So Cal Real Estate News

The Southern California housing news has been coming fast and furious over the last week. May median prices drown dramatically from a year ago and modestly from last month, foreclosures up but maybe peaking, interest rates up, May sales volume the highest since last August but the lowest May since 1995.

The other day the Orange County Register’s front page screamed “Bottom Near?” The vast majority of readers responding to their poll screamed back “No!” by a margin of 3 to 1.

From our perspective, there are several hopeful signs, but we still don’t expect a bottom of prices in most Southern California counties until 2009 at the earliest.

The Good News:

Today’s low prices, down 20% - 35% from the peak in most So Cal communities, continue to attract buyers, despite slowly rising interest rates, high gas prices and rising unemployment. If a home is properly priced, staged, and marketed, we’re still usually able to get it into escrow within 30 days. (See “How to sell your So Cal home for top dollar in 30 days.”) On the other hand, today’s buyers are taking their time and waiting for the home and price that works for them. Plus, with tougher new lending criteria, some buyers aren’t able to obtain financing.

For example, we received multiple offers on our two newest listings within two weeks, but in each case it took us several additional days of negotiating to put the sale together, and part of the difficulties related to finding loans that worked. Another encouraging sign, a Bellflower condo we’ve been watching for some time just went into escrow after sitting for months. No major changes–other than the disappearance of lower priced competition.

Foreclosures in Southern California reached another record high in May. However, in Orange County homes starting the foreclosure process declined from April, so we could be nearing a peak in foreclosures, which is what we’ve been expecting.

The Big Questions:

There are several unknowns which are critical to prices in Southern California bottoming out:

1. The economy: Major job losses would trigger additional foreclosures and distressed sales and could lead us to yet another step down in prices. However, the weaker dollar should prove a boost to U.S. manufacturing. So far, the current recession (if it is a recession) has been relatively mild.

2. Interest rates: Mortgage rates have been moving up slowly but steadily for months. 30 year conforming fixed loans are now at 6.3%, up from 6.2% a week ago. Anything below 7% is historically low, but as rates rise so do payments.

3. Mortgage lending: Since last summer lending practices have gone from ridiculously loose (see “How we got into this mess“) to to overly stringent. Hopefully the pendulum will swing back to reasonable lending standards which will allow more buyers to qualify. If not, the current boomlet could run out of buyers and steam fairly soon.

Our Take:

We still agree with Freddie Mac’s Chief Economist Frank Northaft’s words at last fall’s California Realtor Expo: “We’re in totally uncharted territory. Nobody knows for sure what’s ahead.” (See “How low will prices go?“)

But we still love to at least take educated guesses. Although we still think the odds are that we’ll hit a price bottom early in 2010, we think the rapid decline in prices may lead to a bottom this coming winter instead. Overall, things don’t seem quite as gloomy as they did several months ago. Especially encouraging is the continuation of buying despite rising rates and the end of the traditional spring buying season.

What to Do?

We still think for most people their personal situation should dictate their real estate decisions (see”What to do when nobody knows what’s next“).

Buyers: The market may not be at a bottom, but it’s closer to one than it was a year ago. We think this coming December will be an excellent time to buy, but most people are just too busy with the holidays to even think about house hunting then. Which is why December’s almost always the best month to buy. No need to hurry, but if you find a home and a loan that work for you & you’ll be staying put for a long time and have good job security, maybe you should pull the trigger & start paying down that 30 year mortgage.

Sellers: If you need to sell this year, sooner’s better than later. Next year’s a dice roll, and prices may not be back to today’s level for several years. If you like to gamble, hold on for “as long as it takes,” but if you want to get on with your life, the market’s decent right now, but seasonal declines will probably be setting in soon. (See “Predictions 101: Our 2 market cycles“)

The one thing you shouldn’t do is make your decisions based on what your neighbor got a year or two ago. He won the lottery–you didn’t. At least not as big a prize as he got. But if you bought more than five years ago, you’re still in good shape.

“Upside Down Home Owners:” If you can make the payments & don’t need to move & the loan won’t have a major uptick soon, you can probably ride this thing out. But if you’re going down, it’s time to talk to your lender about serious loan modifications. For more, check out our post on “Trouble making your mortgage payment? 7 ways to get back on track.”

These are challenging times, but they are not bad times. If you need a little help putting things in perspective, click on “perspective” in the column to the right under “Categories” (you’ll need to scroll up from here).

As always, your comments are welcome. Stay tuned for more updates. And thanks for stopping by.

Update from David Emerson: We wrote the following post early 4/15, in anticipation of DataQuick’s release of their March closing statistics for all of Southern California, including L.A. & Orange Counties, Lakewood, Long Beach, Los Alamitos, and the surrounding area. As we predicted, DQ’s March numbers showed an increase in sales which was quite modest by seasonal standards, and also a modest firming in prices.

We’ll insert excerpts from today’s DQ report at appropriate points through the post below. We’ll indent them & put them in italics. We’re leaving our earlier projections and commentary unchanged, because it’s still applicable:

“DataSlow,” as we like to call them, should be out today with their March closing statistics for Southern California. Here’s our preview & interpretation. We’ll update this as needed once the numbers are out.

Data quick reports Southern California two statistics every week and every month: sales volume and median sales price.

It looks like both will be down from March 2007, which will probably get most of the attention. But the month over month figures should be more hopeful.

We expect sales volume to be up a tad from February,

[Here's what DQ reported:] A total of 12,808 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in March. That was up 18.8 percent from 10,777 the previous month but down 41.4 percent from 21,856 in March 2007.

and median prices to be pretty close to February’s numbers.

The median price paid for a Southland home was $385,000 last month, the lowest since $380,000 in April 2004. Last month’s median was down 5.6 percent from February’s $408,000, and down a record 23.8 percent from $505,000 in February 2007. That peak median of $505,000 was reached several times last spring and summer.

[Dave here. This is still a reduction in the rate of decline, and it was caused by some of the problems with median statistics, details below. When isolated by county, the stabilization is more apparent. For example, Orange County's March median of $506,000 was down less than 3% from February's OC DQ median of $520,000. More significantly, OC's $506k March median was actually up from DQs last 4 week OC reports, which both came in at $500,000. Pretty much what we predicted--but don't read too much into that, bulls (details to follow)

Now a word about what that would mean.

It's important to bear in mind what these numbers actually are. First, in terms of today's rapidly moving market, DQs numbers are ancient history. That's because Data Quick today will report Southern California real estate sales that closed escrow during March.

That means the purchase offer was most likely written 45-60 days earlier: Someplace between January 1 and February 14.

Second, DQ's price numbers are medians. If more homes are selling in stater neighborhoods, the median price will drop even if prices are rising. (For a more detailed discussion of the problems with DataQuick's numbers, see "Two big problems with DataQuick's median prices.")

The sharp and sudden drop of the Southland median price reflects a combination of factors, mainly depreciation, especially in areas hammered by foreclosures, and a big shift in the types of homes selling. Since last August, when the continuing credit crunch hit, sales have plunged for more expensive homes financed with "jumbo" mortgages, which until recently were defined as loans over $417,000.

Sales financed with these larger loans, which the credit crunch made more expensive and harder to get, accounted for just 15 percent of Southland sales last month, down from about 40 percent a year ago.

[This is the problem with medians. DQ explains it, but only in the ninth paragraph of their report.]

Even with their problems, however, DQs numbers can be useful. These should offer something for everyone, but some caution is in order.

Housing bears shouldn’t focus too much on the year over year numbers to the exclusion of some possible modest improvement from February to March.

Likewise, housing bulls should be wary of reading too much into what might just be a normal seasonal increase in activity and prices (see “Southern California’s 2 housing market cycles“).

Over the past 20 years Southland sales have risen by an average of 38 percent between February and March. Last month’s 18.1 percent increase from February was the lowest in DataQuick’s statistics, which go back to 1988.

We don’t think today’s DQ numbers will change our own position on what’s ahead (See “A change in our projections?” for our April 4 projection post, or our “classic” November post on this market, “How low will prices go?“)

DQs report is available here. You might also want to check out Peter Hong’s concise, well-written article on today’s DQ numbers.

For a little longer term perspective, you might want to click back to either of our last two posts, (”A little more perspective”) and (”A little perspective“).

Today’s Los Angeles Times has DataQuick’s February closing statistics for the 7 county Southern California Region, & it’s exactly what we predicted: Sales up from January, prices down.

Unfortunately, what writer Peter Hong never seems to mention in the article is that this is old news, for 3 reasons: First, today’s March 14, & DataQuick’s reporting average closings during February, making the average sale date a month ago today. Second, that’s the date the sale closed, so those homes mostly went into escrow in late December and early January! Third, lots has happened just this week to address the underlying problems, most notably the Fed’s new program to increase liquidity.

The article does have a fair amount of quotes from a variety of experts, most saying this means things are a bit worse than they thought. Well, things were pretty bad in December, but they did pick up in January and especially February, so we still expect better news a month from now, when DataQuick reports March closings–which mostly opened escrow in January. And we’ll guarantee sales volume will be up. It’s really not that hard to predict what’s coming in on this month’s freighter if you talk to the guy who loaded it up!

We still think there’ll be a significant increase in closings through this spring, and quite possibly a modest increase in prices, but we also anticipate continued price declines as we move through fall and winter. The real bottom may still be a couple years away, but, as we pointed out here in our November piece, “How Low Will Prices Go?”, this is the most unpredictable downturn we’ve seen, and nobody really knows where it will end.

As Hong’s article eventually points out, DataQuick’s numbers are overly negative due to the preponderance of low end sales, where most of the foreclosures are. We’ve got lots more to say about this, and hopefully we’ll get more posted tonight. For now, I’ve got to get on the road and check on some units that burned last night. Now that’s a real “overnight” decline in value!