I sold my first house in May 1991, 20 years ago. The business then was in many ways easier to understand and predict, especially with respect to values. In California for example, when we go up we go up a lot and when we come down, the same has been true. Appreciation of over 20% or depreciation of over 20% in a single year happens more here than any other state. So you can see why being able to look at trends and make value predictions is important for a good agent when advising clients. In 1991, the business was also much more labor intensive – offers were presented in person, cell phones were rare, and the internet and email didn’t exist. If a buyer wanted to see property, they relied 100% on the agent to pick the homes to view, often from a book published every 2 weeks. Think about it! Still, with all the tremendous improvements in the amount of information and statistics, it is amazing to see just how difficult it is to fully understand what is really going on in the market today. In large part, this is because of government involvement in the supply and demand cycle of Real Estate. Loan modifications, principal reductions, moratorium, robosignings - the attempted clean up of the housing bubble has clearly lengthened the process of hitting bottom and made what to expect impossible to predict. This uncertainty, I believe has also contributed to a bit of gridlock in the market. Buyers want to buy but are weary and sellers want to sell but “not until the market improves”. For many, they don’t realize that time may be 4-5 years away. In an attempt then to explain why this is and what is happening in our valley right now, I have put together the 10 questions I am asked the most, with an answer and an example to illustrate the point. This will be a simple, clear way to communicate with you some important updates.
1.”How is the Market?” Oh my goodness does everyone want to ask this. They care, but some more than others. Some have resigned themselves to not really pay attention until they have to. Some “have to” sooner than they thought they might. The answer for our Valley is that “the market” is slower than I would ever have expected. The best way is always to illustrate with numbers. Last year we sold about 3500 homes in Santa Clarita. Year to date we are on track to sell 2100. For the first time in 20 years-ever-I have seen the amount of closed escrows go DOWN each month from January through April. Through the first 16 days in May we have closed 32 homes. 32!! Honestly, these numbers are so low, you would think it has to be caused by more than just gas prices and job uncertainty, and I believe it is the gridlock described above. Believe it or not, in many areas we actually desperately need new listings of quality, but sellers are afraid to sell. This leads to question #2…
2. “When will prices go up?” For many the answer is years. The simple reason why is that until the distress sales are replaced by regular sales in which the seller asks a higher price and gets it, this will not happen. The numbers here are as follows. By most experts reckoning, there will be over 11 million short sales and foreclosures that sell between 2006-2015. Through 2010 we had closed on 6.7 million of them. If we close 1 million a year (optimistic probably), then 2015 should be when the majority are done and normalcy resumes.
3. “So what is selling?” What many people don’t understand is there is a RED HOT investor market. Cash sales currently account for over 30% of the sales in the US – higher than ever before. These are often beat up foreclosures that cannot be financed and trustee sale “flips”. There is a lot of money out there for such homes because they positively cash flow as rentals and smart people understand one other trend. Home ownership is at its lowest point in 15 years and rental pricing is on the move up again. So, if I put a single family home on the market under $300,000, I can expect multiple offers almost every time.
4. “How do I buy at Trustee Sale?” I started working with an investment company that looks at every property that goes to auction in LA County in 1994. They have agents that cover different areas, they give us the homes going to foreclosure sale each night for the next day, and ask us to value them. If the opening bid is a lot lower than fair market value, they buy it and hire me to sell it for a profit. In the last 4 years the amount of competitors to this Company has gone from 4 or 5 to 50 at these court-house step sales. Yet, for 95% of the people this is never something to do on your own. There is huge risk involved (no inspections or disclosures – what is the real condition?) and you need CASH to buy. Further, many sales are cancelled at the last-minute. The idea of buying 25% under market is always attractive, but for most, the time, money and risk involved mean this is not for them.
5. “When will the Shadow Inventory hit?” The reason everyone asks this goes back to the concern about values. Most people figure there is at least one last “wave” of foreclosures that will go cheap, then the market will slowly stabilize and start to go up. I could write a book on why this wont happen all at once but suffice it to say there are government intervention reasons, big bank accounting reasons, manpower reasons and a few others that will make this a 4-5 year process, not a 12 month one.
6. “Should I buy now or wait?” As I suggested before there are many buyers out there that are motivated to buy. There aren’t as many as we need to stimulate the market like a year ago, but they are out there. Many are asking themselves this question, and the “cold feet” in the middle of escrow factor is higher than I have ever seen it. The reality is that if you want homeownership (most don’t want to answer to a landlord, especially in a rising rent environment), a tax deduction, stability and the idea of appreciation over a long period of time, you should definitely buy now. If you are going to be concerned if values drop a bit in your neighborhood and that will eat you up more than the benefits described above – wait.
7. “What actually is selling?” Great question. To understand why distress sales have such an impact, look at ANY neighborhood in Santa Clarita and look at the “pendings.” These are homes in escrow. Without fail, over 75% of the homes will be short sales and foreclosures. Often it is over 90%. The reason why, again, goes back to values. Buyers think they get better value buying short sales and REO’s, even though the experience is often challenging.
8. “Are regular sales still happening?” Yes. The best example I can give comes from this weekend. A new $895,000 pool and view home came on the market in Stevenson Ranch. It fit a need and received 2 offers, going slightly over list price – in 3 days. About 40% of the homes for sale in Santa Clarita (about 500 homes) are “regular sellers”. As I tell my sellers, about 20% of the sales right now are relatively quick, market value sales when the property is priced properly and shows better than the competition (like the 3 day sale described above). 20% are inferior in condition and/or location and must be priced UNDER market to have a chance – buyers are too picky. 60% are in the middle and will likely take 3-5 months to sell just because that is the way it is. Some won’t have the patience.
9. “Is there any good news on the horizon?” Of course! There is always good news, and think about this for a moment. The largest group of home buyers ever is coming into the market in the next 10 years. There are 7 million “millennials” that will be home buyers – bigger than the baby boomer group. Their entrance should roughly coincide with the end of the distress sale cycle and beginning of appreciation at prices that should be quite affordable. Look out for 2015…..?
10. “How are you doing?” I think people ask me this, in a Real estate context, because so many Realtors have left the business. This will continue big time in the next 3 or 4 years, especially if 2000 homes sales annually becomes the “new normal”. Well, for reasons I am not entirely sure of, last year I was the #1 agent in California for Remax, something I have never done. I think it is more because, everyone else is down so much and we are consistently selling the same amount of homes each year. It is also though I think due to the great place that I sell homes – Santa Clarita continues to be very desirable, and the tremendous amount of loyal clients that I have here. What a blessing!
