–a significant boost for high priced areas like much of Southern California.
• A tax credit of  up to $7,500 for first time buyers who close escrow between 4/9/08 and 7/1/09. (We think this will increase demand, and recommend first time buyers contact us now so we can set them up with a personalized “web portal” which allows them to search, save, and categorize properties on the SoCal Multiple Listing Service.  562.822.SOLD.)
• Provides $11 billion in tax free municipal bond authority for states to set up low interest loans to first time buyers.
• Tightens regulations to avoid future repeats of the recent mortgage meltdown.
• Makes FHA mortgages more available, especially for “work outs” of over encumbered (”upside down”) borrowers who qualify and whose lenders will participate by writing down the loan to 90% of the home’s current market value (details in the article below).
• A tax break for homeowners who don’t itemize:  A $500 - $1,000 write off for their property taxes in 2008.

Overall, we think this bill is a major step in the right direction, and it reinforces the projections we made yesterday for local home price bottoms occurring this winter or next. (See “Home price bottom near for Orange County?“)

Most of the information about the bill in the article below is still accurate, other than the fact that the bill has now passed the House in it’s revised form.

(July 14, 2008, 10:00 a.m.) I just received this info this morning from the National Association of Realtors’ Governmental Affairs Department. It’s the best I’ve seen yet of what the next steps are for the “Federal Housing Finance Regulatory Reform Act of 2008,” better known as the “Mortgage Relief,” “bailout,” or “housing” bill that the Senate approved last week. I’ll pass it on pretty much in it’s entirety:

The proposed $8000 homebuyer tax credit and the FHA and GSE reform and mortgage rescue legislation (H.R. 3221) has passed the Senate and now goes back to the House for what legislators hope will be a binding revision that can pass the House and Senate before the end of July. This “ping pong” effect arises because some Senate Republicans have lodged formal objections to the usual process of taking two differing versions of the bill to a House-Senate conference.

The House and Senate versions of the housing bill are now in very close alignment, with only a few issues to be resolved. Many of the issues revolve around the question of whether the bill will be “paid for.” The major focus of the pay-for problem is the provision in the Senate package that would authorize $4 billion for grants to local governments where communities have been particularly hard-hit by foreclosures. The grants would be made under the Community Block Development Grant program (CDBG). These CDBG provisions are not “paid for.” House Blue Dogs (fiscally conservative Democrats) insist that it be paid for. House Republicans, including President Bush, oppose the CDBG provision altogether. President Bush has threatened to veto the bill, in part because of the CDBG provision. Accordingly, the House has the choice of deleting the grant provisions or finding other, offsetting spending cuts.

Speaker Pelosi (D-CA) also hopes to maintain the 2008 high cost limits of $729,000, while the Senate has agreed to limits up to $625,500 for both the GSEs and FHA. While NAR continues to work for higher limits, it is important to note that even $625,500 is significantly higher than the $550,440 originally passed by the Senate Banking Committee.

Finally, additional tax revenues are needed to close a gap on the tax package. A non-real estate provision has been identified and will likely be added in this final House package, as well. The tax provisions themselves are not likely to be modified in the House.

Financial Services Committee Chairman Frank (D-MA), the architect of the housing and financial reforms, anticipates that the House can finish its work by July 18. If the bill does pass the House by then, the Senate should have adequate time to cast the final vote and send the package to the President for signature by the end of July.

Click here for a chart comparing House and Senate provisions in pdf form.
(Please note: the form is dated “April 2008,” and much has changed in both bill since then.)

Dave again.  As I indicated last week, this legislation is turning out better than I thought. (See “Better than I thought: Taxpayer protections in the “bailout” bill.”)

It’s not going to reverse the home price declines by itself, but it will help reduce the damage caused by the continuing flood of foreclosures.

It’s our opinion that we may be reaching a bottom sooner than originally expected. More about that in a post to come today or tomorrow. But it’s also been our position since November that there are still more surprises ahead. (See “How low will prices go?“)

(7/12/08, 11 p.m.)  I’ve been selling Los Angeles and Orange County real estate for 28 years. I’ve seen conforming loans at 18% in the early 80’s, S & L failures of the late 80’s and massive job losses in the early 90’s but I’ve never seen anything quite like the ongoing drama that’s unfolding before our eyes.

After working through the weekend, the Federal Reserve and the U.S. Treasury announced late Sunday a series of moves designed to show strong support for the two semi-private bulwarks of U.S. mortgages.  (Details here.)

This is more of a reaction to the housing and mortgage mess than any real solution.  They’re not stopping the bleeding–just trying to keep it from increasing at an even faster rate.

In the short run Sunday’s actions keep the collapse in housing values from accelerating even more.  Over the longer term they may actually reduce interest rates, and actually slow the ongoing downward cycle.

How We Got To This Point:

In our humble opinion the current mortgage and housing mess was caused by a combination of:

1. Excessive stimulus by the Fed after 9/11 at a time when the housing prices appeared to be heading towards a correction.  (Essentially, interest rates were dropped and housing was used to keep the economy from crashing, possibly a wise move in view of the circumstances.)
2. The Fed delaying too long in raising rates, further prolonging the boom.
3. Perversely, fixed mortgage rates staying low when the Fed finally began raising the overnight rates they control, because long-bond investors sensed a downturn would result from the Fed rate increases.
4. The creation of unique but poorly designed and highly risky “sub prime” loans further extending the bubble. 4. (For a more detailed explanation, see “How we got into this mess.”)

The end result was a nightmare combination of extremely overvalued homes that were 100% financed or refinanced to shakey borrowers.  Did I mention that many of the loans were written at ridiculously low “teaser” interest rates, which are now doubling, tripling, or worse.

All bubbles eventually burst, but the longer they last the further they must fall.  Many of these loans, however, were based on the false premise that “real estate always goes up.”  When the market stopped moving up, millions of serial refinancers had no place to turn, and the foreclosure parade began.

Eventually, prices dropped so low that even “prime” borrowers who put 20% down found out that they were upside down, which is how even Fannie and Freddie’s best loans began defaulting.

How’s that?  The typical cost of selling a home is around 8 - 12% of a home’s value.  That includes fees, escrow or closing, commissions, title insurance, termite, repairs, and, in this market, points for the buyer.  Even without negative amortization, a 20% down borrower can’t break even after just a 10% decline in value.  We’ve now passed a 25% decline in many Southern California markets.  That doesn’t mean a borrowers with a fixed loan and good credit will defalut. . . . until one of them loses their job, or they get divorced, or have to relocate.  Then they can’t sell the home, so their options are dramatically reduced.  (For some of the options they still have, see “Trouble making your mortgage payment? 7 ways to get back on track“)

So, the lower prices go, the more people get in trouble, and the lower prices go, and the more people get in trouble, and the lower prices go. . . .

All of which makes investors very nervous about mortgage backed securities. Which makes it harder to qualify for mortgages, and also makes them more expensive. And which also makes it hard for Fannie Mae and Freddie Mac to sell their mortgage-backed securities. Which makes mortgages even harder to get and even more expensive. All of which makes prices go even lower.

That’s the vicious downward spiral we’re now in. That’s why I’ve been screaming that we desperately need the Federal Mortgage Act (bailout bill) that the Senate finally passed on Friday. (See “Better than I thought: Taxpayer protections in the “bailout” bill.”)

What the government did over the weekend was to take steps to simply keep solvent Fannie and Freddie, the guarantors of up to 80% of the mortgages now being originated. (Most of the other 20% are backed by the FHA or VA, although some S & Ls still “portfolio” or keep some of the loans they originate, rather than selling them off via Fannie, Freddie or FHA.)

The fall of IndyMac Bank, the third largest bank failure in U.S. history (in terms of dollars, but probably not adjusted for inflation), added further emphasis to the need for help.

So What’s Next?

The strong activity from buyers this year into summer gives good evidence that, even with rising interest rates and hard-to-get loans, prices have corrected enough to bring back buyers.  But the ongoing flood of foreclosures expected well into 2009 will eventually swamp the limited pool of buyers, especially as we move out of the peak buying season. (See “Predictions 101: Our 2 market cycles“)

The weekend’s federal actions will at least keep the mortgage pipeline open, but it doesn’t solve the underlying problems. The Foreclosure relief bill will probably be fast tracked, but it will only help a limited number of borrowers. It will put a dent in the problem, but it won’t even come close to solving it.

Ongoing job losses in housing, finance, construction, home furnishings combined with auto industry problems and the huge losses being absorbed by investors don’t bode well for the future either.

(If you’re a homeowner or investor and are starting to feel a little like the Biblical patriarch, Job, you might appreciate my Pastor’s thoughts on the topic.  For me, it helps keep things in perspective.)

We’ve been predicting further declines through this winter and possibly for another year or two.  But, as we’ve been saying since November (See “How low will prices go?“), there are so many variables in play that nobody can predict what’s ahead with certainty.  (Were you expecting this spring’s dramatic gas price rise?)

Bottom line: today’s prices are great, but they may be going lower. Maybe a lot lower. But there’s no way to know it’s hit bottom in advance. Because nobody really knows what’s ahead.

So you want to know”What to do when nobody knows what’s next.” Well, we already wrote that post, and it’s just a click away.

Note to potential sellers: The market has not died yet, and we have been consistently selling our listings in under 30 days by a combination of aggressive marketing, preparation, staging and negotiating plus accurate pricing. No, they’re not foreclosures, either. For details, check out “How to sell your So Cal home for top dollar in 30 days.” It could be a long time before prices return to today’s levels.

Buyers Southern California prices are expected to drop over the next 5 months and possibly for a lot longer, but you should also consider your personal situation and potentially rising interest rates. One thing’s for sure, if you buy today you’ll be paying a lot less than you would have a year ago! In any case, now’s definitely the time to start saving a down payment & get your finances in order, so you’ll be ready when you decide the time is right. Don’t run out and overspend on a car because you’re not buying a home.

For years I’ve been advising buyers to buy in November or December, but almost nobody has the time then–which is why it’s a great market for buyers. (For more thoughts for buyers see “Time to buy?“)

What we think needs to be done

Here’s where I’m taking an unexpected turn. The root problem became abundantly clear as gas prices rose this spring.

Because of our huge trade deficit, the U.S. is essentially becoming a third world nation, watching while Arab shieks buy up everything from Rancho Santa Fe horse property to the Chrysler building. And our oil dollars finance Al Queda, Hamas, and Iran’s nuclear program!

Meanwhile, we’re sitting on more untapped petroleum reserves than any other nation on the planet. I say it’s time to carefully open up offshore and Alaskan areas to oil drilling, but with a difference. As I understand it, current law allows oil companies remove oil from federal lands for free. I’ll bet Iran & Saudi Arabia don’t do that!

So I say, charge oil companies fair market for the oil they remove from our lands, but split that money between paying down the federal deficit and developing renewable energy sources. Let’s make the U.S. the number one source of clean petroleum alternatives.

Can you imagine the number of good jobs that would create, and the stimulus to our economy?

That’s what I think–& we’re eager to hear your thoughts!

As you may know, a few weeks ago we started what we hope will be the first of several local real estate blogs with LakewoodRealEstateNews.com. Blair and I work both sides of the L.A./Orange County line, and we hope to later add possibly Long Beach and West Orange County blogs as well, maybe more.  You can’t live in Southern California for over 50 years and sell real estate here for almost 30 without getting to know quite a few communities.

Earlier today we put up a post there based on my first home purchase way back in 1976.  We focused primarily on some unique situations in Lakewood, but there are some interesting issues that apply to most Southern California communities.  Especially interesting was a price and rate comparison between 1976 and 2008.  Maybe we’re closer to the bottom than I thought, even with IndyMac’s failure today and all the problems with Fannie Mae and Freddie Mac.

If you’re interested, this link will take you straight to today’s post, “How to pick a Realtor:  Don’t make the mistake I did!”

Enjoy. . . and learn–from my mistakes!

Last night and this morning I got involved in an interesting discussion of the “Federal Housing Finance Regulatory Reform Act of 2008,” better known as the “mortgage bailout” or “foreclosure relief” act.

The discussion took place in the comments section of a post on the Irvine Company’s apartments in John Lansner’s always interesting OC Register real estate blog.

In the process, I learned some surprisingly positive things about that bill.  Ultimately, it led me to the Congressional Budget Office’s June 9 Cost Estimate of the Federal Housing Finance Regulatory Reform Act of 2008, more commonly referred to as the housing “bailout bill.”

According to the generally reliable, non-partisan C.B.O., this bill should actually make $800,000,000 for the taxpayers. Yup, you read that right–it’s supposed to save us money, not cost us! I quote from the summary on p. 1 of the report:

CBO estimates that enacting this legislation would increase revenues by about$8.0 billion over the 2009-2018 period. . . . Over that period, we estimate that spending from those proceeds would total about $7.2 billion. The additional revenues would thus exceed direct spending by an estimated$800 million, decreasing future deficits (or increasing surpluses) by that amount over the next 10 years.

How is that possible?  Well, far from giving borrowers and lenders a free ride, the bill actually makes participating lenders discount their note to 90% of current market value, and then makes the borrowers pay FHA 1.5%  of the loan balance every year and then share 50% of their equity with the FHA when they eventually do sell!

Here’s how the C.B.O. explains it (p. 7, bolding mine):

This legislation also would require FHA to charge the borrower an annual fee of 1.5 percent of the remaining insured principal balance each year. Furthermore, the program would
provide that, upon sale, refinancing, or other disposition of the residence, the borrower
would pay to FHA a share of the new equity that would be created under the program.
(This new equity would be at least 10 percent of the property’s value because of the
required write down to no more than 90 percent of the current appraised value.) [note by Dave:  Some or all of this 10% could disappear if the home declined further in value after the refinance]

FHA’s share would start at 100 percent of that newly created equity, and would drop to
50 percent in the sixth year of the term of the new loan; it would remain at that level for
the duration of the loan. In addition, upon sale or refinancing of the home, the borrower
would be required to pay FHA 50 percent of any appreciation in the appraised value of
the home since the date on which the mortgage was insured (excluding the initial
10 percent equity created by participating in the program).

In the discussion last night, one poster thought that was excessively harsh on the borrower.  Maybe, but the lender wrote down the loan to 90% of current market value, so that 10% equity was a gift from the lender to begin with.  I’m not shedding tears for the lender, either–they’re the ones who got us into this mess with those ridiculous loans to begin with. (see “How we got into this mess“)

I do sympathize with some of the naive borrowers who trusted their lender (who was often also their Realtor) way too much, I think the main focus should be on protecting the overall economy against a collapse. Protecting the taxpayer would come second, then the borrower and the lender.

So if the cost of the program is the owner giving up half their equity, so be it. Remember, the lender’s making a major discount on the principal balance, so that’s basically a gift to the borrower. Sounds like a pretty sweet deal for the borrower to me. And not a bad deal for the taxpayer, either. (See “How we got into this mortgage mess.”)

Sounds like maybe it won’t cost the taxpayers anything, and maybe we all win. Perhaps this specific bailout bill’s not such a bad idea after all!

Maybe I was right about the need for this bill after all! (See “Why we need a mortgage relief bill.”)

There’s lots more to the report, some good & some bad from my perspective, but much better than I expected overall.

That’s my opinion–for now, at least. Feel free to share your opinion below, in relatively polite language, of course. (There is a lot of passion about this topic.)