So Cal Real Estate News

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Default Research, Inc. just released their April foreclosure data for most California counties, and the news is not good. In some ways, however, it may not be all that bad, either.

DRI reports primarily Notices of Defaults, which usually occur 4 - 6 months before the actual foreclosure auction is held on the courthouse steps or some other public venue. It can take 2 - 6 additional months after the auction for the bank to bring the property to market. While not all notices of default result in the home actually being foreclosed, the trend is an excellent forward-looking indicator.

In most Southern California counties, DRI’s numbers set new records for this millennium. Orange County, which hasn’t been hit as badly as it’s neighbors, had the worst monthly So Cal increase this April, up 20% from March, and 280% from April 2007. San Diego County, which entered the foreclosure cycle much earlier than Orange county, was still up 18% from March and 187% from a year earlier.

In the Inland Empire, year over year numbers were terrible, but month over month increases were minuscule, at least in Riverside County. There N.O.D.s were up just a half of a percent from March, but a whopping 450% from 4/07, a possible indication a bottom may be nearing there. San Bernardino County was up 475% from April 2007, and also up 12% from March.

As of this writing, Los Angeles County’s numbers were not yet in, but you can check back later by clicking this link to DRI.

What’s it mean? Well, as we’re fond of saying, there are so many variables nobody can say for certain what’s ahead, but that doesn’t stop us from making our best projection.

While the increases were larger than we expected in some areas, this tends to confirm yesterday’s post: We think we’ve passed the bottom for sales in most of Southern California, but not for price (See “Snapshot from the front lines: One bottom, maybe two,” where we have more specifics listed).

The good news may be that such rapid increases in foreclosures combined with the year’s rapid drops in prices may get us through this correction faster than originally projected. We certainly are seeing increased buyer activity.

The question is, how long will it last–especially with interest rates creeping up.

Stay tuned.

Foreclosures are up, sales are up, closings are tougher, and rental vacancies are down.  And one of the smartest investors I know is making offers again, even as he puts his own home on the market.

That’s what we’re seeing from both sides of the Los Angeles County and Orange County lines.

Total Southern California homes available for sale, from Santa Barbara to San Diego, stands at about 163,500, which is down about 3% from the 169,000 we peaked at about three months ago. In less built-out Orange County, inventory is down more dramatically.

David Haas, our favorite local property manager says his vacancies have declined, largely due to an influx of former homeowners vacating after foreclosure and/or short sale.

The managing partner at the real estate office we work out of reports new escrows for April were the best in about nine months, before the subprime crisis. April’s numbers were modestly better than February’s, with March serving as a trough in between. This is actually fairly typical in real estate–many agents tend to get one or two deals into escrow, then focus on closing them before opening new escrows.

However, escrows remain difficult to close, for several reasons. The reason you hear about most has to do with the difficulty qualifying for a loan, and who can blame lenders for tightening up, given their current onslaught of foreclosures. Of course, sub-prime loans have pretty much dryed up, and most lenders are looking for at least 10% down and good FICO scores for no-verification loans. In problem areas with lots of foreclosures, FHA is requiring 5% down, rather than the traditional 3%.

Some escrows are harder to close because they’re “short sales,” where the current lender must accept a discounted, or “short” payoff in order to facilitate a sale and avoid foreclosure. It’s not uncommon for these to fall out of escrow, either due to the lender refusing to accept the discount, making unreasonable demnads, or just taking too long to respond.

However, enough sales are falling out right now that we’re starting to put in “back up” offers on occasion.

As discussed in our prior post, DataQuick’s latest Orange County medians indicate a modest increase in prices as well.

What’s it all mean? Well, the increase in pending sales & prices is pretty typical for springtime (see “Predictions 101: SoCal’s 2 market cycles“), so that doesn’t prove anything in itself.

However, with the ever increasing number of foreclosed homes hitting the market, stabilization in prices is a good thing.

Have we hit a bottom? In number of sales, we’re pretty sure we have. In price, we’re not so sure. The dramatic and rapid decline in home values is bringing buyers back into the market, but continuing foreclosures are keeping the inventory high. As we move into fall and winter, the number of buyers normally decreases, but most indicators are that foreclosures will continue strong through November at least (See “SoCal defaults up: What it means“).

Two key factors are mortgage interest rates and the economy. Were rates to decline, that could bring in more buyers, but long term rates are slowly moving up. Rising inflation will probably continue that trend, at least over the short term.

As for the economy, it’s hard to say, but interest rates and economic indicators move in opposite directions, so there’s some automatic self-correction there. If the economy continues to falter, longer term rates are apt to decline. If the economy starts picking up steam rates will go up. Probably a wash over all, although a return to “stagflation” (stagnant economy with inflation), a possible worst-case scenario, can’t be ruled out.

Ironically, a return of inflation would eventually push home values higher, but would push them down short term.

There are still so many variables, we’re not ready yet to depart from our mantra, “We’re in unprecedented territory, and nobody can really know what’s ahead.”  (See “How low will prices go?“)

Here are the things we’re relatively confident of:

• Long term interest rates will continue to climb slowly for the time being.
• There’s still time for potential buyers to begin saving a down payment, but they do need to start now.
• So Cal homes are unlikely to return to their peak prices in this decade.
• If you buy a home with a 15-year fixed mortgage and do not refinance or add a HELOC or 2nd, you will own it free and clear in 15 years.
• Most of us aren’t as smart as we think we are, so if a home you like makes sense  for you with a fixed loan, and you’re not planning on moving soon, you should seriously consider buying.  We probably aren’t at the bottom, but we may be close, and nobody will know for sure until a few years after it’s passed.
• By the same token, it makes no sense to hold off on selling until you can get the ridiculous price your neighbor got at the insane peak.  If you can do most of what you want to with what your home will net today, go for it–NOW.    The next month or two might be your best opportunity for a while.
• By the same token

Friday update: The DataQuick OC median numbers discussed below came in this morning, and my predictions yesterday (see post below) came out real close to the actual numbers. Wish I could say the same for my predictions for the Duck in the playoffs. Oh well.

The interesting news is that in every category, DQs actual numbers were stronger than I predicted. What’s that mean? Read on. . . .

OK, here’s my call for tomorrow’s “DataSlow” OC house sales update, which I should be for the 4 weeks ended about 4/21. (We’re still a week away from “DataQuick’s April Median numbers, one of the “Two problems with DataQuick’s median prices.”)

Sales (closings) will be up a decent amount from the prior 4-week period but way down from the year before. Right around 1900 total, off about 40% y-t-y. Continued gradual improvement, typical for deals going into escrow in February.

BTW, April closings, when they get released around 5/15, will be up about the normal amount from the very low March closings (but way below last year). It looks like May will do even better on sales.

Price is another matter. Especially median price. Down a small tad below 20% from a year ago, and up a small tad from the last DQ reported median of $506,000. Maybe $508,000.

However, if you look the details, like in the last report, I think you’ll see the new construction pulling down the overall index with both prices and sales down more than for resales. Resale SFRs and even condos aren’t doing as badly as new construction.

What it means is subject to interpretation. I think if long term mortgage rates (not to be confused with short term fed funds rates) started coming down further, we might have passed the bottom, especially with the activity Steve Thomas and I both are seeing in new escrows.

However, rates are already moving up, and instead of passing fiscal restraint issues to push long term rates down, our beloved Congress continues to try to borrow their way out of this mess with massive bailouts from Bear Stearns to folks who lied to get loans on home they never should have bought or refinanced.

With the interest we’re seeing from buyers, I really think if Congress passed long term fiscal reform, we could put the worst behind us. Things like a line item veto for the next president, cancellation of earmarks, a gradual move to a balanced budget with mandatory across the board cuts and tax increases to force discipline on our free borrowing legislators.

That would be a real mortgage relief bill!

I’ll post links to DQs numbers when they’re available, & you can see how we did.

I’d also like to get a more detailed post up about our thoughts about real mortgage relief. Trouble is, I’ve got to get to work on my real job so I can pay my mortgage. Because I really don’t want Barney Frank forcing my grandkids to eventually pay it for me.

Friday 5/9 postscript: DQs actual numbers (click here for OC Register blogger Jon Lansner’s  DQ graphs & comments for today) indicate even greater strengthening than I expected. Still having some optimism left in my troubled soul, I’d like to hope this means we really have reached a bottom.

In fact, I’ll go so far as to say that if long-term mortgage rates dropped 1% instead of continuing to go up, and if lenders adopted more reasonable underwriting standards, I’m pretty sure we could call last winter as the bottom for both prices and sales.

But I doubt either of those will happen soon. Instead, I think rising mortgage rates (not to be confused with the fed’s overnight, short-term rate) will combine with continuing over-reaction by investors and lenders with tougher than necessary standards to cut this party short. The large pool of homes entering foreclosure is also a negative indicator.

It looks to me like we have passed the bottom in terms of sales activity, but the bottom in terms of price probably (or should I say “maybe?”) still lies ahead this coming winter or next.

DataSlow’s lagging and confusing median prices will continue to improve for another 2 - 5 months, but we’ll see price month-over-month price declines kick in later this year, even as the year-over-year percentage drops decrease.

Overall, I’m beginning to become more optimistic, and am willing to admit that the bottom may, indeed, be past. But only if mortgage rates come back down, which I really don’t see happening.

Bottom line: We’re not deviating from our November post, “How low will prices go?” Nobody can really know what’s next.

One of the many unknowns in the current real estate market/meltdown/crisis/challenge (take your pick) is what the government can and will do to get us out of the mess they helped get us into (see “How we got into this mess“).

Monday night  Fed Chairman Ben Bernanke, speaking at Columbi’a Business School, pushed Congress to act for the sake of us all:

High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.

We think he’s right on the money on that one.    (For the APs report on the speech, click here.)

The challenge is how to correct the problem without bankrupting us all.

On the one hand, there are probably well over a million homeowners who now owe significantly more on their mortgage than their home is worth.  On the other hand, as Tevye would say, there are also no doubt tens of millions of Americans who owe significantly more on their car loan than their car is worth.

Do we really want to set a precedent that the government will bail people out of their own stupid decisions?  Nobody held a gun to anyone’s head to buy a home.  Most of them signed disclosure documents detailing out their loan’s ridiculous terms somewhere in the fine print.

But I know a rocket scientist (literally) that signed those documents and ended up over $100,000 upside down with an obscene payment.  Yes, he “trusted” his real estate agent/lender (bad sign!), who promised she’d get them a refi out of the loan (oops, guess she forgot to mention the prepayment penalty let alone the potential for decline in value).

I also have heard of lenders who had full time “signers” who supplied signatures on behalf of their borrowers for those subprime loans, whether their borrowers knew it or not.  (Now that I think of it, I don’t recall signing loan docs on some refi loans my wife & I did a while back.  Hmmm.)  Oh, did I mention that those disclosure documents were written in a language many of the borrowers didn’t speak (English)?

Bernanke’s taking a different approach.  Something like “we’re all in this boat together, and if we don’t start bailing these people out, we’ll all sink together.”  And he may be right.

Most commentators take this as a direct push from Bernanke for something akin to Rep. Barney Frank’s proposal for broad based foreclosure relief, which would include write-downs of the principal balance for some upside-down homeowners.  (For interesting details on Frank’s bill & the Bernanke connection, check out this post from TheHill.com).

How this all works could get messy, or it could help us all move on.  Or it could sink us all.  Action-reaction.  Unintended consequences.  Like the Fed dropping short term rates so low the dollar drops and inflation picks up & long-term rates (including fixed mortgages) go up.  That just happened.

Or, as my friend in Tennessee, Vince Thrasher, would say, “Hey, ‘The Fed dropping short term rates so low the dollar drops and inflation picks up & long-term rates (including fixed mortgages) go up’ just happened!”

Kind of like the fed dropping interest rates to save the economy after 9/11 and creating a housing bubble.  Yeah, that just happened, too, although Ben wasn’t driving the bus into the ditch back then.

Maybe it’s just time to let things just run their course.  It’s beginning to look like the longer the government tries to put off or minimize a downturn, the worse it becomes.

I’m still hoping an orderly debate may produce a moderate middle course that will at least partially mitigate some of the damage as we move forward.

We’re also advising our sellers to take advantage of the current spring mini-surge if they want to take the most conservative course of action.  And we’re advising our buyers to be patient, negotiate aggressively, and be sure to lock in a 30 year fixed loan they can live with on a home they won’t have to sell any time soon.

Just more evidence that what we said last November is still true:  We’re in uncharted territory, and nobody knows what’s ahead (see “How low will prices go?“)

Or, as Bernanke said last night, in our favorite quote, “A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue.”

Actually, they should have developed those new strategies a year or two ago.  Instead of the new and flexible subprime lending strategies they were working on.

As my mom would say, “Better late than never.”  If Bernanke’s concerned, maybe we should be too.

Real estate news is coming fast and furious! I take a weekend off from blogging for Barb’s birthday, & suddenly I’m hammered.

Several interesting items popped up over the last few days I found fascinating. In this post we’ll focus on the our own beloved California Association of Realtor’s headline-grabbing announcement that median prices are expected to drop 24% this year.  (Later, a look at remarks by the Fed’s Bernanke last night.)

It happened at the Disneyland hotel where our own Pacific West Board of Realtors was holding it’s spring “expo” and pep rally on Friday. Sadly, and ironically, as we local Realtors were meeting, a businessman decided to end it all by jumping from one of the hotel’s towers. Shades of the Great Depression. It is my understanding he was not a Realtor, surprisingly.

But some Realtors probably thought about joining him after they heard from CAR’s Deputy Chief Economist, Robert Kleinhenz, who revised the Association’s 2008 forecast for median home prices statewide. In March, CAR predicted a 9.5% drop for the year. Kleinhenz almost tripled that 9.5%, to a 24% drop. No wonder his boss, California Association of Realtor’s Chief Economist Leslie Appleton-Young, asked him to give the speech. (Leslie was the one out with 9.5% for the year in March, doubling her 4.5% October figure, which we thought was too conservative. Looks like when she ran the numbers again late in April, she just handed the sheet to poor Bob Kleinhenz on her way out the door to advise some poor businessman staying elsewhere in the hotel.)

But wait a minute–that may not be as bad as it seems. Dataquick’s most recent statewide median prices showed a 26% price drop for March 2008 from March 2007, which was when Dataquick’s price median peaked. Dataquick indicated “about half” of that drop was due to a shift in the market to more sales of lower priced homes. (For a detailed post on the problems with Dataquick’s median numbers, check out “Two big problems with DataQuick’s median prices.”)

So if you read between the lines, Kleinhenz, who apparently is playing “bad cop” to the missing Leslie Appleton-Young’s “good cop,” is implying that the worst is behind us. 2007 ended with CAR reporting a statewide median for Single Family homes of $476,000, and their latest number, for March 2008 is down to $414,000! (Click here for CAR’s press release on their March numbers) . That’s actually lower than the $424,000 median average for the year they’re now predicting.

As a 28 year CAR member, I picked up the phone to talk to old Bob himself, but discovered he was in Sacramento giving another speech today. Something about a statewide tour sponsored by Pierce Brothers Mortuary.

In any case, his capable associate, Oscar Wei was available to assist me, and he confirmed my suspicion that CAR now thinks the worst is behind us: “Hopefully, and that’s a lot of hope, things should be bottoming out soon in terms of price,” he told me.

That agrees with Oscar’s bosses comments last Friday at the resort formerly known as “The Happiest Place on Earth: “We do think this is the year we’re going to see our low point for sales. … Monthly sales have already bottomed out.” Also “All these numbers are going to stabilize and slightly improve. … We’re basically climbing above the liquidity crunch to pre-liquidity numbers.”

Well, I may be paying Bob & Oscar’s salaries, but I’m not quite ready to eat their breadsticks. With homes entering foreclosure still increasing (see “So Cal defaults up again“), and the liquidity problem far from solved, Blair and I are still expecting additional declines in values and sales as we move through fall and winter (See “Predictions 101: Our 2 market cycles“).

That doesn’t mean now may not be a good time to buy if you’re in a position to do so.  Shoot, Bob & Oscar could well be right, and Dave & Blair wrong.  Well, Blair anyway.  In fact, we continue to believe that if you find a home you love at a payment you can live with on a 30 year fixed loan, and you don’t intend to move any time soon, at least write an offer on it.

But if you’re not yet in a position to buy, there’s no need to panic.  While sellers may be less motivated as prices firm, we’re not going to see double digit appreciation any time soon.  And there’s a good chance the bottom may still be a year or two away.

But nobody knows for sure, as we keep saying, much to the annoyance of some of our gentle readers.  (See “How low will prices go?”

That’s what makes So Cal Real Estate so interesting.

What do you think’s next?

A week ago I told L.A. Times real estate reporter Peter Hong that much of a Realtor’s job in this market involves delivering bad news to homeowners. Pretty much the opposite of three years ago.

“You go from being like a doctor who delivers babies,” in a booming real estate market, I said, “to being an oncologist, just giving people bad news all day long.” (”Foreclosure glut further depresses housing prices“) Shoot the messenger time. Or keep dialing until the seller finds an agent who tells her what she wants to hear. (See #1 in “5 ways NOT to pick an agent.”)

Well, today brought more bad news for homeowners.

But that’s just one side of the coin. Unlike our 1980-82 housing bust, where mortgage rates topping at 16% were bad news for BOTH sellers and buyers, today’s bad news for sellers is good news for buyers.

Which can turn it into good news for some sellers who might also be buyers, and several other types of buyers:

First, this could be an excellent time to buy for “move out” sellers who are headed to more overbuilt areas like the Inland Empire, Vegas, Texas, or the Central Valley. That’s because prices there have generally dropped more than prices in Southern California’s coastal plain.

Such a “move out” seller can get her current home in escrow, then take her time looking in that outlying area, as prices continue to decline. There are plenty of homes to choose from, and lots of motivated sellers out there.

Folks who are willing to sacrifice a little temporary inconvenience for a lot of greenbacks & that elusive “perfect” home should consider renting in their new community while they continue to look. A buyer with cash in hand is in the best negotiating position, too. This move also lets you take advantage of the annual real estate market cycle (See “Market Predictions 101: Our 2 real estate market cycles“.

Second, the time may also be right for “Move Down” sellers, especially those looking to buy a condo. Since we’ve had a glut of condo building through much of our area, even coastal plain condos are experiencing rapidly declining values and lots of foreclosures.

The same goes for the more modest “starter” single family homes, which turn over more often and have more subprime loans and foreclosures. These aren’t just “blue collar” communities like Stanton or North Long Beach, but also communities like Lakewood, Cypress or even parts of Mission Viejo, which include large tracts originally build for first time buyers.

Third, this might be the right time to buy for people who are ready to settle into their dream home now. Specifically:

1. Buyers who will be living in this home for many years, and
2. Who have good credit, a down payment, and
3. Are tired of renting and are ready for the joys and trials of home ownership, and
4. Would like to start the 15 - 30 year process of paying off a mortgage so they can retire, and
5. Could use two of the three last great tax write-offs (mortgage interest, property tax, and donations), and
6. Are able to locate and negotiate an acceptable price on their “dream home.”

These buyers also might want to nail down the kids new school for next year. Maybe they’ve figured out that they want to enjoy their “dream home” while their kids are still at home. Maybe they’re concerned about interest rates going up. Maybe they know they’ve got busier times ahead & now’s the best time to look for a home & fix it up the way they want.

Maybe they know what we’ve been saying since last November: Nobody knows for sure what’s ahead. (See “How low will prices go?“)

Forth, this may well be an excellent time to buy for those whose personal situation suggests it. Someone who’s relocating into California, whether for work, family, or retirement. Someone who desperately needs a tax break. There are lots of different scenarios where personal situation trumps market speculation.

Some people would prefer to gamble with their stocks or in Vegas but not with home ownership. We believe there are plenty of things far more important than money (See “What to do when nobody knows what’s next,” “A little perspective,” and “A little more perspective.”)

Fifth, this might be a great time for buyers who appreciate the security of buying before or near the bottom.

Prices are already down 20% or more in many Southern California neighborhoods, interest rates are low, especially with inflation looming, and some special jumbo loan programs will be expiring soon. Why not take advantage of it?

Truth is, the best time to negotiate is just before the bottom. While prices don’t shoot up dramatically, the ultra motivated sellers and the super buys do disappear fairly quickly. And you never know it’s a bottom for sure until a year or two passes.

To take a very recent example, in January of 2007 we experienced a temporary “false bottom” caused by dropping rates and seasonal demand. In December I could find 10 - 12 low priced “super bargains” in Rossmoor, a popular west Orange County neighborhood. Within a month, they were all gone! We saw the same thing late in 2001 after the Fed dropped rates in the wake of 9/11.

Both 9/11/01 and 1/07 illustrate two things:

1. Super bargains disappear quickly when the market heads up.
2. You can only be sure of a bottom when you’re looking back months or even years later.

The “double dip” recession that started here in So Cal in 1989 during Gulf War I, then reversed to a new peak in 1990, then collapsed into the end-of-the-Cold-War bust of 1991 - 95 is a great example of # 2.

A personal story. During the ‘91 - ‘95 bust, Barb and I did not enjoy watching our rental homes decline in value, even as my income from real estate sales was also tumbling. But I wanted to avoid hefty taxes from selling those homes, many of which we’d owed for along time.

One day my colleague, John Spear, mentioned in passing that multi family properties in Long Beach had dropped to prices as low as four times Gross Rent. That means the price was down to 4 x the annual rent for some apartments.

Well, since apartments generally produce more income than single family homes, I decided it was time to use the wonderful tool of the 1031 Starker Delayed Exchange to convert our rental homes into rental apartment buildings. That way, even if the market continued to drop, at least we’d have some positive cash flow.

At that point, it looked like prices would continue to drop for years to come. A popular New York financial analyst wrote a syndicated column about how Southern California would never recover. Ever.

As they say, it’s always darkest just before the dawn. Turns out, I was buying at the bottom, but I didn’t know it. Possibly the best financial move (other than structured donations) that Barb & I ever made. And we didn’t even know it at the time. We were just lucky. Blessed, actually.

Bottom line?

If you can find a home you love and can afford with a 30-year or 15-year fixed mortgage, in a location you love, maybe it’s time to stop betting on further drops and become a homeowner. Even a professional gambler knows when to cash in his chips.

At least some of them. You could always pick up a rental or vacation home later on if prices continue to drop.

At least it might be time to start looking. Even if we all think the bottom’s still a ways off.

Only God knows for sure.

And He agrees with us that there are things far more important than money (see Matthew 6:19 - 34).

May 21 update: Ongoing increases in foreclosures and long term interest rates now make us more inclined to think that the bottom may be further off than we had hoped.

That doesn’t significantly alter our basic conclusions in this post, but it should at a little more caution. And a little more hope for those who are still saving for a down and seeking to improve their credit.

We recommend you check out today’s post on the subject: “Oh-oh! We just passed a nationwide bottom!.”

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

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

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

Now for the bad news:

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

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

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

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

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

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

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

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

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