Passing a Southern California real estate price bottom. . . maybe THE bottom!
Posted in Uncategorized | By Blair Newman and Dave Emerson |
(12/19/08) Back on August 30th we essentially called a bottom this winter for single family homes in established neighborhoods in Southern California’s coastal plain. Then the time bomb that was the real estate crisis finally exploded, threatening to take down the global economy.
This being an election year. the government sprung into unprecedented action. . . repeatedly. Just this Monday we saw the Federal Reserve dramatically slash the fed funds rate to. . . zero!
Where’s that leave the Southern California real estate market. Pretty much where we were back on August 30th, when we wrote the following:
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 plain 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. (From “Who should buy Southern California Real Estate between now and Christmas?”)
Please don’t misunderstand. We continue to believe that we’re in uncharted territory and nobody can be absolutely certain what will come next (see our classic post from November, 2007: “How low will prices go?“). But the further we get into this dramatic downturn, the more clearly we can see what may well be the bottom.
What we know:
You don’t sell Southern California real estate for 30 years without learning a few things about our real estate cycle. And we can observe a few other things from current market activity–activity that Data Quick won’t report until mid March when today’s purchase contracts show up in the February medians. So here’s some things we know for sure or are fairly certain of:
- The bottom for sales volume in Southern California real estate was passed last winter. Year-over-year sales figures are up dramatically, fueled by the foreclosure bargains and other distressed sales such as “short sales.”
- The volume of sales entering the foreclosure market is beginning to decline, especially in the stable (established–not new) areas of the Coastal Plain. Homes financed with the worst of the subprime loans have already been foreclosed and resold. There is not an infinite supply of such homes. In addition, a variety of federal programs for distressed homeowners are beginnning to kick in.
- Most well-priced bank owned homes in Southern California’s coastal plain are getting competing offers.
- Interest rates are exceptionally low.
- The fed is working hard to get banks to lend more, relaxing their over-reaction to the mortgage crisis.
- Real estate sales and prices almost always bottom in December (which is reflected in DataQuick closing stats for February and March).
- Even in the unlikely event unemployment reached 10%, 90% of the population would still be employed.
- Home prices in Southern California have been rolled back to 2003 levels.
- Combining low prices with low interest rates makes Southern California homes more affordable than they have been in many, many years. . . possibly since the bottom of the last recession.
- Dramatic cut backs by builders are reducing the available supply of housing units.
- Southern California still has the best climate, most diverse economy and most innovative economy in the nation.
All in all, there’s a very good chance this may be the best time to buy.
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December 26th, 2008 at 1:58 pm
You say (in #1) that the forclosure market has begun to decline, you ignore the wave of upcoming option arm resets that affect more of the desirable O.C. homes that people really want.
With 30 years experience you say that 90% unemployment is o.k. for the housing market? With that, you have crossed over to either ignorance or disingenuity.
And scaring people with “you’ll be too late”… I felt dirty just reading that. I can’t imagine how it must have been writing it…
December 26th, 2008 at 8:26 pm
Robert,
Thanks for taking the time to comment. We try to stick to a calm discussion of the facts here rather than personal attacks, but I don’t really blame people who don’t know me for getting upset about a Realtor they think is just trying to make a buck.
In any case, please let me respond to your points:
1. Option ARM resets: I’m well aware of the coming resets over the next two quarters, even went to a lengthy economists seminar on it. I just don’t anticipate anything like the sub-prime foreclosure wave that is beginning to recede for several reasons:
a) Option ARMs were made to more stable borrowers in more stable neighborhoods, as you indicated. Some of these people will have difficulty with their resets, but they’ve at least been making the original payments for 2 - 5 years. They’re generally a more stable class of borrowers than those who’ve already given up on their sub-prime loans.
b) Recent drops in interest rates will make the resets less dramatic than they would have been only a few weeks ago.
c) A host of federal and lender programs are now in place to help reduce the number of foreclosures.
Which is pretty much what I said in # 2 above (not # 1). I just didn’t mention the resets because I think they’re not going to be all that significant. But thanks for bringing it up so I could address it specifically. Many people share your concern, including myself–but to a much lesser extent.
2. I never said “90% unemployment is o.k. for the housing market.” I said “Even in the unlikely event unemployment reached 10%, 90% of the population would still be employed.” My point being that if conditions are right, there are still lots of people able to buy Southern California homes.
Yesterday–on Christmas Day–my business partner Blair was negotiating on behalf of a seller of ours with three different buyers. No, the home was not an REO, just an entry level home that we priced, staged and marketed right. To me, that tends to confirm what I wrote in the above post about a week ago.
Why the activity? A decline in available REOs in the neighborhood coupled with low interest rates and some innovative local loan programs. Those three families were not concerned about losing their jobs. There are plenty of potential buyers out there that have been saving and waiting to buy, and who aren’t worried about their jobs.
3. I never said “you’ll be too late.” What I said was considerably more measured: “All in all, there’s a very good chance this may be the best time to buy.”
I did quote what I wrote, speaking in general terms about market bottoms, back in August. There will come a time when buyers, like lemmings, flock back into the market, and if you wait until then you will have missed the bottom. That’s what I’ve observed over and over again in the past three decades in this business, and I hardly “feel dirty” sharing my advice and experience.
On this blog we try to give our readers a view of what we’re seeing on the front lines of Southern California real estate, through the perspective of our years in the market. As I said at the beginning of the post, nobody knows what’s next. I still think there’s a good chance that we just passed through the price bottom, and I hope to have a new post up going into more detail shortly.
There are many unethical real estate agents out there, so I can’t blame you for being skeptical. Most of them haven’t been in the business all that long, and many of them have now found other lines of work. They are more of a problem to us than they are to you, believe me.
Again, thanks for taking the time to comment. Discussion–especially of differences–is one of the best features of today’s interactive media.
Hope my clarification helps.
December 28th, 2008 at 1:47 am
The personal attack comment wasn’t aimed at me, right?…
To not understand how realtors have to bring in the “you’ll be too late” hysteria that have cost so many people their homes, savings, and marriages in the last few years? You must know that salary fundamentals (let alone current economic realities) still do not support current prices, let alone RISING prices. You know that… even though we ARE getting closer.
You also wrote that “some of these people will have difficulty with their resets, but they’ve at least been making the original payments for 2 - 5 years.” and “I just didn’t mention the resets because I think they’re not going to be all that significant.”
$1,000 added (or much more) a month isn’t that significant? This is real money to real people! Realtors must have done well in 2004-2006 not to think that’s a budget-breaker for most families. And to refi would be impossible as they’ll be completely underwater as well.
Linsey Planer, realtor in the OC Voice, wrote, “I’m not convinced that this is necessarily the turnaround I’m looking for. Most of the increase in sales is in the most distressed parts of our market. In addition, 60% increase in sales over the historic lows of 2007 is good, but clearly not great. We are still about 50% off in sales volume from 2003 numbers and we are back to 2003 pricing.
Do I think we are approaching a bottom? I do. Am I ready to tell my buyers, ‘Hurry, before it’s too late?’ Not necessarily. I think it may be time for some buyers to take the leap, however there are a lot of factors that go into that decision.”
She continues…
“But, I find it insulting when my colleagues reprint articles with a glimmer of hope, so that they may spread them far and wide with a ‘Hurry and Buy Now’ approach. Consumers are smart. Information is everywhere. My clients understand that sales may be up, but prices are down. My clients all have been watching the market, local trends, and values. To suggest that if they don’t pull the trigger today, they’ll ‘miss the boat’ insults their intelligence and frankly, it continues to diminish the level of professionalism of the industry as a whole.”
You get full credit for running your disclaimer (”nobody can be certain”), but I just don’t see why you can’t simply advertise your experience and years of service instead of goading us into a sale. (I think this every time I go to purchase a car as well…)
My wife says it’s my fault that I know too much (I make charts & graphs and work with numbers all day), perhaps ignorance would be bliss…
December 28th, 2008 at 12:29 pm
Robert,
Good stuff. Both your & Lisey’s comments are right on. Thanks for taking the time to detail things out. I’m thinking maybe you should write a guest post on when you think the So Cal (or OC if that’s your area) market will bottom. Even use some of those graphs.
Maybe I over-reacted to that line about feeling “dirty” in your first comment. I’m in this business for the long term–obviously (after 30 years). I disdain agents who lie to make a sale as much as you do. Probably more, because I end up having to pick up the pieces when their sub-prime buyers become distressed short sale sellers.
In this case, I’m just trying to get out my personal view on what I think may be taking place.
During the last recession (around 1995) I “timed” the market for Long Beach multi-family property almost perfectly, but I didn’t realize it until a couple of years had passed. I bought because prices and interest rates made sense to me on some properties, and I was prepared to ride the market down a bit more. At the time, nobody thought we’d hit bottom yet.
I’m planning on getting a more detailed post up, because I think we’re going to see multiple price bottoms, depending on the location & type of home.
As I indicated the the 8/30 article which I quoted from, the coastal plain of So Cal will most likely bottom before the inland areas. As I wrote back on 8/1, new construction prices may have already bottomed. “Move up” homes, which have not been as affected by foreclosures as starter homes, may well have further to drop.
The consensus view among economists is that home prices will bottom next winter, not this one. But real estate tends to be a leading economic indicator. Real estate certainly led us into this recession, and the feds are trying to get real estate to lead us out. There are many people who want homes, and the lowering of interest rates plus the passing of the holidays combined with efforts to reduce foreclosures will almost certainly result in some upward movement of prices over the next six months.
December is a “bottom” for prices almost every year, although that bottom is reported in March as February closings, and the upward move doesn’t show in DQ stats until April in the March closings or later. (That’s part of what I meant by if you wait until you know we’ve bottomed, you’ll be late to the party, along with all the other buyers who are waiting on the sidelines to jump in.)
While I do expect a rapid disappearance of the “super bargain” priced starter homes once we begin bottoming, I also expect rising interest rates will hold back a rapid return to peak sales prices.
So I agree with you that nobody should feel like they have to buy now. But if someone finds a home that works for them with a long term fixed loan they can afford, and they have secure jobs and plan to stay, buying now may trump market timing. They may even end up timing the market right as well.
Because nobody knows for sure what’s next. But we do know that both prices and interest rates are down dramatically right now.
December 28th, 2008 at 8:46 pm
We agree! I might be gearing up to buy soon if wifey & I were looking for an entry condo. Price may still fall on those but to get the best selection I imagine it’s not a bad time…
Full disclosure/why I’m here: we’re looking for a single family, 2000 SF in south OC. We’re 700+ Fico, 50k down (and still saving) ready. Yes, we are the “pent up demand” everyone keeps hearing about! (finally, famous!) But most of the homes we see are still 100-200k more than they ought to be. We make well in the 6-figures and still can’t afford these. By “ought to be,” I mean that inflation-adjusted, we could have afforded them in 2001, 1998, 1992, 1987, 1976, you name the year…
We can only hope & pray we’re headed back to incomes & affordability pricing. We’ve had friends buy in the last 3 years and it destroyed them. It’s likely where the “dirty” feeling welled up & out it came. Sorry bout that…