So Cal Real Estate News

“ECONOMY HAS HEADS SPINNING”  my morning paper screams at me before I’ve even picked it up off the driveway.  Stocks tanking, huge firms failing or being bailed out, DataQuick medians show yet another home price drop.

And we decide today’s the day to tell you it’s a sellers’ market?

Well, yes and no.

Actually I decided last night it was time to write a post that it’s become a sellers’ market at the low ends for detached single family homes in most neighborhoods in the Coastal Plane of Los Angeles and Orange Counties.

What’s going on now:

You see, what we try to do here, as our masthead says, is give you “real estate news and perspectives from the front lines.”  What we and our colleagues see going on right now at open houses and with buyers and sellers in Southern California.

So we’re 3 months ahead of DataQuick, whose monthly median closing price stats just reported August closings on sales that were negotiated mostly in June.  We’re 5 - 6 months ahead of Case-Schiller, who averages 3 months of closings using their unique “matched pairs” approach and then delays a month to release.

So let me tell you what’s actually happening right now:

• Showings are up significantly at all of our listings priced below $500,000, and up modestly on our “move-up” inventory.
• That offer I made a few weeks ago that I told you about (See “Who should buy between now and Christmas?“):  Outbid.  Swamped with competing offers.  My “all cash, close in 10 days, as is” offer didn’t even get a phone call back!
• Yesterday I surveyed several other agents I’ve known for years.  Every one of them said buyer activity was up dramatically over the last few weeks.
• Even my partner, Blair, & his wife are about to make an offer.

Why?

Pretty simple, actually.  Summer just ended, prices have been coming down, and–oh, yeah–mortgage rates just plummeted:

• August is almost always one of the slowest months of the year, but things generally pick up in September and October before slowing again as the holidays approach.
• Foreclosures and pre-foreclosure “short sales” have been forcing prices down all year.  Data Quick’s August median for OC was back to the level of November 2003!  Vacation over, kids back in school, & buyers are noticing that neighborhood they couldn’t afford last year is now within their reach.
• When the U.S. Government (that’s you & me, in case you didn’t notice) basically took over Fannie Mae and Freddie Mac, confidence returned to the mortgage markets and rates dropped around a full point, with 30 year fixed loans at 5.5%!  Rates have ticked up a bit since then, but are still near record lows.

What’s it mean?

Good question.  Is it a seasonal blip or did we just pass the bottom, at least for starter homes in built-out areas?  Well, part of it is seasonal, but that’s not the whole story.  What happens next will largely be determined by the answer to five key questions:

1. What will the economy do?
2. What will interest rates do?
3. What will mortgage rates do?
4. Are foreclosures peaking?
5. Have prices corrected enough?

The first two will tend to counter-balance each other.  If the economy continues it’s sharp declines, both the fed and investors will combine to drop interest rates, both short and long term.

As for mortgage rates, with the feds supporting the market, we know the margin, or mark-up, for mortgages will stay at the more normal levels we’ve seen over the past few weeks.  One of the biggest challenges for housing has just been met.  Federal intervention is having some positive results for home sellers and buyers, as we’ve been predicting all year.

Foreclosures may be the key here.   In California it takes about 4 months to foreclose on a home from filing the initial Notice of Default through the Trustee’s Sale.  Longer if the owner files bankruptcy.  It takes another 1 -3 months to get the occupant out and the home on the market.   We know that the banks have been taking back record numbers of homes, assuring a continued influx of foreclosed homes hitting the market through year’s end.

We can also check on homes entering the foreclosure process (we give you two links for that under “Useful Links” in the column to the right, but we prefer the data in the “Preforeclosure” link.)  A month ago, it looked like homes entering foreclosure were peaking, but recently released August stats are up for both Orange and Los Angeles Counties.  Government relief for foreclosures is about to kick in next month, and the shakiest borrowers have already lost their homes.  On the other hand, a sinking economy combined with coming payment “resets” (increases) on many adjustables may put more homeowners in jeopardy.  This one may be “too close to call,” but I think by mid spring of 2008 the worst of the foreclosure market will be behind us.

Which brings us to question # 5.  You’ll get plenty of debate on this, but the multiple bids on properly priced REOs make it pretty obvious to me that some prices have, indeed corrected enough, provided interest rates don’t rise dramatically & the economy doesn’t tank.

What prices have corrected enough? The prices that bring competitive bids:  The fire-sale prices the lenders are now offering on starter single family homes in built-out markets. Pretty much what we said three weeks ago, except it’s happening now, not early next year.

Is this the bottom?

For SFRs in the coastal plane of OC & L.A. Counties, maybe so, maybe this December, maybe later.  It largely depends on the economy, interest rates, and when foreclosures peak.  Stay tuned, & we’ll keep you posted on what we’re seeing here on the front lines of So Cal Real estate.

Our 2-hour, $5 October Buyer Seminar:

We actually scheduled a two hour buyers seminar with the city of Lakewood’s Community Services Department several months ago.  It’s open to everyone, not just Lakewood residents.  It’s from 9 - 11 a.m. on Saturday, October11 at Lakewood’s Mayfair Park (Clark and South St.).  We designed this to help buyers make the most of this fall and winter’s unusual buying opportunites. Class size is limited to allow interaction. Sponsored by Lakewood’s Community Services Department. Details here. No, we’re not selling tapes, cds, books, or DVDs! We’re both former teachers, & we enjoy a chance to discuss real estate in a “classroom” setting.

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

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

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

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

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

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

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

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

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

Stay tuned.

One of the many unknowns in the current real estate market/meltdown/crisis/challenge (take your pick) is what the government can and will do to get us out of the mess they helped get us into (see “How we got into this mess“).

Monday night  Fed Chairman Ben Bernanke, speaking at Columbi’a Business School, pushed Congress to act for the sake of us all:

High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.

We think he’s right on the money on that one.    (For the APs report on the speech, click here.)

The challenge is how to correct the problem without bankrupting us all.

On the one hand, there are probably well over a million homeowners who now owe significantly more on their mortgage than their home is worth.  On the other hand, as Tevye would say, there are also no doubt tens of millions of Americans who owe significantly more on their car loan than their car is worth.

Do we really want to set a precedent that the government will bail people out of their own stupid decisions?  Nobody held a gun to anyone’s head to buy a home.  Most of them signed disclosure documents detailing out their loan’s ridiculous terms somewhere in the fine print.

But I know a rocket scientist (literally) that signed those documents and ended up over $100,000 upside down with an obscene payment.  Yes, he “trusted” his real estate agent/lender (bad sign!), who promised she’d get them a refi out of the loan (oops, guess she forgot to mention the prepayment penalty let alone the potential for decline in value).

I also have heard of lenders who had full time “signers” who supplied signatures on behalf of their borrowers for those subprime loans, whether their borrowers knew it or not.  (Now that I think of it, I don’t recall signing loan docs on some refi loans my wife & I did a while back.  Hmmm.)  Oh, did I mention that those disclosure documents were written in a language many of the borrowers didn’t speak (English)?

Bernanke’s taking a different approach.  Something like “we’re all in this boat together, and if we don’t start bailing these people out, we’ll all sink together.”  And he may be right.

Most commentators take this as a direct push from Bernanke for something akin to Rep. Barney Frank’s proposal for broad based foreclosure relief, which would include write-downs of the principal balance for some upside-down homeowners.  (For interesting details on Frank’s bill & the Bernanke connection, check out this post from TheHill.com).

How this all works could get messy, or it could help us all move on.  Or it could sink us all.  Action-reaction.  Unintended consequences.  Like the Fed dropping short term rates so low the dollar drops and inflation picks up & long-term rates (including fixed mortgages) go up.  That just happened.

Or, as my friend in Tennessee, Vince Thrasher, would say, “Hey, ‘The Fed dropping short term rates so low the dollar drops and inflation picks up & long-term rates (including fixed mortgages) go up’ just happened!”

Kind of like the fed dropping interest rates to save the economy after 9/11 and creating a housing bubble.  Yeah, that just happened, too, although Ben wasn’t driving the bus into the ditch back then.

Maybe it’s just time to let things just run their course.  It’s beginning to look like the longer the government tries to put off or minimize a downturn, the worse it becomes.

I’m still hoping an orderly debate may produce a moderate middle course that will at least partially mitigate some of the damage as we move forward.

We’re also advising our sellers to take advantage of the current spring mini-surge if they want to take the most conservative course of action.  And we’re advising our buyers to be patient, negotiate aggressively, and be sure to lock in a 30 year fixed loan they can live with on a home they won’t have to sell any time soon.

Just more evidence that what we said last November is still true:  We’re in uncharted territory, and nobody knows what’s ahead (see “How low will prices go?“)

Or, as Bernanke said last night, in our favorite quote, “A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue.”

Actually, they should have developed those new strategies a year or two ago.  Instead of the new and flexible subprime lending strategies they were working on.

As my mom would say, “Better late than never.”  If Bernanke’s concerned, maybe we should be too.

Real estate news is coming fast and furious! I take a weekend off from blogging for Barb’s birthday, & suddenly I’m hammered.

Several interesting items popped up over the last few days I found fascinating. In this post we’ll focus on the our own beloved California Association of Realtor’s headline-grabbing announcement that median prices are expected to drop 24% this year.  (Later, a look at remarks by the Fed’s Bernanke last night.)

It happened at the Disneyland hotel where our own Pacific West Board of Realtors was holding it’s spring “expo” and pep rally on Friday. Sadly, and ironically, as we local Realtors were meeting, a businessman decided to end it all by jumping from one of the hotel’s towers. Shades of the Great Depression. It is my understanding he was not a Realtor, surprisingly.

But some Realtors probably thought about joining him after they heard from CAR’s Deputy Chief Economist, Robert Kleinhenz, who revised the Association’s 2008 forecast for median home prices statewide. In March, CAR predicted a 9.5% drop for the year. Kleinhenz almost tripled that 9.5%, to a 24% drop. No wonder his boss, California Association of Realtor’s Chief Economist Leslie Appleton-Young, asked him to give the speech. (Leslie was the one out with 9.5% for the year in March, doubling her 4.5% October figure, which we thought was too conservative. Looks like when she ran the numbers again late in April, she just handed the sheet to poor Bob Kleinhenz on her way out the door to advise some poor businessman staying elsewhere in the hotel.)

But wait a minute–that may not be as bad as it seems. Dataquick’s most recent statewide median prices showed a 26% price drop for March 2008 from March 2007, which was when Dataquick’s price median peaked. Dataquick indicated “about half” of that drop was due to a shift in the market to more sales of lower priced homes. (For a detailed post on the problems with Dataquick’s median numbers, check out “Two big problems with DataQuick’s median prices.”)

So if you read between the lines, Kleinhenz, who apparently is playing “bad cop” to the missing Leslie Appleton-Young’s “good cop,” is implying that the worst is behind us. 2007 ended with CAR reporting a statewide median for Single Family homes of $476,000, and their latest number, for March 2008 is down to $414,000! (Click here for CAR’s press release on their March numbers) . That’s actually lower than the $424,000 median average for the year they’re now predicting.

As a 28 year CAR member, I picked up the phone to talk to old Bob himself, but discovered he was in Sacramento giving another speech today. Something about a statewide tour sponsored by Pierce Brothers Mortuary.

In any case, his capable associate, Oscar Wei was available to assist me, and he confirmed my suspicion that CAR now thinks the worst is behind us: “Hopefully, and that’s a lot of hope, things should be bottoming out soon in terms of price,” he told me.

That agrees with Oscar’s bosses comments last Friday at the resort formerly known as “The Happiest Place on Earth: “We do think this is the year we’re going to see our low point for sales. … Monthly sales have already bottomed out.” Also “All these numbers are going to stabilize and slightly improve. … We’re basically climbing above the liquidity crunch to pre-liquidity numbers.”

Well, I may be paying Bob & Oscar’s salaries, but I’m not quite ready to eat their breadsticks. With homes entering foreclosure still increasing (see “So Cal defaults up again“), and the liquidity problem far from solved, Blair and I are still expecting additional declines in values and sales as we move through fall and winter (See “Predictions 101: Our 2 market cycles“).

That doesn’t mean now may not be a good time to buy if you’re in a position to do so.  Shoot, Bob & Oscar could well be right, and Dave & Blair wrong.  Well, Blair anyway.  In fact, we continue to believe that if you find a home you love at a payment you can live with on a 30 year fixed loan, and you don’t intend to move any time soon, at least write an offer on it.

But if you’re not yet in a position to buy, there’s no need to panic.  While sellers may be less motivated as prices firm, we’re not going to see double digit appreciation any time soon.  And there’s a good chance the bottom may still be a year or two away.

But nobody knows for sure, as we keep saying, much to the annoyance of some of our gentle readers.  (See “How low will prices go?”

That’s what makes So Cal Real Estate so interesting.

What do you think’s next?

A week ago I told L.A. Times real estate reporter Peter Hong that much of a Realtor’s job in this market involves delivering bad news to homeowners. Pretty much the opposite of three years ago.

“You go from being like a doctor who delivers babies,” in a booming real estate market, I said, “to being an oncologist, just giving people bad news all day long.” (”Foreclosure glut further depresses housing prices“) Shoot the messenger time. Or keep dialing until the seller finds an agent who tells her what she wants to hear. (See #1 in “5 ways NOT to pick an agent.”)

Well, today brought more bad news for homeowners.

But that’s just one side of the coin. Unlike our 1980-82 housing bust, where mortgage rates topping at 16% were bad news for BOTH sellers and buyers, today’s bad news for sellers is good news for buyers.

Which can turn it into good news for some sellers who might also be buyers, and several other types of buyers:

First, this could be an excellent time to buy for “move out” sellers who are headed to more overbuilt areas like the Inland Empire, Vegas, Texas, or the Central Valley. That’s because prices there have generally dropped more than prices in Southern California’s coastal plain.

Such a “move out” seller can get her current home in escrow, then take her time looking in that outlying area, as prices continue to decline. There are plenty of homes to choose from, and lots of motivated sellers out there.

Folks who are willing to sacrifice a little temporary inconvenience for a lot of greenbacks & that elusive “perfect” home should consider renting in their new community while they continue to look. A buyer with cash in hand is in the best negotiating position, too. This move also lets you take advantage of the annual real estate market cycle (See “Market Predictions 101: Our 2 real estate market cycles“.

Second, the time may also be right for “Move Down” sellers, especially those looking to buy a condo. Since we’ve had a glut of condo building through much of our area, even coastal plain condos are experiencing rapidly declining values and lots of foreclosures.

The same goes for the more modest “starter” single family homes, which turn over more often and have more subprime loans and foreclosures. These aren’t just “blue collar” communities like Stanton or North Long Beach, but also communities like Lakewood, Cypress or even parts of Mission Viejo, which include large tracts originally build for first time buyers.

Third, this might be the right time to buy for people who are ready to settle into their dream home now. Specifically:

1. Buyers who will be living in this home for many years, and
2. Who have good credit, a down payment, and
3. Are tired of renting and are ready for the joys and trials of home ownership, and
4. Would like to start the 15 - 30 year process of paying off a mortgage so they can retire, and
5. Could use two of the three last great tax write-offs (mortgage interest, property tax, and donations), and
6. Are able to locate and negotiate an acceptable price on their “dream home.”

These buyers also might want to nail down the kids new school for next year. Maybe they’ve figured out that they want to enjoy their “dream home” while their kids are still at home. Maybe they’re concerned about interest rates going up. Maybe they know they’ve got busier times ahead & now’s the best time to look for a home & fix it up the way they want.

Maybe they know what we’ve been saying since last November: Nobody knows for sure what’s ahead. (See “How low will prices go?“)

Forth, this may well be an excellent time to buy for those whose personal situation suggests it. Someone who’s relocating into California, whether for work, family, or retirement. Someone who desperately needs a tax break. There are lots of different scenarios where personal situation trumps market speculation.

Some people would prefer to gamble with their stocks or in Vegas but not with home ownership. We believe there are plenty of things far more important than money (See “What to do when nobody knows what’s next,” “A little perspective,” and “A little more perspective.”)

Fifth, this might be a great time for buyers who appreciate the security of buying before or near the bottom.

Prices are already down 20% or more in many Southern California neighborhoods, interest rates are low, especially with inflation looming, and some special jumbo loan programs will be expiring soon. Why not take advantage of it?

Truth is, the best time to negotiate is just before the bottom. While prices don’t shoot up dramatically, the ultra motivated sellers and the super buys do disappear fairly quickly. And you never know it’s a bottom for sure until a year or two passes.

To take a very recent example, in January of 2007 we experienced a temporary “false bottom” caused by dropping rates and seasonal demand. In December I could find 10 - 12 low priced “super bargains” in Rossmoor, a popular west Orange County neighborhood. Within a month, they were all gone! We saw the same thing late in 2001 after the Fed dropped rates in the wake of 9/11.

Both 9/11/01 and 1/07 illustrate two things:

1. Super bargains disappear quickly when the market heads up.
2. You can only be sure of a bottom when you’re looking back months or even years later.

The “double dip” recession that started here in So Cal in 1989 during Gulf War I, then reversed to a new peak in 1990, then collapsed into the end-of-the-Cold-War bust of 1991 - 95 is a great example of # 2.

A personal story. During the ‘91 - ‘95 bust, Barb and I did not enjoy watching our rental homes decline in value, even as my income from real estate sales was also tumbling. But I wanted to avoid hefty taxes from selling those homes, many of which we’d owed for along time.

One day my colleague, John Spear, mentioned in passing that multi family properties in Long Beach had dropped to prices as low as four times Gross Rent. That means the price was down to 4 x the annual rent for some apartments.

Well, since apartments generally produce more income than single family homes, I decided it was time to use the wonderful tool of the 1031 Starker Delayed Exchange to convert our rental homes into rental apartment buildings. That way, even if the market continued to drop, at least we’d have some positive cash flow.

At that point, it looked like prices would continue to drop for years to come. A popular New York financial analyst wrote a syndicated column about how Southern California would never recover. Ever.

As they say, it’s always darkest just before the dawn. Turns out, I was buying at the bottom, but I didn’t know it. Possibly the best financial move (other than structured donations) that Barb & I ever made. And we didn’t even know it at the time. We were just lucky. Blessed, actually.

Bottom line?

If you can find a home you love and can afford with a 30-year or 15-year fixed mortgage, in a location you love, maybe it’s time to stop betting on further drops and become a homeowner. Even a professional gambler knows when to cash in his chips.

At least some of them. You could always pick up a rental or vacation home later on if prices continue to drop.

At least it might be time to start looking. Even if we all think the bottom’s still a ways off.

Only God knows for sure.

And He agrees with us that there are things far more important than money (see Matthew 6:19 - 34).

May 21 update: Ongoing increases in foreclosures and long term interest rates now make us more inclined to think that the bottom may be further off than we had hoped.

That doesn’t significantly alter our basic conclusions in this post, but it should at a little more caution. And a little more hope for those who are still saving for a down and seeking to improve their credit.

We recommend you check out today’s post on the subject: “Oh-oh! We just passed a nationwide bottom!.”

Note, 7/15: This is our classic post on the current housing turmoil. We think we’ve been proven right by subsequent events, so there’s no need to modify it, although we’ll occasionally add updates at the end. We think it’s as relevant today as it was when it was written.

Yesterday (11/27) the Los Angeles Times front page asked “Homeowners’ big question, How low will prices go?”

Today, they gave us a partial answer: “L.A., O.C. home prices decline sharply.”

We’ve got a better answer: “Nobody knows.” We first heard it at the California Association of Realtors’ economists panel in Anaheim last month. It came from Frank Nothaft, chief economist at Freddie Mac, as he was discussing how low prices would go and when things would turn around: “We just don’t know,” Nothraft said. “We’re in totally uncharted territory.” His point being that the problems brought on by sub-prime lending make this “correction” a new animal.

In a way, however, Northaft was just restating the conventional wisdom regarding any market’s cycles: “They don’t ring a bell when it hits the bottom. Or the peak.”

The consensus seems to be we’ve got 1 - 3 down years ahead of us, more if a major recession hits. Most economists also predict that Southern California real estate will take a bigger hit than the national average, just as we went up more. Prices are predicted to “correct” between 15% and 40%, with most economists in the 20% to 25% correction range. Maybe worse for outlying areas like the Inland Empire or Palmdale, and for entry level condos everywhere.

Having a bit of a contrarian nature, when everybody gets on the recession bandwagon, we start thinking about getting off. To be honest, we’ve already seen price corrections of as much as 20% in Lakewood, Los Alamitos, parts of Long Beach and Orange County and some other markets we serve.

That’s from peak to current low, and it’s comparing like homes (similar location, size, & condition), not the almost useless median selling price that takes comparing apples with oranges to an insane new level.

With interest rates dropping again and prices already down, we wouldn’t be surprised to see prices start moving upward this coming February. But we wouldn’t be surprised if they kept dropping as well. (We’re talking about prices on homes going into escrow in February, not closings. So the increase that may come this February would show up in March or April closing statistics.)

Why don’t we know? “Uncharted territory.” Too many variables: interest rates are dropping, prices have dropped, but more foreclosures are coming, and Congress may be making the “liquidity crisis” worse with the House’s proposed “reform” bill. We just don’t know. Nobody does. If they say they do, they’re either lying or deluded, or God.

What to do when nobody knows when we’ll hit bottom? That’s in the post which follows this one, (”What to Do When Nobody Knows What’s Next”).

7/15 update: Nobody knows what’s next, but that doesn’t stop us from making our best projection, which we try to update regularly as needed. For our latest posts, just look under “Recent Posts” near the top of the column to the right.

On a more uplifting note, you might also want to check out “A little perspective.”

Finally, we’ve added two links at the top of the column to your right so you can search almost all of Southern California’s Multiple Listing Services directly:

Search So Cal M.L.S. gives you direct access into the MLS covering Orange County and southeast Los Angeles County (think Greater Long Beach).

Search M.L.S. Alliance gives you direct access to a search across almost all Southern California Multiple Listing Services.

Feel free to play with them both & see which one you prefer. You shouldn’t find any ads as you use them, but you will have to deal with our picture as you search. We’ve been told you can print it & put it in your attic to deter termite and pest infestations.