WHAT YOU NEED TO KNOW ABOUT TODAY’S SANTA CLARITA REAL ESTATE MARKET

As we enter the traditionally “slower” part of the year, there is an interesting mix of changes in the market that are important to point out as we try to figure just how long-and how deep-the price declines in our valley will be.  No one can predict the future, but there is enough information that I think it’s clear that the worst is behind us -how much lower can we go anyway?.  Still,  for most of Santa Clarita we aren’t at bottom yet.  To jump ahead, I will explain why price softness and decline will likely continue in Santa Clarita for awhile-in some parts of town where the foreclosure rate is higher- as much as 2-4 years is possible.  Still, as I have said before, some parts of town (typically older and more established where speculation was minimal and turnover in 2003-2006 was light) we are seeing inventory go down which can lead to stability sooner than later. So, in my constant pursuit of offering good information for you to draw your own conclusions-here is what is definitely happening. I’ll start with the positives:

1. The INVENTORY of homes for sale is down from one year ago by about 30% (2400 homes for sale vs 1731 today). Real Estate is a supply and demand business and inventory going down each month (as 2008 has been thus far) is at the top of the list of things that must happen before prices stabilize.

2. The number of homes in ESCROW is up over last year as well. In Real Estate we talk about (or at least I do), “absorption rates” which is the amount of homes for sale in a given area divided by the amount of homes in that area ‘under contract’. 100 homes for sale, of which 30 are in escrow is a rate of 30%. We have been under 15% for much of the last two years. Today we have 564 homes in escrow and 1731 for sale.  Last year it was about 330 homes in escrow and 2400 for sale-today is more than double the absorption rate of a year ago.

3. Because of price declines, AFFORDABILTY is way up. In late 2004, I warned that less than 20% of first time buyers state wide could afford a median priced home. In Santa Clarita where the median price was almost $600,000, the percentage was even lower. That’s a problem. Today, the median price is in the low 400’s and the number that can afford to buy is almost 40% . There is tremendous strength right now under $450,000 where value, better interest rates and easier qualification are making buyers of many. Investors are seeing that with 25% down they can buy and rent out property and cover their payment. That NEVER happened 4 years ago. Last week there were 61 new sales in Santa Clarita. 60 were under $800,000. 50 were under $500,000. WOW! There are many buyers out there waiting for the market to “bottom out”. First time and entry level buyers aren’t among them-they are bidding on foreclosures like crazy. IF this continues stability will come first to this price point…but we aren’t there yet.

 So there are 3 tangible, verifiable trends that are encouraging for those that are looking for price stability. I even have sellers saying they want to wait until next year because “the market will be better”. I would love for that to happen but do not think it will. Here’s why:

1. Even though the number of homes for sale is down , the percentage of FORECLOSURES is way up. Of the 1731 homes for sale in Santa Clarita today over 800 are foreclosures or in default (“short sales”).  Part of the reason inventory is down is that many “normal” sellers have given up and taken their home off the market-or never tried to start with. So what we have is a market in which every day my “hot sheet” shows the new listings and every day between 40-60% are foreclosures and short sales. Simply stated that is a seller that can AND WILL reduce their price until it sells. There is no “taking it off the market and waiting”. It sells-period. This means further price declines-and possibly big ones-where foreclosure numbers are high.

2. The UPPER END is particularly vulnerable. In Santa Clarita today there are 145 homes for sale over 1 million and 10 in escrow. Taking Agua Dulce out, there are 130 for sale and 9 in escrow. The good news is in the million plus range only 9 of the 130 are in default. Meaning there aren’t a buch of these listings in default which will surely bring prices down more quickly.  The bad news is that that is a very low “absorption rate”.  Because so few people are selling and moving up (the traditional source of power for Real Estate in our Valley), the upper end is going to be slow unless the home is extremely special with little competition. Remember there are 130 for sale!

3. Financing is still incredibly tough, especially for homes over $700,000. Even though the conforming loan is supposed to be $729,900, in practice ALL lenders have higher rates for loans above $417,000 (the old conforming cut off) and are very demanding in terms of documentation and appraisal. This isn’t going to change until lenders really WANT to loan again, especially to the large percentage of people that are self employed or have income beyond W-2’s. Most lenders tell me we will never see a “stated income” loan again. Good or bad, it’s reducing the amount of sales that could lead to quicker price stability. The anticipated boost to the $600,000-$800,000 price range from the increase in conforming loan amounts clearly has not happened. Basically, every price point over $450,000 has all the signs of a bit more decline and the $600-$900 range has a lot more foreclosures than the 1 million plus range so we’ll have to see what happens.

Beyond this, the final reason I am suggesting that a majority of our valley will see further declines is what is still to come. All of the Asset Managers and those “in the know” at the larger lenders predict a continued flow of foreclosures for the next year. They are being snapped up quickly which is good but they aren’t going away soon, which is bad. This one factor-more than any other-will continue to lead prices down, especially over $450,000 where there is so much less demand. Of course, I hope it is not too much deeper. Until recently, people that bought homes from late 2004 to today represented 90% of the foreclosures. Because of price declines I am now seeing homes  bought in late 2003 coming up in default. In short, the foreclosure cycle isn’t close to over.  When it finally is, then I’ll start writing again about the “hot markets” we have seen in the past.

What I learned from “Breakfast with Countrywide”

Almost everyone knows the name “Angelo Mozilo”-he’s the former CEO of Countrywide and he’s been in the news a lot in the last few years, mostly with negative connotations. This morning I  had the opportunity to meet and listen to Andrew Gissinger. It’s likely you haven’t heard his name much, but I think you might in the future, and if you do I suspect it will  be with good connotations. Andrew (he goes by “Drew”), is the new Executive Managing Director and Chief Operating Officer (COO) at Countrywide, and he actually wants to meet the people out there on the front lines everyday and get their feedback on how Countrywide can improve. What a concept! He struck me as approachable, reasonable, fair, willing to critique his own company and clearly understands the entire loan process, from underwriting to the variety of products available; and he had some interesting thoughts on what is happening and will likely happen in the future.  I mention this because I think “no nonsense” people like him will lead us out of the problems that we face in the Real Estate Business and I can only hope that Wells Fargo, Bank of America and the others have similar leadership.

     So what did I learn? Lets start with facts and figures. Everyone wants to know when prices will stop falling-here is what the Countrywide people are looking at:

1. Based on data I will share in a minute, they expect prices nation wide to bottom out at the end of 2009. Further, as prices firm and start to rise, they will not hit January 2007 levels until 2013.

2. The reasons for another 18 months of decline break down to a combination of things that are happening:

   a. Foreclosures are at the highest level seen since 1981.  1 of 9 sales in California today is a foreclosure. This won’t slow until late 2009.

  b. There are about 1.2 million homes for sale in the US that are vacant-this is a huge number of homes that need to be absorbed.

   c. There is an 11 month supply of property for sale vs. 4.5 month supply in July 2005.

   d. There is still a tremendous problem with availability of financing for buyers. Simply stated, there are no investors to buy loans unless they are solid gold credit, lots of money down etc. Until this changes the market won’t have the demand it needs to get these homes absorbed at a rate that would stop prices from falling further. Also, because of this, FHA loans (where the Government is the “investor”), will dominate the next few years-Drew thinks up to 35% of new loans will be FHA.

3.  On the positive side, there are other trends that will ultimately help lead to stability;

   a. Building permits for new construction are at their lowest point in decades. Because of immigration, desire to rebuild/rehab existing properties and desire for new homes, this lack of product will firm up the resale market. This is confirmed by my builder friends that all seem to mention 2011 as when they will focus on building in earnest again. Lack of supply=price stability.

   b. Past housing declines in California have been driven by unemployment and that isn’t happening now. Unemployment is about 5%-higher than the 3.75% of 2000, but nothing like the over 9% of the early 1990’s. People don’t buy homes if they don’t have jobs, but that isn’t the issue. Buyer confidence and availability of finacing are the issues this time (thats me talking, not Drew but I think he would agree). As liquidity opens up and defaults wane, prices will stabilize. According to Coutrywide-that’s late 2009.

   c. Possibly speeding up the process is the unprecedented involvement of our Government-The Fed, Congress and Regulatory agencies. Bottom line-they don’t want foreclosures and further price decline if possible. What they didn’t want to hear 9 months ago, seems to be open to discussion now-anything to keep people in their homes (rate and term modifications, tax breaks for short sales, raising conforming loan amounts, etc) and create quicker stability is on the table.

 So thats what is happening-high rates of default and large inventories of foreclosures driving down prices on one side, lack of new building, no real unemployment problem, lower interest rates and possible Government involvement on the other. A few other opinions I found interesting:

The whole idea that loans coming due and owners couldn’t afford the “reset” hasn’t been nearly the reason for foreclosure that people speculated a few years ago-mostly because the reset rate is at or BELOW in many case what it was before the reset. Not in all cases of course, but as I wrote 2 years ago, far more foreclosures have been created by investors and owners walking away from a bad investment than people that truly can’t afford their “new” rate. For those, Countrywide alone has modified over 60,000 loans.

 The problem of getting “short sales” approved has improved but is still a disaster for many potential buyers and their agents. There are far more short sale listings than there are foreclosures. Unlike the 1990’s though, lenders like Countrywide have sold these loans to literally hundreds of investors. They are the ultimate decision makers on accepting these and it remains trying. Still, the investors-unlike most of 2007-are starting to be more open to resolving deafults with short sales and the response time has clearly improved in most cases.

 There was a lot more shared but these were the high points. It confirmed my feeling that the market today is a lot like 1997-prices are still declining and foreclosures will continue for awhile but there are underlying trends that lead me to think that 1999 (read-stability/appreciation), isn’t that far away-our inventory is down to 1945 homes today from 2500 at the beginning of the year. I’ll keep you informed! 

The Difference Between Short Sales and Foreclosures

I had a conversation today with a past client that wants me to help her find a home this Spring and by the end of the call it was clear to me that there is no topic more important for buyers and sellers in today’s market to thoroughly understand than what a “short pay” listing is compared to a foreclosure listing. First lets start with the basics.

A “short pay” or “short sale” listing is one in which the seller will get no money. They owe more than the home is worth. They want to sell but in order to do so they have to ask their lender-or lenders-to take less than what is owed. As such, they have little concern in most cases at what price the property ultimately sells, because they see no proceeds either way. Enter the Real Estate agent, anxious to make a sale. They suggest to the seller, ‘lets price this well below the others to guarantee you get an offer, which we will then submit to the lender(s), to see if they will approve you for a short sale”. Seems innocent enough, but this is how the problems start.

I call short sales “maybe” listings. I have also called them frustrating, time consuming, impossible to predict and a waste of time. Here is what you need to know:

1. The whole process can take anywhere from 2-9 months to get a final answer from the lender if you make an offer. There are often multiple decision makers involved that will determine;
a. Does the seller even QUALIFY for a short sale? Do they have hardship? True inability to pay? Any possibility to re-finance and keep them in the home? Etc.
b. Does the offer price reflect a fair price for the property? Lenders aren’t stupid. They may be willing to accept an offer that is close to market value but they aren’t going to accept something WAY under it-why would they?
c. Who are the real decision makers and what is their agenda? Back in the 1990’s most short sales were processes that took about 6-8 weeks. In almost all cases the agent dealt directly with a person skilled in evaluating what they call “loss mitigation”. In cases where there was a second trust deed (which was the majority), we dealt directly with a Private Mortgage Insurance Representative. They were motivated to get what
they could to minimize their loss. Because the majority of todays defaulted loans do not involve PMI (the defaulting seller usually got an 80/20 piggyback loan or some type of loan specifically designed to avoid PMI) we now try to communicate and negotiate with 2nd Trust Deed holders that represent pools of investors that bought the Security on Wall Street. Sound complicated? It is. We often don’t know who the real decision
makers are and how to negotiate with them, hence the huge increase in time frames for an answer.

And then the anser is “NO”. “No” we won’t approve the seller, “no” we won’t accept that price, “no” we can’t get the other investors to sign off. And it only took 3, 4, 5, 6 months of hard work to get to that. How many buyers are going to be excited about going through that??

2. Another problem with “Short Sales” is how poor many agents are at handling them, especially with respect to pricing. I mean it isn’t for me to say how they and their client should price it, but when it is obviously so low the bank will never approve the price, something is wrong. I can look at virtually any list of homes for sale in Santa Clarita and tell which ones are short sales solely by the prices. Now 10 years ago this wasn’t too big of a problem because the buyers didn’t even know about them. Today, with the Internet, all buyers see these homes and think they are “normal” listings that they can buy today. They aren’t and they can’t. Agents are not required to disclose to the public that a listing is a short sale-they only have to disclose it to other agents.
As such, agents have gotten creative calling these listings “pre-foreclosures” on realtor.com as an attempt to draw calls from buyers hungry for “deals”. I’m not going to say “short sales” don’t sell-they do. Sometimes they are good deals. But boy are they a headache for the 80% of the time they don’t go through, and in the
process of marketing them the public sure can get confused-and frustrated.

A foreclosure on the other hand is completely different. This is a home owned by a Bank or lending institution. They want to sell it, they have an established price based on an appraisal and can give a buyer an answer in a matter of days-not months. These are fantatstic opportunities for buyers in today’s market as they represent highly motivated sellers with prices that now are almost always are the lowest in tract. Whenever you see “bank owned”, “foreclosure” or “REO” that is a property to investigate. There are dangers-they are always sold “as-is” and often need repairs, but at least there isn’t the painful process of the “short sale” to go through in attempting to buy one. Many times foreclosures are properties that were short sales that didn’t get approved and went to trustee sale. For the patient buyer, sometimes they can then buy it as a foreclosure if the short sale process didn’t pan out.