So Cal Real Estate News

(8/1/08) Frequent readers know Blair & I have been candid about what we don’t know during this amazing real estate market cycle here in Southern California. (See “How low will prices go?“)

But today, as I was looking through the Orange County Register’s Friday new homes advertising section, it suddenly hit me:

Prices on most So Cal new construction have either already hit bottom, or will be hitting bottom between now and December 26.

So, if you’ve always wanted to live in a new home, I suggest you start doing your research now.

Why now?

Simple:  Supply and demand.  New home permits have been way down for over a year now.  Most developers may be as addicted to building as a drug addict is to dope, but they aren’t crazy.  And even if they are, their bankers aren’t.  There just isn’t that much additional inventory coming onto the market.

In most segments, we’re in the final phases of a clearance sale, and the stores haven’t been ordering new inventory for some time.  Essentially, they’re going of business–some permanently, others temporarily.  And the “going out of business sale” is winding down.

Exactly which new construction?

In the developed areas of Orange, San Diego and Los Angeles Counties, the lower end of new construction will probably hit bottom first, as may also be the case in resales.  That would include almost all starter homes, especially condo/townhomes/lofts and “C” neighborhood detached homes.  As Lyon Homes reported today, the lower end homes are now the bulk of their sales, allowing them to sell out these tracts earlier.

In the outlying areas, it’s a bit trickier due to the impact of high commuting costs and economic problems from the building slowdown itself.  The areas with shorter commutes will most likely bottom first.  High end, move-up tracts may have further down to go as well.  Do your homework and look for desperate builders or whole tracts that are now bank-owned.

What about resales?

The glut of bargain basement new homes needs to be cleared out to stabilize resales, so this would be a step in the right direction.  There are two additional problems facing resale housing:

1. The glut of foreclosures and “short sales,” especially on the low end.
2. The lack of the normal buyers for move-up homes, because most owners of starter homes either already moved up during the boom or else have had their equity disappear during the plunge.  For example, last weekend we held open a beautiful Los Alamitos five bedroom, three bath pool home. Over 50 people came through, and most of them fell in love with the home.  Unfortunately,  almost all of the potential buyers had another home they needed to sell first.  In most cases, that home had been taken off the market because they couldn’t sell it at a price that they felt they needed to make the move, including one family that was making a lateral move back to California from Florida.  (The first Florida summer will do that for you!)  Same problem that Lyons is having with move-up homes.  On the flip side, prices have been “stickier” on most move-up resales, due to both a lack of competition from foreclosures and the ability of their sellers to wait out the downturn.

For resales, we’re sticking for now with our latest projections (see”An optimistic update on our projections of a home price bottom“).  In short, we think the odds are for a bottom either this coming winter or next, but it’s too close call as to which.

What to do?

• If you’ve got your heart set on a new home, start looking now and be ready to close before year’s end.
• If a resale will do, get your “ducks in a row” by figuring out what you’ll qualify for and what your home might sell for if you’re moving up, or if you’d be better off refinancing out your down payment now and renting it out.  (You’d need to close escrow on it within 3 years of moving out or you lose your tax free $250,000/$500,000 exclusion of capital gains.)  This winter should be good–prices have already dropped more than I’ve ever seen in my 28 years as a Realtor and broker.   But prices might be better in winter of ‘09-’10.

We think the deciding factor should be your personal situation.  For more, check out our classic post on “What to do when nobody knows what’s next.”  Of course, we’ll try to answer any question you leave in the form of a comment below.  You can also feel free to go to “About Us” and scroll to the last few lines to get our phone numbers, or simply put “contact me please” in the comment section below (click the word “comments” below if there’s no box to complete).

Times of great opportunity are ahead.  For many new home buyers, they’ve already arrived, and quite possibly for resale buyers as well.  Praying for wisdom might be a good place to start!

(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.

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

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?

April 10 update: In the week since writing this post, the roller coaster ride of hopeful and negative news has continued unabated.

One thing that concerns us is this week’s release of California’s Foreclosure stats for March, however (see “So Cal Defaults Up Again & What it Means”). has got us reconsidering. But there are a couple hopeful possibilities we’re also keeping our eyes on. We’re watching to see what Congress might do next, and keeping another eye on the ever-surprising Fed.

So stay tuned for further developments. In the meantime, we still think this is as accurate a description of where we’re at & where we’re going as we can write. For now.

We concluded our last post (”Two Problems with DataQuick’s Median Prices,” with our observation that the actual drop in So Cal home values from top to current bottom is about 25 - 30% (less in higher end areas, more in condos, starter areas, and areas with lots of new construction).

The obvious question is, “How Much More Should So Cal Prices Have to Correct?”

25 - 30% may well be about the right amount of correcting–nobody knows for sure, as we keep saying (see “How Low will Prices Go?“).

But the market will almost certainly overcorrect, especially with all the current negativity, all the foreclosures still in process, and the difficulties getting mortgages continuing.

Ben Bernanke, the Fed Chairman, thinks governmental actions already in place will begin to kick in later this year, and things will slowly begin improving from there. He hopes, but he’s not sure. (See “Bernanke predicts bottom later this year” for excerpts from his Wednesday testimony with our English “translation”/summaries.) Remember, however, that part of his job seems to be keeping an optimistic spin going.

But UC San Diego’s Nobel Prize winning economist, Clive Granger, thinks the U.S. economy has already been in a recession for about four months. He expects the current recession to last an additional 2-6 months, depending on what occurs in the housing and financial markets. Like Bernanke, that puts the bottom later this year.

Slightly more pessimistic is Freddie Mac Chief Economist Frank Nothaft. (He was also the panelist from last October’s CAR Expo who formed the basis for our belief that nobody knows what will happen next with his remarks that “we’re in uncharted territory.”) (Obviously, that belief hasn’t stopped us from making our best guesses at what’s next.)

Maybe Dr. Nothaft now thinks the picture’s becoming a bit clearer. Last week he told a lunch audience that he expects that life should begin to return to the housing sector late this year or early next but says prices may not recover significantly until 2010.

Then this morning DataQuick released figures for OC showing prices were still dropping but sales volume is continuing to rise, as we’ve been predicting (see the Register’s R.E. blog for details). (Also bear in mind what we said yesterday about DataQuick’s numbers being several months behind, among other things.

Then this afternoon the Register blog put up another post quoting a South OC Realtor who does a lot of number crunching saying what we basically said a month ago, that activity’s picking up.

Now remember what we said about those two So Cal real estate market cycles on Wednesday. Annual cycle: up in the spring, down in the fall. Add in these predictions that the economic cycle may be nearing a bottom, and what do you get? Could it be we’ll hit bottom this winter, not a year later as we had been thinking?

Maybe, but what about today’s increase in unemployment to 5.1%, with economists particularly worried because the drop was so broadspread, no longer limited to housing and construction.

This morning I spoke with one broker I’ve known for 30 years about activity in his office. Yeah, he said, sales (opening of escrows) were up in February, but then they dropped a bit in March, and the last few weeks have been especially slow. The March slowdown he attributed to actual competition for houses, citing one agent who had presented 8 offers for one buyer who needed help with closing costs. There were enough competing offers and enough buyer activity that the sellers were no longer making those concessions.

The cause of the slowdown over the last two weeks , however, was harder to figure out. “Dave, there’s just so many cross currents,” he told me. “The market’s just in flux.”

That flux may mean that we’re nearing a bottom. Or it may mean the mini-upturn we saw in February and March is turning down.

Or it may just mean it’s still too early to tell what’s going on.

This post was intended to update our projections. So I looked up our most recent forecasting post, March 24’s “What’s Next for Southern California Housing.”

Here’s what we said in summary back then:

“We continue to expect a window of opportunity for sellers for the next several months, followed by opportunities for buyers through this winter. We still thing there’s a significant chance (20%?) of a major price collapse of an additional 15 - 25% , but there’s also a possibility that the worst is behind us.”

“Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something. up”

Looks like there’s not a whole lot to update, although there are some things I might tweak:

• That window of opportunity for sellers may already be starting to close.
• An additional price decline of 5% - 10% through this winter is probably the most likely scenario, but by no means a certainty.
• There’s a significant possibility that the market will bottom this winter, but it’s still to early to really know.
• There’s also evidence that real estate’s woes may spread through the economy and pull prices down much further, into a recession that might last for years.
• Washington is becoming increasingly proactive, which could be good. . . or bad, depending on what specific steps are taken.
• One thing hasn’t changed at all:

Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something up.

What to do? Guess it’s time to again refer to our December 1 post, “What to do when nobody knows what’s next.”

Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something up.

We’d love to hear your thoughts, especially what you see happening in your corner of So Cal.

April 10 note: As of this morning, we’re beginning to think the bottom’s probably at least 20 months off, rather than the 8 we’ve been hoping for recently. Those foreclosure stats we mentioned really have us concerned, but we may be overreacting to one item. Because you never know for sure what’s going to happen next!

In about ten days, there will be much media noise as DataQuick releases their So Cal median price figures for March.

We expect sales will be up from February, but down from March ‘06. Some analysts will be surprised. Prices will be down from a year earlier, but not down nearly as much as expected from a month earlier. In fact, the median price for Orange County might actually be up slightly from February.

But it’s not really news. And it’s not even what you think it is.

It’s not news because they’ll be reporting what took place back in January and early February, when those homes that closed in March actually went into escrow, as we explained in “Market Predictions 101: Our Two Real Estate Cycles.” By the time “DataSlow” reports them, they’ll be almost 3 months old.

“DataSlow’s” median price numbers aren’t what you think because any average, median or mean (for you mathematicians), can be skewed by shifts between market segments, as was so clearly pointed in a recent statistical study by Zillow’s number-cruncher.

For example, let’s say DataQuick started reporting “median grocery prices” at your local Vons. In November, when lots of people are buying expensive items like turkeys, that median would go up. Now the prices of things might actually be down (at least in our hypothetical, if not in the real world right now. Turkey might be cheaper than it was a month earlier. But because more people were buying turkeys instead of hamburger, the median price would still go up.

Same thing in the real estate market. When there are more first time, low end, buyers the median goes down. When there are more high end buyers, it goes down.

That’s why through most of 2006 DataQuick’s median price kept moving up, even as prices in most neighborhoods were dropping. As subprime loans stated to dry up, activity was switching from the low end to the middle and higher prices. So the median average moved up, since more of the sales were in higher priced neighborhoods, even as the prices in those neighborhoods fell.

More recently, there’s been an increase in lower end sales as lenders foreclose on many subprime borrowers in starter homes, then quickly unload the property at whatever price the market will bear. Meanwhile, most high end homeowners moved up and put a substantial down payment into their home, so there are far fewer foreclosures and distressed sales in the higher neighborhoods. Instead, those homeowners for the most part have decided to just wait out the current down turn.

In 2006, DataQuick’s median price was going up while actual prices were dropping in most neighborhoods. Lately, DataQuick’s median has been dropping faster than actual prices in most neighborhoods. We believe the actual drop in So Cal home values from top to current bottom is about 25 - 30% (less in higher end areas, more in condos, starter areas, and areas with lots of new construction).

In our next post, which should be out soon, we’ll combine that last little nugget of information with our Bernanke post and our Predictions 101 post to update our own predictions.

In the meantime, your thoughts and questions are always welcome. If there isn’t a “Leave a Comment” box below, then click on the “0 comments” or “2 comments” comment-counter just below this paragraph on the right. Make up a “Name” or just use your first name, as that will be public. Your e-mail will remain entirely confidential, but we can use it for a confidential response if requested. Thanks for visiting!

Talk about being out in front of a story!

Early April 1, before I went to the Westminster Justice Center for a day of Jury Duty (details later this week), we put up our most popular post yet, “Major Housing Breakthrough Near?”

“It looks like our leaders may finally be setting aside their egos and personal agendas to work together for the common good,” we wrote two days ago.

“Behind-the-scenes discussions between Congressional leaders and the Bush administration may be about to bear fruit. And that fruit would be a pragmatic Housing Relief Act of 2008 which combines the best ideas from partisans of all stripes to provide both immediate relief and long term reform.”

So guess what’s the top story on Los Angeles Times‘ website this morning? “Senate advances mortgage relief plan.”

Here are the first two paragraphs of today’s Times’ article:

WASHINGTON — Senate Democratic and Republican leaders reached agreement Wednesday on a multibillion-dollar package to address rampant foreclosures and other problems stemming from what may be the worst housing slump since the Great Depression.

The compromise measure, placed on a fast track by the election-year desire to mollify voters, could be approved by the Senate as early as this week. It would be the first significant intervention by federal lawmakers to aid victims of the mortgage crisis.

Looks like you heard it here first!

Now, we’re pleased with our reputation for honesty. Really (see Redfin’s post, “A Realtor We Can Trust“). So we’ll also have to disclose that we got a couple of “minor” details wrong near the end of our April 1 prophetic post.

Like Congress eliminating earmarks and passing a line-item veto and Bush cutting back on Iraq spending to help fund the bill. And the AARP agreeing to support a one year suspension of social security’s cost of living increase. And McCain picking Obama as his running mate in the midst of all the bipartisan unity.

But it was posted on April 1.

By that we mean, it took a couple of days for all the details to come out. Right?

Shoot, our first report on a pending bipartisan breakthrough on housing was posted on March 31 (”Pragmatic White House Ready to Help Out?“).

“We think it could be a major step in the right direction–or a major disaster. As always, “the devil is in the details.” We just hope & pray that our employees in Washington (yup–we pay their salaries!) will finally put special interests, dogma, and party politics aside long enough to work for the common good, ” we wrote back then.

Who knows, maybe they were listening in Washington.

So maybe that post coming out on April 1 was just a coincidence? What are we going to do if we get some unbelievable, hot info on April 1? Sit on it until April 2, and let the big boys get ahead of us?

In any case, the devil is still going to be in the details, which range from federal mortgage relief bonds to tax breaks for homeowners, builders, and people who buy and occupy foreclosures.

There’s still time for partisanship to kill the bill, with hearings in the house scheduled for next week. Wouldn’t it be nice if our representatives will use that time to make the bill better for the nation as a whole, rather than to grandstand or advance partisan interests.

Otherwise, the joke might just be on us.

Only we wouldn’t be laughing.

Note: Most of our market predictions are based on So Cal’s two market cycles: the annual cycle and the broader economic cycle. It’s basic stuff, but if you understand both cycles, you’ll be miles ahead of 90% of the population and 50% of the agents in trying to figure out what’s going to happen next.

Yesterday Peter Viles had an interesting post on who’s buying in So Cal today in his L.A.Times’ blog. That got me thinking about writing a post on “Time to Buy?”

But I’m going to save that post for the near future. Instead, I’m going to “set the stage” for that with the first post in our new “back to basics” Real Estate 101 series.

1: The “Economic Cycle”

In any real estate market, there are at least two basic cycles. We’ll call the longer cycle the “real estate economic cycle” It roughly corresponds with the boom-bust-boom-bust business cycle we’re all too familiar with. 20 years ago I used to say these cycles generally take about 4 - 7 years. In other words, it usually takes 4 - 7 years to go from bottom through peak back to new bottom.

Well, the current So Cal real estate “economic cycle” last hit bottom around 1995, so it’s already gone about 13 years. But we were heading for a bottom before the Fed began their “life support” intervention after 9/11 in 2001 (see “How We Got into this Mess”). That would have been about an 8 - 9 year cycle, at least.

2: The Annual Cycle

We’re not going to insult your intelligence by telling you how long the annual cycle lasts, but we will say it’s much more predictable then the longer “economic cycle.”

All things being equal, the annual cycle has both prices and activity bottoming in December, then gathering steam through the winter, peaking in late spring, leveling off in summer, and heading down in fall.

In what we used to consider a “normal” market, prices only went down in the fall about half as much as they went up in the spring. As we near the peak of a booming economic cycle, prices go up year round, but they go up faster in the spring and slower in the fall. Outside events, like the Fed lowering rates on 9/12/01 or Bush I invading Iraq in 1989 impact both cycles.

By “activity” we’re talking about homes going into escrow, which is what the average Californian means when she says “Our house just sold!” (Not that the average Californian is saying that much right now. But she would if she’d read our post on “How to Sell Your So Cal Home for Top Dollar in 30 Days in Any Market.”)

DataSlow’s median pricing statistics report homes closing escrow, which is usually about 30 - 60 days after they opened escrow. And DataSlow reports those stats about a month after the median closing date, so it’s 2 - 3 month old “news” when you read it in the paper. So DataSlow’s charts would indicate that prices peak in the summer, but that’s just the homes that went into escrow in the spring closing in the summer.

Why . . .

do prices usually peak in the spring and drop in the fall here in So Cal? 3 reasons:

1. Income taxes. Many buyers are brought into the market each year when they have their taxes done and realize they need more tax shelter, and that begins early in the year as those with simple returns file in January. For other’s, buying a home becomes a new year’s resolution.

2. Honey Do Lists. Many sellers also make a new year’s resolution to sell and move up or down. But all it takes for a buyer to “get on the market” (start looking) is to stop at an open house or get online (see “A Better Way to Search for Home Listings“). And first time buyers usually one to get into that home of their own by summer.

But it takes a lot of work for most sellers to get on the market! Work they’ve been putting off for years. And if it ain’t happened in the last decade, it ain’t gonna happen real fast now. For most sellers it takes 4 - 7 months to realize they’re not going to get everything done and call a Realtor for advice on what to do & who to hire. So must sellers are getting on board the real estate train right when most buyers have already gotten off. That affects supply and demand, which affects price.

3. School, Vacation, Weather & Holidays.

O K, that’s really 3 - 7, but we’ll lump them together. Buyers with school age kids want to get into their new home before school starts in the fall, and they want to have it in escrow before school gets out in June. That’s so they can get their kids signed up at the new school before the staff takes off.

Once summer hits, buyers have other things on their plate the rest of the year. Summer vacation, back to school, then Thanksgiving and Christmas. (Despite the weather, Christmas in California begins in September or October. As my pastor, Chuck Smith of Calvary Chapel Costa Mesa, says, “When you see those Christmas decorations going up in the stores, you know Halloween is just around the corner.”)

So buyers are pretty much too busy to buy from when the kids get out of school on. Sellers, however, tend to be at least one generation older than their buyers. They’re less apt to have school age kids, they take their vacations off peak, & they’re often just getting their home ready to put on the market when summer hits, as we said.

Selling a home is frequently a less discretionary decision than buying. Divorce, death, foreclosure, and job transfers occur at a fairly consistent pace all year round. (Actually, death tends to occur in the winter after Christmas, but you really didn’t log onto this blog to hear about my college days working at the Westwood Village Mortuary as a resident manager.)

Local Variations

The annual cycle varies by region somewhat. In areas with brutal winters (which to us is pretty much any place north of Fresno), things continue to drop until the snow starts melting. In resort areas, prices tend to peak during peak seasonl–winter in the desert & in ski areas, summer in most other vacation meccas.

How to Figure Out What’s Next

These two cycles are not synchronized, but they do influence each other. When the economic cycle is in a major downward move, prices may just level off in the spring, or even drop some. But if the downward cycle continues, they’ll drop even faster in the fall.

Our understanding of the annual cycle enabled us to predict the increase in activity that DataQuick and the Association of Realtors reported for February closings. It’s why we think closings will also be reported as up when March figures are released in about a week.

The question is, will the impact of the overall downward cycle overpower the normal seasonal uptick. Remember, it’s still early in the annual cycle: March closings mostly went into escrow in January and early February. Our best guess is that sales will be up but prices down for March closings, but by April or May prices may also be modestly up.

Part of the problem with prices is that DataQuick uses median prices, which can be skewed by differences in which price ranges of home are selling (see Jeff Collin’s summary of a detailed study that proves what we’ve been saying about this for years.)

Well, now you’ve got one of the basics of predictions down. Give it a shot, & see if you can impress your friends. Or shoot us a comment or question, so we can explain it better or add whatever we may be missing.