So Cal Real Estate News

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

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

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

1: The “Economic Cycle”

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

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

2: The Annual Cycle

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

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

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

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

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

Why . . .

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

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

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

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

3. School, Vacation, Weather & Holidays.

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

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

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

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

Local Variations

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

How to Figure Out What’s Next

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

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

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

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

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

Selling for top dollar fast isn’t all that hard, even in today’s slow market. Last month we took three listings, and had all three in escrow within 14 days of hitting the market.

In fact, our 30 years of experience has taught us that if you don’t sell in 30 days, you almost certainly won’t get top dollar. You’ll also be more frustrated with the whole process.
It’s not rocket science, either. The technology’s changed, but the basic steps to selling fast for top dollar remain the same. We’ve been teaching classes on them for almost two decades. There are only six key steps, yet very few agents or sellers complete even four of them correctly:

1. Preview & plan with a trusted adviser, often a Realtor with at least 15 years experience–one who’s been through a few slumps before. Actually, the most important step seems to be picking the right agent, and then picking his or her brains as early in the process as possible. We recommend starting by checking out our “Top 5 Ways not to Pick a Listing Agent.”

Develop priorities for steps 2 & 3 below, discuss what would be the best time to get the home on the market, and get a rough idea of the price & net you can expect.

2. Prepare the property. By now you should have determined which repairs and upgrades deserve your attention, and the time you have to get them done. Most sellers focus on the wrong things–things that bug them, as residents, but that most buyers don’t even notice.

Concentrate on things that a person would notice when just spending 60 seconds touring the home, because the first 60 seconds are the critical first impression period. That means the front yard, the front room, the kitchen, baths, & master bedroom. Don’t even think about fixing broken things that aren’t obvious, like an inoperable dishwasher. Those will be negotiated after the home inspection, and the buyer may not even care.

3. Stage the home. This is putting your best foot forward–like shining your shoes before a job interview. It usually involves removing clutter and some furniture throughout the home. Sometimes we recommend adding or changing furniture so that the home will appeal to the most likely buyer. For example, many sellers have converted a bedroom into an office or den after their kids have moved out, but frequently buyers need an extra bedroom more than a den. We actually have an inventory of what we call “instant beds” to use in such a situation. The slower the market, the more critical this step is.

We also instruct our sellers how to stage the home before each showing, which usually includes turning on extra lights and moving to the front yard while the home is shown. We usually discuss the questions they can expect from buyers and agents, and the best ways to respond (rule #1 is “Never lie.”)

4. Price accurately. Not too high, not too low. Based not just on recent sales but also on an evaluation of your competition–the best priced, most attractive homes currently on the market. Not based on what the seller values, but on the values of the most likely buyers, who are usually quite a bit younger than the seller. Here’s another place where an inexperienced, dishonest or lazy agent can cost you tens of thousands of dollars. Also one who isn’t familiar with your neighborhood.

5. Wise, aggressive marketing. This involves doing dozens of things right: flyers, Multiple Listing Information & photos, web photos and virtual tours, property search placement, web and print advertising, open houses, etc. There’s a right way and many wrong ways to do each one.

For example, the only phone numbers on our signs and flyers are our cell phones. Sign calls don’t go to an 18 year old receptionist who’s never seen the property, but to one of the two listing agents, day or night. We’re even careful about the time of day and day of the week we input our listings. We shoot our own virtual tours because Blair’s a great photographer and we know what buyers are looking for (for an example, check out LosAlDreamHome.com.  Each home gets it’s own website with an appropriate domain we buy just for it. Our goal is to obtain competing offers the first weekend or two. By the way, we’re counting the 30 days to sell from the day it hits the market to the day you accept an offer.

5. Negotiate wisely. Again, dozens of things that need to be done right. Herb Cohen’s You Can Negotiate Anything is one of my favorite layman’s books on negotiations, but the real secret is to find an agent who’s an expert at it. It’s not just about price–terms, time frames, repairs, deposits, release of deposits, and the buyers’ ability to qualify & intention to close are also critical.

6. Disclose wisely, follow up regularly, and don’t blow it during the escrow. My mentor used to say 90% of our work is done once the escrow’s opened. With today’s crazy news and lending climate, that’s even more true today than it was in 1980.

We’re talking about correct execution of basic fundamentals.

“Gentlemen, this is a football.”

“Back to basics.”

And yes, you still can sell your home for top dollar in 30 days, with the right approach and the right help.

For a real-life example of the sort of teamwork necessary to implement this approach in today’s market, including some of the challenges, check out “The team that made it happen.”

As always, your questions, comments, and feedback is appreciated. You can also call us directly at 562.822.SOLD.

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?

Sunday’s New York Times had an interesting article on“How a Bubble Stayed Under the Radar,” dealing with economic theory and herd mentality.

Basically, it said what any long term observer of either the real estate or stock markets must have already concluded: Market prices get too high near the end of most up cycles, and too low at the end of most down cycles.

I figured that out at least three cycles ago, when another Realtor mentioned the insane bidding up of home values in 1989 was typical of the last, overpricing gasps of a market about to collapse. I thought our market had peaked in 2004, which was obviously too early. Still, in 2005 I made my ill-fated effort to beat the market by exchanging for out of state property (see my recent post on out of state investing). It’s the same herd mentality that created bubbles from internet stocks to silver.

Ironically, as our southern California prices drop, people tend to forget the flip side of the same herd mentality: The lows become irrational as well. Which either will at some point create or is currently creating opportunites to “buy low.”

I don’t think anybody can know with certainty if that time of opportunity is now or yet future. Once we know for certain, it will have past, and the best bargains will be gone.

But I do know that thousands of homes are on the market for prices 20% to 40% below the highs of a few years back. And I do know that many sellers are willing to take far less than they’re asking. And interest rates are also quite low.

I also know that prices tend to go up in the first half of the year and down in the second. So it appears that this year’s great opportunity may be passing. December of 2009 may present even greater opportunities. Or not.

But at some point, this market will overcorrect. Maybe it already has.

We’ve got foreclosures, federal “remedies,” a weakening economy, low interest rates, high gas prices, and low home prices, all in a presidential election year.  So it’s impossible to know what’s ahead, but we can make educated guesses.

For several months, we’ve said spring will bring increased home sales.  We also think prices will either slow or stop their decline, at least for the next few months.   Beyond that, things get cloudier, but the odds are that sales will slow again later this year.

Our own experience this February is bearing this out.  We took three listings in the last couple of weeks, and now have all three of them in escrow.  In addition, today we are opening escrow on a new home purchase for one of those sellers; the other two do not plan to purchase at this time.

We’d like to think some of this success is the result of our 30+ years combined experience, but low interest rates and an active market have certainly helped.

Our goal with almost every listing is to get it into a solid escrow within 30 days, and preferably within the first two weekends.   Over the years, we’ve found out that’s the key to getting top dollar.  After a month, buyers and sellers both lose interest.  Buyers figure if nobody’s bought it after a month, it can’t be that great a deal, unless the home has some extremelyy distinctive features.  Most sellers can only keep a home looking it’s best and put up with the hassle of showings for a month, if that.  As one wise Realtor once told me, “If it sells in the first month, everybody’s happy.”

However, in a slow market, it’s a lot harder to get a home sold in a month.  And most of Southern California’s real estate agents had never seen a really slow market until this one hit. Blair & I had to revert to what had worked for me during prior slumps:  1980-82, 1985-86, 1989 and 1991-95.  This time we’ve had to adjust for the internet, technology, & the fact that buyers now have direct access to listings, but the basic principals remain the same.

It takes a skillful combination of preparing and staging the home; accurate pricing; effective, targeted marketing; careful negotiating and screening of buyers, and continual vigilance during escrow.   Doing  dozens and dozens of things right.  We’ve got it down to the day of the week our listings go into the local M.L.S.

But all of that works better when the market’s more active.  Which is why we believe our successes overt the last half of February are a good indicator that this spring may provide a window of opportunity for both sellers and buyers throughout Southern California.

A while back we discussed some of the unique positive indicators in the So Cal real estate market, & mentioned that we’d discuss some of the negative indicators shortly. Well, shortly wasn’t so short, as we enjoyed Christmas, but here’s our tardy continuation.

Before we go negative, however, we should point out we’re putting our last unsold listing into escrow this week. We think that may be a positive indicator of a nice spring coming, so not all the arrows are pointing down.

However, 3 huge problems do loom on the immediate horizon:

1. Foreclosures. Most of those crazy subprime loans will be “resetting” in the next 6 months. “Reset” is a polite term for “payments zooming,” in some cases doubling. The banks are doing some things t0 help, but most still predict a massive increase in an already high foreclosure rate. They may be wrong, but it still will be a drag on the market.

2. Economic slowdown, or worse. Real estate is generally considered a “leading” indicator, & it may resume that role in the current economic cycle. Most builders and tradespeople we talk too are in a huge slowdown which may well continue to ripple through the economy, as the recent Christmas selling season seems to indicate.

3. Problems getting loans. The lending market has over-reacted to the sub-prime insanity, now making financing harder for everyone, even “prime” borrowers.

For these reasons, most economists predict it will be 2 – 4 years before real estate is back to “normal,” whatever that is.

We can just about guarantee that the December & January median price figures from DataQuick for Southern California will show continuing declines, probably drastic. But those are sales that went into escrow in November and December–old news.

We wouldn’t be surprised to see at least price stabilization locally this spring, for reasons hinted at by our being “sold out” in the middle of winter!

We’ll go into that in more detail in a few days. In the mean time, have a safe and happy New Years’ Celebration. And if you know anybody who needs a couple of good L.A. & Orange County real estate agents, we’re sold out & ready to go to work! Give us a call at 562-822-7653 any time!

March 31, 2008 update: We now have a direct link from this blog to the So Cal Multiple Listing Service. Just click “Search So Cal M.L.S.” under “Multiple Listing Services” near the top of the column to the right of this post. SoCal MLS covers Orange County and Greater Long Beach.

For tips on how to get the most out of the So Cal MLS search, read on:

For years we’ve been frustrated with the real estate search engines available to the general public.

Realtor.com is generally the most popular, and may have the best access to Multiple Listing Service (M.L.S.) listings on a nationwide basis. But we find the search options so broad they’re not terribly useful. (For example, “lot size” starts with a minimum 1/2 acre–not real useful in Long Beach!) Worse, their most popular searches use paid placement to sort the results. They also only show one photo unless the listing agent pays for more. (We know, because we pay for high placement & photos. Feels like extortion to us, but in this market we need to do all we can for our sellers.)

Now we’ve got a better option, at least for buyers (or sellers) interested in Orange County or southeast Los Angeles County. We just linked this blog, directly to the So Cal M.L.S. No ads, no paid placement, more photos, you can include homes in escrow, and you can search without revealing any personal info.

Now for some pointers about the search, from someone who’s been searching the MLS since before there were computers to search with. Just click on “Search So Cal M.L.S.” near the top of the column directly to the right of this post.

The basic search screen will come up, which lets you specify your exact price range, or just a top price (or bottom price, if you happen to be Bill Gates). We recommend going slightly above your top price, since most sellers are willing to negotiate in this market.

Don’t skip “style,” because that’s where you specify single family or condo/townhome or both.

Under city you also have the option of searching by zip code, which is a huge help in every city we know of with more than 1 zip code.

You can also search by school district, another major help in cities like Lakewood or La Palma that are split between several districts.

Before you click on “Search Now,” be sure to scroll down another inch to click on the “Advanced Search” bar. This lets you specify a minimum for square feet of living space. That’s often more useful than bedroom count, since one listing agent’s bedroom is another’s den and another’s closet.

As you scroll down you may want to skip the “special” sections, as that data is not mandatory for listing agents to input, and many agents apparently have better things to do than properly market their listings.

Be sure to scroll all the way down to the “Include:” section, where we recommend including the max 15 properties at a time so you can scroll instead of clicking pages. The cryptic “display results with” drop-down allows you to sort by price, starting with the lowest priced homes. Again, to accommodate Bill Gates & his colleagues, you can also sort starting with the highest priced homes if you prefer.

Please give it a try, & let us know what you think, if you have any questions or other tips, by clicking on the bold “comment” directly below on the right.

Note, 7/15: This is our classic post on the current housing turmoil. We think we’ve been proven right by subsequent events, so there’s no need to modify it, although we’ll occasionally add updates at the end. We think it’s as relevant today as it was when it was written.

Yesterday (11/27) the Los Angeles Times front page asked “Homeowners’ big question, How low will prices go?”

Today, they gave us a partial answer: “L.A., O.C. home prices decline sharply.”

We’ve got a better answer: “Nobody knows.” We first heard it at the California Association of Realtors’ economists panel in Anaheim last month. It came from Frank Nothaft, chief economist at Freddie Mac, as he was discussing how low prices would go and when things would turn around: “We just don’t know,” Nothraft said. “We’re in totally uncharted territory.” His point being that the problems brought on by sub-prime lending make this “correction” a new animal.

In a way, however, Northaft was just restating the conventional wisdom regarding any market’s cycles: “They don’t ring a bell when it hits the bottom. Or the peak.”

The consensus seems to be we’ve got 1 – 3 down years ahead of us, more if a major recession hits. Most economists also predict that Southern California real estate will take a bigger hit than the national average, just as we went up more. Prices are predicted to “correct” between 15% and 40%, with most economists in the 20% to 25% correction range. Maybe worse for outlying areas like the Inland Empire or Palmdale, and for entry level condos everywhere.

Having a bit of a contrarian nature, when everybody gets on the recession bandwagon, we start thinking about getting off. To be honest, we’ve already seen price corrections of as much as 20% in Lakewood, Los Alamitos, parts of Long Beach and Orange County and some other markets we serve.

That’s from peak to current low, and it’s comparing like homes (similar location, size, & condition), not the almost useless median selling price that takes comparing apples with oranges to an insane new level.

With interest rates dropping again and prices already down, we wouldn’t be surprised to see prices start moving upward this coming February. But we wouldn’t be surprised if they kept dropping as well. (We’re talking about prices on homes going into escrow in February, not closings. So the increase that may come this February would show up in March or April closing statistics.)

Why don’t we know? “Uncharted territory.” Too many variables: interest rates are dropping, prices have dropped, but more foreclosures are coming, and Congress may be making the “liquidity crisis” worse with the House’s proposed “reform” bill. We just don’t know. Nobody does. If they say they do, they’re either lying or deluded, or God.

What to do when nobody knows when we’ll hit bottom? That’s in the post which follows this one, (“What to Do When Nobody Knows What’s Next”).

7/15 update: Nobody knows what’s next, but that doesn’t stop us from making our best projection, which we try to update regularly as needed. For our latest posts, just look under “Recent Posts” near the top of the column to the right.

On a more uplifting note, you might also want to check out “A little perspective.”

Finally, we’ve added two links at the top of the column to your right so you can search almost all of Southern California’s Multiple Listing Services directly:

Search So Cal M.L.S. gives you direct access into the MLS covering Orange County and southeast Los Angeles County (think Greater Long Beach).

Search M.L.S. Alliance gives you direct access to a search across almost all Southern California Multiple Listing Services.

Feel free to play with them both & see which one you prefer. You shouldn’t find any ads as you use them, but you will have to deal with our picture as you search. We’ve been told you can print it & put it in your attic to deter termite and pest infestations.