Near the end of July we made an upbeat revision in our forecast, giving a 40% probability Southern California home prices would bottom this coming winter, a 40% chance of our price bottom coming the following winter, and a 20% of our bottom coming after that.  We also began specifying which areas and price segments can be expected to bottom first.  (For details and our rationale, check out “An optimistic update on our projections of a home price bottom.”)

Now we’re getting even a bit more optimistic, largely due to modest declines in homes going into foreclosure combined with the rapid decline in prices over the past year.

Nobody can say with certainty when Southern California home prices will hit bottom (See “How low will prices go?“).  DataQuick’s numbers won’t reflect that bottom until long after it’s passed (see “Two big problems with DataQuick’s monthly median price reports“).  However, there comes a time before the price bottom in every market cycle where the wise buyer starts looking very seriously.

I think that time is now.  In fact, last week I put in my first offer on a California property in over ten years.  (Last month I also decided to run for my local City Council for the first time ever, but that’s another story for another blog.)

Let’s take a close look at some questions this raises, including where, what, and why to buy now:

Where to buy now: While we believe recovery for the desert area and the Inland Empire may not come unti spring of 2010, we now believe the next four months are likely to present the best buying opportunities for most property classes in the coastal plane of Los Angeles and Orange Counties.

Why? As we’ve indicated in “Our Two R.E. Market Cycles,” in most years both sales volume and prices for homes going into escrow tend to bottom in November and December. People are too busy preparing for the holidays to buy homes but lenders and builders are trying to unload inventory before year’s end.  It’s almost like an annual “year end clearance” sale for real estate.

With the number of homes going into foreclosure beginning to decline and effects of the federal housing relief bill beginning to kick in (see “The good news about the ‘Housing and Economic Recovery Act’ “), we think the odds now are that this winter’s apt to be as good as it gets for buyers looking in the more built out areas of So Cal.

What’s more, interest rates are still near historical lows and are expected to gradually rise over the years ahead.  Very low prices and rates make for an excellent buying opportunity.

Finally, there are literally hundreds of thousands of buyers sitting on the fence right now waiting for the market to bottom.  Once they all sense the time is right, you’ll have far more competition from other buyers than you have right now.  If you’re not early, you’ll be late.   Once everybody recognizes a golden opportunity, it’s too late to take advantage of it.

Due to the annual cycle, we know activity’s apt to pick up starting 12/26, we think the prudent buyer should at least get her feet wet in the market now.

Who should buy now? Buyers who have fairly decent credit, access to a down payment of at least 3.5% (the new FHA minimum), stable income, and who aren’t planning on selling in the next five years.  (3-5 years used to be the rule of thumb for accumulating enough equity to cover selling costs.  1-2 year “flipping” for anything besides severely distressed property is probably a thing of the past.)  It’s also not a time for negative amortization loans, or adjustable mortgages with low teaser rates and payments that will rise dramatically.  We recommend 7 - 30 year fixed, fully amortizing loans.

What to buy now? We think lower end Single Family Homes (SFRs) will rebound first, as they’ve been driven down the most by foreclosures.  Starter condos, which were overbuilt more than SFRs in LA & OC, will probably lag behind.  Quite likely move-up homes will also lag, since most buyers need to build up equity in their current home in order to move up.

We also like the discounts available on “short sales.”

What’s a “short sale?” In a  “short sale” the current mortgage holder accepts a reduced, or “short” payoff at close in order to avoid foreclosure.  It actually takes longer than a normal sale or a bank foreclosure, and you can expect the current mortgage holder to attempt to renegotiate or even cancel the sale.  I got plenty of experience with short sales back during the 1991 - 1996 SoCal real estate crash, and so far Blair and I have closed every short sale we’ve opened.

Why the discount on short sales? For agents, short sales are twice the hassle for 1/6 less commission, since the mortgage holder always insists on reducing the commission as a condition of accepting the short sale, if they’re willing to accept it at all.  Buyers would also rather avoid the renegotiation hassles not to mention the chance of the current lender disallowing the losing the home 30 - 60 days into the escrow.  As a result short sales often go for 5% - 15% below market.  And market is already 25% - 40% below what it was at the peak.

What about foreclosures? Once the bank takes the home back, the hassles of a short sale and the reduced commission are both eliminated, so the demand increases.  Some REOs (”Real Estate Owned,” or lender-owned, foreclosed properties) are initially overpriced.  When an REO is underpriced, the lender may wait 7 - 10 days before accepting an offer, essentialy holding an auction so that the price will get bid up, sometimes actually selling above market.

When should I start looking? Preferably September or early October.  That way you’ll have time to look and to familiarize yourself with your options.  Some experts say you should look at 20 similar homes before making an offer.  With the internet, it’s not that hard.  You can search for yourself using the links to Southern California Multiple Listing services in the column to your right.  Better yet, we can set you up on the MLS’s “Listing Book,” which allows you to sort out the listings you prefer.  (Just shoot us an e-mail at BlairNewman at verizon.net.  (You know what the “at” represents, but most web-crawling e-mail harvesters don’t.)

It’s also good to start looking now so that if you find a short sale you like you’ll have time to give it a shot, & still have time to look and write other offers if the current lender plays hardball 45 days down the line.

What if prices continue to drop next year? We think the odds are against that, but nobody can say for certain.  What we do know is that prices have already fallen by about a third from the peak.  By staying in developped areas, you minimize the risk of dramatic additional falls.  Of course, if the economy takes a major turn for the worst while you’re looking, you can always wait.  Check back with us, or sign up for our RSS feed, to see our take on future developments.

How do we get started? First, talk to an honest, reliable lender (if you don’t know any, we do.  562.822.SOLD).  Find out what you qualify for on a fixed loan, if you need to work on your credit, how much down you’ll need, etc.

Then find an honest, experienced, diligent full-time agent.  Not someone you know at work (they’re not full-time, no matter what they say), probably not a relative, and not a friendly person you meet at an open house.  At least five years in the business, at least 50 closed sales, at least 5 of them in the neighborhood you’re interested in.   Again, with 30+ years in the business, we can probably find someone good for you if you can’t.  If you’re thinking southeast L.A. County (Long Beach, Lakewood, Norwalk, Cerritos, etc.) or west or North Orange County (Cypress, Rossmoor, Seal Beach through La Mirada and La Habra), we’ve got many years experience there ourselves, with over 500 homes sold.

You may decide you want to wait a little longer, but you may also find your dream home & be able to negotiate a great deal.  Whatever you finally decide, now’s a great time to get started.  There’s a very good chance it may be the smartest financial decision of your life!

Los Alamitos has been my home town for twenty years.  It’s a great place to live.  In many ways ranging from location to schools to climate it may be one of the best places in Southern California for someone with a middle class income to buy a home.  (In fact, I just happen to have a beautiful 5 bedroom pool home on a cul de sac that we recently listed–details and virtual tour at LosAlDreamHome.com.)

Like any town, Los Alamitos isn’t perfect.  Two things about it bother me the most.   Although Los Alamitos has fewer than 7,000 registered voters, it’s in the big leagues when it comes to traffic congestion and hostility on it’s City Council. It’s a case of periodic gridlock on the streets and at city hall.

As a Realtor, my job for the last 28 years has involved getting buyers and sellers to work together for their mutual benefit.  I’m a big believer in “win-win” negotiating.  So I decided to toss my hat in the ring for this year’s Los Alamitos City Council election, to see if I could get our divided City Council to work as one team instead of two.  In a town this small, we have more things that unite us than that divide us.

I recently started a blog, LetsFixLosAl.com, for several reasons:

• To promote a greater spirit of teamwork on Los Alamitos’ City Council.
• To suggest and promote strategies to reduce the occasional gridlock on Los Alamitos’ streets.
• As a 21st century town hall meeting in cyberspace where citizens can discuss these issues 24/7/365.

Oh yeah.  The blog seemed like an inexpensive way for a political neophyte to compete for two council seats against three former mayors and another neophyte.

LetsFixLosAl.com is less than a week old, and only has a few posts up, but I plan to add to it several times a week, chronicling first-hand the adventures of a newbie small town politician.   At this point, I’d also appreciate input from both local residents and anyone else with a good idea to share.

Check it out, and let me know what you think.  It should at least provide some interesting insights on politics from a front-line perspective.  Pretty much what we try to do with Southern California real estate on this site.

At first we thought it would just make lenders more reluctant to lend in California, but on a closer look we now think that, overall, it’s another positive step in the right direction.

Because it was an emergency bill, many of the changes took place immediately. The bill applies only to loans made between 1/1/03 and 12/31/07– which are the loans most likely to go into foreclosure.

60 Days Notice for Tenants in Foreclosed Homes

According to the state legislative counsel,

Until January 1, 2013, this bill would give a tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure, 60 days to remove himself or herself from the property. . . .

From the bill itself:

A tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure shall be given 60 days’ written notice to quit pursuant to Section 1162 before the tenant or subtenant may be removed from the property as prescribed in this chapter.

(b) This section shall not apply if any party to the note remains in the property as a tenant, subtenant, or occupant.

The above provisions of the law expire 1/1/2013 unless extended by the legislature.

This is a new law, but it appears to give a tenant 60 days from when notice is given after the foreclosure, as long as neither the tenant nor anyone else living in the property was a signer on the loan that foreclosed.  But those 60 cays could become as many as 180 before the tenant is actually out of the property.

Here’s the details, courtesy of the best property manager in Greater Long Beach, Dave Haas:  It would probably take the lender at least a week to prepare and post the notice, often much more.  After the 60 days had elapsed the owner would then have to obtain a court order if the tenant had not vacated.  If the tenant did not vacate after the expiration of the 60 day notice, it would take and additional 30 days minimum if the tenant did not contest the Unlawful Detainer (eviction) proceeding; 60 if he contested it; and 90 if he filed bankruptcy.

About a week after the court order rules the marshall or sheriff  posts the notice to vacate within 7 additional days.   If the tenant hasn’t left by then, the owner and her locksmith meet the sheriff at the property and enforce the order with a “lockout.”

At that point, the tenant would be gone, but would have an additional 15 days to come back and claim any personal property that was left behind.  (Lockouts usually happen early in the morning and generally consist of a brief but professional “Hello, time to go,” from the sheriff followed by a lock change by the owner’s locksmith.)  60 days notice, up to 90 days to get the order to evict, another 14 to the lockout, another 15 to store the tenant’s possessions for a maximum of about 180 days, worst case.  Maybe longer over the holidays.

However, if the tenant stops paying rent during that initial 60 day notice, a 3 day notice would be posted and an eviction would start at the expiration of the 3 days, taking a maximum of another 120 days. This law does not allow for the tenant to stay rent free, nor does it apply to former owners, just renters.

Most tenants do not want a “U.D.” (Unlawful Detainer, or eviction) on their record, and will arrange continue paying rent and move within the 60 day time frame.

The 60 day notice is posted not at the beginning of the foreclosure process, but once the home is either taken back by the lender or sold to a new owner at the Trustee’s Sale on those legendary courthouse steps.   That’s a minimum of 111 days from filing the “Notice of Default” which actually begins the foreclosure process.  In most cases, the borrower has missed several monthly payments before the “N.o.D.” is filed.

The bill also has requirements concerning the lender filing that Notice of Default:

Required Notifications prior to filing a Notice of Default:

At least 30 days prior to filing a N.o.D. the lender or their representative must meet with the borrower either in person or by phone “in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure.”   This notification can only be waived if the lender demonstrates “due diligence” by following a number of prescribed steps and still is unable to contact the borrower.

This provision becomes operative 9/6/08, to allow lenders time to set up procedures.  N.o.D.s filed before then apparently are exempt.

Maintenance of Property

This one we think we really like.  As usual, the devil’s in the details, but it’s indended to prevent foreclosures from ruining a neighborhood by requiring the lender or new owner to maintain vacant residential property acquired at a trustee’s sale.  Included are excessive foliage, failure to prevent trespassers and squatters, and other conditions of public nuisance, including standing water and mosquito issues.  Fines of up to $1,000 per day should ensure compliance.  This provision takes effect immediately.

Provisions to Encourage Loan Modifications

This makes it easier for the loan servicer to work out a loan modification if such a modification is expected to ultimately save the lender money.  (Remember, many loans are held in huge consolidated blocks by large investors from pension funds to insurance companies, who pay a servicing company to collect the payments and foreclose if necessary.  You may make payments to Chase, but the Cal State Employees Pension Fund might actually own the loan.  In that  example, this provision give Chase more authority to act to achieve a mutually acceptable resolution on a loan secured by California property.

Three specific requirements must be met:

1. The loan is in payment default, or payment default is reasonably foreseeable:  In other words, the borrower is in trouble.  Quite likely will require a “hardship letter” with supporting evidence.
2. It looks like the lender will lose less money with a workout than with a foreclosure.
3. The loan modification is consistent with the servicer’s contractual or other authority.

These provisions may facilitate workouts under the newly approved federal mortgage relief bill in the state of California.

On the whole, this bill appears better designed up close than we thought when we first read about it.  As with the federal bill, there was give and take and consultation with the various interests involved.

As always, we value your input in the form of comments.

Click here for the text of the bill and the Legislative Counsel’s Digest.

But today, as I was looking through the Orange County Register’s Friday new homes advertising section, it suddenly hit me:

Prices on most So Cal new construction have either already hit bottom, or will be hitting bottom between now and December 26.

So, if you’ve always wanted to live in a new home, I suggest you start doing your research now.

Why now?

Simple:  Supply and demand.  New home permits have been way down for over a year now.  Most developers may be as addicted to building as a drug addict is to dope, but they aren’t crazy.  And even if they are, their bankers aren’t.  There just isn’t that much additional inventory coming onto the market.

In most segments, we’re in the final phases of a clearance sale, and the stores haven’t been ordering new inventory for some time.  Essentially, they’re going of business–some permanently, others temporarily.  And the “going out of business sale” is winding down.

Exactly which new construction?

In the developed areas of Orange, San Diego and Los Angeles Counties, the lower end of new construction will probably hit bottom first, as may also be the case in resales.  That would include almost all starter homes, especially condo/townhomes/lofts and “C” neighborhood detached homes.  As Lyon Homes reported today, the lower end homes are now the bulk of their sales, allowing them to sell out these tracts earlier.

In the outlying areas, it’s a bit trickier due to the impact of high commuting costs and economic problems from the building slowdown itself.  The areas with shorter commutes will most likely bottom first.  High end, move-up tracts may have further down to go as well.  Do your homework and look for desperate builders or whole tracts that are now bank-owned.

What about resales?

The glut of bargain basement new homes needs to be cleared out to stabilize resales, so this would be a step in the right direction.  There are two additional problems facing resale housing:

1. The glut of foreclosures and “short sales,” especially on the low end.
2. The lack of the normal buyers for move-up homes, because most owners of starter homes either already moved up during the boom or else have had their equity disappear during the plunge.  For example, last weekend we held open a beautiful Los Alamitos five bedroom, three bath pool home. Over 50 people came through, and most of them fell in love with the home.  Unfortunately,  almost all of the potential buyers had another home they needed to sell first.  In most cases, that home had been taken off the market because they couldn’t sell it at a price that they felt they needed to make the move, including one family that was making a lateral move back to California from Florida.  (The first Florida summer will do that for you!)  Same problem that Lyons is having with move-up homes.  On the flip side, prices have been “stickier” on most move-up resales, due to both a lack of competition from foreclosures and the ability of their sellers to wait out the downturn.

For resales, we’re sticking for now with our latest projections (see”An optimistic update on our projections of a home price bottom“).  In short, we think the odds are for a bottom either this coming winter or next, but it’s too close call as to which.

What to do?

• If you’ve got your heart set on a new home, start looking now and be ready to close before year’s end.
• If a resale will do, get your “ducks in a row” by figuring out what you’ll qualify for and what your home might sell for if you’re moving up, or if you’d be better off refinancing out your down payment now and renting it out.  (You’d need to close escrow on it within 3 years of moving out or you lose your tax free $250,000/$500,000 exclusion of capital gains.)  This winter should be good–prices have already dropped more than I’ve ever seen in my 28 years as a Realtor and broker.   But prices might be better in winter of ‘09-’10.

We think the deciding factor should be your personal situation.  For more, check out our classic post on “What to do when nobody knows what’s next.”  Of course, we’ll try to answer any question you leave in the form of a comment below.  You can also feel free to go to “About Us” and scroll to the last few lines to get our phone numbers, or simply put “contact me please” in the comment section below (click the word “comments” below if there’s no box to complete).

Times of great opportunity are ahead.  For many new home buyers, they’ve already arrived, and quite possibly for resale buyers as well.  Praying for wisdom might be a good place to start!

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!

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)

]]> http://socalrealestatenews.com/blog/what-is-the-s-pcase-schiller-home-price-index/feed/ http://socalrealestatenews.com/blog/so-cal-rocks-earthquake-update/ http://socalrealestatenews.com/blog/so-cal-rocks-earthquake-update/#comments Tue, 29 Jul 2008 20:17:29 +0000 Blair Newman and Dave Emerson http://socalrealestatenews.com/blog/?p=219 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?

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

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.