Who should buy Southern California real estate between now and Christmas
Posted in For Buyers, Investing in Real Estate, Market Trends and Projections | By Blair Newman and Dave Emerson | Tags: Foreclosures, Los Angeles County real estate, Market Trends, Orange County real estate, real estate price predictions, short sales, when to buy
Note: Special 2 hour, $5 buyer seminar with Blair & Dave set for Saturday, October11 at Lakewood’s Mayfair Park (Clark and South St.). We designed this to help buyers make the most of this fall and winter’s unusual buying opportunites. Class size is limited to allow interaction. Sponsored by Lakewood’s Community Services Department. Details here. No, we’re not selling tapes, cds, books, or DVDs!
It wasn’t that long ago that Blair and I thought Southern California home prices were most likely to begin to rebound in spring of 2010.
Near the end of July we made an upbeat revision in our forecast, giving a 40% probability Southern California home prices would bottom this coming winter, a 40% chance of our price bottom coming the following winter, and a 20% of our bottom coming after that. We also began specifying which areas and price segments can be expected to bottom first. (For details and our rationale, check out “An optimistic update on our projections of a home price bottom.”)
Now we’re getting even a bit more optimistic, largely due to modest declines in homes going into foreclosure combined with the rapid decline in prices over the past year.
Nobody can say with certainty when Southern California home prices will hit bottom (See “How low will prices go?“). DataQuick’s numbers won’t reflect that bottom until long after it’s passed (see “Two big problems with DataQuick’s monthly median price reports“). However, there comes a time before the price bottom in every market cycle where the wise buyer starts looking very seriously.
I think that time is now. In fact, last week I put in my first offer on a California property in over ten years. (Last month I also decided to run for my local City Council for the first time ever, but that’s another story for another blog.)
Let’s take a close look at some questions this raises, including where, what, and why to buy now:
Where to buy now: While we believe recovery for the desert area and the Inland Empire may not come unti spring of 2010, we now believe the next four months are likely to present the best buying opportunities for most property classes in the coastal plane of Los Angeles and Orange Counties.
Why? As we’ve indicated in “Our Two R.E. Market Cycles,” in most years both sales volume and prices for homes going into escrow tend to bottom in November and December. People are too busy preparing for the holidays to buy homes but lenders and builders are trying to unload inventory before year’s end. It’s almost like an annual “year end clearance” sale for real estate.
With the number of homes going into foreclosure beginning to decline and effects of the federal housing relief bill beginning to kick in (see “The good news about the ‘Housing and Economic Recovery Act’ “), we think the odds now are that this winter’s apt to be as good as it gets for buyers looking in the more built out areas of So Cal.
What’s more, interest rates are still near historical lows and are expected to gradually rise over the years ahead. Very low prices and rates make for an excellent buying opportunity.
Finally, there are literally hundreds of thousands of buyers sitting on the fence right now waiting for the market to bottom. Once they all sense the time is right, you’ll have far more competition from other buyers than you have right now. If you’re not early, you’ll be late. Once everybody recognizes a golden opportunity, it’s too late to take advantage of it.
Due to the annual cycle, we know activity’s apt to pick up starting 12/26, we think the prudent buyer should at least get her feet wet in the market now.
Who should buy now? Buyers who have fairly decent credit, access to a down payment of at least 3.5% (the new FHA minimum), stable income, and who aren’t planning on selling in the next five years. (3-5 years used to be the rule of thumb for accumulating enough equity to cover selling costs. 1-2 year “flipping” for anything besides severely distressed property is probably a thing of the past.) It’s also not a time for negative amortization loans, or adjustable mortgages with low teaser rates and payments that will rise dramatically. We recommend 7 - 30 year fixed, fully amortizing loans.
What to buy now? We think lower end Single Family Homes (SFRs) will rebound first, as they’ve been driven down the most by foreclosures. Starter condos, which were overbuilt more than SFRs in LA & OC, will probably lag behind. Quite likely move-up homes will also lag, since most buyers need to build up equity in their current home in order to move up.
We also like the discounts available on “short sales.”
What’s a “short sale?” In a “short sale” the current mortgage holder accepts a reduced, or “short” payoff at close in order to avoid foreclosure. It actually takes longer than a normal sale or a bank foreclosure, and you can expect the current mortgage holder to attempt to renegotiate or even cancel the sale. I got plenty of experience with short sales back during the 1991 - 1996 SoCal real estate crash, and so far Blair and I have closed every short sale we’ve opened.
Why the discount on short sales? For agents, short sales are twice the hassle for 1/6 less commission, since the mortgage holder always insists on reducing the commission as a condition of accepting the short sale, if they’re willing to accept it at all. Buyers would also rather avoid the renegotiation hassles not to mention the chance of the current lender disallowing the losing the home 30 - 60 days into the escrow. As a result short sales often go for 5% - 15% below market. And market is already 25% - 40% below what it was at the peak.
What about foreclosures? Once the bank takes the home back, the hassles of a short sale and the reduced commission are both eliminated, so the demand increases. Some REOs (”Real Estate Owned,” or lender-owned, foreclosed properties) are initially overpriced. When an REO is underpriced, the lender may wait 7 - 10 days before accepting an offer, essentialy holding an auction so that the price will get bid up, sometimes actually selling above market.
When should I start looking? Preferably September or early October. That way you’ll have time to look and to familiarize yourself with your options. Some experts say you should look at 20 similar homes before making an offer. With the internet, it’s not that hard. You can search for yourself using the links to Southern California Multiple Listing services in the column to your right. Better yet, we can set you up on the MLS’s “Listing Book,” which allows you to sort out the listings you prefer. (Just shoot us an e-mail at BlairNewman at verizon.net. (You know what the “at” represents, but most web-crawling e-mail harvesters don’t.)
It’s also good to start looking now so that if you find a short sale you like you’ll have time to give it a shot, & still have time to look and write other offers if the current lender plays hardball 45 days down the line.
What if prices continue to drop next year? We think the odds are against that, but nobody can say for certain. What we do know is that prices have already fallen by about a third from the peak. By staying in developped areas, you minimize the risk of dramatic additional falls. Of course, if the economy takes a major turn for the worst while you’re looking, you can always wait. Check back with us, or sign up for our RSS feed, to see our take on future developments.
How do we get started? First, talk to an honest, reliable lender (if you don’t know any, we do. 562.822.SOLD). Find out what you qualify for on a fixed loan, if you need to work on your credit, how much down you’ll need, etc.
Then find an honest, experienced, diligent full-time agent. Not someone you know at work (they’re not full-time, no matter what they say), probably not a relative, and not a friendly person you meet at an open house. At least five years in the business, at least 50 closed sales, at least 5 of them in the neighborhood you’re interested in. Again, with 30+ years in the business, we can probably find someone good for you if you can’t. If you’re thinking southeast L.A. County (Long Beach, Lakewood, Norwalk, Cerritos, etc.) or west or North Orange County (Cypress, Rossmoor, Seal Beach through La Mirada and La Habra), we’ve got many years experience there ourselves, with over 500 homes sold.
You may decide you want to wait a little longer, but you may also find your dream home & be able to negotiate a great deal. Whatever you finally decide, now’s a great time to get started. There’s a very good chance it may be the smartest financial decision of your life!
Tags: Foreclosures, Los Angeles County real estate, Market Trends, Orange County real estate, real estate price predictions, short sales, when to buy
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September 5th, 2008 at 8:59 am
Please educate yourself on Alt-A and option ARM resets, then revise your prediction on when SoCal will hit bottom!
September 5th, 2008 at 12:04 pm
bassist,
Thanks for taking the time to comment. I’m well aware of the ongoing reset issue. It is a concern, but I didn’t go into it the post, because I’ve concluded that the reset problem is overstated:
1. Many of these borrowers have already been foreclosed upon or negotiated short sales. Just this week we closed a short sale for a seller that had no problem making the current payment, but could read the writing on the wall–and on her monthly statement. She knew her payment would double next year, she knew she was upside down, & she decided to deal with it sooner rather than later.
2. The banks may be slow, and they may have made some very dumb loans, but they’re not complete idiots. Most banks would rather work out than reset, and the bailout bill gives them some new options. Banks prefer modifications to foreclosures, and many resets will be renegotiated.
Time will tell. Bears will never think prices have fallen enough, but I sense we may look back on this as an opportune time to buy before thousands of vacillating buyers all get off the fence.
I’m now seeing some homes list for almost half their value at the peak. There are real values out there, and I expect there to be even more between now and Christmas.
The point of this blog is for an experienced Realtor/broker to tell you what he’s seeing on the front lines, and I’m seeing some exceptional values. Yesterday I had breakfast with the broker/owner of a large local property management firm, & he voluntarily said exactly the same thing.
Time will tell, and if I sense things moving in a different direction, I’ll post it here first.
Again, thanks for taking the time to comment.
September 6th, 2008 at 2:46 pm
I agree with you that there are some t great oppurtunities right now but the bottom line banks are still bogged down. In california the banks are driving the market and thats not such a good thing. They accont for about 40% of all home sales in california. Gmac laying off 60% of its employees and shuting down hundreds of lending firms tells you that people applying for home loans is actually going down. Real estate in california is still historically overpriced as you compare it to income i think prices need to come down to normal levelsistorically. Interest rates rising will only bring prices lower. Unemployment will continue to rise through the end of the year . The government will dictae real estate bottom in the mean time i will sit tight. I have been sitting tight on a pre -approved loan from countrywide for four months but there is nothing out there that tells me buy. Keep up the good work and hopefully you guys can post more often because there is so much going on in the market
September 29th, 2008 at 10:53 pm
You foks know why the foreclosure rate has slowed significantly in California? The Legislature passed a measure whereby a lender has to give a borrow a 60-day notice of intent, instead of the traditional 30-day notice. That effectively ensured that for a 30 day period, no homes would go into foreclosure. But once the 60 day window has passed, the rates continue to increase as before.
September 29th, 2008 at 10:56 pm
And frank, you and I are in the same boat looking for the same signs. Hold tight until the end of the year. There will be bargains galore. The feds will artificially reduce lending rates just to motivate homebuyers to jump off the fence and commit.
October 12th, 2008 at 10:22 am
If you look on Redfin MLS they will show you the home prices, and how much the home your researching went for at the height. It will also show similar sales. I have seen many in So. Cal for over 60% off the Crazy prices of 04-06. Some REO’s are even more. Just do your research. Most investors and banks consider that your total monthly expenses need to be less than 75% of what you could rent it for to truly break even on renting an investment. In my rentals over the last decade this has certainly been the case. So if you crunch your numbers and can come up with this total (ie- a 750 payment with Princ. Int. Ins. and Tax and the home can rent for over $1000) then you should be fine (it sits, and thigs break etc) If you can get this price , many investors will be willing to buy. And as long as you have a little liquidity then you can wait until prices go up. I believe there is more choices available as the trend curves toward the bottom than when it just starts to go up. You may get a much better investment. God Bless your Investments and may you ever thank Him and Give back to the One who gave it to you in the first place (Oh that He would bless us indeed-scripture quoted in Prayer of Jabeez book)
October 23rd, 2008 at 5:19 pm
I agree with most of what you said. I’m looking in the North OC area and still think that market, particularly the Fullerton area still has another 10% to go.