So Cal Real Estate News

We’ve got foreclosures, federal “remedies,” a weakening economy, low interest rates, high gas prices, and low home prices, all in a presidential election year.  So it’s impossible to know what’s ahead, but we can make educated guesses.

For several months, we’ve said spring will bring increased home sales.  We also think prices will either slow or stop their decline, at least for the next few months.   Beyond that, things get cloudier, but the odds are that sales will slow again later this year.

Our own experience this February is bearing this out.  We took three listings in the last couple of weeks, and now have all three of them in escrow.  In addition, today we are opening escrow on a new home purchase for one of those sellers; the other two do not plan to purchase at this time.

We’d like to think some of this success is the result of our 30+ years combined experience, but low interest rates and an active market have certainly helped.

Our goal with almost every listing is to get it into a solid escrow within 30 days, and preferably within the first two weekends.   Over the years, we’ve found out that’s the key to getting top dollar.  After a month, buyers and sellers both lose interest.  Buyers figure if nobody’s bought it after a month, it can’t be that great a deal, unless the home has some extremelyy distinctive features.  Most sellers can only keep a home looking it’s best and put up with the hassle of showings for a month, if that.  As one wise Realtor once told me, “If it sells in the first month, everybody’s happy.”

However, in a slow market, it’s a lot harder to get a home sold in a month.  And most of Southern California’s real estate agents had never seen a really slow market until this one hit. Blair & I had to revert to what had worked for me during prior slumps:  1980-82, 1985-86, 1989 and 1991-95.  This time we’ve had to adjust for the internet, technology, & the fact that buyers now have direct access to listings, but the basic principals remain the same.

It takes a skillful combination of preparing and staging the home; accurate pricing; effective, targeted marketing; careful negotiating and screening of buyers, and continual vigilance during escrow.   Doing  dozens and dozens of things right.  We’ve got it down to the day of the week our listings go into the local M.L.S.

But all of that works better when the market’s more active.  Which is why we believe our successes overt the last half of February are a good indicator that this spring may provide a window of opportunity for both sellers and buyers throughout Southern California.

7/15/08 update: Lots has happened since we wrote this post back in February. It has certainly been an interesting ride, and plenty of opportunities are still out there. For our latest posts on what’s going on, simply click “front page” in the upper left corner, then scroll down, or check out the “recent posts” in the upper right below our “search” box. We’ll continue giving you straight talk from real estate’s front lines, with the perspective of 30 years experience.

The Federal Reserve’s latest rate cuts may well have just radically shortened the present housing slump. The “bottom” may be a lot closer than anyone suspected just two weeks ago.

That may mean the time to buy is actually now, for several reasons.

First to get the lowest interest rates. Right now, you can get 30 year fixed mortgages well around 5.7%. That’s outstanding. . . but rates were a little lower a few days earlier. Why? Well, the Fed really can’t control long term rates–they’re set by market forces.

So, when the bond market thinks we’re headed into a recession because the Fed hasn’t lowered short term rates enough, long term rates drop. And when the Federal Reserve reduces the risk of recession by aggressively dropping the rates they control, long term rates move up. That’s one reason all the Fed rate increases back in 2003 - 05 didn’t reduce long term rates. And it’s why that much-expected additional lowering by the Fed could mean today’s mortgage rates may be the lowest we’ll see in a long time.

Second, this may be the time to buy because the best time to buy isn’t at the bottom, but a little before the bottom. I know first hand there are tons of potential buyers waiting to jump in once they think the market bottoms. The trick is to jump in before they do. Because the below market properties are the first to go. Plus, once sellers think things are moving up, they become much harder to negotiate with.

The truth is, almost nobody buys at the very bottom, or sells at the very top. And they didn’t know they were doing it until they looked back. I know–I bought several properties near the bottom of the last cycle around 1995, but I didn’t realize how fortunate I was until several years later. Likewise, I also once locked a long term interest rate at a bottom, but had no way of knowing it at the time. I just knew it was an interest rate I could live with.

A third reason this may be the time to buy relates to what we call the “annual real estate cycle.” You see, the forces of supply and demand are influenced by annual events. Buyers are way too busy to look for a home with the holidays around the corner, so demand slackens in December. Once the New Year begins & they’ve resolved to get that first home, demand picks up. Especially after they see how much they’re paying in taxes. As we move into late spring, the push is on for many to move to a better school district. Parents want to get the home in escrow & lock in the address before the school administration is gone for the summer.

But as good weather & summer vacations kick in, buyers get other things on their mind & demand slows. That’s too bad, because that seller who resolved to get her home on the market in January is finally finishing their pre-listing painting & cleaning, & supply is finally increasing.

All of which means that, all things being equal, prices go up dramatically from Feb. - May, level in the summer, & decline in fall & early winter. Which means the annual cycle just bottomed. Then the Fed dropped rates. Twice. And Congress is working on a stimulus package. And maybe it’s time to start looking for bargains.

(Updated 8/8/08) (Lucky you!)  With home prices down 15- 35% in Southern California, we are increasingly encountering clients who don’t know what to do when they need to sell or refinance in today’s troubled real estate and mortgage markets.

Of course, if you’ve got enough equity in your home, selling or refinancing is not such a problem, although you’ll net less cash out than you would have a year or two ago. We’ve got lots of ways to help sellers maximize their net in today’s market, but that will have to wait for another post. (If you can’t wait, call us at 562 822 7653 or post a question in the comments below & we’ll give a brief summary)

The real crunch comes when you owe more than 90% of what your home’s worth. For refinancing, that’s because 100% refinance loans have largely disappeared.

For sellers, it’s because the total cost of selling a home today generally runs between 8 - 12% of the sales price (escrow, commission, termite, title, home warranty, & often points and incentives).

As we see it, homeowners with little, no, or negative equity have at least 7 options:

1. Live with your existing loan the way it is. If you can make the payments and plan to live there for a long time, you’ll eventually be fine. Depending on when you bought, what you put down, & when the market recovers, it may take 2 - 10 years, but inflation eventually should bail you out.

For our projections for Southern California housing, check out “An optimistic update on our projections of a home price bottom“  If you’re reading this much after 8/10, you might also want to click on  “Market Trends and Projections” under Categories a short scroll down the right sidebar.  There you can scroll through our latest projections posts starting with the most recent.

Why live with it? I’ll bet your car, clothes, appliances, and furniture are all worth less today than what you paid for them, and they’re not expected to go up over the next 2 - 10 years, either. However, if your loan is scheduled to adjust up to where the payments or interest rate is unreasonable, option # 2 is worth trying:

How to live with it? Spend less than you earn. That may be the very best-kept obvious secret to financial freedom.  It starts with a simple but realistic budget.

How to spend less? This is like flossing your teeth–everybody knows how & knows they should but nobody has the time.  If you’re behind on your mortgage, it’s time to make the time!

• Keep track of what you’re spending.  Write it all down–every penny, they say–for at least a month.  It may surprise you where your money goes.  At the same time, you can start with the next step:
• Find places to cut spending.  Some of these will be obvious as soon as you write them down or even before.  Do it immediately–even as you’re still tracking your spending.  Here are some to consider:
  • Eat out less.  Pack a lunch–even if it’s just yogurt.  Make your own coffee.
  • Drive less.  Carpool?  Ask if you can try  a 4 day 10 hour work week–or one day a week working at home.  Walk, bike, combine trips.  You know the drill.
  • Cut out or reduce luxuries.
  • Look for free or inexpensive entertainment or recreation.  The beach can be a lot more fun than Disneyland.  Friends can come over and watch the game on Tivo instead of going there.  With a delayed start and DVR you can save time & gas too!  Disc golf is easy to learn, almost free, and there’s rarely a wait for a tee time!
  • My favorite:  Go to an all cash basis.  No more plastic.  Ever.
  • My wife’s favorite:  Never buy anything that’s not on your list the first time you see it. Put it off at least 24 hours.  Even 6.  Give your brain some time to override your emotions and the professionals’ well crafted pitch.
  • These are just a few ideas to get you started–most of us spend way more than we need to.
• Make a budget:  a financial plan.  And stick to it.
  • Be sure to include categories for emergencies, savings, donations, and those two surprisingly unexpected annual budget busters, Christmas and vacation.
  • When Barb & I first did this we actually cashed my paycheck every month and divided it between evelopes, as budgeted.  When the envelope was empty, that spending stopped–or we had to cut back in another area.

How to earn more:

• Rent out a room or two.  Keep your eyes open for people that might work  Get the word out where you know people like work, church, civic organizations.  Maybe post at student housing offices at local colleges.  Use your head.  I might stay away from Craig’s list.  Shoot, here in SoCal you might even try an informal bed and breakfast arrangement.
• Add a part-time job.
• Get your spouse, co-owner, or working age child to increase their income or contribution.
• Make yourself more valuable to your employer. . . or another one.
• Ask for overtime. . . within reason.  There’s more to life than work!

This could and probably will grow to a seperate post, so for now we’ll move on to six other options:

2. If you’ve got one of those killer loans that’s already adjusted up or will shortly, try to negotiate with your lender for better terms. It’s never a good idea to just give up without at least trying to work something out. It doesn’t hurt or cost anything to ask. You might ask to have the interest rate reduced or held at the current low level until the home goes up in value enough to allow you to sell or refinance. Lenders are much more willing to negotiate if you have a legitimate hardship, but if you didn’t have a hardship you probably wouldn’t have a problem making the payments.

Bad loans had a lot to do with the current real estate mess (see “How We Got Into This Mess“). If your loan was misrepresented by your lender, you might mention it in a matter-of-fact, non accusatory way.

3. You could also try to negotiate for a reduced principle balance to allow you to refinance or to at least make the payments on the current loan. This is sometimes known as a “cram down.” If there’s no equity, they really don’t want your home back, & they could lose a lot more if they had to foreclose. As an added incentive, you might propose some sort of equity sharing arrangement as partial compensation, although I wouldn’t start off with that, & I’d try to keep it modest.

4. Negotiate a “short sale” with your lender. The lender reduces the payoff amount to allow you to close escrow with little or no out of pocket expense. Most lenders prefer this to a foreclosure, but they can be tough and sometimes unreasonable. Still, we’ve been able to negotiate payoff discounts well over $100,000 for a number of our sellers over the last year, just as we did during the 1991 - 1996 downturn. In fact, lenders seem to be more reasonable and more eager to deal this time around. If you’re going this route, you need an excellent, experienced negotiator on your side; the bank’s got plenty of them on theirs. Most real estate agents will tell you they can do that, but if they don’t have at least 15 years experience, I’d avoid them.

In fact, before talking to any agents, check out our post on “Top 5 Ways NOT to Pick an Agent.” You might also want to take a look at our experience & advice on “How to Sell Your So Cal Home for Top Dollar in 30 Days.”

5. Bring cash to escrow to enable a sale or refinance. During the last recession, we saw many sellers write checks to escrow for thousands of dollars to enable them to sell. This keeps their credit & their conscience clean, while allowing them to move on. For those with significant assets, it’s worth considering.

6. “Give the home back to the bank.” This is generally referred to as a “deed in lieu” of foreclosure, and it still saves the bank time and money over foreclosing. However, if there are other encumbrances (2nd T.D., equity line, judgements, tax liens, etc.) they may prefer to foreclose, to wipe out those junior liens.

7. Let the lender foreclose. In California, that give you a minimum of about 120 days you can live in the house without making payments from when the lender files their Notice of Default (you’ll get a copy!). That “N.o.D.” usually isn’t filed until you’ve missed at least two payments, sometimes a lot more.

Possible Steps to Determine which Option to Start With:

1. Pray, if you’re so inclined. In this case, it wouldn’t be a bad idea even if you’re not so inclined! We could all use some divine wisdom & intervention to get through the current mortgage mess! Like I said above, it never hurts to ask!

2. Get the facts on your loan. Review your last statement to find out exactly what you owe. Check your loan documents or call customer “service” to find out when your payment will adjust & by how much. (If you call, & you’ve got a big bump coming, you might want to try this when they tell you: Inhale sharply, then say “Oh no! I don’t know how we can handle that!” Then shut up & wait to see if they offer anything. Silence is one of the most powerful of negotiating tools, & whoever speaks first to break the silence usually loses.)

3. Get the facts on what your home’s worth. I suggest calling an experienced, honest, full time, diligent Realtor. We’d be happy to refer one, or possibly even help you out ourselves. 562 822 SOLD. Or e-mail RealtorDaveE at msn dot com. (Use the symbol @ for “at” and a period for “dot–” we have to be careful to avoid spamming web crawlers, sorry.) The agent can also give you a more accurate idea of your costs of sale and what preparation & staging would be best. We don’t recommend selling by owner or using a part-time or inexperienced agent in today’s market.

4. Consider the tax, credit, & ethical consequences of the various options. Tax wise, the recently passed federal Mortgage Forgiveness Debt Relief Act of 2007 can save thousands in tax for most borrowers exercising options 3, 4, 6, or 7 above in 2007, 2008, or 2009. Don’t ignore the ethical implications–I can’t think of anyone who’s ever regretted doing the right thing, but lots of people who’ve regretted unethical behavior. Credit wise, options 1 & 5 shouldn’t hurt your credit at all, neither should option 2 in most cases. Options 3 & 4 are generally considered less harmful than 6 or 7, especially if you continue making payments, but you’ll want to ask your lender if & how it will be reported to the credit bureaus.

Obviously, this post is general in nature & you should consult the appropriate legal, tax, real estate and other professionals for your specific situation & state. Our point is, you do have options, and doing nothing is generally considered the worst option of all. Good luck, & let us know how things work out!

As always, your thoughts & comments are welcome.

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.