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.

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.