For 15 years I have started the New Year with a review of the past year in Real Estate and offered some suggestions on what we might see in the year(s) ahead. Reviewing a year like 2010 may be harder than any year before it. The first half of the year had unexpectedly strong buyer demand (fueled by government incentives) and the second half was much slower than expected as the stimulus ended and inventory rose every month from June on. I would describe 2010 as “confusing.” As I have suggested before, I have never read so many news reports on Housing that would seemingly contradict each other. Many well respected analysts have published convincing articles explaining why housing in many areas is “undervalued.” Could that include Santa Clarita? Yet, in the very next article I would read that there are over 7 million homes in some stage of foreclosure which will keep values down until 2020. 2020? That would be the longest slide in home prices in history! It is true that there are more homes with no equity than ever before but how many of them will actually be foreclosed on? No one knows. And if this is what will keep values down for so long why is the foreclosure inventory still only about 10% in Santa Clarita? Confusing. In your neighborhood you probably noticed a sale that suggested prices were stabilizing, and then see a short sale that was $50,000-$100,000 below everything else in the tract. Confusing. What is not confusing though is the clear fact that until the distress sales become a much smaller part of what is available, prices will have no upward pressure. That is why for 2011 I would expect that we will have a market that is a lot like 2010 – over 60% of the homes closing escrow will be either short sales or foreclosures and that is what will keep prices from rising. However before jumping into some details to explain why this year will likely be a lot like last year, let’s acknowledge the fact that never before has the Government been more involved in the business of Real Estate, and what Washington does can have a big impact on inventory and prices.
Just as the first half of 2010 was stronger than expected due to buyer incentives, 2011 could be positively affected price-wise if Government forces the Big lenders to better aid homeowners with loan modification and to avoid foreclosure. Will this happen? Who knows? Understand though that the thought of massive foreclosures and short sales is what still keeps many buyers on the sidelines or keeps them from buying “regular” sales at higher prices. If short sales alone were somehow removed from the market, our inventory would go from 1200 homes for sale to about 600 and prices would go up. This won’t happen of course but you can see how the huge political pressure to work with distressed properties could affect us. If some policy gave the perception that those 7 million underwater homes were unlikely to ever come to market, we would immediately see more confidence that price stability was at hand. And if such a policy did happen, the number one reason prices stay soft, short sales, would become a fraction of what they are today. So, in the old days, I would report on supply and demand, new construction, buyer confidence and report to you what the New Year might bring. This year we have historically low rates, lots of investor buyers in the lower price ranges, reasonably low inventory, almost no new construction and still no sign of obvious price stability! Here is why 2011 will be more of the same.
Real Estate is more than just numbers these days. Perception is critical, and I will say that buyers do seem to feel that if we aren’t at “bottom,” we are at least close. While it might seem silly to even try to predict the future – especially with what Washington may try to do, I think it is pretty clear that the market we have now is likely to be the market we will have for awhile, at least the next 2 years. That is a market in which prices neither go down a lot nor do they rise. What is no longer confusing – or debatable – Is the fears that we had in 2008 are no longer a concern. In 2008, we were rightly worried that the banking system could collapse. This month we have seen Chase, Wells and Citi report record earnings. Only Bank of America reported a loss and that is due to write offs from bad loans, something that for most of the big lenders, the worst is close to over. Their balance sheets are strong and a huge key to stability is the perception and reality that lending is safe. Loans are not difficult to get – IF you have good credit. Further, there have been recent articles proclaiming homes are undervalued – with very valid explanations as to why. Builders tell me that some of the prices in Santa Clarita are so low that they couldn’t build the same home at what it sells for today. So if the lending system is on firmer ground, prices are so low, new construction doesn’t really exist to siphon buyers away from resale homes, why aren’t prices yet going up? It’s funny, I feel like we are in 1997 when the 7 year slide in prices was about to be over, nobody knew it, and a few years later everyone said to me “why didn’t you tell me to buy then?” Only time will tell if now is like then. So why won’t the 5 year slide in prices (we peaked in May, 2005) be over in 2011 and likely not for even a few more years? Simply stated it is because there are still a lot of distress sales to come that will keep prices suppressed.
As long as 25% of the homes in Santa Clarita are upside down, and a portion of them will certainly be sold over the next 2 years, there will be no strong force to move prices up if demand stays the same. Expect to see some sales that are clearly top dollar for their neighborhoods, right alongside sales of similar models for 10-15% less due to inferior condition, less desirable location or just because short sales always sell at a discount because of the headaches to all concerned. In late summer I posted 5 sales in 5 neighborhoods that showed my “standard sale” next to either a model match or comparable short sale for 10-20% less. Basically the same home! This will continue as long as short sales represent 50% of the 1200 homes for sale in Santa Clarita. Some history may be helpful here. This exact same situation occurred in 1997-1999 as the last of the short sales and foreclosures were absorbed in the 1990-1998 price slide. The difference this time is that the prices are higher, the losses are greater and there are far more homes under water. Still, I believe that cries of foreclosure “shadow inventory” that will swamp the market won’t happen either. The big foreclosure wave of 2007-2008 (where foreclosures represented 25% of the inventory) that drove prices down has ebbed to half of that for 3 years now. There is no reason to think that foreclosures will represent more than about 12% of the homes for sale anytime soon, and they are not being priced as aggressively as they were in 2007-2008 either. Let’s finish with some numbers and trends to better understand.
2010 had just under 3,500 closed sales, up from about 3,220 in 2009. For perspective, the “boom years” of 2003-2005 had over 5,000 closings each year. Prices were relatively stable in the first half of 2010 (arguably rising slightly in the lower price ranges), before edging lower in the last 6 months. The stimulus and tax credits had more of an impact than we thought they would. September to mid December was markedly slower than expected – less buyer calls, showings, offers and opened escrows. As I write this in mid January though, we experienced a remarkably active late December which will go toward suggesting what I think we will experience for at least the next two years. Simply, a market that goes in cycles with brief periods of low inventory that will have some sales at strong prices that suggest recovery and stabilization only to be followed by some sales that suggest a still declining market. I am seeing every month areas that had lots of foreclosures or short sales a year ago with virtually nothing for sale today. If a motivated buyer wants to live in that neighborhood and there is no “low ball” distress sale to choose from he must, and will, pay “retail.” Popular areas like Westridge, Stevenson Ranch and even hard hit Tesoro, have had and will continue to have, nice move in condition “regular” sales at prices 10-15% above inferior condition model match distress sales. This will confuse those that don’t understand it but it has been happening for over a year and will continue. Why will this occur? Because this market, though completely different from some of the problems we had in the 1990′s, is in some ways exactly the same.
Consider that from mid 1990-1998 prices either fell dramatically (20% in the second half of 1990) or very slowly edged down before stabilizing in 1998 and then starting a slow appreciation in 1999. It took 9 years! During that time there were fits and starts – sales that looked like the worst was over, only to be followed by some new foreclosures or short sales that were lower. From May of 2005 until today prices have had BIG drops (20% in the first 6 months of 2007) and long slow periods of decline-about 8% over 2010. I have told many people that our inventory is actually relatively low (about 1200 homes for sale in a valley of over 200,000 people) but buyer demand is still tempered by uncertainty. The market will stay this way for one big reason – short sales that are consistently priced below the “regular” sales, suggesting to buyers and appraisers that stability is not yet at hand. More than anything else watch the percentage of short sales and distress sales – as they start to go noticeably down we are nearing stability. This really looked to be happening in the first half of 2010, but not in the second half. This is the reason why, though there are many more positive signs than a few years ago, it will still take a few years to weed through the distress sales before prices may rise again.
2011 – more of the same!
