So Cal Real Estate News

Got into a little “discussion” today on Jon Lansner’s O.C. Register Real Estate Blog about why prices are dropping faster inland than on the coast. Thought it might be worth repeating here.

Here’s the initial question, posed in a comment by “Jimmy:”

How bizzare. While you are all looking for a bottom in inland real estate, I am still waiting for a price decline in CdM (Corona del Mar). This is so unusual that it should be a real concern. You have to be concerned about making any real estate investment until someone explains why CdM and NB(Newport Beach) seem to be hanging on while some inland locations plummet.

Here’s our response:

There are at least 4 reasons the Coast & the I.E. are on different tracks:

1. Tons more new construction in the I.E. Unsold inventory, possible overbuilding, & lots more recent purchases near the peak being foreclosed. Plus lots more subprime home loans. Last time I checked, the I.E. offices of the firm I work for had hundreds of unsold REOs in their listing inventory.
2. Lots more equity near the coast. These are prime, move-up, destination neighborhoods. People buy there and stay put. And they generally put money down–lots of money–from the home they’re moving out of. CdM and NB ain’t exactly “starter” neighborhoods. And the folks who do start out there usually have a big chunk of change to put down anyway.
3. Supply and demand. There’s still dirt to build on in the I.E.
4. Gas prices. Not to mention traffic. Who wants to live on the 91 with gas this high & heading up?

There is a theory out there that a dropping tide will eventually lower all ships. I suspect that’s true, but if it does come don’t look for as big a percentage drop on the coast as inland.

Hope that helps.

I remember back during the last big slump, in 1994 when you could hardly give a home away in the inland parts of South Orange County. Bach then there was more new construction there–it was a bit like the Inland Empire was today, but South OC was a lot closer to being built out. South OC prices jumped dramatically during the last boom, and today they’re not down nearly as sharply as the I.E.

We’re still thinking prices throughout So Cal will probably be lower this November and December, but nobody knows for sure, as we keep saying.

The best time to buy is just before the bottom.

When REOs in the I.E. are selling for less than the cost of land, it may be a good time to buy, or at least to write some lowball offers. Auctions can be another thing (see “Foreclosure Tips“)

Earlier today we discussed the stats that showed median prices in Southern California as a whole were down 19% last month from their peak in July of 2007, also touching on our projections for the rest of this year (”So Cal Price Update”).

Frankly, in our primary market areas of West Orange County and Greater Long Beach, we believe prices actually peaked in the summer of 2006, based on comparable homes. DataQuick’s 7 county numbers were skewed by the huge foreclosure problems in the Inland Empire, as well as inherent flaws in their median pricing system. The Orange County Register’s Real Estate Blog has a good summary and explanation of 8 different indexes & their most recent reports for Orange County. DataQuick showed the greatest year-over-year decline (16% in O.C.), while the other indexes ranged from 15% to 6% drops.

Basically, we still believe we’re in uncharted territory & nobody knows what’s next, as we wrote back in November (”How Low Will Prices Go?”).

Our recommendation for Los Angeles and Orange County buyers and sellers is still to focus primarily on where you are in life, not where the market is. Since nobody really knows what’s next, don’t get too obsessed with what the future holds.

If selling makes sense, why roll the dice & wait up to six years (or more?) for prices possibly to just get back where they are now?

As for buying, if you can buy a home that works for you with a 30 year fixed loan, why gamble on rates or prices going up, or waste several years of your life gambling things will get worse before they get better. (see “What to Do When Nobody Knows What’s Next.”)

We’re not saying it’s time to buy for speculative reasons, and we certainly wouldn’t be trying to “flip” right now unless I got an extraordinarily good buy (and that does happen in market’s like this). I’m certainly not saying we’ve hit bottom.

We’re saying nobody really knows, because we’ve never seen anything like this. For example–we think the Fed caught just about everybody by surprise this week with their creative moves to enhance liquidity.

Who know what might come next? If some lenders were smart, they’d just shave $100,000 off the loan if needed to avoid foreclosure. They’d certainly drop interest rates or eliminate the obscene resets they have coming. (Of course, if they were smart, they wouldn’t have made 100% loans to subprime borrowers without income verifications when the market was obviously peaking, but maybe they can learn. . . .)

We’re saying nobody knows what the future holds, especially this time. So if you’ve always dreamed of a home on a lake in Lake Forest & find one that works for you with 30 year fixed financing, & if you’ve got a stable job & aren’t moving, why not make an offer & start living your dream? If it works, maybe you should let your life determine decisions, not speculation. Here’s a novel thought: think of it as a home, not a piggy bank!

Ditto to sellers. Forget what your neighbor got 2 years ago. Prices on your next home are down too, and so are interest rates. Maybe you can’t get the triple garage, but maybe you never would. If everything else works, give it a shot. You’re not getting any younger!

We’ve watched the market and buyers and sellers for 30 years, and we see some unique opportunities right now that may not last. And we see too many people making decisions based on ego or gambling in stead of getting on with their lives.

Feel free to call 562 822 SOLD or simply comment if you want specific input on your situation.

Reporting from the front lines of the real estate battles here in Los Angeles and Orange Counties, we can now definitely say that sales activity and even prices are bouncing back from the record lows of November - January.
We think this provides local sellers with a window of opportunity, but it’s a window that will most likely be closing in a matter of months. . . or weeks.

Want evidence? We discussed our own increase in sales activity in our 2/29 Market Update post–3 listings sold in an average of about 8 days each. Then Blair noticed that our office “board” of new escrows was full for the first time in about a year, another major increase in activity. Then last night I ran into Ken, our termite expert from Coastline Termite, at the Anaheim Ducks game, and he reported a dramatic increase in sale inspections.

Trouble is, we experienced a similar bump last winter, but it petered out as interest rates went up in the spring. Then it fell apart as the subprime mortgage mess exploded, making it difficult to impossible to get a mortgage. Long term mortgage rates are rising again, as our elected officials try to borrow their way out of a recession, especially with an election breathing down their necks. And the “other shoe” of the subprime mess is dropping as I keyboard, with foreclosures only increasing their record pace.

Then there’s the annual cycle–busy spring, slow fall, prices dropping by winter. Put it all together, and it’s our opinion that sellers need to “make hay while the sun shines.” And it could stop shining sooner than you’d like. If you’d like more info, leave a comment or give us a call at 562.822.SOLD.

What about buyers? Prices, and even interest rates, could well be lower this coming December. In fact, the whole thing might fall apart in 2009, once the election’s behind us. But we wouldn’t be too surprised if prices continue to slowly move upwards, at least in the coastal plains of L.A. and Orange Counties. So, if you find a home that you really like, and you can afford with a 10 - 30 year fixed loan, and it’s in a good location, go ahead & buy it now. If not, keep saving up a down, paying down credit card debt, & looking around. If you want a direct portal to the Southern California Multiple Listing Service, just click on the link you prefer under “Multiple Listing Services” near the top of the right column.  We suggest you start with “Info & Tips on M.L.S. Searches.”

Finally, a word about timing. We’re talking about current activity–homes going into escrow. What the media usually reports is closed sales, which take place roughly 45 days after a home goes into escrow, then get reported in DataQuick’s confusing median price summaries about two weeks after the end of the month in which they close, which is about 60 - 90 days after they went into escrow. So the increases we’ve seen over the last few weeks won’t be reported until long after they close in April and late March.

Just mark your calendar–around 4/15 DataQuick (or “DataSlow,” as we prefer) will report a remarkable increase in sales for L.A. and Orange County homes, which will continue into the April closings they report mid May. You read it here first.

So, that’s today’s word from the front lines. We’d appreciate your thoughts & comments. Personally, we hope the Anaheim Ducks repeat last year’s spring performance, but the So Cal real estate market takes a more steady, less bumpy road this year. If not. . . there’s always baseball! Anybody up for a Freeway World Series?

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

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

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

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

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

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

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

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

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

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

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

How to earn more:

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

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

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

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

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

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

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

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

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

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

Possible Steps to Determine which Option to Start With:

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

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

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

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

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

As always, your thoughts & comments are welcome.