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!

As you may know, a few weeks ago we started what we hope will be the first of several local real estate blogs with LakewoodRealEstateNews.com. Blair and I work both sides of the L.A./Orange County line, and we hope to later add possibly Long Beach and West Orange County blogs as well, maybe more.  You can’t live in Southern California for over 50 years and sell real estate here for almost 30 without getting to know quite a few communities.

Earlier today we put up a post there based on my first home purchase way back in 1976.  We focused primarily on some unique situations in Lakewood, but there are some interesting issues that apply to most Southern California communities.  Especially interesting was a price and rate comparison between 1976 and 2008.  Maybe we’re closer to the bottom than I thought, even with IndyMac’s failure today and all the problems with Fannie Mae and Freddie Mac.

If you’re interested, this link will take you straight to today’s post, “How to pick a Realtor:  Don’t make the mistake I did!”

Enjoy. . . and learn–from my mistakes!

UPDATE: Katelyn Elizabeth Newman checked was born at 3:16 a.m. Wednesday morning, 5/28, weighing in at 8 lbs 6 oz, 20 inches. Mom, Dad, baby, grandpa Dave & others all tired but doing well. Film or at least photo at 11. Hopefully.

Guess I’m getting a little first-hand help with that whole keeping real estate in perspective thing we’ve been posting about periodically. (See “A Memorial Day perspective on our housing market,” “A little perspective,” or “A little more perspective.”)

Although Blair & I had been expecting his wife & my daughter Beth to go into labor this week with their second child, I was still caught a little off guard when Kaiser checked her in after her weekly check-up this morning.

It’s now over 12 hours since they started the ptosin to induce her, & she might be working on it all night. Meanwhile, after visiting Beth at the hospital, moving cars, & taking care of some preparation work on a new listing this morning, good old “Papa Dave” has been providing day care for Beth’s two year old daughter & her almost two year old cousin.

So that promised “Tale of Three Listings” post is still in my head rather than on this blog. Sorry.

Don’t even have time to post about all the interesting real estate news today, although it’s pretty much what we’ve been predicting all along.

Hopefully we’ll have some posts up shortly. Maybe a baby picture too.

Just more evidence that, regardless of the market’s crazy cycles, life does go on.

And there really are things in life much more important than real estate.

It sounds like the Senate may once again prove the more statesmanlike chamber. Word is now breaking that Democrat Senator Chris Dodd and Republican Richard Shelby, with help from their respective Senate leaders, have bridged the gap between the parties and dramatically reduced the projected cost of the Senate’s version of Barney Frank’s massive Foreclosure Relief Bill.

The Senate version is projected to cost a little less than 1/3 of the projected $1.7 billion price of Frank’s bill, according to Forbes.com’s post, which is the most detailed I’ve found yet.

The New York Times quotes Senator Chris Dodd as saying “The bill addresses the root of our current economic problems — the foreclosure crisis — by creating a voluntary initiative at no estimated cost to taxpayers which will help Americans keep their homes. The bill also establishes a new fund that will help create more affordable housing for millions for Americans.”

From where we sit in on the Los Angeles and Orange County line, the foreclosure crisis may be at least as much branch as root (see “How we got into this mess“).

This more modest version may be the best we could expect, but I still have several concerns. By itself it’s hardly enough to get us out of the mortgage mess Congress, the Fed, and a cast of thousands got us into. (see “How we got into this mess“).

It’s also a great example of our ongoing mantra, “It’s impossible to know what’s going to happen next.” (See “How low will prices go?“)

Ironically, as Senators Dodd and Shelby were announcing their foreclosure progress, April DataQuick numbers indicated increasing sales but dropping prices, as we recently predicted (See “Snapshot from the front lines: One bottom, maybe two“).

It may be that what we’re seeing is the market finding it’s own bottom, as banks price their REOs at prices that are attracting buyers. Unfortunately, inflation seems to be driving interest rates up, which will put more downward pressure on prices, especially combined with all the foreclosures still in the “pipeline.” (See “So Cal April Foreclosure Data Just In.”)

There are a number of things we like in the Senate version of the housing relief bill. On the whole, it seems like a good move that will help.

However, the new challenge to housing, which we think is potentially more damaging than the foreclosure problem, is ongoing increases in long term mortgage rates (see “Oh-oh! We just passed a nationwide bottom!“).

We still think Congress would do the housing market a bigger favor if they worked to reduce the huge deficits that inevitably drive up interest rates. We’d love to see our three Senator/Presidential Candidates work together on a bill to eliminate congressional earmarks and give the next president a line-item veto.

Now that would be real “straight talk,” real “change we can believe in,” real “solutions for America,” and real foreclosure relief!

Today the Wall Street Journal reported that Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and his committee’s ranking Republican, Sen. Richard Shelby of Alabama have reached an “agreement in principal” that could lead to senate approval of their own version of Barny Frank’s $300 billion dollar mortgage relief bill.

You may recall our post ten days ago about Ben Bernanke’s seeming support of such a bill.

While we are supportive of some of the many things included in Frank’s bill, there are huge problems which we hope our Senators are wise enough to correct.

1. It makes no sense to bail out loans that never should have been made and that will ultimately fail regardless of temporary bailouts. There’s plenty of blame to go around for the subprime crisis (see “How we got into this mess“), some goes to borrowers who lied about their income, other to lenders willing to make no down home loans to borrowers with Fico scores so low I wouldn’t have accepted them as renters, let along borrowers. In either case, there’s no sense in putting off the inevitable for borrowers who never should have become homeowners.
2. It makes no sense to reward and encourage irresponsibility. It’s really up to the borrower to read and understand the loan documents, not to just “trust our agent,” who probably hasn’t read them either.
3. Let’s not punish tens of millions of responsible homeowners who are also taxpayers by forcing them to shoulder billions of potential losses to bail out less responsible homeowners.

In fairness, many subprime borrowers were duped by mortgage brokers who were often also real estate agents, eager to make a commissions for both the sale and the loan. I’ve heard tales of some agents employing full time “signers” to supply signatures on loan applications and documents. Many others simply trusted agents who spoke their language to correctly explain the various English documents. The documents are indeed overwhelming. I usually scan loan docs that I sign, but rarely do I read every word of every page.

The other day as Barb & I were out for an evening stroll we passed a home which had recently been foreclosed and then sold. The buyers paid about $200,000 less than the former owners had paid almost three years ago. They had moved in, and we noticed new kitchen cabinets stacked in the garage, no doubt waiting installation.

This was not a subprime loan gone bad, just a case of a buyer who bought at the peak and then decided to accept a job transfer as prices were declining. They picked a really friendly Realtor whose child was on the same soccer team as theirs (see”Top 10 ways NOT to pick a real estate agent“).  The agent allowed them to overprice the home, then chase the market down, then take it off the market and rent it until their considerable equity was gone.

Sad for the borrower, sad for the lender, good for the buyer.  Kind of a cleansing and a fresh start, ultimately for everyone.  Not the end of the world.  Nobody died.  The sun’s still coming up.  Lender and  borrower made their choices and lived with the consequences.  And the American taxpayer didn’t have to bail anyone out.

Worse things could happen.  Rep Frank’s bailout bill, unless modified by the Senate, might be one of them.

(more…)

The old country veteran looked me in the eye.  “It’s like wrestlin’ a bear, Dave!”

“You either give it your all, and keep wrestlin’ him ’til you finally got him down on the ground & whopped,” he continued,

“Or you just give up and die!”

With those words, spoken to me just a few hours ago in the living room of our model unit deep in the green hills of McMinnville, Tennessee, we resume our adventures in out of state investing (see “What I learned about investing out of state” for the first installment).

Hmmm, I thought to myself.  He sure didn’t use that analogy two and a half years ago when he sold me those two apartment complexes.

About two weeks ago I sent “Brother James” and his associate an e-mail exploring the possibility of disposing of the two rural Tennessee complexes Barb and I acquired two long years ago.  Tired of investing too much time and money trying to turn them around, I’ve begun exploring the option of unloading them sooner rather than later.

This afternoon, after pondering the numbers I sent him and then inspecting both properties, the investment Realtor and his partner were supposed to give me their conclusions about what sort of selling price I could expect.

Instead, it seemed to be turning into a lecture on fighting on in the gallant, life-and-death struggle to turn these properties around.

As a veteran agent myself, it’s always both interesting and educational to have the tables turned and be acting as the seller or buyer.

I’m still in the process of gathering data and evaluating how badly I really want to fight on or if I’m just ready to die, which may be better than the alternative in this case.   We have made a lot of progress, but we’ve still got a lot of “challenges” ahead (in real estate, we never have “problems,” only “challenges”).

At this point, if I had it to do over again, I wouldn’t.  But I think we’ve all had trials that helped us grow, and looking back later, we appreciate the process.  It’s had some fun moments, but they’d be a lot more fun if the cash was flowing in the opposite direction.

So I still say, keep your investments close to home.

And if you do venture far, resist the temptation to leverage yourself beyond what you’re already successful at.  In my case, I bought a complex in rural Tennessee that had three times as many units as our largest California complex, even though it cost less than half what that California complex was worth.  I should have started out with a smaller complex, and I should have at least stayed in a more urban setting at first, such as greater Nashville.

Buying several houses in Franklin might have been a smarter 1031 exchange, in hindsight, as my bar-wrasslin’ realtor suggested.

Or maybe just being content with what I had.  The pursuit of expansion for expansion’s sake does add a layer of complexity which may not be worth it.

I may add more thoughts to this post later.  But right now, I’ve got to go wrestle a bear.

For the next few days, we’re in the process of making several changes to this and two other blog sites.

As long as you’re aware of what’s going on, it’s all good.

First, we’re launching the first of several blogs we plan which will be devoted to one specific community or region.  We’re starting off with Lakewood, where I (David Emerson) grew up and where Blair now lives.  Other regional sites we’ve got in the planning stages include Long Beach and several regions of Orange County.

For a few more days, however,  LakewoodRealEstateNews.com will be forwarding automatically to SoCalRealEstateNews.com, because almost all of our posts here are quite relevent for Lakewood buyers and sellers.  If you were looking for LakewoodRealEstateNews.com, we suggest you click on some of our “Top Posts in the sidebar to your right, then come back in a few days when the Lakewood site will be fully functional.

Second, we’re in the middle of switching our domain from wordpress to our own host. So right now, you’ll find “SoCalRealEstateNews” in two places, SoCalRealEstateNews.com (that’s where you are now, with a closeup of green leaves at the top, for now) and SoCalRealEstateNews.wordpress.com (which has a photo of Blair and Beth at Crystal Cove across the top.)

For now, when you click on “internal” links, you’ll sometimes find yourself switched to the other site, but the posts themselves are the same.

Having our own hosting gives us greater flexibility, so eventually we will phase out the wordpress site.

If this is all confusing to you, don’t worry about it.  Just scroll or click through either site, enjoy, & give us your suggestions and feedback by leaving your comments by clicking “comments” at the end of each post.

Thank you for your patience, and for visiting SoCalRealEstate News.com.

To find out more about who we are and what we do, just click here.

Just as the National Association of Realtors’ forecasts tend to be overly optimistic (see this morning’s post), Chapman University’s tend to be quite pessimistic. I think they’re still mad that Gary Watts made them look foolish several years in a row, or it could just be something inherent in their system.

Anyway, as part of their coming June “comprehensive forecast of key economic variables,” Chapman’s Economic Research Center today released their projection of Los Angeles County, Orange County, and Inland Empire housing prices based only on one variable, affordability.

To reach the historical average affordability rate, Chapman says L.A.County median home prices need to fall an additional 23.3% and Orange County by another 13.7%. The Inland Empire, which has had the more severe overbuilding and foreclosure rates, need “only” fall another 8.2% to reach Chapman’s magical median.

Now for the bad news:

“It is likely that home prices will decline even more . . . since corrections usually drop the affordability index below the historical mean.”

Their math assumes modest income increases and flat interest rates. Declining rates could significantly decrease the amount of “correction” needed, while more modest pay increases could offset at least some of that.

I think historical trends in L.A. and Orange Counties are skewed by many years of affordable land. Today’s situation of being practically built out on the coastal plain should result in higher affordability rates, in our opinion. That doesn’t totally invalidate Chapman’s conclusions–we’d just pick more modest numbers. We’re also hopeful that continue declines in mortgage rates will increase affordability.

It seems to us that both Chapman University and Gary Watts are like broken clocks. Gary’s stuck at sunrise: He always thinks prices will keep going up. Chapman’s stuck at midnight: The worst is yet to come. They’re both right once in each economic cycle, like a broken 24-hour clock that’s right once a day.

Still it’s one more thing to consider. We think a 5% - 10% additional price drop will hopefully do it for the coastal plain at least. (See “A Change in Our Projections“).

Like we keep saying, nobody knows for sure (See “How Low Will Prices Go?”).

For Chapman’s full report, including some nifty charts, in PDF form, click here.

And click here for “a little perspective” on our real estate woes, here for “a little more perspective,” here to find out “what to do when nobody knows what’s next,” or here to find out “how to sell your So Cal home for top dollar in 30 days.”

As for me, I think it’s time to get outside in this beautiful weather & go for a jog.

(4/15/08)  Yesterday’s paper brought an uplifting story that helped put our real estate woes in perspective.

Today’s paper was a little more brutal. “The Next Big Quake: Big One Nearly Certain by 2038,” screamed the Register. The Times was a bit gentler: “Likelier here: the next Big One.”

Fortunately, I try to start each day with a something a little more inspiring. This year I’m reading through Wisdom for Today, a daily devotional by my Pastor, Chuck Smith.

Appropriately enough for April 15th, today’s devotional was taken from the Biblical book of Job.

It’s based on advice the troubled Job received from Eliphaz, a friend who had come to “comfort” Job in his distress. Possibly the oldest book of the Bible, Job could have been written yesterday for today’s California home owners.

Titled “Nothing + Nothing = Nothing,” today’s devotional is taken from Job 15:31, “Let him not trust in futile things, deceiving himself, for futility will be his reward.”

Here’s the first paragraph of “Pastor Chuck’s” thoughts on the passage:

“In his attempt to understand why God had stripped Job of all his possessions, Eliphaz reasoned that Job had foolishly put his trust in those possessions. Though Job had not done so, Eliphaz was right in speaking against the folly of those who are lulled into a deceptive sense of security by their wealth.”

Like maybe thinking Southern California real estate can only go up in value?

Bottom line, even if that were true, you still can’t take it with you!

1,500 years after Job, Jesus put it this way:

“Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there your heart will be also.” (Matthew 6:19-21)

I find that last sentence especially interesting. Jesus’ reason for not focusing on material wealth wasn’t so much that “you can’t take it with you,” as that it will distract our hearts from far more important things. Things that are eternal, like our family, our neighbors, our character and God.

Hopefully the last few year’s “shake up” in Southern California real estate values or the coming “shake up” reported in today’s paper will help us all focus more on things that can’t be shaken.