Lets face it, in the 18 years that I have been “reading” the market and reporting to my clients and friends what to expect, I was never further off than in 2008. You can look it up-I felt prices would fall modestly in the most popular areas and up to 20% in the areas hardest hit by foreclosures. The 20% part was close. Newer areas with high foreclosure rates dropped 22-29% in 2008. These are areas like Plum Canyon, Tesoro, Canyon Gate, Creekside Valencia, Stetson Ranch and Fair Oaks Ranch that sold between 2004-2006, where buyers bought at top dollar and often with little or nothing down. More established areas though where people had bought at lower prices and had equity, I didn’t expect to get hit too hard. Well as we all know 2008 hit every neighborhood hard and shook everyone’s confidence in Real Estate. 2008 marked higher than expected volumes of foreclosures hitting Stevenson Ranch, Castaic, Copper Hill North Saugus and other very popular areas that sold primarily prior to the height of the market in 2005. The drop in these areas was between 15-25% in 2008-far more than logic suggested should happen. Why? (I’ll explain in a minute) Are we now at bottom? (In some price points we are close, in others-no), What will happen in 2009? The answers to all of this I will now attempt to answer. Also, understand this report is geared just to the Santa Clarita Valley. What is happening here may or may not be happening in other areas. I will try to examine facts which can not be debated or manipulated. So, even though everyone seems to have an opinion where the Real Estate Market may be heading, one thing is certain. Where foreclosures occur, prices fall. Lets analyze then the foreclosure phenomena and accept the fact that when they stop, then stability will occur.
It is always a challenge to write this report. Those that know me, know that I never “sugarcoat”, I report my perception of the facts so that my clients can make good decisions. Many of my buyers I have been telling for years to wait (the market here peaked in May of 2005, I have probably 20 clients that are waiting SINCE THEN to buy based on my advice). Well, 2009 will be the year for many if they are buying under $500,000. To understand why so many experts predict 2009 to represent “bottom” it is important first to look at the numbers. Real Estate is always a numbers business and it will be my contention that the “number” of foreclosures will be by far the single biggest factor in establishing price stability. First, the ammount of homes for sale has stayed at about 1400 for over 3 months. This represents only just over a 4 month supply for a Valley of 200,000 people. Next closings in 2008 were up about 10% over 2007 (3042 vs 2876). Median and average prices are down into the 400’s now, meaning affordability is way up. Interest rates for this price point are now below 5%. All of this points to normal inventory, exceptional affordability, selection…so why is everyone so nervous that values will keep dropping? Because we have been bombarded with unprecedented turmoil! Banks going out of business, 401k’s cut 40%, prices of homes in every neighborhood dropping, appraisals impossible to bring in…it’s hard to think positive with all that happening!! Yet, that is probably a “logical” view for lower priced property where stabilty is already occuring. Today, with tough credit and down payment requirements, prices and affordability as good as they have been in 10 years and a foreclosure wave that will stop sometime…this is probably the best time to buy and the safest time for a bank to lend in a decade!! We just don’t realize it yet.
So what about higher price points? The over $500,000 market is trickier to predict and not yet one to suggest total confidence to buy in. It’s because of the foreclosure question and the reality that rising unemployment shakes confidence as much as everything I just described. When people are nervuos about their jobs or income, they don’t buy-especially over $500,000. The reality of 2009, is that if foreclosures were not as high as 2008 (and I will explain in a minute why they will be), but unemployment rose, prices would still come down in the mid to upper price ranges. So for those of you too impatient or busy to read the nuances of what will affect values in 2009, here is what I think will happen.
1. Under $500,000 homes will be stable or decline less than 6%. Condos in low foreclosure areas the same, high foreclosure areas drop 5-10%. Under $300,000 homes stable or INCREASE 5-10% (this is already happening in some areas). Newer condos under $300,ooo relativly stable, no increase. Older condos a bit more decline
2. Homes 450,000-675000 (the new conforming loan limit is 625,000, these homes will be in that range), stable to 10% decrease depending on demand in the area. Higher foreclosure areas I expect to decrease another 5-15%.
3. Homes 675000 to 900000 will start to stabilize by the end of the year in the high demand areas. High foreclosure areas have another 5-20% to go.
4. Over 900,000 today has over 100 homes for sale in our valley and only 8 in escrow. Simply stated they don’t sell quickly. The good news is that there are very few short sales and foreclosures in this price point. Many sellers should take their homes off the market here unless they are super sharp, and many aren’t. This market is too tough to call but aided greatly by the (so far) lack of foreclosures in this price point, I think it drops probably 5-10% in the Stevenson Ranch, Valencia parts of town, more than that in Newhall, Hasley and Sand Canyon where homes basically STOPPED selling in 2008. The exception to this, as it is in any market, is highly upgraded homes in great locations with hard to find amenities (great privacy, big lots, views etc).
So where did these predictions come from? Well, I show property, preview property, track the default statistics and basically talk to hundreds of buyers, sellers and agents every month. You get a pretty strong feeling for things when its what you do all day every day. At the economic conference at the Hyatt in November all 3 economists predicted bottom in 2009 using very convincing and relevant data. I just think that unless it’s in the lower ranges there will be too many foreclosures for that too happen just yet. Here is why:
1. Loan Modifications are not going to stop foreclosures. THE big talk at Default Conferences and in the media is to keep people in their homes by changing the terms of their loans-lowering interest rates and sometimes even reducing loan ammounts. I represent a Company (Titanium Solutions), that is hired by servicers to have agents (like me) go out to homeowners in default and give them the great news that they qualify for a loan modification. Here is the problem-half the time the homeowner has rented it out and stopped payments. They don’t even live there anymore. Another 25% of the time they are so far upside down, they don’t care about modifying the loan, they have walked away mentally and don’t really have an open mind to modifying and keeping the property. In my experience, only about 25%of the time do they work. For people that are not in default, they work more often and that is great. Keeping people in their homes is great. But to suggest that loan modifications will stem the tide of foreclosures, sadly is not going to happen. Rising property values will stem the tide of foreclosures
2. Lower Notice of Default Rates is an illusion. One of the economists at the Hyatt actually predicted “bottom” in Santa Clarita in the spring of 2009 with prices RISING in the summer. Hey, no one would be happier with that than me! However he based that claim on dropping inventory (true), lower interest rates (true, thankfully), and lower Notices of Default in August and September. His claim was that lower default and lower foreclosures means price stability. That will undoubtedly be true when it happens, as I have said. The problem is that the lower Notices of Default and foreclosures seems to be due more to Senate bill 1137 passed in August than anything. This Bill required lenders to reach out homeowners and have actual communication before foreclosing. Most servicers I talk to acknowledge no signifigant change in the numbers of people in default, just a slow down in the process of getting them to market. Many feel this “artificial” stop in the process will eventually lead to those homes hitting the market in 2009. I’ll do one better than that though. In 2005 I reported that the market had peaked and commented on how many investors had called me to sell their property while they still could. That large group of homes has by now either sold traditionally or been foreclosed and sold-mostly by 2007. So the investors are through the system but we still have all the people that bought with little or nothing down and the people that saw 2008 wipe out whatever equity they had. These are not investors but homeowners that maybe bought in 2006 (30% of all loans in 2006 were little or nothing down) or pulled money out in 2006/2007 when they still had a line of credit. I am personally seeing many of these situations right now. Hopefully loan modifications can get more aggressive to help some, but as I have said before, many people just walk away when they are upside down, and 2008 made a lot of people upside down.
For these reasons I (and many others), expect foreclosure volumes in 2009 to be similar to 2008. Why then is there more stability in the lower price ranges, where there are so many foreclosures?? Because of….
3. The return of the investor. For the first time in almost 10 years a buyer can buy a home for under $350,000, put 25% down, rent it out and have a positive cash flow. Investors realized this big time as prices plunged in 2008 and they, along with highly motivated first time buyers are creating multiple offers on virtually every foreclosure that comes on the market-especially under 290,000 where it REALLY pencils out. As all smart agents know, this is where the market is and it can even be shown that in the last 3 months, prices have bumped UP a bit. Rentals remain strong and for many “big picture” investors, Real Estate is a better choice than the stock market.
So what does all this mean? Well, I think 2009 will be a lot like 2008. I expect the number of sales to increase slightly again (people don’t know that 2008 was actually the 8th highest sales year of the last 40 in California for number of transactions). I expect a lot of strength in the lower price points, rates to stay low and slowly people will start to feel bottom and buy with more confidence. By the end of the year the foreclosure numbers will start to subside, leading to eventual price stability in higher price points. Finally, we must understand that this massive, painful, sobering correction is going to have a lot of long term good for the Housing market. Upside down people will modify or walk away and those homes will “reset” at todays values. Also, we are experiencing about a 5 year period in Santa Clarita of very low building of new construction. As this cycle comes to an end by probably 2010/2011…..? We dare to dream.
Posted by nealweichel 