So Cal Real Estate News

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for more June sales info from NAR.

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

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

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

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

It’s Local

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

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

An Interesting Formula

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

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

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

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

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

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

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

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

Our Current Best “Guestimate”

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

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

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

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

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

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

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

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

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

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

What to Do?

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

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

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

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

Homeowners today are paying for years of greed, stupidity, and dishonesty by just about everyone in the mortgage and real estate food chain, from buyers and borrowers to lenders and agents to bankers and sellers. . . . Here’s the link to our March 29 post to our front-row view on how it all developed: “How we got into this mess.”

For a story about how teamwork got one homeowner out of it, see the post below, “The team that made it happen.”

For options for homeowners with toxic mortgages, you might also want to check out “Trouble making your mortgage payment? 7 ways to get back on track“

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Consider our current situation:

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

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

Consider the Great Depression:

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

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

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

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

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

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

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

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

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

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

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

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

It’s been pretty clear for a while that, in Orange County and Los Angeles County, at least, we passed the bottom for sales activity this past winter.  (”What’s next for Southern California housing?“)

It’s also growing increasingly clear that the bottom for prices is still ahead of us.  (See “Snapshot from the front lines: One bottom, maybe two.”)

But there’s another “bottom” that also recently passed us by.  Unfortunately, that’s the bottom for long term interest rates.

While watching the Dodgers beat the Angels in 100 degree heat on Saturday, Blair and I were discussing some mutual friends he was about to open an escrow with.  They were young teachers (like both Blair and I were once), and wanted to take advantage of some special first time buyer financing that was about to phase out.  Blair had placed another couple in a similar loan about a month earlier, and he remarked how the fixed interest rate on that program had gone up almost 1% in that month.

Now I’ve been aware that long term rates are going up, and warning about the consequences, but it really hit me between the eyes as I was filling up my 12 gallon Element’s tank at Costco yesterday morning:   The roaring return of inflation means long term interest rates aren’t likely to come back down any time soon.

Somewhat like sales volume and prices (see “Predictions 101: Our 2 market cycles“), mortgage interest rates tend to go down in the winter and up in the spring, possibly for the same reasons.  But this spring’s increase in rates is now accelerating due to the return of inflation, especially oil-related inflation.

The main causes of those oil price increases ?

1. Increasing oil demands from China, India, and the developing world.
2. The decline in the U.S. dollar’s value.

Reason #1 is cited as the main cause, and all the evidence is that so far we’re just seeing the tip of the iceberg as young industrial giants continue to grow.  U.S. oil usage is now just an ever-decreasing fraction of usage in these growing new economies.  That’s why we can expect fuel and other commodity inflation to only increase for the immediate and possibly long term.

Reason  #2 was largely caused by the Fed’s cuts in U.S. interest rates.  That further restricts the rate-cutting they’re able to undertake.  More significantly, the Fed only controls short-term rates; long term rates are determined by market conditions.  Those long term rates frequently move in the opposite direction when the fed makes cuts in short term rates.

Bottom line:  Long term mortgage and interest rates will continue rising for most of this year, although they may dip modestly next winter.  Only the onset of a very major recession is likely to reverse the upward trend.

That dramatically affects the cost of housing.  With the mythical 20% down on a $500,000 median OC home, the principal and interest payment on a 30 year fixed loan @ 6% is just under $2,400.  @7% that same loan payment rises over 10% to $2661.

In my 30 years of working with buyers, I’ve found that most view cost in terms of down payment and loan payment more than in terms of sales price.  To bring the loan payment in our example back down to $2,400 the loan amount would have to drop almost 10%.   That’s a 9% price drop if you allow for the reduced down payment to be added to the loan.

At this point most economists think the continuing flood of homes entering the foreclosure process in Orange County, Long Beach, and Los Angeles County ensure continuing price declines throughout the region (see “So Cal April Foreclosure Data Just In“).  Are you ready for another 10% decline on top of that?  Add that to ripple effects of the economic decline that may be just beginning, and the scenario gets downright scary.

Recommendations?

Market timing is nice, but you need to give primary consideration to your personal situation.  (See “What to do when nobody knows what’s next.”)  We believe it’s time to think of a house primarily as a home and primarily as a piggy bank or investment.

Potential Selllers: Before you panic, remember the words of Frank Nothaft, chief economist at Freddie Mac to last fall’s California Realtors’ Expo 2007, 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.”  (See “How low will prices go?“)   Actions cause reactions, and nobody really knows how all this will unwind.  All we really know is that more surprises lie ahead.

That said, I just got off the phone with Blair trying to figure out a way to move up the time frame for getting a couple of our new listings onto the market.  We believe any seller who needs to sell in the next year or two should give very serious consideration to getting their home on the market now.

It’s still possible to sell for top dollar in 30 days.  (See “How to sell your So Cal home for top dollar in 30 days.”)   But you need an experienced, honest, diligent and competent agent who’ll tell you the truth, not what you want to hear (see ” Top 5 ways NOT to pick an agent“).   (BTW, my cell is 562.822. 7653.  If we can’t service your area, there’s a good chance we know or can find a good agent who can.)

Overencumbered (”upside down”) sellers: You have several options:  See “Trouble making your mortgage payment?  7 ways to get back on track” for starters.  There are tax breaks for sellers being foreclosed and participating in “short sales,” where the lender takes a discounted payoff so you can close escrow.   But as things stand now you won’t get those breaks if you close escrow after the end of the year.  Same if the trustee’s sale’s in 2009.  That may get extended, but I wouldn’t bet on it.  Again, we’re only a phone call or a “comment” away if you want to discuss your situation.

Potential buyers: Prices coming down as rates go up doesn’t really help with your payment.
We recently wrote a post discussing specific buyers who might benefit from buying in the current market (see “Time to buy?“).  Move-down and move-out buyers, among others, might find real benefits right now.

If you’re not yet in a position to buy, take advantage of the time you’ve probably got to get ready.  That means saving a down payment or at least closing costs, working on your credit score.  (Try annualcreditreport.com, a free service of the credit reporting firms.  Don’t use freecreditreport.com, which isn’t really as free as it sounds.)

Winter’s usually best for market timing if you’re a buyer. This year, lots of lenders will be trying to close sales by year’s end.  By fall we’ll have a better idea of if the bottom’s likely to be this winter, next, or later, so “stay tuned.”  An RSS feed’s not a bad idea, my 16 year old says it’s easy to do from this blog–if you don’t understand that, ask your kid.  If you do, maybe you can post a comment & explain it before I can get Nate to do so.  (Finals and all coming up.)

Perspective:

Every market presents challenges and opportunities.  These are times when you need experienced, informed, honest professionals to help you make the best decisions.  They are out there, hidden among the pretenders.  Hopefully we’ll have a post up soon on how to spot them.  In the meantime, you can check out “Top 10 ways NOT to pick a real estate agent,” or give me a call (562.822.SOLD).

The challenges we face in today’s market, while serious, are nothing compared to what thousands are facing right now in Burma and China.  Or thousands more in America who, like Ted Kennedy face serious diseases.

For an inspiring story from the pages of the OC Register about a handicapped young man overcoming challenges, you might want to check out “A little perspective.”   I also appreciate my pastor’s reflections on the classic Biblical book of Job.

Today the Wall Street Journal reported that Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and his committee’s ranking Republican, Sen. Richard Shelby of Alabama have reached an “agreement in principal” that could lead to senate approval of their own version of Barny Frank’s $300 billion dollar mortgage relief bill.

You may recall our post ten days ago about Ben Bernanke’s seeming support of such a bill.

While we are supportive of some of the many things included in Frank’s bill, there are huge problems which we hope our Senators are wise enough to correct.

1. It makes no sense to bail out loans that never should have been made and that will ultimately fail regardless of temporary bailouts. There’s plenty of blame to go around for the subprime crisis (see “How we got into this mess“), some goes to borrowers who lied about their income, other to lenders willing to make no down home loans to borrowers with Fico scores so low I wouldn’t have accepted them as renters, let along borrowers. In either case, there’s no sense in putting off the inevitable for borrowers who never should have become homeowners.
2. It makes no sense to reward and encourage irresponsibility. It’s really up to the borrower to read and understand the loan documents, not to just “trust our agent,” who probably hasn’t read them either.
3. Let’s not punish tens of millions of responsible homeowners who are also taxpayers by forcing them to shoulder billions of potential losses to bail out less responsible homeowners.

In fairness, many subprime borrowers were duped by mortgage brokers who were often also real estate agents, eager to make a commissions for both the sale and the loan. I’ve heard tales of some agents employing full time “signers” to supply signatures on loan applications and documents. Many others simply trusted agents who spoke their language to correctly explain the various English documents. The documents are indeed overwhelming. I usually scan loan docs that I sign, but rarely do I read every word of every page.

The other day as Barb & I were out for an evening stroll we passed a home which had recently been foreclosed and then sold. The buyers paid about $200,000 less than the former owners had paid almost three years ago. They had moved in, and we noticed new kitchen cabinets stacked in the garage, no doubt waiting installation.

This was not a subprime loan gone bad, just a case of a buyer who bought at the peak and then decided to accept a job transfer as prices were declining. They picked a really friendly Realtor whose child was on the same soccer team as theirs (see”Top 10 ways NOT to pick a real estate agent“).  The agent allowed them to overprice the home, then chase the market down, then take it off the market and rent it until their considerable equity was gone.

Sad for the borrower, sad for the lender, good for the buyer.  Kind of a cleansing and a fresh start, ultimately for everyone.  Not the end of the world.  Nobody died.  The sun’s still coming up.  Lender and  borrower made their choices and lived with the consequences.  And the American taxpayer didn’t have to bail anyone out.

Worse things could happen.  Rep Frank’s bailout bill, unless modified by the Senate, might be one of them.

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.

Foreclosures are up, sales are up, closings are tougher, and rental vacancies are down.  And one of the smartest investors I know is making offers again, even as he puts his own home on the market.

That’s what we’re seeing from both sides of the Los Angeles County and Orange County lines.

Total Southern California homes available for sale, from Santa Barbara to San Diego, stands at about 163,500, which is down about 3% from the 169,000 we peaked at about three months ago. In less built-out Orange County, inventory is down more dramatically.

David Haas, our favorite local property manager says his vacancies have declined, largely due to an influx of former homeowners vacating after foreclosure and/or short sale.

The managing partner at the real estate office we work out of reports new escrows for April were the best in about nine months, before the subprime crisis. April’s numbers were modestly better than February’s, with March serving as a trough in between. This is actually fairly typical in real estate–many agents tend to get one or two deals into escrow, then focus on closing them before opening new escrows.

However, escrows remain difficult to close, for several reasons. The reason you hear about most has to do with the difficulty qualifying for a loan, and who can blame lenders for tightening up, given their current onslaught of foreclosures. Of course, sub-prime loans have pretty much dryed up, and most lenders are looking for at least 10% down and good FICO scores for no-verification loans. In problem areas with lots of foreclosures, FHA is requiring 5% down, rather than the traditional 3%.

Some escrows are harder to close because they’re “short sales,” where the current lender must accept a discounted, or “short” payoff in order to facilitate a sale and avoid foreclosure. It’s not uncommon for these to fall out of escrow, either due to the lender refusing to accept the discount, making unreasonable demnads, or just taking too long to respond.

However, enough sales are falling out right now that we’re starting to put in “back up” offers on occasion.

As discussed in our prior post, DataQuick’s latest Orange County medians indicate a modest increase in prices as well.

What’s it all mean? Well, the increase in pending sales & prices is pretty typical for springtime (see “Predictions 101: SoCal’s 2 market cycles“), so that doesn’t prove anything in itself.

However, with the ever increasing number of foreclosed homes hitting the market, stabilization in prices is a good thing.

Have we hit a bottom? In number of sales, we’re pretty sure we have. In price, we’re not so sure. The dramatic and rapid decline in home values is bringing buyers back into the market, but continuing foreclosures are keeping the inventory high. As we move into fall and winter, the number of buyers normally decreases, but most indicators are that foreclosures will continue strong through November at least (See “SoCal defaults up: What it means“).

Two key factors are mortgage interest rates and the economy. Were rates to decline, that could bring in more buyers, but long term rates are slowly moving up. Rising inflation will probably continue that trend, at least over the short term.

As for the economy, it’s hard to say, but interest rates and economic indicators move in opposite directions, so there’s some automatic self-correction there. If the economy continues to falter, longer term rates are apt to decline. If the economy starts picking up steam rates will go up. Probably a wash over all, although a return to “stagflation” (stagnant economy with inflation), a possible worst-case scenario, can’t be ruled out.

Ironically, a return of inflation would eventually push home values higher, but would push them down short term.

There are still so many variables, we’re not ready yet to depart from our mantra, “We’re in unprecedented territory, and nobody can really know what’s ahead.”  (See “How low will prices go?“)

Here are the things we’re relatively confident of:

• Long term interest rates will continue to climb slowly for the time being.
• There’s still time for potential buyers to begin saving a down payment, but they do need to start now.
• So Cal homes are unlikely to return to their peak prices in this decade.
• If you buy a home with a 15-year fixed mortgage and do not refinance or add a HELOC or 2nd, you will own it free and clear in 15 years.
• Most of us aren’t as smart as we think we are, so if a home you like makes sense  for you with a fixed loan, and you’re not planning on moving soon, you should seriously consider buying.  We probably aren’t at the bottom, but we may be close, and nobody will know for sure until a few years after it’s passed.
• By the same token, it makes no sense to hold off on selling until you can get the ridiculous price your neighbor got at the insane peak.  If you can do most of what you want to with what your home will net today, go for it–NOW.    The next month or two might be your best opportunity for a while.
• By the same token