So Cal Real Estate News

(10/8/08)  I’ve been teaching brief buyers’ and sellers’ classes for the city of Lakewood for about 20 years now.  I like to do a buyers’ class early in the fall each year in anticipation of the market bottom that usually occurs during the winter months (see “Real Estate 101:  Our 2 market cycles.”)

Several months ago we scheduled this year’s class with Lakewood’s Community Services Department for this Saturday, October 11, from 9 – 11 a.m. at Lakewood’s Mayfair Park (details & registration link here). At the time, we were anticipating at least the annual market bottom and possibly a cyclical bottom as well, but we weren’t exactly anticipating the events of the last few weeks!

The current market presents that rare combination of low prices and low interest rates that usually mark a bottom.  That bottom could be occurring right now, or it could still be years away.  Regardless, smart buyers should prepare now for the bottom that eventually will come.

Our little class includes basics of buying, an overview of foreclosures, break-out sessions for first time buyers, move-up buyers, and investors, an overview of current lending options, and an up to the minute discussion of the current market and what may be anticipated.  It’s open to all, whether Lakewood residents or not.

Blair and I were both teachers when we first went into real estate, and we enjoy getting back into a classroom setting from time to time.  My decision to buy my first home way back in 1976 was largely based on information I received in a similar, but longer, Saturday class taught by Los Angeles realtor Scotty Herd for UCLA’s extension program.  It gave Barb and I the information, tools, and confidence we needed to make that first purchase.  The buyer and seller classes we do give us an opportunity to discuss real estate in a classroom, rather than selling, setting.

If you know of someone who may be thinking about buying in the next year or two, this course would be an excellent opportunity to get some useful information.

We’ll also be doing a similar class for sellers on January 24, same place, time & price (info & reg link here).  You can also call us directly at 562.822-SOLD if you have questions or want additional information.

“ECONOMY HAS HEADS SPINNING”  my morning paper screams at me before I’ve even picked it up off the driveway.  Stocks tanking, huge firms failing or being bailed out, DataQuick medians show yet another home price drop.

And we decide today’s the day to tell you it’s a sellers’ market?

Well, yes and no.

Actually I decided last night it was time to write a post that it’s become a sellers’ market at the low ends for detached single family homes in most neighborhoods in the Coastal Plane of Los Angeles and Orange Counties.

What’s going on now:

You see, what we try to do here, as our masthead says, is give you “real estate news and perspectives from the front lines.”  What we and our colleagues see going on right now at open houses and with buyers and sellers in Southern California.

So we’re 3 months ahead of DataQuick, whose monthly median closing price stats just reported August closings on sales that were negotiated mostly in June.  We’re 5 – 6 months ahead of Case-Schiller, who averages 3 months of closings using their unique “matched pairs” approach and then delays a month to release.

So let me tell you what’s actually happening right now:

• Showings are up significantly at all of our listings priced below $500,000, and up modestly on our “move-up” inventory.
• That offer I made a few weeks ago that I told you about (See “Who should buy between now and Christmas?“):  Outbid.  Swamped with competing offers.  My “all cash, close in 10 days, as is” offer didn’t even get a phone call back!
• Yesterday I surveyed several other agents I’ve known for years.  Every one of them said buyer activity was up dramatically over the last few weeks.
• Even my partner, Blair, & his wife are about to make an offer.

Why?

Pretty simple, actually.  Summer just ended, prices have been coming down, and–oh, yeah–mortgage rates just plummeted:

• August is almost always one of the slowest months of the year, but things generally pick up in September and October before slowing again as the holidays approach.
• Foreclosures and pre-foreclosure “short sales” have been forcing prices down all year.  Data Quick’s August median for OC was back to the level of November 2003!  Vacation over, kids back in school, & buyers are noticing that neighborhood they couldn’t afford last year is now within their reach.
• When the U.S. Government (that’s you & me, in case you didn’t notice) basically took over Fannie Mae and Freddie Mac, confidence returned to the mortgage markets and rates dropped around a full point, with 30 year fixed loans at 5.5%!  Rates have ticked up a bit since then, but are still near record lows.

What’s it mean?

Good question.  Is it a seasonal blip or did we just pass the bottom, at least for starter homes in built-out areas?  Well, part of it is seasonal, but that’s not the whole story.  What happens next will largely be determined by the answer to five key questions:

1. What will the economy do?
2. What will interest rates do?
3. What will mortgage rates do?
4. Are foreclosures peaking?
5. Have prices corrected enough?

The first two will tend to counter-balance each other.  If the economy continues it’s sharp declines, both the fed and investors will combine to drop interest rates, both short and long term.

As for mortgage rates, with the feds supporting the market, we know the margin, or mark-up, for mortgages will stay at the more normal levels we’ve seen over the past few weeks.  One of the biggest challenges for housing has just been met.  Federal intervention is having some positive results for home sellers and buyers, as we’ve been predicting all year.

Foreclosures may be the key here.   In California it takes about 4 months to foreclose on a home from filing the initial Notice of Default through the Trustee’s Sale.  Longer if the owner files bankruptcy.  It takes another 1 -3 months to get the occupant out and the home on the market.   We know that the banks have been taking back record numbers of homes, assuring a continued influx of foreclosed homes hitting the market through year’s end.

We can also check on homes entering the foreclosure process (we give you two links for that under “Useful Links” in the column to the right, but we prefer the data in the “Preforeclosure” link.)  A month ago, it looked like homes entering foreclosure were peaking, but recently released August stats are up for both Orange and Los Angeles Counties.  Government relief for foreclosures is about to kick in next month, and the shakiest borrowers have already lost their homes.  On the other hand, a sinking economy combined with coming payment “resets” (increases) on many adjustables may put more homeowners in jeopardy.  This one may be “too close to call,” but I think by mid spring of 2008 the worst of the foreclosure market will be behind us.

Which brings us to question # 5.  You’ll get plenty of debate on this, but the multiple bids on properly priced REOs make it pretty obvious to me that some prices have, indeed corrected enough, provided interest rates don’t rise dramatically & the economy doesn’t tank.

What prices have corrected enough? The prices that bring competitive bids:  The fire-sale prices the lenders are now offering on starter single family homes in built-out markets. Pretty much what we said three weeks ago, except it’s happening now, not early next year.

Is this the bottom?

For SFRs in the coastal plane of OC & L.A. Counties, maybe so, maybe this December, maybe later.  It largely depends on the economy, interest rates, and when foreclosures peak.  Stay tuned, & we’ll keep you posted on what we’re seeing here on the front lines of So Cal Real estate.

Our 2-hour, $5 October Buyer Seminar:

We actually scheduled a two hour buyers seminar with the city of Lakewood’s Community Services Department several months ago.  It’s open to everyone, not just Lakewood residents.  It’s from 9 – 11 a.m. on Saturday, October11 at Lakewood’s Mayfair Park (Clark and South St.).  We designed this to help buyers make the most of this fall and winter’s unusual buying opportunites. Class size is limited to allow interaction. Sponsored by Lakewood’s Community Services Department. Details here. No, we’re not selling tapes, cds, books, or DVDs! We’re both former teachers, & we enjoy a chance to discuss real estate in a “classroom” setting.

Note: Special 2 hour, $5 buyer seminar with Blair & Dave set for Saturday, October11 at Lakewood’s Mayfair Park (Clark and South St.). We designed this to help buyers make the most of this fall and winter’s unusual buying opportunites. Class size is limited to allow interaction. Sponsored by Lakewood’s Community Services Department. Details here. No, we’re not selling tapes, cds, books, or DVDs!

It wasn’t that long ago that Blair and I thought Southern California home prices were most likely to begin to rebound in spring of 2010.

Near the end of July we made an upbeat revision in our forecast, giving a 40% probability Southern California home prices would bottom this coming winter, a 40% chance of our price bottom coming the following winter, and a 20% of our bottom coming after that.  We also began specifying which areas and price segments can be expected to bottom first.  (For details and our rationale, check out “An optimistic update on our projections of a home price bottom.”)

Now we’re getting even a bit more optimistic, largely due to modest declines in homes going into foreclosure combined with the rapid decline in prices over the past year.

Nobody can say with certainty when Southern California home prices will hit bottom (See “How low will prices go?“).  DataQuick’s numbers won’t reflect that bottom until long after it’s passed (see “Two big problems with DataQuick’s monthly median price reports“).  However, there comes a time before the price bottom in every market cycle where the wise buyer starts looking very seriously.

I think that time is now.  In fact, last week I put in my first offer on a California property in over ten years.  (Last month I also decided to run for my local City Council for the first time ever, but that’s another story for another blog.)

Let’s take a close look at some questions this raises, including where, what, and why to buy now:

Where to buy now: While we believe recovery for the desert area and the Inland Empire may not come unti spring of 2010, we now believe the next four months are likely to present the best buying opportunities for most property classes in the coastal plane of Los Angeles and Orange Counties.

Why? As we’ve indicated in “Our Two R.E. Market Cycles,” in most years both sales volume and prices for homes going into escrow tend to bottom in November and December. People are too busy preparing for the holidays to buy homes but lenders and builders are trying to unload inventory before year’s end.  It’s almost like an annual “year end clearance” sale for real estate.

With the number of homes going into foreclosure beginning to decline and effects of the federal housing relief bill beginning to kick in (see “The good news about the ‘Housing and Economic Recovery Act’ “), we think the odds now are that this winter’s apt to be as good as it gets for buyers looking in the more built out areas of So Cal.

What’s more, interest rates are still near historical lows and are expected to gradually rise over the years ahead.  Very low prices and rates make for an excellent buying opportunity.

Finally, there are literally hundreds of thousands of buyers sitting on the fence right now waiting for the market to bottom.  Once they all sense the time is right, you’ll have far more competition from other buyers than you have right now.  If you’re not early, you’ll be late.   Once everybody recognizes a golden opportunity, it’s too late to take advantage of it.

Due to the annual cycle, we know activity’s apt to pick up starting 12/26, we think the prudent buyer should at least get her feet wet in the market now.

Who should buy now? Buyers who have fairly decent credit, access to a down payment of at least 3.5% (the new FHA minimum), stable income, and who aren’t planning on selling in the next five years.  (3-5 years used to be the rule of thumb for accumulating enough equity to cover selling costs.  1-2 year “flipping” for anything besides severely distressed property is probably a thing of the past.)  It’s also not a time for negative amortization loans, or adjustable mortgages with low teaser rates and payments that will rise dramatically.  We recommend 7 – 30 year fixed, fully amortizing loans.

What to buy now? We think lower end Single Family Homes (SFRs) will rebound first, as they’ve been driven down the most by foreclosures.  Starter condos, which were overbuilt more than SFRs in LA & OC, will probably lag behind.  Quite likely move-up homes will also lag, since most buyers need to build up equity in their current home in order to move up.

We also like the discounts available on “short sales.”

What’s a “short sale?” In a  “short sale” the current mortgage holder accepts a reduced, or “short” payoff at close in order to avoid foreclosure.  It actually takes longer than a normal sale or a bank foreclosure, and you can expect the current mortgage holder to attempt to renegotiate or even cancel the sale.  I got plenty of experience with short sales back during the 1991 – 1996 SoCal real estate crash, and so far Blair and I have closed every short sale we’ve opened.

Why the discount on short sales? For agents, short sales are twice the hassle for 1/6 less commission, since the mortgage holder always insists on reducing the commission as a condition of accepting the short sale, if they’re willing to accept it at all.  Buyers would also rather avoid the renegotiation hassles not to mention the chance of the current lender disallowing the losing the home 30 – 60 days into the escrow.  As a result short sales often go for 5% – 15% below market.  And market is already 25% – 40% below what it was at the peak.

What about foreclosures? Once the bank takes the home back, the hassles of a short sale and the reduced commission are both eliminated, so the demand increases.  Some REOs (“Real Estate Owned,” or lender-owned, foreclosed properties) are initially overpriced.  When an REO is underpriced, the lender may wait 7 – 10 days before accepting an offer, essentialy holding an auction so that the price will get bid up, sometimes actually selling above market.

When should I start looking? Preferably September or early October.  That way you’ll have time to look and to familiarize yourself with your options.  Some experts say you should look at 20 similar homes before making an offer.  With the internet, it’s not that hard.  You can search for yourself using the links to Southern California Multiple Listing services in the column to your right.  Better yet, we can set you up on the MLS’s “Listing Book,” which allows you to sort out the listings you prefer.  (Just shoot us an e-mail at BlairNewman at verizon.net.  (You know what the “at” represents, but most web-crawling e-mail harvesters don’t.)

It’s also good to start looking now so that if you find a short sale you like you’ll have time to give it a shot, & still have time to look and write other offers if the current lender plays hardball 45 days down the line.

What if prices continue to drop next year? We think the odds are against that, but nobody can say for certain.  What we do know is that prices have already fallen by about a third from the peak.  By staying in developped areas, you minimize the risk of dramatic additional falls.  Of course, if the economy takes a major turn for the worst while you’re looking, you can always wait.  Check back with us, or sign up for our RSS feed, to see our take on future developments.

How do we get started? First, talk to an honest, reliable lender (if you don’t know any, we do.  562.822.SOLD).  Find out what you qualify for on a fixed loan, if you need to work on your credit, how much down you’ll need, etc.

Then find an honest, experienced, diligent full-time agent.  Not someone you know at work (they’re not full-time, no matter what they say), probably not a relative, and not a friendly person you meet at an open house.  At least five years in the business, at least 50 closed sales, at least 5 of them in the neighborhood you’re interested in.   Again, with 30+ years in the business, we can probably find someone good for you if you can’t.  If you’re thinking southeast L.A. County (Long Beach, Lakewood, Norwalk, Cerritos, etc.) or west or North Orange County (Cypress, Rossmoor, Seal Beach through La Mirada and La Habra), we’ve got many years experience there ourselves, with over 500 homes sold.

You may decide you want to wait a little longer, but you may also find your dream home & be able to negotiate a great deal.  Whatever you finally decide, now’s a great time to get started.  There’s a very good chance it may be the smartest financial decision of your life!

(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!

(7/30/08) Back on April first of this year, while debate was raging on the bill, we wrote a post titled “Major housing breakthrough near?“  It included the following:

It looks like our leaders may finally be setting aside their egos and personal agendas to work together for the common good.

Behind-the-scenes discussions between Congressional leaders and the Bush administration may be about to bear fruit. And that fruit would be a pragmatic Housing Relief Act of 2008 which combines the best ideas from partisans of all stripes to provide both immediate relief and long term reform.

The comments off the record are almost unbelievable: “The collapse of the American housing and lending markets is an impending crisis that compels us to lay aside partisan differences and work together,” one Senate leader has discovered. “Ultimately, we’re all in the same boat, and if it sinks, we all drown!” she continued.

“We need to recognize that we are all on the same team,” according to a key administration figure. “We need to stop acting like the Shaq and Kobe Lakers and start acting like this year’s UCLA Bruins. You don’t see Collison and Love fighting for the ball!”

The details are still being finalized, but they involve major concessions and some unique innovations from both sides of the aisle.

We meant it as an April Fool’s post!

Turned out, the joke was on us, & we’re glad!

While the bill’s far from perfect, it includes a lot of positives, from increased oversight of the mortgage giants Fannie, Freddie, to tax credits for first time buyers for a limited time.

What’s especially significant is the numerous compromises it took to get the bill through Congress.  For example, that first time buyer tax credit ended up being an interest free loan that has to be paid back over fifteen years.  Stimulus for housing now, partial payback for the taxpayers later.

Many housing bears are eager for values to fall more, even if it does ruin the nation’s economy and banking system.  Their hatred for this bill might be evidence they fear it just might work.

We think it’s a step in the right direction.  Maybe several steps.  The bottom of this crash is at least a little closer today than it was yesterday.  On our latest projections post, we increased the probability of a bottom within the next seven months by 5% directly as a result of this bill.  Hopefully, we’re being conservative.  (That post also lists some of the additional beneficial features of the bill.)

Thanks to those leaders in D.C. that finally realized that ultimately, as Americans, we’re all on the same team!

(July 25, 2008)  Let’s start off by reiterating that this is risky business. There are lots of variables that could change in the months ahead, from interest rates to employment to the international scene. That’s why we continue to insist that nobody can predict the bottom with absolute certainty, as Freddie Mac’s chief economist Frank Northaft told us last fall. (See “How low will prices go?“)

Be that as it may, everybody wants to take their best guess at what’s coming next, and recent developments are making us think it may be time to update our projections.

The Housing Relief Bill

A big reason for our increasing optimism is President Bush’s pragmatic decision this week to accept $3.9 billion for cities to buy up and fix foreclosed properties as a trade-off for federal guarantees for Fannie Mae and Freddie Mac which should calm both the stock market and stabilize lending.

Although the additional deficit spending the bill may create will put some more upward pressure on interest rates, we do think it will go a long ways to reducing the glut of foreclosures.  On the whole it seems to be a surprisingly good example of well-crafted, bipartisan legislation.

Besides the money to buy up foreclosures, other features in the bill that we like include:

1. A permanent increase in loan limits for Fannie, Freddie, and FHA to $625,000 in the highest cost areas like much of Southern California.

2. A “tax credit” (which is repaid over fifteen years interest free) of  up to $7,500 for first time buyers who close escrow between 4/9/08 and 7/1/09.  (Although the credit phases out for joint filers with income over $150,000 and individual filers over $75,000, Blair & I think this will increase demand significantly, especially early in 2009.   In fact, we’ll break with our normal procedure here and actually 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.)

3. $11 billion in tax free municipal bond authority for states to set up low interest loans to first time buyers.

4. It tightens regulations to avoid future repeats of the recent mortgage meltdown.

5. Making 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).

6. The complex but intriguing arrangement that encourages loan workouts instead of foreclosures or “short sales.”  The lender reduces the loan amount to 10% below current market value in exchange for getting the loan off their books.  The borrower agrees to share that 10% and future equity with the taxpayers.  And we the taxpayers (also known as the government) guarantee the new loan through FHA, provided the buyer can qualify.

The total revised package is expected to sail through the Senate and Bush has now promised to sign it.  While dangers of inflation and unemployment still threaten, we think the housing bill will have a more positive impact than we originally thought.  Combine that with the fact that the market seems to be finding a bottom in terms of price, and we’re hopeful the positives will outweigh or at least neutralize the negatives of the normal summer slowdown, foreclosures, and shaky employment.

With that in mind, we’re now revising our projections as follows:

Our Current Best “Guestimate”

40% chance: Bottom sometime between now and the end of winter:

We think the limited time offer of $7,000 tax credits for first time buyers will provide a significant stimulus to a market where we’re already seeing multiple competing offers on well-priced bank REOs.  At the same time, cities will begin bidding for some foreclosures, and others will see favorable workouts with the lenders which the bill makes possible.

Some of the bills provisions don’t kick in until October, but the tax relief is retroactive.  We think the bottom will most likely coincide closely with our normal seasonal cycle, which bottoms in December or January.  (We’re talking about escrows that open in December or January, which would close in February or March be reported by DataQuick a couple weeks later.  See “Predictions 101: Our 2 market cycles” and “Two big problems with DataQuick’s monthly median price reports.“)   However, it’s possible that the bottom may actually come earlier.

Of course, nobody will know for sure it’s a bottom until prices start rising in the months following.  Then we’ll be wondering if it’s a false bottom through the following winter.

Which So Cal County will bottom first? All real estate is local, and we think Southern California’s Coastal Plane will hit the bottom first, followed by the desert and Inland Empire areas possibly a year later.  This is due to the impact of gas prices on outlying areas plus overbuilding and more foreclosures there.  Of the larger So Cal counties, we expect Orange County home prices to bottom first because it’s the most built-out and has the lowest percentage of starter homes.  We expect either Los Angeles or San Diego County home prices to hit bottom next, followed by Riverside and San Bernardino Counties.

Of the smaller counties, Santa Barbara looks like it’s already bottomed, with June foreclosures there hitting a 14 month low.  Ventura County homes may be nearing a price bottom, while the smaller inland counties are largely in the same boat as the Inland Empire.

The other 60%: 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.

20% chance: Bottom later than next winter. Either a lengthy recession, or a bottom late winter of 2010-2011.

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: There’s a significant chance that what we’re seeing now is as low as prices are going to go.  But we’re saying there’s an equal chance that the bottom won’t hit until a year from this winter.  And we’re also saying nobody can know for sure.

If you’re in a position to buy, start looking now & if you see something that works for you, make an offer at a price you can afford.  You can use the MLS links in the right hand column to directly access any MLS in Southern California.

As a minimum, buyers should 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.

Although predicting a 40% chance of a bottom in the next five months hardly echos NAR’s “buy now!” theme, it’s dramatically more optimistic than we were just a few weeks ago.  Of course, new developments could reduce or encourage our optimism.   Stay tuned, & we’ll keep giving you our best projections based on what we’re reading, what we’re seeing on the front lines, & our experience of over 30 years in this amazing, interesting, and unpredictable business.

What Would Really Help

The “Housing Bailout Bill” seems like a pretty good example of Congressional give-and-take for the common good.  We think there are two logical but somewhat radical additional steps our politicians need to take now to protect our economy and our way of life:

1.  Modest steps to federal deficit reduction, specifically, reducing “pork.” I’m thinking of wasteful spending to get Legislators re-elected, like Alaska’s famous “Bridge to Nowhere.” Passing a bill eliminating such Congressional “earmarks” and also giving the next president a line-item veto would be a very simple step in the right direction.  I’d also favor a mandatory deficit reduction bill that would impose across-the-board spending cuts and tax increases if our politicians couldn’t come up with budgets that meet a long term schedule to reduce the federal deficit.  Taxing our great grandkids is the ultimate in “taxation without representation,” which our forefathers rightly considered tyranny.

2.  Reduce the trade deficit by allowing careful new drilling for oil, but with a catch.  The U.S. is sitting on more untapped oil reserves than any country in the world. I say use the revenue from that oil to create the best clean, renewable energy industries in the world.  Open up more areas for safe drilling but dramatically increasing leasing fees on federal lands. Then split the billions in increased federal revenue between federal deficit reduction and renewable energy innovations.

That would undoubtedly strengthen the dollar, stimulate the economy, reduce the trade deficit, and lead  to a cleaner environment.  In the case of Alaska’s Arctic refuge, drilling would sacrifice less than .01% of ANWR to actual exploration in return for a $137 – $327 billion reduction in our trade balance (see Wikipedia, “Artic Refuge drilling controversy.”)   We can keep sending our the money to the Saudis, or keep it here and use it for high paying jobs, deficit reduction, and energy innovations.  Seems like a no-brainer to me, but I am a Realtor. . . .

We welcome your questions or comments

(July 24,2008)   This morning’s news provided more evidence that this spring’s buying surge is subsiding, as we predicted.

The National Association of Realtors released their statistics for existing-home closings in June:  Sales were off 2.6 percent from May, at a seasonally adjusted annual rate of 4.86 million units in June, down from a pace of 4.99 million in May.  That’s 15.5 percent lower than the relatively hot 5.75 million-unit rate of June 2007, when the market was just beginning to slow.

Home inventory (available listings) rose 0.2 percent to 4.49 million existing homes available for sale, an 11.1.-month supply at the current sales pace, up from a 10.8-month supply in May.  Inventory is a better indicator of future sales than closings.  Given the ongoing influx of foreclosures, and the normal seasonal trends (See “Predictions 101: Our 2 market cycles“) we were surprised that inventory didn’t grow faster.

To us, this modest increase in inventory is good news, and may actually be an indicator the tsunami of foreclosures may be nearing a peak. On the other hand, the slowdown in June closings would indicate the market started slowing way back in April, since that’s when June closings started going into escrow. That’s real cause for concern.

NAR’s data is less useful than DataQuick’s for several reasons:

1. It’s nationwide, and the smallest breakdown is into 4 national regions (see below)
2. It excludes most resales, FSBOs (“For Sale By Owner) and other transfers that didn’t use a Realtor or were not listed in a local MLS, such as exclusive listings.
3. It’s released about a week later than DQ’s numbers for the same month.

Regular readers already know our complaints about “DataSlow, which also apply to NAR’s medians:”

1. Closings lag actually lag sales by about 45 days, making it “old news.”
2. Median prices area easily skewed by shifts in what price homes are selling, making it hard to read the tea leaves.
3. Most news outlets rarely explain DataSlow’s flaws, so the general public seems to think the numbers reflect actual values in the current market.  (For details on DQ, see Two big problems with DataQuick’s monthly median price reports“

NAR’s stats for the western region are actually more positive, with sales rising 1.0 percent in June to a pace of 1.03 million, only 6.4 percent lower than June 2007.  That’s more in line with what we were seeing locally in April, although the traditional post-spring slow-down has set-in since.  The median price in the West was $288,400, which is 17.2 percent below June 2007.  Medians in most SoCal markets are down about 25% from a year ago, based on DataQuick’s June numbers.

NAR spinmeister and chief economist Lawrence Yun, put his usual positive spin on the numbers.  “About four in 10 homes are purchased by first-time buyers, which frees existing owners to trade up,” Yun said. “With many potential first-time home buyers on the sidelines, a first-time buyer tax credit would have a significant positive impact on both housing and the economy. Combined with permanent increases to mortgage loan limits and enhancing the FHA loan program, the housing stimulus package working its way through Congress would go a long way toward helping consumers and boosting the overall economy.”

While we’re not sure the housing relief bill that passed the House yesterday will go a “long way” towards helping us, we do think it’s a big step in the right direction, and it tends to reinforce our projections in our last post, “Home price bottom near for Orange County?“  In fact, we’re thinking about actually making our numbers there a bit more optimistic due to Bush’s announcement that he will sign the housing bill.

The biggest downside of the housing bill is that it pushes up the federal deficit even further, which will put even more upward pressure on interest rates.  What Congress & the Administration really need to work on is a Deficit Reduction Bill, which would work to eventually reduce the deficit by eliminating “earmarks,” giving our next president a line item veto, and forcing a combination of mandatory budget cuts and mandatory across-the-board spending reductions if certain deficit reduction targets aren’t met.  Don’t hold your breath on that one.

We still believe our economy also needs is a serious effort to reverse the massive outflow of American dollars to OPEC.  We think the envirornmentalists among us need to allow for low risk drilling in Alaska and off shore, as well as safe nucleur power.  Conversly, the U.S. needs to charge market value for new oil, not give it away free to the oil companies.  That would provide billions of dollars to divide between deficit reduction and alternative energy research and development.

All of which would create millions of good jobs, stabilize the dollar, reduce our balance of payments deficit, reduce federal deficit spending, bring down the price of oil, reduce interest rates, and provide real relief for American homeowners and even banks.

Click here for more June sales info from NAR.

For today’s details on the “Federal Housing Finance Regulatory Reform Act of 2008″ and what’s next, click here.

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?“)

(7/12/08, 11 p.m.)  I’ve been selling Los Angeles and Orange County real estate for 28 years. I’ve seen conforming loans at 18% in the early 80′s, S & L failures of the late 80′s and massive job losses in the early 90′s but I’ve never seen anything quite like the ongoing drama that’s unfolding before our eyes.

After working through the weekend, the Federal Reserve and the U.S. Treasury announced late Sunday a series of moves designed to show strong support for the two semi-private bulwarks of U.S. mortgages.  (Details here.)

This is more of a reaction to the housing and mortgage mess than any real solution.  They’re not stopping the bleeding–just trying to keep it from increasing at an even faster rate.

In the short run Sunday’s actions keep the collapse in housing values from accelerating even more.  Over the longer term they may actually reduce interest rates, and actually slow the ongoing downward cycle.

How We Got To This Point:

In our humble opinion the current mortgage and housing mess was caused by a combination of:

1. Excessive stimulus by the Fed after 9/11 at a time when the housing prices appeared to be heading towards a correction.  (Essentially, interest rates were dropped and housing was used to keep the economy from crashing, possibly a wise move in view of the circumstances.)
2. The Fed delaying too long in raising rates, further prolonging the boom.
3. Perversely, fixed mortgage rates staying low when the Fed finally began raising the overnight rates they control, because long-bond investors sensed a downturn would result from the Fed rate increases.
4. The creation of unique but poorly designed and highly risky “sub prime” loans further extending the bubble. 4. (For a more detailed explanation, see “How we got into this mess.”)

The end result was a nightmare combination of extremely overvalued homes that were 100% financed or refinanced to shakey borrowers.  Did I mention that many of the loans were written at ridiculously low “teaser” interest rates, which are now doubling, tripling, or worse.

All bubbles eventually burst, but the longer they last the further they must fall.  Many of these loans, however, were based on the false premise that “real estate always goes up.”  When the market stopped moving up, millions of serial refinancers had no place to turn, and the foreclosure parade began.

Eventually, prices dropped so low that even “prime” borrowers who put 20% down found out that they were upside down, which is how even Fannie and Freddie’s best loans began defaulting.

How’s that?  The typical cost of selling a home is around 8 – 12% of a home’s value.  That includes fees, escrow or closing, commissions, title insurance, termite, repairs, and, in this market, points for the buyer.  Even without negative amortization, a 20% down borrower can’t break even after just a 10% decline in value.  We’ve now passed a 25% decline in many Southern California markets.  That doesn’t mean a borrowers with a fixed loan and good credit will defalut. . . . until one of them loses their job, or they get divorced, or have to relocate.  Then they can’t sell the home, so their options are dramatically reduced.  (For some of the options they still have, see “Trouble making your mortgage payment? 7 ways to get back on track“)

So, the lower prices go, the more people get in trouble, and the lower prices go, and the more people get in trouble, and the lower prices go. . . .

All of which makes investors very nervous about mortgage backed securities. Which makes it harder to qualify for mortgages, and also makes them more expensive. And which also makes it hard for Fannie Mae and Freddie Mac to sell their mortgage-backed securities. Which makes mortgages even harder to get and even more expensive. All of which makes prices go even lower.

That’s the vicious downward spiral we’re now in. That’s why I’ve been screaming that we desperately need the Federal Mortgage Act (bailout bill) that the Senate finally passed on Friday. (See “Better than I thought: Taxpayer protections in the “bailout” bill.”)

What the government did over the weekend was to take steps to simply keep solvent Fannie and Freddie, the guarantors of up to 80% of the mortgages now being originated. (Most of the other 20% are backed by the FHA or VA, although some S & Ls still “portfolio” or keep some of the loans they originate, rather than selling them off via Fannie, Freddie or FHA.)

The fall of IndyMac Bank, the third largest bank failure in U.S. history (in terms of dollars, but probably not adjusted for inflation), added further emphasis to the need for help.

So What’s Next?

The strong activity from buyers this year into summer gives good evidence that, even with rising interest rates and hard-to-get loans, prices have corrected enough to bring back buyers.  But the ongoing flood of foreclosures expected well into 2009 will eventually swamp the limited pool of buyers, especially as we move out of the peak buying season. (See “Predictions 101: Our 2 market cycles“)

The weekend’s federal actions will at least keep the mortgage pipeline open, but it doesn’t solve the underlying problems. The Foreclosure relief bill will probably be fast tracked, but it will only help a limited number of borrowers. It will put a dent in the problem, but it won’t even come close to solving it.

Ongoing job losses in housing, finance, construction, home furnishings combined with auto industry problems and the huge losses being absorbed by investors don’t bode well for the future either.

(If you’re a homeowner or investor and are starting to feel a little like the Biblical patriarch, Job, you might appreciate my Pastor’s thoughts on the topic.  For me, it helps keep things in perspective.)

We’ve been predicting further declines through this winter and possibly for another year or two.  But, as we’ve been saying since November (See “How low will prices go?“), there are so many variables in play that nobody can predict what’s ahead with certainty.  (Were you expecting this spring’s dramatic gas price rise?)

Bottom line: today’s prices are great, but they may be going lower. Maybe a lot lower. But there’s no way to know it’s hit bottom in advance. Because nobody really knows what’s ahead.

So you want to know”What to do when nobody knows what’s next.” Well, we already wrote that post, and it’s just a click away.

Note to potential sellers: The market has not died yet, and we have been consistently selling our listings in under 30 days by a combination of aggressive marketing, preparation, staging and negotiating plus accurate pricing. No, they’re not foreclosures, either. For details, check out “How to sell your So Cal home for top dollar in 30 days.” It could be a long time before prices return to today’s levels.

Buyers Southern California prices are expected to drop over the next 5 months and possibly for a lot longer, but you should also consider your personal situation and potentially rising interest rates. One thing’s for sure, if you buy today you’ll be paying a lot less than you would have a year ago! In any case, now’s definitely the time to start saving a down payment & get your finances in order, so you’ll be ready when you decide the time is right. Don’t run out and overspend on a car because you’re not buying a home.

For years I’ve been advising buyers to buy in November or December, but almost nobody has the time then–which is why it’s a great market for buyers. (For more thoughts for buyers see “Time to buy?“)

What we think needs to be done

Here’s where I’m taking an unexpected turn. The root problem became abundantly clear as gas prices rose this spring.

Because of our huge trade deficit, the U.S. is essentially becoming a third world nation, watching while Arab shieks buy up everything from Rancho Santa Fe horse property to the Chrysler building. And our oil dollars finance Al Queda, Hamas, and Iran’s nuclear program!

Meanwhile, we’re sitting on more untapped petroleum reserves than any other nation on the planet. I say it’s time to carefully open up offshore and Alaskan areas to oil drilling, but with a difference. As I understand it, current law allows oil companies remove oil from federal lands for free. I’ll bet Iran & Saudi Arabia don’t do that!

So I say, charge oil companies fair market for the oil they remove from our lands, but split that money between paying down the federal deficit and developing renewable energy sources. Let’s make the U.S. the number one source of clean petroleum alternatives.

Can you imagine the number of good jobs that would create, and the stimulus to our economy?

That’s what I think–& we’re eager to hear your thoughts!