So Cal Real Estate News

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!.”