So Cal Real Estate News

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

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

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

It’s Local

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

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

An Interesting Formula

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

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

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

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

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

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

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

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

Our Current Best “Guestimate”

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

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

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

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

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

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

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

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

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

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

What to Do?

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

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

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

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

July 21 update: Yesterday the “The Housing and Economic Recovery Act of 2008” was passed by the House by an overwhelming 272-152 vote.  It’ now goes back to the Senate where prompt approval is expected.  Meanwhile, the Bush administration has dropped their opposition to the bill’s $3.9 billion in grants for local governments to buy and rehab foreclosed properties, as a trade off for propping up Freddie Mac and Fannie Mae.

Other provisions of the bill in it’s current form include:

• Permanent increases Fannie, Freddie, and FHA loan limits to $625,000 in the highest cost areas–a significant boost for high priced areas like much of Southern California.
• A tax credit of  up to $7,500 for first time buyers who close escrow between 4/9/08 and 7/1/09. (We think this will increase demand, and recommend first time buyers contact us now so we can set them up with a personalized “web portal” which allows them to search, save, and categorize properties on the SoCal Multiple Listing Service.  562.822.SOLD.)
• Provides $11 billion in tax free municipal bond authority for states to set up low interest loans to first time buyers.
• Tightens regulations to avoid future repeats of the recent mortgage meltdown.
• Makes FHA mortgages more available, especially for “work outs” of over encumbered (”upside down”) borrowers who qualify and whose lenders will participate by writing down the loan to 90% of the home’s current market value (details in the article below).
• A tax break for homeowners who don’t itemize:  A $500 - $1,000 write off for their property taxes in 2008.

Overall, we think this bill is a major step in the right direction, and it reinforces the projections we made yesterday for local home price bottoms occurring this winter or next. (See “Home price bottom near for Orange County?“)

Most of the information about the bill in the article below is still accurate, other than the fact that the bill has now passed the House in it’s revised form.

(July 14, 2008, 10:00 a.m.) I just received this info this morning from the National Association of Realtors’ Governmental Affairs Department. It’s the best I’ve seen yet of what the next steps are for the “Federal Housing Finance Regulatory Reform Act of 2008,” better known as the “Mortgage Relief,” “bailout,” or “housing” bill that the Senate approved last week. I’ll pass it on pretty much in it’s entirety:

The proposed $8000 homebuyer tax credit and the FHA and GSE reform and mortgage rescue legislation (H.R. 3221) has passed the Senate and now goes back to the House for what legislators hope will be a binding revision that can pass the House and Senate before the end of July. This “ping pong” effect arises because some Senate Republicans have lodged formal objections to the usual process of taking two differing versions of the bill to a House-Senate conference.

The House and Senate versions of the housing bill are now in very close alignment, with only a few issues to be resolved. Many of the issues revolve around the question of whether the bill will be “paid for.” The major focus of the pay-for problem is the provision in the Senate package that would authorize $4 billion for grants to local governments where communities have been particularly hard-hit by foreclosures. The grants would be made under the Community Block Development Grant program (CDBG). These CDBG provisions are not “paid for.” House Blue Dogs (fiscally conservative Democrats) insist that it be paid for. House Republicans, including President Bush, oppose the CDBG provision altogether. President Bush has threatened to veto the bill, in part because of the CDBG provision. Accordingly, the House has the choice of deleting the grant provisions or finding other, offsetting spending cuts.

Speaker Pelosi (D-CA) also hopes to maintain the 2008 high cost limits of $729,000, while the Senate has agreed to limits up to $625,500 for both the GSEs and FHA. While NAR continues to work for higher limits, it is important to note that even $625,500 is significantly higher than the $550,440 originally passed by the Senate Banking Committee.

Finally, additional tax revenues are needed to close a gap on the tax package. A non-real estate provision has been identified and will likely be added in this final House package, as well. The tax provisions themselves are not likely to be modified in the House.

Financial Services Committee Chairman Frank (D-MA), the architect of the housing and financial reforms, anticipates that the House can finish its work by July 18. If the bill does pass the House by then, the Senate should have adequate time to cast the final vote and send the package to the President for signature by the end of July.

Click here for a chart comparing House and Senate provisions in pdf form.
(Please note: the form is dated “April 2008,” and much has changed in both bill since then.)

Dave again.  As I indicated last week, this legislation is turning out better than I thought. (See “Better than I thought: Taxpayer protections in the “bailout” bill.”)

It’s not going to reverse the home price declines by itself, but it will help reduce the damage caused by the continuing flood of foreclosures.

It’s our opinion that we may be reaching a bottom sooner than originally expected. More about that in a post to come today or tomorrow. But it’s also been our position since November that there are still more surprises ahead. (See “How low will prices go?“)

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.

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

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

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

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

Consider our current situation:

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

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

Consider the Great Depression:

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

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

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

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

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

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

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

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

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

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

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

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

Today we take a look at the first of three listings on the same block that closed escrow in the last few weeks. Two of the homes illustrate common but very costly mistakes sellers make. The other illustrates both pitfalls and strategies for success in today’s market.

Let’s call them “the probate seller who didn’t listen,” “The “flipper” Realtor who didn’t think,” and “The team that made it happen.” Today we’ll take a look at . . .

“The Probate Seller who Didn’t Listen”

We first met “Sue” last fall, shortly after her mother died. Sue was the executrix, and wanted to talk to us about selling her mother’s home.

We met at the property in late September . The home had a lot of deferred maintenance, but Blair & I both thought the family would be wise to get the home on the market quickly. We were pretty sure that the market’s downward spiral would only be made worse by the approaching winter slow season (see “Predictions 101: Our 2 market cycles“).

We felt with a little intense effort the home could be in escrow before the winter holiday slowdown, and we were happy to do our part to help. That included advancing money for some needed work, assisting with several other things to speed things up.

We knew what needed to be done in the face of a market we knew was moving down quickly, and we were willing to devote “over and above” effort to make it happen. I’d rather spend a few hours moving furniture in October than days sitting a slow open house in December.

We also had another reason for trying to move things along. After years of handling probate sales, we’ve learned that closing the sale on the family home, while difficult, invariably helps the family turn a page and move forward. The family almost always thanks us for moving things along.

A Lesson from an Earlier Probate Listing

We’ve closed several such sales of family homes over the last two years, and invariably the family tends to drag things out while prices decline. For example, on one Long Beach sale the two daughter-in-laws wanted to spend an estimated six months sorting, boxing, and holding garage sales on the things their father-in-law had accumulated over fifty years in the home. We advised the family that not only would that prolong a painful process, but the home was almost certain to decline by thousands of dollars every month they delayed.

“You’ll waste six months of weekends, make a few hundred dollars on the garage sales, and lose tens of thousands of dollars on the sale of the home,” I advised them. “Do you really think that’s what Dad would want?”

Most husbands know it’s dangerous to get in the way of a wife with a plan. (I imagine wives experience the same issues with husbands with a plan, since all of us tend to be stubborn, but I can only speak as a husband.) The two daughter-in-laws had their game plan, but fortunately for everyone, the husbands took our advice.

It only took the family one weekend to get what they wanted out of the house. We’ve developed a lot of resources for situations like this, from wholesale auction houses to antique dealers to non-profit thrift stores like the Salvation Army and Food Finders that will actually clear out your cupboards for you. Not to mention painters, handymen, and rehab people. In fact, I’ve got to finish this post pretty soon so I can get over & check on a crew that’s refinishing floors and painting the inside of a listing we just took.

Amnyway, in about two weeks, that home was on the market, in another two it was in escrow, and our swift action saved the family at least $50,000 of their inheritance. By the time we were done, the whole family was glad they listened to us.

A Different Story This Time

Back to the seller who didn’t listen. To speed things up, we began some initial work right away, arranging for a garage sale and large item pick up to help with the staging as well as a termite inspection to identify what required corrections we might want to take care of in advance to improve marketability.

The seller wanted us to meet with her and her husband to complete the listing agreement, and we kept encouraging her to move things along, but other things kept coming up. First they were going to be out of town, then they had guests visiting, then it was something else.

October is generally a decent month for selling, but as you move into November things slow dramatically, and we knew this winter was going to be especially brutal. (DataQuick and other closing reports reflect this slowdown in the months when those sales close escrow, which is why January and February are normally bottoms for closings, as we explain in “Two big problems with DataQuick’s monthly median price reports“).

We were just trying to move things along in a timely fashion, but the Sue the executrix/seller just had other priorities. We knew that this wasn’t going to be as difficult as Sue thought, & we were ready to help expedite things to make it easier on the family.

There is a tendency for people to list with someone who just tells them what they want to hear. We were telling Sue that the winter holidays were breathing down our neck, and time was of the essence. We also felt some minimal cosmetic improvements would go a long way to maximizing the family’s proceeds. And we were willing to advance the money and arrange for the work.

Now, you can’t survive in this business for 28 years without learning how to be diplomatic, but sometimes people just don’t want to hear the truth no matter how diplomaticly it’s presented.

So Sue went out and found an agent who would tell Sue what she wanted to hear, and that was the last we heard from Sue.

Three months later, near the end of January, the home was listed with a fairly experienced local agent who apparently saw no time urgency nor any need for cosmetic improvements. By then, prices had dropped about $40,000 in the neighborhood. No painting, staging, or corrective work was done, another big mistake in our opinion, but not as big as the delay to market. A few months later the price was reduced by $40,000. Two months after that it went into escrow for $30,000 below that reduced price.

It finally closed escow in mid May for $320,000. I’m fairly confident that, had the seller followed our suggestions and time table, we could have sold it for around $425,000, with around $5,000 of painting and work. So in exchange for not having a “pushy” Realtor, Sue lost her and her two sisters about $100,000 and six months.

One Big Mistake

Sue’s main mistake was ignoring the advice of an experienced agent who knew what he was talking about. Instead, she listed for the most common wrong reason out there: Sue found an agent who told her what she wanted to hear (see ” Top 5 ways NOT to pick an agent“).

Disclaimer: I’m not saying experienced Realtors are infallible. (For example, in December of 2007 it appeared to me that the market had bottomed. That was based on an unseasonable December increase in sales and prices. Indeed, that pickup I noticed resulted in DataQuick’s reporting a peak last spring. But I didn’t see last spring’s increase in interest rates, and greatly misjudged the impact of the sub prime crisis. On that one, I relied on the input of the “experts” like DataQuick’s John Karevoll. A really big mistake!)

But I am saying that a thoughtful, honest, experienced table probably knows things the average seller doesn’t. His or her input is worth considering. It’s foolish to simply reject something you don’t want to hear. It’s even more foolish to pick an agent just because he tells you what you want to hear, no matter how enthusiastic he is in agreeing with you. But that’s much easier said than done.

Telling the sellers what they want to hear is the easiest way to get a listing, and almost every agent knows it. In this market, it’s also the easiest way to cost the seller money and to take a listing that expires.

Never make your decision based on the agent’s analysis–instead, check out the agent’s track record and experience, and talk to sellers that agent currently has listed (ask her to bring a complete MLS print-out of all their listings for the past two years. Then ask another agent to print out the same list and make sure the two lists match.)

In a difficult market, picking the right agent is probably the most important decision you’ll make. For more tips on agent selection, you might also want to check out “<a href=”http://socalrealestatenews.com/blog/top-10-ways-not-to-pick-a-listing-agent/” target=”_blank”>Top 10 ways NOT to pick a real estate agent</a>”.

So that’s the sad story of “the probate seller who didn’t listen.” Next is the case of “The “flipper” Realtor who didn’t think,” a home across the street and down from Sue’s, and how that home, like Sue’s contributed to the entire neighborhood’s decline in value.

Please feel free to add your thoughts or questions as a comment below.

Friday update: The DataQuick OC median numbers discussed below came in this morning, and my predictions yesterday (see post below) came out real close to the actual numbers. Wish I could say the same for my predictions for the Duck in the playoffs. Oh well.

The interesting news is that in every category, DQs actual numbers were stronger than I predicted. What’s that mean? Read on. . . .

OK, here’s my call for tomorrow’s “DataSlow” OC house sales update, which I should be for the 4 weeks ended about 4/21. (We’re still a week away from “DataQuick’s April Median numbers, one of the “Two problems with DataQuick’s median prices.”)

Sales (closings) will be up a decent amount from the prior 4-week period but way down from the year before. Right around 1900 total, off about 40% y-t-y. Continued gradual improvement, typical for deals going into escrow in February.

BTW, April closings, when they get released around 5/15, will be up about the normal amount from the very low March closings (but way below last year). It looks like May will do even better on sales.

Price is another matter. Especially median price. Down a small tad below 20% from a year ago, and up a small tad from the last DQ reported median of $506,000. Maybe $508,000.

However, if you look the details, like in the last report, I think you’ll see the new construction pulling down the overall index with both prices and sales down more than for resales. Resale SFRs and even condos aren’t doing as badly as new construction.

What it means is subject to interpretation. I think if long term mortgage rates (not to be confused with short term fed funds rates) started coming down further, we might have passed the bottom, especially with the activity Steve Thomas and I both are seeing in new escrows.

However, rates are already moving up, and instead of passing fiscal restraint issues to push long term rates down, our beloved Congress continues to try to borrow their way out of this mess with massive bailouts from Bear Stearns to folks who lied to get loans on home they never should have bought or refinanced.

With the interest we’re seeing from buyers, I really think if Congress passed long term fiscal reform, we could put the worst behind us. Things like a line item veto for the next president, cancellation of earmarks, a gradual move to a balanced budget with mandatory across the board cuts and tax increases to force discipline on our free borrowing legislators.

That would be a real mortgage relief bill!

I’ll post links to DQs numbers when they’re available, & you can see how we did.

I’d also like to get a more detailed post up about our thoughts about real mortgage relief. Trouble is, I’ve got to get to work on my real job so I can pay my mortgage. Because I really don’t want Barney Frank forcing my grandkids to eventually pay it for me.

Friday 5/9 postscript: DQs actual numbers (click here for OC Register blogger Jon Lansner’s  DQ graphs & comments for today) indicate even greater strengthening than I expected. Still having some optimism left in my troubled soul, I’d like to hope this means we really have reached a bottom.

In fact, I’ll go so far as to say that if long-term mortgage rates dropped 1% instead of continuing to go up, and if lenders adopted more reasonable underwriting standards, I’m pretty sure we could call last winter as the bottom for both prices and sales.

But I doubt either of those will happen soon. Instead, I think rising mortgage rates (not to be confused with the fed’s overnight, short-term rate) will combine with continuing over-reaction by investors and lenders with tougher than necessary standards to cut this party short. The large pool of homes entering foreclosure is also a negative indicator.

It looks to me like we have passed the bottom in terms of sales activity, but the bottom in terms of price probably (or should I say “maybe?”) still lies ahead this coming winter or next.

DataSlow’s lagging and confusing median prices will continue to improve for another 2 - 5 months, but we’ll see price month-over-month price declines kick in later this year, even as the year-over-year percentage drops decrease.

Overall, I’m beginning to become more optimistic, and am willing to admit that the bottom may, indeed, be past. But only if mortgage rates come back down, which I really don’t see happening.

Bottom line: We’re not deviating from our November post, “How low will prices go?” Nobody can really know what’s next.

A week ago I told L.A. Times real estate reporter Peter Hong that much of a Realtor’s job in this market involves delivering bad news to homeowners. Pretty much the opposite of three years ago.

“You go from being like a doctor who delivers babies,” in a booming real estate market, I said, “to being an oncologist, just giving people bad news all day long.” (”Foreclosure glut further depresses housing prices“) Shoot the messenger time. Or keep dialing until the seller finds an agent who tells her what she wants to hear. (See #1 in “5 ways NOT to pick an agent.”)

Well, today brought more bad news for homeowners.

But that’s just one side of the coin. Unlike our 1980-82 housing bust, where mortgage rates topping at 16% were bad news for BOTH sellers and buyers, today’s bad news for sellers is good news for buyers.

Which can turn it into good news for some sellers who might also be buyers, and several other types of buyers:

First, this could be an excellent time to buy for “move out” sellers who are headed to more overbuilt areas like the Inland Empire, Vegas, Texas, or the Central Valley. That’s because prices there have generally dropped more than prices in Southern California’s coastal plain.

Such a “move out” seller can get her current home in escrow, then take her time looking in that outlying area, as prices continue to decline. There are plenty of homes to choose from, and lots of motivated sellers out there.

Folks who are willing to sacrifice a little temporary inconvenience for a lot of greenbacks & that elusive “perfect” home should consider renting in their new community while they continue to look. A buyer with cash in hand is in the best negotiating position, too. This move also lets you take advantage of the annual real estate market cycle (See “Market Predictions 101: Our 2 real estate market cycles“.

Second, the time may also be right for “Move Down” sellers, especially those looking to buy a condo. Since we’ve had a glut of condo building through much of our area, even coastal plain condos are experiencing rapidly declining values and lots of foreclosures.

The same goes for the more modest “starter” single family homes, which turn over more often and have more subprime loans and foreclosures. These aren’t just “blue collar” communities like Stanton or North Long Beach, but also communities like Lakewood, Cypress or even parts of Mission Viejo, which include large tracts originally build for first time buyers.

Third, this might be the right time to buy for people who are ready to settle into their dream home now. Specifically:

1. Buyers who will be living in this home for many years, and
2. Who have good credit, a down payment, and
3. Are tired of renting and are ready for the joys and trials of home ownership, and
4. Would like to start the 15 - 30 year process of paying off a mortgage so they can retire, and
5. Could use two of the three last great tax write-offs (mortgage interest, property tax, and donations), and
6. Are able to locate and negotiate an acceptable price on their “dream home.”

These buyers also might want to nail down the kids new school for next year. Maybe they’ve figured out that they want to enjoy their “dream home” while their kids are still at home. Maybe they’re concerned about interest rates going up. Maybe they know they’ve got busier times ahead & now’s the best time to look for a home & fix it up the way they want.

Maybe they know what we’ve been saying since last November: Nobody knows for sure what’s ahead. (See “How low will prices go?“)

Forth, this may well be an excellent time to buy for those whose personal situation suggests it. Someone who’s relocating into California, whether for work, family, or retirement. Someone who desperately needs a tax break. There are lots of different scenarios where personal situation trumps market speculation.

Some people would prefer to gamble with their stocks or in Vegas but not with home ownership. We believe there are plenty of things far more important than money (See “What to do when nobody knows what’s next,” “A little perspective,” and “A little more perspective.”)

Fifth, this might be a great time for buyers who appreciate the security of buying before or near the bottom.

Prices are already down 20% or more in many Southern California neighborhoods, interest rates are low, especially with inflation looming, and some special jumbo loan programs will be expiring soon. Why not take advantage of it?

Truth is, the best time to negotiate is just before the bottom. While prices don’t shoot up dramatically, the ultra motivated sellers and the super buys do disappear fairly quickly. And you never know it’s a bottom for sure until a year or two passes.

To take a very recent example, in January of 2007 we experienced a temporary “false bottom” caused by dropping rates and seasonal demand. In December I could find 10 - 12 low priced “super bargains” in Rossmoor, a popular west Orange County neighborhood. Within a month, they were all gone! We saw the same thing late in 2001 after the Fed dropped rates in the wake of 9/11.

Both 9/11/01 and 1/07 illustrate two things:

1. Super bargains disappear quickly when the market heads up.
2. You can only be sure of a bottom when you’re looking back months or even years later.

The “double dip” recession that started here in So Cal in 1989 during Gulf War I, then reversed to a new peak in 1990, then collapsed into the end-of-the-Cold-War bust of 1991 - 95 is a great example of # 2.

A personal story. During the ‘91 - ‘95 bust, Barb and I did not enjoy watching our rental homes decline in value, even as my income from real estate sales was also tumbling. But I wanted to avoid hefty taxes from selling those homes, many of which we’d owed for along time.

One day my colleague, John Spear, mentioned in passing that multi family properties in Long Beach had dropped to prices as low as four times Gross Rent. That means the price was down to 4 x the annual rent for some apartments.

Well, since apartments generally produce more income than single family homes, I decided it was time to use the wonderful tool of the 1031 Starker Delayed Exchange to convert our rental homes into rental apartment buildings. That way, even if the market continued to drop, at least we’d have some positive cash flow.

At that point, it looked like prices would continue to drop for years to come. A popular New York financial analyst wrote a syndicated column about how Southern California would never recover. Ever.

As they say, it’s always darkest just before the dawn. Turns out, I was buying at the bottom, but I didn’t know it. Possibly the best financial move (other than structured donations) that Barb & I ever made. And we didn’t even know it at the time. We were just lucky. Blessed, actually.

Bottom line?

If you can find a home you love and can afford with a 30-year or 15-year fixed mortgage, in a location you love, maybe it’s time to stop betting on further drops and become a homeowner. Even a professional gambler knows when to cash in his chips.

At least some of them. You could always pick up a rental or vacation home later on if prices continue to drop.

At least it might be time to start looking. Even if we all think the bottom’s still a ways off.

Only God knows for sure.

And He agrees with us that there are things far more important than money (see Matthew 6:19 - 34).

May 21 update: Ongoing increases in foreclosures and long term interest rates now make us more inclined to think that the bottom may be further off than we had hoped.

That doesn’t significantly alter our basic conclusions in this post, but it should at a little more caution. And a little more hope for those who are still saving for a down and seeking to improve their credit.

We recommend you check out today’s post on the subject: “Oh-oh! We just passed a nationwide bottom!.”

We got our April “Research Update” from NAR yesterday (”Existing Home Sales to Stabilize Before Upturn in Second Half of 2008“) . That seems too optimistic to us.

Maybe Lawrence Yun, their new Chief Economist, hasn’t heard about the annual cycle yet (See “Market Predictions 101:  Our 2 Real Estate Cycles“), because he thinks things will start picking up when they start slowing down in most years.

Here are the first three paragraphs of NAR’s press release:

Little change is expected in existing-home sales over the next few months, before improving notably during the second half of the year, according to the latest forecast by the National Association of Realtors®.

Lawrence Yun, NAR chief economist, said the market will come into clearer focus this summer.  “Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure,” he said.  “We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets.  The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met.”

The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in February, slipped 1.9 percent to 84.6 from an upwardly revised reading of 86.2 in January, and was 21.4 percent lower than the February 2007 index of 107.6.  “The slip in pending home sales implies we’re not out of the woods yet, though an era of successive deep sales declines appears to be over,” Yun said.

We do see some signs of bottoming, but from where our office sits on the OC/LA County line off the 605 in Lakewood, we really can’t tell if it’s just a spring uptick on a longer downward trail.  We’re still sticking with our most recent forecast (see “A Change in Our Projections?“)

We think DataQuick’s numbers from yesterday only tend to confirm our perspective (”What DQs numbers mean“)

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“).

Default Research, Inc. has posted their California county by county foreclosure numbers for March, and So Cal county numbers are pretty much up across the board to the highest numbers yet for the current downturn.

This report is made up primarily of Notice of Defaults (NODs), the first step in the 4 month foreclosure process. It sounds like the number of bank owned (REO) homes coming on the market will continue to increase well into fall throughout Southern California.

Bear in mind that filing for bankruptcy can add several months to that 4 month process, and additional time is required by the lender to gain occupancy and then make any needed repairs. So these NODs reported for March will be coming on the market as REOs no earlier than July, and well into fall. Of course, not all NOD properties end up foreclosed. (For tips on buying foreclosures, click here: “Foreclosure Tips.”)

But there’s a big “if.” One of the unknowns is what will end up in the Housing Relief Act currently working it’s way through Congress. If Congress gets it right, that could dramatically reduce the number of homes actually taken back by the banks.

We’re hoping Congress and/or the lenders come up with a reasonable program to allow qualified owners to hold onto their homes, but we’re not exactly holding our breath, either. We think debt relief for qualified buyers primarily provided by their lender in exchange for concessions by Congress and the borrower could significantly mitigate the impact of all these foreclosures on the market, but I’m starting to sound like Bernanke, which is really scary!

So I’ll leave what Congress might do for another post, except to say two things:

1. Some home owners who bought with subprime 100% liar loans that really have no business owning property.
2. We are at some risk of another Great Depression caused by the current crisis, and if some unworthy homeowners and lenders are helped in the process of saving the rest of us, so be it. When my lifeboat’s sinking, I prefer to focus on bailing it out rather than arguing about who got us into the mess. “Blessed are the merciful. . . ” wasn’t my idea, but it saves a lot of grief in the long run.

Bottom line: Looks like the bottom for prices is still a ways off, maybe a long ways. Like Freddie Mac’s Chief Economist told us last October, we’re in uncharted territory, and nobody really knows what’s going to happen next (see “How Low Will Prices Go?“).

That said, we’re still sticking to our best guess that prices are most likely to hit bottom either this December or next (see our most recent projections post, “A Change in Our Projections?”

BTW, this market is troubled, but not dead. We just put our last listing into escrow in 3 days last week. Like we keep saying, it’s not rocket science (see “How to Sell Your So Cal Home for Top Dollar in 30 Days“).

Default Research uses actual visits to the court houses to collect their data, which should make it more accurate and more timely than most other foreclosure reporting services. If you want to look directly at their charts for every county in California going back to 2006, just click here. We also have a direct link to their “California N.O.D. (Foreclosure) Stats” under “Great Links” near the top of our right sidebar.

You will see each Southern California county had a new record for NODs in March, with one anomaly. Most lenders do not file NODs over the Christmas holiday period. (I’ve been told that’s because lenders really aren’t total Scrooges, but I suspect it may also be because they take some time off then.) So you will notice NODs were down about 50% across the board for December, but up about 50% for January. That’s why some counties show higher numbers for January than for March–but not if you average the two winter months.

Stay tuned for more breaking news as our adventure in So Cal real estate continues. . . .

In the meantime, forward to our next post, “Let’s Go Ducks!”, for something a little more positive. We hope.