So Cal Real Estate News

(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!

Last night and this morning I got involved in an interesting discussion of the “Federal Housing Finance Regulatory Reform Act of 2008,” better known as the “mortgage bailout” or “foreclosure relief” act.

The discussion took place in the comments section of a post on the Irvine Company’s apartments in John Lansner’s always interesting OC Register real estate blog.

In the process, I learned some surprisingly positive things about that bill.  Ultimately, it led me to the Congressional Budget Office’s June 9 Cost Estimate of the Federal Housing Finance Regulatory Reform Act of 2008, more commonly referred to as the housing “bailout bill.”

According to the generally reliable, non-partisan C.B.O., this bill should actually make $800,000,000 for the taxpayers. Yup, you read that right–it’s supposed to save us money, not cost us! I quote from the summary on p. 1 of the report:

CBO estimates that enacting this legislation would increase revenues by about$8.0 billion over the 2009-2018 period. . . . Over that period, we estimate that spending from those proceeds would total about $7.2 billion. The additional revenues would thus exceed direct spending by an estimated$800 million, decreasing future deficits (or increasing surpluses) by that amount over the next 10 years.

How is that possible?  Well, far from giving borrowers and lenders a free ride, the bill actually makes participating lenders discount their note to 90% of current market value, and then makes the borrowers pay FHA 1.5%  of the loan balance every year and then share 50% of their equity with the FHA when they eventually do sell!

Here’s how the C.B.O. explains it (p. 7, bolding mine):

This legislation also would require FHA to charge the borrower an annual fee of 1.5 percent of the remaining insured principal balance each year. Furthermore, the program would
provide that, upon sale, refinancing, or other disposition of the residence, the borrower
would pay to FHA a share of the new equity that would be created under the program.
(This new equity would be at least 10 percent of the property’s value because of the
required write down to no more than 90 percent of the current appraised value.) [note by Dave:  Some or all of this 10% could disappear if the home declined further in value after the refinance]

FHA’s share would start at 100 percent of that newly created equity, and would drop to
50 percent in the sixth year of the term of the new loan; it would remain at that level for
the duration of the loan. In addition, upon sale or refinancing of the home, the borrower
would be required to pay FHA 50 percent of any appreciation in the appraised value of
the home since the date on which the mortgage was insured (excluding the initial
10 percent equity created by participating in the program).

In the discussion last night, one poster thought that was excessively harsh on the borrower.  Maybe, but the lender wrote down the loan to 90% of current market value, so that 10% equity was a gift from the lender to begin with.  I’m not shedding tears for the lender, either–they’re the ones who got us into this mess with those ridiculous loans to begin with. (see “How we got into this mess“)

I do sympathize with some of the naive borrowers who trusted their lender (who was often also their Realtor) way too much, I think the main focus should be on protecting the overall economy against a collapse. Protecting the taxpayer would come second, then the borrower and the lender.

So if the cost of the program is the owner giving up half their equity, so be it. Remember, the lender’s making a major discount on the principal balance, so that’s basically a gift to the borrower. Sounds like a pretty sweet deal for the borrower to me. And not a bad deal for the taxpayer, either. (See “How we got into this mortgage mess.”)

Sounds like maybe it won’t cost the taxpayers anything, and maybe we all win. Perhaps this specific bailout bill’s not such a bad idea after all!

Maybe I was right about the need for this bill after all! (See “Why we need a mortgage relief bill.”)

There’s lots more to the report, some good & some bad from my perspective, but much better than I expected overall.

That’s my opinion–for now, at least. Feel free to share your opinion below, in relatively polite language, of course. (There is a lot of passion about this topic.)

Homeowners today are paying for years of greed, stupidity, and dishonesty by just about everyone in the mortgage and real estate food chain, from buyers and borrowers to lenders and agents to bankers and sellers. . . . Here’s the link to our March 29 post to our front-row view on how it all developed: “How we got into this mess.”

For a story about how teamwork got one homeowner out of it, see the post below, “The team that made it happen.”

For options for homeowners with toxic mortgages, you might also want to check out “Trouble making your mortgage payment? 7 ways to get back on track“

This is the third in a series of of three posts on three listings on the same block that closed escrow earlier this year. The first two are good examples of costly but common seller mistakes. (See “A Tale of Three Listings: The probate seller’s big mistake” and “The “flipper” Realtor who didn’t think.”)

Today we look at the third listing, a good illustration of what’s going on throughout Southern California right now. It shows how we got into this mess and what it takes for homeowners to get out of it.

Meet the Johnsons:

This seller first called us around the first of the year. We’ll call them Mr. and Mrs. Johnson. They had purchased the home in June of 2002 for $275,000 with 20% down. They refinanced two years later for $325,000 and again in 2006 for $338,000.

Refinancing every two years is generally better for the mortgage broker than the homeowner, but these owners were relatively conservative. Not only did they avoid negative amortization loans, they also resisted the temptation to pull out the bulk of their equity. Otherwise, they could easily have owed over twice as much as they did.

When we first met, there were about six home listed within 150 yards of their home, including “short sales” next door and across the street. That sounds like an Inland Empire or ghetto listing, but was actually just an unlucky block in a decent part of Lakewood.

Like most sellers, the Johnsons knew that values were down, but still had unrealistic expectations for their home. Even in normal markets, most sellers tend to overprice their home, giving value to personalized “improvements” that actually are negatives to most buyers, and overlooking negatives they’ve grown accustomed to.

When we prepared for our appointment, we were pleased to see that they still had equity in their home, but it was far less equity than they had expected. However, their personal situation was such that it was a good time for them to move. They wisely chose to let their personal situation guide them in an uncertain market, rather than speculate on when the bottom might come (see “What to do when nobody knows what’s next“).

Getting Ready

Unlike many sellers, they were willing to listen to our recommendation, not just on pricing but also on timing, preparation, and staging (see “How to sell your So Cal home for top dollar in 30 days“):

• Preparation: We suggested adding some flowers in the front, fertilizing the lawn, and repainting the chipped & peeling front porch, and removing posters and repainting the teens’ bedrooms.
• Staging: This was a large home with an unusual floor plan, including a huge master bedroom with some unused space and a small utility room with a half bath.

Partly because the average seller is about 20 - 40 years older than their most likely buyer, most sellers aren’t aware of how visually dependent their buyers are. Verbal suggestions aren’t nearly as effective as properly staging a home.

In this case, we suggested using a bookcase to seclude a part of the master as a semi-private office or retreat. We felt that the utility room with a private half bath should be staged as a bedroom, and offered the use of one of our inflatable twin “instant” beds. This would also enable us to list the home as a four bedroom, two bath rather than a three bedroom with utility room, without potential buyers asking “Where’s the bedroom.”

As almost always, we also recommended removing or relocating some furniture to make the home look larger, as well as eliminating knick-knacks and clutter.

• Timing: Aware of the coming onslaught of foreclosure listings we strongly recommended the Johnsons waste no time getting their home on the market.
• Pricing: Correct staging and preparation would significantly improve the sellers’ bottom line, but locating and closing a qualified buyer using today’s tighter lending standards is often a major challenge.

The first week a home is on the market is the best opportunity to get competing offers.  So it was critical to hit the market with all staging and preparation done, and to hit it at an aggressive price. Our hope was to obtain competing offers within the first two weekends, not only so we would be in a stronger negotiating position, but also so we could focus on the buyer most apt to close the escrow.

• What not to do: Fortunately, the Johnsons called us early in the process of deciding what to do. Not only did that allow us to encourage them to speed up the process to take advantage of early spring activity in a falling market, but it also allowed us to help them focus their preparation efforts on the most productive items.

As is commonly the case, there were several repair items they wanted to fix that we felt would be better left for the physical inspection once we had a buyer. That not only saved time and effort, it also allowed the buyers to pick the repair items that were most important to them.

The Team Effort:

In order to get things moving quickly, we completed the listing paperwork that night, with a target of getting the home on the market in a few weeks, once the work was done. We agreed on a tentative list price, which would be adjusted as needed just prior to putting the home on the market.

We were amazed at how efficiently the Johnsons went to work. The bedrooms were painted and lawn fertilized within a few days. Furniture was moved out, and our “instant bed” was moved in.

There were, however, a few areas where disagreements arose. The master retreat was set up with a desk from the former utility room, but the bookcase screen never made it.

We never fully agreed on pricing, although we were only off by a few thousand dollars. In a challenging market like today’s, accurate pricing from the start is quite important. As with proper staging and preparation before hitting the market, “you never get a second chance at a good first impression.” That’s especially true now that listing information travels at the speed of light over the internet.

Still, it’s the seller’s house, and all we can do is explain our recommendations. We were very fortunate the Johnsons worked so well on preparation, staging, and timing. And we weren’t that far off on pricing, but things might have gone smoother were the initial price just 1% lower.

Our Part:

It’s not just the seller who has to work hard in this market, however. As the Johnsons were preparing the home we began working on our marketing plan into play. We’re constantly looking for and trying out new ideas, and over the last three decades we’ve incorporated quite a few that have proven effective. Selling a home for top dollar fast isn’t rocket science, but it does involve doing lots of little things right. In the Johnson’s case, this included:

• buying the home’s address for the domain for the home’s website & getting a sign printed with the domain. (1234Main.com, for example–much easier to remember than “12J75jKR Wxyz@prudential.yahoo.homes.com or whatever)
• videoing the virtual tour
• photographing, writing & printing the color flyers for inside the house & for the brochure box
• preparing 19 photos for the MLS & adding captions
• recording an audio tour & put up our call-capture “audio tour” sign so we could follow-up with buyers while they were still in front of the house.
• putting up our personalized “for sale” sign with only our cell number on it, so all calls would go to one of us, not some 18-year-old receptionist who’d never seen the house (or an agent taking “floor time” who’d rather sell the buyer his own listing).
• holding open houses with about two dozen strategically placed signs.
• over 400 flyers delivered throughout the tract to neighbors who might have friends or family looking to buy in the neighborhood.
• Bringing our local office through on tour.
• Precisely timing the inputting of the listing into the M.L.S. and onto the internet to maximize the possibility of multiple offers (we’ve actually go this down to not just which day of the week but also what time on that day.) (Sorry–that’s our secret, but we know what works. It changes based on the market anyway.)

The Results:

The good news was, we had an offer within the first two weeks, and were able to negotiate a mutually acceptable price and terms. The “challenge” (we try to avoid words like “bad news” or “problem”) was, the buyer wasn’t as strong as we would like, in terms of qualifying for the loan. They weren’t terrible, probably a little stronger than average. They were even “pre-qualified,” but that really doesn’t mean much if you check out the fine print. They were still weaker than we’d prefer.

So we dragged out the negotiating process a bit, checked with other potential buyers, but nobody else appeared, and that initial burst of activity when a new listing hits was dying down. The home was fairly unique, which also limited our pool of buyers. The seller was firm on their price, so we went with the only buyer we had. In this market, you can be too choosy.

Unfortunately, in these days of ever changing lender requirements, the lender modified the loan requirements during the escrow, if the buyers’ agent is to be believed. (BTW, the buyers’ agent is never to be believed, but there’s only so much a third party can verify. Shoot, even Presidents have been known to lie under oath!)

The buyer really wanted the home, and kept searching for a loan that would work, but after a few weeks we put the home back on the market to see if we could find a stronger buyer. Unfortunately, we were right about the declining market as well as the uniqueness of the home. We couldn’t find another buyer quite as willing to pay top dollar, but after about a month back on the market we did find a buyer who was able to successfully close the sale in less than a month within 2% of the original asking price.

The sellers are now happily moved into their new home and are getting on with their lives in the location that’s right for them. Meanwhile, four of the other six listings on their block have not yet sold, and the other two both eventually sold but for almost 20% below their original asking prices.

Bottom line:

• Sellers today need to be flexible and willing to expend some effort.
• Find an experienced, honest, diligent Realtor (or two) as early as possible.
• Take your agents’ advice very seriously.
• Beware of letting market timing or wishful thinking trump your personal needs.
• Get it right the first time–condition, pricing, staging, marketing & listing agent.

That’s what we think–we’d love to have you add your comments, thoughts, or questions below.

I’ve been going back on forth on the bailout bill since it was introduced, but I just finished a phone call that’s got me jumping onto the pro-bailout bandwagon.

I just got off the phone with an efficient but polite collections representative folks at legendary sub-prime EMC Mortgage. We were discussing a “short sale,” which is anything but short. Basically, it’s the sale of an “upside down” (over encumbered) property where the lender takes a reduced or “short” payoff to enable the sale. The seller is a client of ours, and reflecting on her situation gave me a renewed desire to see at least the core parts of the bill passed.

This borrower is now upside down due to both market declines and negative amortization. A change in her family situation has created major challenges, and there’s no way she’ll be able to make her payment once massive scheduled payment reset kick in down the road.

When she first called me a few months back, I referred her to “Trouble making your mortgage payment? 7 ways to get back on track.” I suggested she review that post, then contact her lender to try to work out a waiver of the negative amortization and reduction of her interest rate. After about two months, EMC told her they weren’t interested.

It seemed like EMC was just too busy dealing with people whose loans had already reset. They didn’t want to deal with borrowers whose reset is still months away. They basically told her they’d talk to her then, but she felt that if they wouldn’t make a commitment to reduce the principal balance and interest rate now, she’d be better off biting the bullet sooner than later.

That’s when we started on the short sale. Despite another short sale listing across the street and a new REO listing a few houses away, we now have a buyer in escrow and are awaiting approval from EMC Mortgage’s loss mitigation department.

Were the Mortgage Relief Bill already in place, I’m pretty sure the owner would have been able to keep her home, we’d have one less listing in a saturated market, and EMC’s loss would be lessened, and the home owner’s equity increased. Pretty much a “win” all the way around.

Under the provisions of the Mortgage Relief Bill, as I understand them, if EMC accepted a write-down of the loan to 97% of current market value, FHA would insure a refinance with at least 3% equity if the borrower actually qualified, which I’m pretty sure would be the case in this situation.

Some people oppose the “bailout” bill because they feel like it rewards greedy lenders and imprudent borrowers. In this case, however, the lender would still have to write down at least $100,000. The homeowner, a hard-working, honest first-time buyer who trusted her lender too much, has lost her original equity and has certainly learned from her mistake.

However, the bigger issue isn’t helping undeserving borrowers & homeowners, but cutting back on the oncoming wave of foreclosures to help our economy by stabilizing home prices and keeping more banks solvent.

Some have suggested that private initiatives could do the same. They might to some extent, but they sure haven’t helped any of the upside down sellers I’ve worked with so far. The truth is, the bailout bill itself is significantly limited in how many homeowners it would help.

From where I sit, on the front lines of the market crash, it sure looks like it will take both private and government assistance to get us out of this hole, or at least keep us falling into one unseen since the Great Depression.

The increase in sales indicates prices have fallen to a reasonably affordable level. But the oncoming wave of foreclosures is apt to drive prices even lower, resulting in even more foreclosures and a spiral downward only compounded by energy, interest, inflation, and manufacturing woes.

We’re all in the same boat, & I’m not in favor of letting it sink just because someone else kicked a hole in the bottom. Sometimes even the “innocent” have to help bail out the boat! Private and government initiatives alike.

I’m not in favor of bailing out anyone who can’t qualify for the new loan. No more “liar loans,” please! If I understand this bailout bill correctly, the FHA would only loan to homeowners who could qualify.

In this specific case, what my seller was trying to negotiate with EMC was similar to what the bailout’s proposing. I’m sure she’d make it work if her principal balance was down to 3% below market instead of $100,000 over market and if she had a fixed FHA loan at say 6.25% instead of an adjustable about to adjust to 13%.

There’s plenty not to like about the govt. bail out, but the basic concept of the lender writing the loan down to a little below market value in return for FHA rewriting the loan if the buyer qualifies should reduce the foreclosure onslaught somewhat. I think the Senate tends to produce better law then the House, and they did some significant changes from Barney Frank’s original bill. They got more of it right than I expected.

We’ve seen a price correction around 25%, which is enough to bring buyers back even in such a negative environment. If it weren’t for all the additional REOs in the pipeline we’d probably be nearing a price bottom, based on current activity.

But the decline of an additional 25% that some people are predicting due to the REO problem would trigger a whole new round of foreclosures–a downward spiral of doom that could be worse than the Great Depression. That would cost FHA and taxpayers more than reducing the flood by guaranteeing some loans to stem the tide somewhat.

To me, it looks like a “pay me now, or pay me later” sort of thing, regardless of whose fault it is.  And there’s plenty of blame to go around, believe me! (see “How we got into this mess“)

“The nation is in the throes of a housing downturn that is shaping up to be the worst in a generation,” according to Harvard’s State of the Nation’s Housing report, released Monday.

“The slump in housing markets has not yet run its full course,” according to Nicolas P. Retsinas, the director of Harvard’s Joint Center for Housing Studies. “Mortgage rates have barely responded to the aggressive easing of the Federal Reserve, the supply of for-sale vacant units continues to grow, and much tighter underwriting is locking many would-be home buyers out of the market.”

This is pretty much old news, but it’s a pretty accurate summary of what’s been going on both nationally and here in Southern California. Looking ahead, Retsinas says, “At some point demand will bounce back. Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability. It is difficult to judge how far away from these conditions we may be.”

We certainly agree with that last statement, as we’ve been saying since last November (see “How low will prices go?“). However, we think the significant drop in Southern California home prices coupled with a moderately strong local economy and lack of overbuilding in the coastal plain may well lead to a recovery beginning in the next 6 to 20 months.

For more details, see Harvard’s press release, for the full report, click HERE.

Remember, real estate is local, and projections for your neighborhood may vary, even if Harvard is correct. To see our latest projections post, check out So Cal home price bottom near?

The Southern California housing news has been coming fast and furious over the last week. May median prices drown dramatically from a year ago and modestly from last month, foreclosures up but maybe peaking, interest rates up, May sales volume the highest since last August but the lowest May since 1995.

The other day the Orange County Register’s front page screamed “Bottom Near?” The vast majority of readers responding to their poll screamed back “No!” by a margin of 3 to 1.

From our perspective, there are several hopeful signs, but we still don’t expect a bottom of prices in most Southern California counties until 2009 at the earliest.

The Good News:

Today’s low prices, down 20% - 35% from the peak in most So Cal communities, continue to attract buyers, despite slowly rising interest rates, high gas prices and rising unemployment. If a home is properly priced, staged, and marketed, we’re still usually able to get it into escrow within 30 days. (See “How to sell your So Cal home for top dollar in 30 days.”) On the other hand, today’s buyers are taking their time and waiting for the home and price that works for them. Plus, with tougher new lending criteria, some buyers aren’t able to obtain financing.

For example, we received multiple offers on our two newest listings within two weeks, but in each case it took us several additional days of negotiating to put the sale together, and part of the difficulties related to finding loans that worked. Another encouraging sign, a Bellflower condo we’ve been watching for some time just went into escrow after sitting for months. No major changes–other than the disappearance of lower priced competition.

Foreclosures in Southern California reached another record high in May. However, in Orange County homes starting the foreclosure process declined from April, so we could be nearing a peak in foreclosures, which is what we’ve been expecting.

The Big Questions:

There are several unknowns which are critical to prices in Southern California bottoming out:

1. The economy: Major job losses would trigger additional foreclosures and distressed sales and could lead us to yet another step down in prices. However, the weaker dollar should prove a boost to U.S. manufacturing. So far, the current recession (if it is a recession) has been relatively mild.

2. Interest rates: Mortgage rates have been moving up slowly but steadily for months. 30 year conforming fixed loans are now at 6.3%, up from 6.2% a week ago. Anything below 7% is historically low, but as rates rise so do payments.

3. Mortgage lending: Since last summer lending practices have gone from ridiculously loose (see “How we got into this mess“) to to overly stringent. Hopefully the pendulum will swing back to reasonable lending standards which will allow more buyers to qualify. If not, the current boomlet could run out of buyers and steam fairly soon.

Our Take:

We still agree with Freddie Mac’s Chief Economist Frank Northaft’s words at last fall’s California Realtor Expo: “We’re in totally uncharted territory. Nobody knows for sure what’s ahead.” (See “How low will prices go?“)

But we still love to at least take educated guesses. Although we still think the odds are that we’ll hit a price bottom early in 2010, we think the rapid decline in prices may lead to a bottom this coming winter instead. Overall, things don’t seem quite as gloomy as they did several months ago. Especially encouraging is the continuation of buying despite rising rates and the end of the traditional spring buying season.

What to Do?

We still think for most people their personal situation should dictate their real estate decisions (see”What to do when nobody knows what’s next“).

Buyers: The market may not be at a bottom, but it’s closer to one than it was a year ago. We think this coming December will be an excellent time to buy, but most people are just too busy with the holidays to even think about house hunting then. Which is why December’s almost always the best month to buy. No need to hurry, but if you find a home and a loan that work for you & you’ll be staying put for a long time and have good job security, maybe you should pull the trigger & start paying down that 30 year mortgage.

Sellers: If you need to sell this year, sooner’s better than later. Next year’s a dice roll, and prices may not be back to today’s level for several years. If you like to gamble, hold on for “as long as it takes,” but if you want to get on with your life, the market’s decent right now, but seasonal declines will probably be setting in soon. (See “Predictions 101: Our 2 market cycles“)

The one thing you shouldn’t do is make your decisions based on what your neighbor got a year or two ago. He won the lottery–you didn’t. At least not as big a prize as he got. But if you bought more than five years ago, you’re still in good shape.

“Upside Down Home Owners:” If you can make the payments & don’t need to move & the loan won’t have a major uptick soon, you can probably ride this thing out. But if you’re going down, it’s time to talk to your lender about serious loan modifications. For more, check out our post on “Trouble making your mortgage payment? 7 ways to get back on track.”

These are challenging times, but they are not bad times. If you need a little help putting things in perspective, click on “perspective” in the column to the right under “Categories” (you’ll need to scroll up from here).

As always, your comments are welcome. Stay tuned for more updates. And thanks for stopping by.

Blair and I have both worked for the same owners our entire careers: Bruce Mulhearn owns the firm, while Clint Roe owns & manages our office. Both were experienced brokers back when I first got my license in 1980.

Bruce and I have climbed Mt. Whitney & skied Mammoth together, usually competing against each other all the way. He’s an enthusiastic optimist, as are most successful entrepreneurs.

Bruce mails out an upbeat letter to all 800+ of his agents about twice a month. This week’s letter is entitled “A Proper Perspective–Past, Present, and Future.” Please understand–we’re not changing our basic market predictions (see “How low will prices go?“). However, we do think Bruce helps put the current downturn in perspective. Here are some excerpts:

The current financial morass is painful; however, it would be wrong to rank it with many of the past 100 years. The problem is we have a cultural rut of pessimism, according to Zachary Karabell of The Wall Street Journal. It drains our collective energy, blinds us to possibilities, and erodes our world leadership.

Consider our current situation:

1. Unemployment: 5%
2. Inflation: 4%
3. Economic Growth: 0.6%
4. Housing has delcined primarily in four states–by approximately 20% We conveniently forget that in these states property values increased over 100% in the previous five years.

Hardly statistics to celebrate, but a far cry from the real crises of the 20th Century.

Consider the Great Depression:

1. From 1929 to 1932 the Dow went from 380.33 to 41.22–a decline of 89%.
2. By 1933 unemployment was 24.9%; after seven years of the New Deal it was still 14.6%
3. 4,000 banks failed in 1933.
4. Not only did millions lose their homes, most of them became homeless and lined up at soup kitchens.

Or compare our current situation to the ’70s and ’80s:

1. 1977 unemployment 8.5%. 1982: almost 10%.
2. From 1973 to 1974 stocks dropped 46%, from 1067 to 560.
3. 14% inflation under Jimmy Carter, with odd & even days to line up for blocks to buy gas–at a higher percentage of consumer spending than today.
4. In 1979 I had over 20 offices and 500 agents; by 1982 I was down to 6 offices with 125 agents–but we survived.

Dave here, interrupting Bruce for a few paragraphs with an “Amen!” This market really isn’t all that bad, at least in terms of sales volume. The slowest market I ever say was in 1990 - 91 during the build-up to George H. W. Bush’s first Iraq war. For months there were virtually no buyers. I took listings off the market.

The Southern California defense bust housing crash of 1991-1995 was also much worse than today’s market, in terms of a slowdown in sales, but not in price declines. I remember a story told back then by Century 21’s CE0: When he flew in to Honolulu for a statewide C-21 rally back then, he was greeted by hundreds of cheering, shouting, horn-tooting, confetti-throwing, gold-coated C-21 agents. In the midst of all the hoopla, he heard a passing businessman remark, “Guess they finally found a buyer.” True story!

Today’s just not that bad! The last listing we took, which went on the M.L.S. just 3 business days ago, had two competing offers within 24 hours, although Blair was still negotiating both of them last time I checked (5803Hayter.com). Likewise, although it took a couple weeks, the listing we took prior to that one also had competing offers, despite being one of those troublesome short sales (AdwenStreet.com). While the strategies we discuss in “How to sell your So Cal home for top dollar in 30 days” will work in almost any market, they work better when more buyers are out there, and that’s the case right now. Now back to Bruce Mulhearn’s thoughts:

There were also tough times during the tech blowout at the end of the century.

Tech stocks dropped from 5,000 to below 2,000. Teal estate has never had that kind of downside. But there was also an upside due to technology, which led to invaluable innovation and welath creation in the USA and around the world. Hundreds of thousands became wealthy.

America has always been marveled at and envied. I believe that 95% of the world still wants to live here. At the start of the 20th Century Britain’s ambassador to the U.S., Lord Bryce, remarked about “the hopefulness of American’s people.”

While there may be strength in America’s self-criticism 100 years later, there is a fine line between self-criticism and defeatism. We need to snap out of our deep pessimism. Our fears put us at a disadvantage in today’s world.

I’ve been to both China and Dubai, where you can feel electricity in the air–the hum of activity, ambition, and sheer optimism about the future. It’s both a strength and a source of energy, even though the Chinese stock market was down almost 50% in the past months, and there have been severe real estate crashes in both Shanghai and the Persian Gulf.

We have a choice in life. We can view our circumstances through grime-encrusted lenses, or with more flexibility about our so-called weaknesses. I’m not suggesting rose-colored glasses, but a need to break this downward spiral. Let’s not have the world declare, “What happened to the American Spirit?”

There are some amazing opportunities for buyers right now. Two of them, “short sales,” and REOs, also involve some amazing incompetance by the same lenders that helped get us into this mess. (see “How we got into this mess“)

We saw both at work today at two homes about 100 yards apart in Downey.

Amazing opportunities for buyers:

This morning my colleague Blair and I were shooting a virtual tour for a new “short sale” listing we have (you can check out some of it at AdwenStreet.com). A “short sale,” which is anything but short, is a sale in which the lender takes a “short” or reduced payoff to facilitate a sale. The last one we closed, in Lakewood, saw the lender reducing their demand by well over $100,000.

Short sales present some unique opportunities for buyers who aren’t in a hurry if their agents are willing to do twice the work for a reduced commission. The downside is often a month or more of waiting to see if the seller’s lender will accept your terms. As part of the process, your agent generally has to agree to reduce his commission.

As a result, lots of agents and buyers just skip over short sales. But deals can be had for the patient. For example, at $347,777 our listing is currently the best priced home in the MLS in Downey, it’s in a good location, has a nice recently remodeled kitchen and big family room. The home across the street, also a short sale, just went into escrow at a record low price–but we’re now lower than they were.

As we were driving off, we noticed an open house being set up at a new “Bank Foreclosure” listing that isn’t even in the M.L.S. yet. Stopping in we discovered a home that was priced at $300,000–$50,000 below the two formerly lowest priced listings down the street.

When I got back to my home office, I checked the public records to see what similar homes were selling for when the market peaked. I found four comparable homes in the same neighborhood that sold in the summer of 2006 or early 2007 for about $650,000.

That represents a decline in prices of over 50%!

Now the foreclosed home needs a good cleaning and some yardwork. It’s back yard seemed small, and the floorplan a bit choppy. But it’s got three bedrooms and a bath and a half in a decent neighborhood that’s close to L.A., LAX, and the OC for $300,000!

I think the REO is priced below market, and will sell pretty fast, possibly above list. Still, it represents an excellent opportunity for someone who can act fast.

Because most agents don’t want to hassle with the double negotiations and pay cuts of a short sale, it may actually represent a better value for someone willing to come in with a low offer and wait a month or two. It’s in much better condition, has lots of upgrades, and has twice the garage & twice the back yard of the short sale.

What struck me, however, is that this is a market where the qualified buyer who can put together at least a 3% down payment rules. When the market does bottom, qualified buyers who wait on the sidelines for the market to drop further risk competing not just with the thousands on the sideline like them, but also with thousands more who currently don’t qualify but eventually will as lenders again relax their standards from the current overreaction to the market downturn.

Continuing lender incompetence:

The flip side of this good news for buyers is some bad news for homeowners and the economy in general, made worse by the continuing incompetence of too many lenders.

The owner of our new short sale listing called us a couple months ago to discuss her options. I referreed her to our post for upside down and troubled borrowers, “Trouble making your mortgage payment? 7 ways to get back on track.”

The family’s situation had changed since they refinanced, and she knew it would be impossible to continue making the payments once her mortgage reset. I suggested as a first step, and to avoid selling, that she try to negotiate with her lender for a reduction in both interest rate and principal.

Unfortunately, her loan was with well known subprime lender EMC, a subsidiary of Bear Stearns. They took 45 days to tell her they wouldn’t do anything until the actual reset hits in about a year. Kind of like a bank robber asking you to trust him. Pretty much left her no alternative to the short sale.

The REO was even worse. Foreclosed by GMAC mortgage, the home was listed about $20,000 too low, the agent didn’t even count the bathrooms right (missed a half bath!), & a $100 cleaning would raise the value even more. Besides missing a bathroom, the black and white flyer didn’t even have a price on it. And the agent was holding it open before even bothering to put it into the M.L.S., a typical tactic of unethical agents to shaft the seller in order to “double end” the listing by picking up the buyer. Typical of so many lenders that stick with a handful of often lazy out-of-area agents rather than take the time to find an honest, competent local agent–and there are plenty of them with time on their hands right now!

Two examples of how lenders are making things worse for themselves and homeowners everywhere because their loss mitigators and asset managers just aren’t doing their jobs. Sometimes it’s because they’re overworked, but there are plenty of underemployed Realtors and loan agents and processors out there they could easily hire & train.

Info for those thinking about buying:

If you’d like more info on either of these homes, or just want further information, you can call me (Dave Emerson) at 562.822.7653 or e-mail me at RealtorDaveE at msn dot com. (I wrote out the @ and the . to avoid spamming bots.)

Please understand: we think the absolute bottom’s still ahead, due to all the foreclosures just entering the pipeline (see “Oh-oh! We just passed a nationwide bottom!“)

But we also think nobody knows for sure what the future holds. (See “How low will prices go?“).

And we think that for many of us, there are more important things in life than market timing. (See “What to do when nobody knows what’s next.”)

When you can get a 50% discount, it may be time to think about buying.

Coming soon:

Thanks for stopping by. Please check back from time to time–we try to post our “news and perspectives from the SoCal real estate front lines” at least 3 to 5 times each week. On Monday we’re planning “A Tale of Three Closings” chronicling a “flip” gone bad, a seller gone mad, and today’s escrow problems on three homes that just closed escrow on the same Lakewood block.

It’s been pretty clear for a while that, in Orange County and Los Angeles County, at least, we passed the bottom for sales activity this past winter.  (”What’s next for Southern California housing?“)

It’s also growing increasingly clear that the bottom for prices is still ahead of us.  (See “Snapshot from the front lines: One bottom, maybe two.”)

But there’s another “bottom” that also recently passed us by.  Unfortunately, that’s the bottom for long term interest rates.

While watching the Dodgers beat the Angels in 100 degree heat on Saturday, Blair and I were discussing some mutual friends he was about to open an escrow with.  They were young teachers (like both Blair and I were once), and wanted to take advantage of some special first time buyer financing that was about to phase out.  Blair had placed another couple in a similar loan about a month earlier, and he remarked how the fixed interest rate on that program had gone up almost 1% in that month.

Now I’ve been aware that long term rates are going up, and warning about the consequences, but it really hit me between the eyes as I was filling up my 12 gallon Element’s tank at Costco yesterday morning:   The roaring return of inflation means long term interest rates aren’t likely to come back down any time soon.

Somewhat like sales volume and prices (see “Predictions 101: Our 2 market cycles“), mortgage interest rates tend to go down in the winter and up in the spring, possibly for the same reasons.  But this spring’s increase in rates is now accelerating due to the return of inflation, especially oil-related inflation.

The main causes of those oil price increases ?

1. Increasing oil demands from China, India, and the developing world.
2. The decline in the U.S. dollar’s value.

Reason #1 is cited as the main cause, and all the evidence is that so far we’re just seeing the tip of the iceberg as young industrial giants continue to grow.  U.S. oil usage is now just an ever-decreasing fraction of usage in these growing new economies.  That’s why we can expect fuel and other commodity inflation to only increase for the immediate and possibly long term.

Reason  #2 was largely caused by the Fed’s cuts in U.S. interest rates.  That further restricts the rate-cutting they’re able to undertake.  More significantly, the Fed only controls short-term rates; long term rates are determined by market conditions.  Those long term rates frequently move in the opposite direction when the fed makes cuts in short term rates.

Bottom line:  Long term mortgage and interest rates will continue rising for most of this year, although they may dip modestly next winter.  Only the onset of a very major recession is likely to reverse the upward trend.

That dramatically affects the cost of housing.  With the mythical 20% down on a $500,000 median OC home, the principal and interest payment on a 30 year fixed loan @ 6% is just under $2,400.  @7% that same loan payment rises over 10% to $2661.

In my 30 years of working with buyers, I’ve found that most view cost in terms of down payment and loan payment more than in terms of sales price.  To bring the loan payment in our example back down to $2,400 the loan amount would have to drop almost 10%.   That’s a 9% price drop if you allow for the reduced down payment to be added to the loan.

At this point most economists think the continuing flood of homes entering the foreclosure process in Orange County, Long Beach, and Los Angeles County ensure continuing price declines throughout the region (see “So Cal April Foreclosure Data Just In“).  Are you ready for another 10% decline on top of that?  Add that to ripple effects of the economic decline that may be just beginning, and the scenario gets downright scary.

Recommendations?

Market timing is nice, but you need to give primary consideration to your personal situation.  (See “What to do when nobody knows what’s next.”)  We believe it’s time to think of a house primarily as a home and primarily as a piggy bank or investment.

Potential Selllers: Before you panic, remember the words of Frank Nothaft, chief economist at Freddie Mac to last fall’s California Realtors’ Expo 2007, 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.”  (See “How low will prices go?“)   Actions cause reactions, and nobody really knows how all this will unwind.  All we really know is that more surprises lie ahead.

That said, I just got off the phone with Blair trying to figure out a way to move up the time frame for getting a couple of our new listings onto the market.  We believe any seller who needs to sell in the next year or two should give very serious consideration to getting their home on the market now.

It’s still possible to sell for top dollar in 30 days.  (See “How to sell your So Cal home for top dollar in 30 days.”)   But you need an experienced, honest, diligent and competent agent who’ll tell you the truth, not what you want to hear (see ” Top 5 ways NOT to pick an agent“).   (BTW, my cell is 562.822. 7653.  If we can’t service your area, there’s a good chance we know or can find a good agent who can.)

Overencumbered (”upside down”) sellers: You have several options:  See “Trouble making your mortgage payment?  7 ways to get back on track” for starters.  There are tax breaks for sellers being foreclosed and participating in “short sales,” where the lender takes a discounted payoff so you can close escrow.   But as things stand now you won’t get those breaks if you close escrow after the end of the year.  Same if the trustee’s sale’s in 2009.  That may get extended, but I wouldn’t bet on it.  Again, we’re only a phone call or a “comment” away if you want to discuss your situation.

Potential buyers: Prices coming down as rates go up doesn’t really help with your payment.
We recently wrote a post discussing specific buyers who might benefit from buying in the current market (see “Time to buy?“).  Move-down and move-out buyers, among others, might find real benefits right now.

If you’re not yet in a position to buy, take advantage of the time you’ve probably got to get ready.  That means saving a down payment or at least closing costs, working on your credit score.  (Try annualcreditreport.com, a free service of the credit reporting firms.  Don’t use freecreditreport.com, which isn’t really as free as it sounds.)

Winter’s usually best for market timing if you’re a buyer. This year, lots of lenders will be trying to close sales by year’s end.  By fall we’ll have a better idea of if the bottom’s likely to be this winter, next, or later, so “stay tuned.”  An RSS feed’s not a bad idea, my 16 year old says it’s easy to do from this blog–if you don’t understand that, ask your kid.  If you do, maybe you can post a comment & explain it before I can get Nate to do so.  (Finals and all coming up.)

Perspective:

Every market presents challenges and opportunities.  These are times when you need experienced, informed, honest professionals to help you make the best decisions.  They are out there, hidden among the pretenders.  Hopefully we’ll have a post up soon on how to spot them.  In the meantime, you can check out “Top 10 ways NOT to pick a real estate agent,” or give me a call (562.822.SOLD).

The challenges we face in today’s market, while serious, are nothing compared to what thousands are facing right now in Burma and China.  Or thousands more in America who, like Ted Kennedy face serious diseases.

For an inspiring story from the pages of the OC Register about a handicapped young man overcoming challenges, you might want to check out “A little perspective.”   I also appreciate my pastor’s reflections on the classic Biblical book of Job.