What REALLY happened to all the homes and what it may mean to Sellers

Every year in December I write to all my friends and past clients to give them my predictions about Real Estate coming into a New Year. I usually include things about interest rates, new construction, business moving into Santa Clarita and other issues that affect value. More than anything else though people want to know if the value of their home will go up or down. Sometimes it is pretty easy to predict, lately it has been incredibly hard. Lets start with the basics and then get into an issue that has become by far the biggest question mark in Real Estate-”Shadow Inventory”. As I have recently reported, we currently have the lowest amount of inventory that I have ever seen in 19 years of selling Real Estate. In a Valley of over 200,000 people we have UNDER 500 homes for sale. New listings in the lower price ranges are often met with multiple offers. If we weren’t hearing every day about unemployment, rising notice of defaults, appraisal challenges, and coming off of the most sobering correction in Real Estate history, prices would be going up. So as we head into 2010, I will say here what I share every day with my clients:

1.Prices under $450,000 are stable and/or going up. There is a tremendous lack of inventory and huge demand for new listings.

2.Prices between $450,000 and $650,000 are stable in Stevenson Ranch, Valencia, Saugus and most of Castaic and Newhall. Less so in Canyon Country. Newer homes typically have more demand than older-no big surprise there.

3. Prices over $650,000 are not yet stable in most parts of our Valley and will REALLY be affected if there is a significant increase in foreclosure supply as there is not as much demand in this price point as there is in the lower ranges. It is completely opposite-especially over 1 million-than the lower price ranges.

Fairly straightforward, right? In a “normal” market I would likely be predicting a very strong 2010 with increases in most homes under $500,000. Ah, but this isn’t normal! Not with Government intervention, short sales priced wherever the agent wants, foreclosures selling without ample time on the market to allow free market bidding, “investors” soliciting me for my short sale listing so they can buy them under market and plenty of other garbage that should not be happening. Even more concerning is the over one million homes nationwide that have been in default that MAY come on the market. How many? When? How? This is so critical to pricing and yet so unclear that even experts completely disagree. See what I mean? HARD to predict. Let’s try to keep it simple.

  Let me start by saying that I have spent a lot of time in the last 18 months at great conferences, compared notes with other top agents and met with experts from Fannie Mae, Freddie Mac, FHA, Bank of America, Wells Fargo, Chase and anyone else that should have insight on this  topic.  My questions are: “Where are all of the houses for sale that the public records tell us are dafaulted?”. “Why are there so many people living in homes for months (and years!), without making a payment?” Why hasn’t it been taken back by the Bank? Why are Fannie and Freddie now RENTING back the home to the people they just  foreclosed on? If you follow this “shadow inventory” question, you know that there are plenty of conspiracy theories-the banks are waiting for prices to rise, the banks are waiting for the governmant to bail them out, the banks are using mark to market accounting and don’t want to show just how bad their balance sheets really are. There are a few others and some or all of this may have some basis in truth. Here though is what we KNOW to be true;

1. The Government REALLY does not want more foreclosures. They have forced the Banks (and by Banks I mean lenders and servicers), to stop foreclosure proceedings and forced them to do anything possible to modify loans and keep people in their homes. They have endorsed Fannie and Freddie’s rent back policies. Again, they REALLY do not want more foreclosures.

2. Because default becomes a matter of public record, analysts can show just over one million homes that are in some stage of foreclosure, from over 90 days to over a year, that have not been taken back by the banks. Again, there are theories as to why but the math does show 2 groups that together add up to about this number.  First there are just over half a million homes that were delayed by the moratoriums that are now being processed because they do not qualify for loan modification or they are vacant. This process started this summer and most experts will tell you that just the processing time alone is about 90 days, longer if occupied. Combine that with the almost 600,000 loans that were modified by Presidential order under the HAMP program and we see where the homes are. So  the moratoriums ended at the exact same time that the Government REQUIRED the top 10 servicers to do 500,000 loan mods by November1, a goal that was exceeded. According to many, the sheer man power alone to do this made it impossible. Most people in the know suggest that we will see the foreclosure numbers come back SLOWLY as the huge task of moratorium, modification, and possible foreclosure processing occurs. As such, expect the foreclosures to be spread out over a much longer time frame, which the Government very much wants. Better for price stability, better for buyers and sellers, though not because of some perfectly calculated effort just the overwhelming amount of work and time involved.

3. Finally, nowhere close to the one million homes will come on the market as foreclosures because the Government has also told the lenders that if people don’t qualify for a loan modification, or do a loan mod and fall back into foreclosure they want to see SHORT SALES. In fact, it is likely that we will see the Government offer financial incentives to sellers and the lenders to go this route. Also discussed has been turning around the process in a much shorter time frame and making all short sales basically non recourse-no having the seller sign promissary notes or other demands that have made them fall apart in the past. If these things happen, and most expect they will-look out. Short sales will dominate resales in areas like Santa Clarita for the next 3-5 years as upside down sellers use them to get right side up.

So this big number of “maybe” listings sits out there leading to further uncertainty and until they are absorbed expect a market like this one for years. Prices won’t go up a lot, but they won’t go down a lot either. As such, I have committed myself to try to be part of the solution in a new way-helping anyone that needs it to stay in their homes. We will have free seminars starting in January here at my conference room for those needing direction on loan modification or the right way to do a short sale. In April we will offer free sales information and applications to reduce property taxes. Most importantly though we have to self police as agents and homeowners, the unregulated short sale process currently occuring. Over 60% of the listings in our Valley are short sales, many that don’t “smell” right. We simply must end this “Wild Wild West” way of listing short sales well below market value and then convincing the lender that it is market value. Short sales should have multiple offers due to lack of inventory and they should be open to competitive bidding just like “normal” sales. Police your neighborhoods and if something looks wrong, call the agent on it. Incentives should be put in place for homeowners (currently getting nothing out of a short sale) to sell as high as the market will allow. The irony of all the fraud and mismanagement that occured with prices going up is the same thing is happening to cause them to go down because of an unscrupulous or ignorant few. There is a right way and a wrong way and the only way to have stability and transparency is with rules on short sales that often do not exist. I am tired of seeing homes go off the market in one day at  $100,000 below what it could sell for, and  it happens all the time. If we can eliminate this then next years update will not be nearly as hard to predict.

Will Short Sales Save Real Estate?

About 18 months ago I wrote about how an avalanche of short sales had come on the market, frustrating sellers, buyers and lenders attempting to process them. My message at the time was–basically–they take forever, they are rarely successful and lenders don’t seem to know what to do with them or how to answer homeowners questions about tax implications, etc. I summarized for buyers: “foreclosures good, short sales bad”. For sellers I advised consulting your tax and legal professional, I’ll try to help you if I can and I likely can’t answer your questions. As an agent, I really didn’t want to have anything to do with them, and neither did many other realtors. We wouldn’t list them if there was more than one loan, and we wouldn’t show and sell them because the foreclosures were plentiful and the response time was so much quicker.  Well, what a difference the last 18 months have made! Let’s start with what I believe are a few important, “We all don’t agree on everything that is happening in Real Estate but we likely can agree on…” statements:

First, as people that either own Real Estate or work in the industry, we must accept that virtually everyone wants transparency and stability in the market. Transparency in terms of understanding where all of the upside down and defaulting properties are and are likely to end up, and stability in terms of pricing so that normalcy to the market can occur. It’s not a stretch to say that almost all the affordability numbers are in line again, especially in the lower price ranges where we have had a housing shortage for all of 2009. Let’s also agree that price stabilty is the #1 desired goal for homeowners, lenders (less foreclosures), and buyers to feel comfortable in purchasing and for overall economic confidence. Price stability also solves most of the problems that the Government has been trying to solve with the Housing crisis.  Agreed?

Second, let’s accept the fact that prices will go down if supply exceeds demand and will especially go down if foreclosures dominate the inventory. Foreclosures are a fraction of what they were a year ago for a variety of reasons including the fact that lenders want to avoid them at all costs. Let’s also agree that people will only walk away from their homes if there is no equity–a situation that occurs to a fairly high percentage of homes in Santa Clarita in particular, and California in general.

Third, let’s agree that people are mostly motivated by their own self-interest–they will walk away if they have no equity and especially if they are really upside down. It’s not uncommon for me to talk to people that owe $50,000-$150,000 more than their home is worth. In those situations–even if their lender offers an incredible loan modification–it’s a very risky situation for the lender to be in. Further, if we do not stop prices from falling it will lead to even more foreclosures which will lead to more falling values, etc.

In other words STABILITY in pricing is key to all of the things that everyone wants, but is currently being sabotaged by the big elephant in the room–the inability of people that are upside-down to have their loan amount changed to market value by a loan modification or some other means and that isn’t likely to change any time soon. In other words if there was some way that all the people that owe way more than their house is worth could somehow “reset” their value to today’s values, they wouldn’t leave and stability would occur sooner.

Up until now the lending community has adamantly opposed any kind of “cram down” in loan amounts to today’s values, even though it would certainly reduce the amount of foreclosures in the future. Loan modifications, though better than 9 months ago, are not going to solve the problem either if a homeowner doesn’t want to stay in an upside down home. Enter then, the short sale as another solution to the problem of price stability.

It would take too long to explain all of the changes I have seen with respect to Lender’s attitudes toward short sales, but let’s just say that they want to do them…a lot. Foreclosure is terribly expensive–politically and financially. Now when a homeowner inquires about loan modification and is less than thrilled with the result, the BANK WILL OFTEN TELL them to short sale. Understand that this is completely opposite from 18 months ago when lenders didn’t seem to understand–or believe–exactly how serious this situation is. Today, lenders like Bank of America have been working on platforms that will allow the process to be shortened and clearly understood by all concerned. Outsource companies that, in the past, have only handled foreclosures are now setting up with their lender clients “pre-approved short sale” divisions with agents specifically trained to handle them, just like foreclosures. Legal and tax professionals have started pointing out the very clear differences between foreclosure and short sale and what we didn’t fully grasp a year ago is now clear–there is no disputing that to a homeowner comparing just walking away (foreclosure) to attempting to sell there are benefits to credit, how quickly they can buy again, tax and deficiency issues as well as the ethical issue of not honoring the loan commitment. In other words, there are huge pushes by everyone (Government, lenders, servicers, etc) to work it out not walk away, and they will make it worth your while to do so.

In the past 3 months I have seen short sales approved in less than a month, short sales approved when the homeowner had not missed a payment and short sales approved by both lenders when there was more than one loan (still the biggest problem). I have had homeowners call me saying “my lender suggested I call an experienced short sale realtor”. This month, I saw a client that did a short sale in June, apply for and receive a new loan (at todays market values, get it?), to buy their new home. So it seems that the lenders want to do them, agents are willing to work on them, often because there is so little for sale other than short sales, and the government has offered incentives to lenders and homeowners to pursue them over foreclosure.  Finally, the next 12 months will likely tell if the upside-down homeowner will be able to sell short and ultimately “reset” their loan amount  into today’s value situation by buying again shortly thereafter. If so, we may see, along with modifications, another piece in the market stability puzzle  that everyone desires. See the attached “Short Sale vs Foreclosure” sheet for more details.

So why aren’t prices going UP??

   It sure must be difficult to be a homeowner in Santa Clarita these days and understand what is happening with prices. In the last 2 weeks I have seen feature stories in the LA Times with topics about Real Estate that are all over the map. Sales are way up over last year but median prices down. Unemployment and economic uncertainty are going to lead to further foreclosures and price declines, yet hundreds of thousands of loan modifications are now happening and foreclosure inventory is a fraction of last year.  Interest rates remain low, there is virtually no new construction to buy and new listings are all seeing multiple offers. Any buyer will tell you that virtually any home–and especially the few foreclosures we have seen this year–have so many offers they don’t want to even try. Yet, there are new appraisal rules that make appraising property and getting financing more difficult than ever. Oops, now there is a movement in Congress to overturn that appraisal rule. Look out when a lot of the “Option ARM”  loans reset next year.

The truth is that all of these articles are factual. So, depending on how you look at  things, its either the best time to buy a home in years or you would have to be some kind of crazy person to even consider it!

Which leads us to the topic of the day–should prices actually be going up?  It’s funny, maybe even silly to suggest it, but I am a numbers guy and Real Estate is a numbers business. Here is the fact that most buyers and Realtors know, but almost no one else seems to–on numbers alone this is a 100% seller’s market. In Santa Clarita today there are about 623 homes for sale. Contrast this with a year ago when it was 1790 and you start to get the picture. However, if you are a serious “ready to go” buyer there are just over 300 homes available that are not short sales. That is the lowest number I have EVER SEEN in selling Real Estate for 19 years. Meaning for a valley of 200,000 people we have under a two month supply of active inventory. We have more homes IN ESCROW than for sale-almost 900! In any universe that operates on supply and demand, that means prices should be going up.  Further, this is happening virtually everywhere–Vegas, Antelope Valley, Riverside–areas that 10 months ago were saturated with homes, today have buyers lined up with little to buy.

So why arent they? Two big reasons are problems with appraisals and short sales. I will explain both but first I should point out that this is not the case in our market over $800,000. As “red hot” as the under $500,000 market is, and relatively stable the $500,000-$700,000 market currently is, over $750,000 in Santa Clarita there are 109 homes for sale and 24 in escrow. So the split that I have written about before between under $500,000 and over $750,000 remains–they are truly two different markets.  (this is due to less available financing, less buyer confidence, lack of move up buyers and others issues for another blog).

So why aren’t prices going up under $500,000? Well, I can give several examples–just from the past 6 weeks–that would suggest they are. In Stevenson Ranch we sold a condo for $325,000 where “comparable sales” were around $300,000, AND brought the appraisal in. In Saugus I sold a 3 bedroom home (with 4 offers by the way) for $380,000 in which larger homes down the street had recently sold for around $350,000. And in Valencia we have a sharp Brighton Village home under contract for $415,000 in which the latest sales from last year were in the $370,000 range. Fortunately the appraiser yesterday acknowledged not only the demand for our property (7 offers), but the far superior condition of ours over other lower sales. Unfortunately, that is not always the case.

Indeed, more often than not when we sell homes under $500,000 today, we do not have the comparable sales to support the offers we get and agents like myself know we have to have a very short appraisal contingency time frame and  get as many back up offers as possible. Appraisers are not giving the “value” for superior condition that buyers perceive–especially when comparing a “fixer foreclosure” with a move in condition “normal sale”. More often than not, the appraisers are unwilling to reflect any strength in the market upward. Last week one told me, “Neal, I have to appraise for a decling market” even though there was not one home for sale in the area and ten were in escrow! I’m not piling on appraisers–they have a tough job that due to new restrictions that I won’t go into here is getting tougher. But that is reason #1 that we are not seeing stability yet, or quantifiable price increases under $500,000. Sadly, reason #2 is due to my fellow agents and it concerns “short sales”.

About a year ago the appraisers were required to use foreclosures and short sales as “comparables” in their appraisals. Meaning that even if it was vacant, dirty, with a dead lawn, terrible flooring, poor fixtures and appliances it would be compared to the regular home being sold in the same neighborhood. The logic given was that foreclosures and short sales represented so much of the sales going on (well over 50% then and now in Santa Clarita), that they in fact represented “the market”. It became my job of course to point out the differences in condition, location, etc. and hope that the appraiser would give the necessary adjustments.  The bigger problem though became not the beat up foreclosure sales, but the short sales that were not in poor condition but that a realtor priced artificially low to get offers. In many cases these homes sold lower than they would have or should have. Agents who didn’t know market value (or didn’t care) have listed many properties as short sales at lower than market prices and made it almost impossible to create stability in many areas, let alone have prices increase. Worse, unlike foreclosures which typically have numerous offers driving price up to what should be market value before opening escrow, with “short sales” the agent will often take the first offer and process it, even if it is below real market value.  Just often enough the bank will approve it giving an artificially low sense of “value” for that property. I can show 50 sales from the last 3 months that, if they were given the opportunity to be properly priced, marketed and bid on, would have sold for no less than 10% more than they did.  This is not an exact science and all agents can have reasons for pricing short sales aggressivly, but I am seeing sales easily 20% below market value that just don’t help with price stability. So short sales kind of represent the unregulated “wild wild west”: agents can price them wherever (unlike foreclosures) and until there is some accountability this will continue to be a problem.

Next time, I will again address the supposed coming “wave” of foreclosures and why there may not be the ammount we thought or why, based on huge pent up demand, they may actually sell for higher prices than many buyers expect.

So where is the “Wave of Foreclosures?”

Virtually everybody that follows the Real Estate Industry–especially in California–has been talking about the next wave of foreclosures that is supposed to hit and drive prices down. Even many of the buyers and sellers that I talk to have heard rumors or pieces of information about “moratoriums lifted” and “loan resets” and all kinds of things that make them want to wait if they are a buyer and sell before they hit if they are a seller. The point is that everyone knows that large amounts of foreclosures equals further price declines and everyone knows that values in Santa Clarita are already 35-60% lower than the height of the market in May 2005.  And of course everyone wants to try to time something, something that I have come to the conclusion may be impossible to time. I have spent the last 9 months talking to top agents, asset managers for banks, executives in the Title Industry and people that should just plain know the answers to my questions about this “wave” and guess what- NO ONE KNOWS. We have been hearing “after the first of the year”, “after Obama is in” , “after the moratoriums end”, and in May 2009 foreclosures are at the LOWEST point of the last 3 years. So what gives? I can tell you that I have spent hundreds of hours trying to understand what is really happening and I will present it here in as clear a way as I can, because it is complicated. Lets start with does this “wave” even exist…and the answer is yes.

1. If you talk to Executives at the largest loan servicing companies (Wells, Citi, Bank of America, Chase etc), they will confirm that they have hundreds of thousands of properties in default. Many of these properties are so far upside down that there is no way the owner wants it back unless the Bank (I will use ‘Bank’ and ‘Loan Servicing Company’ to represent the ultimate decision maker-they are not necessarily the same) is able or willing to “cram down” the loan amount; meaning take the $450,000 loan and magically change it to $300,000 which is what today’s value is. So far this has not happened and unlikely will ever happen because of  how this would have to occur. It’s incredibly complicated. These hundreds of thousands of properties, in many cases, haven’t even had a Notice of Default (which is public record after 90 days of missed payments) or a Notice of Trustee Sale (another 110 days after that), let alone gone back to the bank to be liquidated as a foreclosure. WHY?

2. The answer is political policy and the mysterious “moratoriums” which have been in place since last year. Understand that “foreclosure” is a bad word and politically anything that can be done to stop the process is in political favor right now-whether it makes logical sense or not. Last year the Senate passed a bill REQUIRING banks to have direct communication with borrowers in default and work on loan modifications. The banks (including Fannie Mae and Freddie Mac) immediately instituted “moratoriums” on foreclosure. We expected these to end at the beginning of the year and the natural process not to be artificially stymied. That didn’t happen. In California this past February the Governor proposed, and passed, SB 7a which extended those moratoriums until August.

Now this isn’t about whether foreclosure is good or bad-it’s terrible for anyone that was truly taken advantage of  (a small percentage in my experience) or really wants to stay in their homes. As an agent, the sooner these end, the easier my battles with appraisers will be when they compare the “normal” homes I sell to the beat up foreclosure that no one wants and I’m told is “comparable”. They aren’t.  Still, foreclosure is a part of Real Estate. Bottling up hundreds of thousands of homes artificially that should be coming on the market so that the bank can remove a non-performing asset, a new homeowner can improve the property, and price stability can occur sooner not later is what everyone should want. And it isn’t happening.

Today in Santa Clarita there are about 800 homes for sale. If you take out the “short sales” there are about 370. This is the lowest point in over 5 years. Of those 370, only 61 are foreclosures or “REO’s”. Last year at this time there were over 2200 homes for sale. What has occured is a 180 degree change from a “buyer’s market” to a seller’s market and NO ONE SEEMS TO KNOW IT. The reason why is that the appraisers are still appraising for a decling market even though any agent will tell you there is precious little to show and any buyer under $500,000 will tell you that they have lost out on multiple properties, been trying to buy for months, etc. So prices haven’t gone up except in the under $325,000 price point, and for a lot of reasons will not go up any time soon.  In fact, because this process of getting rid of defaulted properties is being extended so much I do not think that we will see prices rise for several years except possibly in the lowest price points. Even when we do sell for a higher than customary price, the appraisal will not come in, so the sooner confidence comes back, the better.

So what will happen to all these properties?? Of course they will be sold and most “experts” are suggesting that is the end of the year for California, UNLESS the governor extends the moratoriums. Many of the larger lenders have recently ended their moratoriums  and agents are seeing an increase in “broker price opinions” which is the precursor to the lender taking the property back so that it can be marketed as a foreclosure. Still the numbers of active listings are LOW.

A final point of interest in this guessing game is that the lenders are now being given financial incentive to pursue short sales with defaulted borrowers. Last week the Obama Administration announced new guidelines for short sales designed to motivate the lender/servicer ($1000) and borrower ($1500) to pursue short sales as an alternative to foreclosure. Understand that if the President or Governor or whomever can claim to have “saved X amount of homes from foreclosure”, it makes them look good. And is very likely the right thing to do. This was announced last week so it remains to be seen if the “short sale” will replace the foreclosure as the home of choice for buyers starving for homes, but I wouldn’t be surprised.  Unfortunately many of the challenges of negotiating a successful short sale remain (lots of time, understaffed lenders, lack of cooperation between lien holders, etc). I have personally had several defaulted homeowners not get the loan modification that they wanted and were advised by the lender to pursue a short sale. If this trend continues (and I think it will),  these properties may actually represent more of a “wave” than the foreclosures. So this bears watching. In the mean time,  I am actively listing short sale homes in an attempt to be part of the solution….stay tuned.

The 2 Types of Buyers in Today’s Market

A large part of my time is spent meeting with and advising sellers. It is advice that varies from area to area and especially from the very busy lower price points to the very slow higher price ranges. It truly is 2 completely different markets. Understanding the differences and tracking the numbers is crucial. An agent really can’t accurately advise a seller without fully understanding the dynamics of what is selling and what is not.   What every seller wants to know is “how much and how long?” and if how much isn’t “enough” then how long before it goes back up?. Every seller in every price point asks these questions and the best agents always know the answers, in any type of market.  To be able to answer them in a confusing market like we are in today requires an understanding of who the buyers really are and what their motivation is. In other words to have a “sale” you need a home for sale AND a buyer. In today’s market there are clearly two types.

     The first buyer is the one that does not HAVE to buy now. This buyer may be a first timer that is renting or living with family, someone who sold and is renting “waiting for a good deal”, or someone who owns and intends to buy and keep their existing property. In all cases though there is NO DEFINITE TIME FRAME to purchase. They may be motivated by value (which is why the foreclosures sell so well and with multiple offers), or the best location and upgrades. In either case they will wait for it, however long it takes. For many of my sellers I suggest that this buyer is likely not our buyer unless they offer superior condition/location and a price that is attractive. It must be both to attract this buyer.

   The next buyer is the buyer that is highly motivated to buy TODAY. They just sold their home and do not want to do a double move. They must be in before the next school year. The Company just transferred them and they want to settle in to their new town. Whatever the situation, this buyer is as motivated by time as money and for many of my sellers, THIS is the buyer they are looking for. The challenge is that in a declining market there are far fewer of this type of buyer than in a stable or appreciating market. To find them, I attempt  to literally track every buyer that I can in the marketplace. I have ads and signs that generate dozens of buyer calls each week. I talk to them. Internet inquiries -I respond. We call agents that show our listings and ask what their buyers needs are. I meet weekly with the top agents in town at a Network meeting where we attempt to put buyers and sellers that we are working with together. In all cases this gives tremendous insight into who is buying and who isn’t.

What this means to today’s seller that is not willing to price under the competiition, is that it takes a lot of time, and the higher in price the longer it takes. For example, right now in Santa Clarita there are 132 homes for sale over $800,000. Unlike the lower price ranges, there are only 9 short sales and 7 foreclosure properties in this price range. Meaning over 85% of the homes for sale are just regular sellers waiting for the right buyer to come along-not the distressed properties that so many buyers request. The tough part is that only 16 homes over $800,000 are under contract, meaning over 85% also are not selling. The average time on the market for this group is over 115 days. This group in many cases is waiting for the #2 type of buyer, and there arent that many. What we have is buyers waiting for lower prices or better homes and so far they aren’t coming. Then we have sellers not willing to lower to effect a sale and you have a market that can easily confuse those that don’t understand why homes still can sell at top dollar-but only when there is little or no competition and only when the seller is patient enough. Sometimes that is asking a lot. Contrast that with homes available under $400,000 where there is a ton of activity and a ton of short sales and foreclosures. There are 458 homes for sale in this price range and 311 of them are short sales-homes that the “MUST BUY TODAY” buyer has to avoid. That is why when a new foreclosure or “regular sale listing comes on the market in this price point it sells IMMEDIATELY. The average time on the market here is only 37 days.

 So, if you are a seller over $800,000 be prepared to give yourself-and your agent-the months necessary to sell. Waiting for the #2 buyer can take a long time…..

What Happened to all the Foreclosures??

I suggested in my “Predictions for 2009″ that prices would be directly affected by new foreclosures coming to market. For the past 4 years, areas that had lots of foreclosures dropped as much as 50%, whereas areas that had lower rates of default  lost less than 10%. It was my expectation that, based on continued high default rates, prices would be soft and in many areas continue to decline because of foreclosure competition driving prices down. Surprisingly, the amount of foreclosures coming to market has been a fraction of last year at this time. In fact, inventory in Santa Clarita is at about 1150 homes vs. 2065 a year ago. So what is happening??

1. Starting last year many loan servicers started complying with a government led “moratorium”. I have tracked dozens of homes that went to foreclosure sale in December, January, Februaury and March that have never come on the market. I could write a thesis on what I believe is happening here, but suffice it to say they aren’t for sale…yet. Loan modifications, by my estimate, will only work for about 25% of these (many are vacant or tenant occupied), so the biq question is WHEN? Today in Santa Clarita there are “only” 106 bank owned properties compared to well over 300 a year ago. Multiple offers are commonplace and agents that don’t really understand the Santa Clarita market are pricing foreclosures lower (in some cases much lower) than they need to.

2. Assuming a large amount of foreclosures hit the market this summer, the lower price ranges will still be relativly stable for good condition properties. In fact, if we removed the “short sales” from the market it would not be a buyers market under $450,000. Let me explain. Of the 1181 homes for sale today, 564 are short sales. These are listings that every agent, if they are being honest, shows only as a last resort. Take away these homes and we have 617 “salable today” properties. The last time the number was that low prices were going UP 25% a year, not down. Stand around the Remax office and listen to all the agents moan about the lack of homes to show their buyers and you would swear it’s 2004. The challenge, of course, is that the buyer’s mentality today is 180 degrees opposite of 2004–they are unwilling many times to offer asking price or over asking price for lower priced properies with multiple offers. Many just don’t understand or accept the supply/demand dynamic happening, but smart buyers are buying quality under $450,000 without reservation.

The exception to this discussion is homes over $800,000. This has been a low foreclosure part of the market, but prices are adjusting here rapidly–for the most part due to a lack of buyer confidence and lack of available financing. As always, the numbers tell the tale. Today in Santa Clarita, over $800,000, there are 137 homes for sale and only 25 in escrow. Over 1 million it’s even tougher–83 homes for sale and only 4 in escrow. Less than 20% of these are short sales or foreclosures, so it’s more lack of demand (and more than ample supply) driving prices down here. Top quality still sells, but it better be priced right.

1 Year Later-How Short Sales Are Changing!

About one year ago I wrote a blog that I asked every buyer that we worked with to read. It was designed to let them know–in no uncertain terms–all the problems for a buyer pursuing a short sale. Essentially I wanted them to understand the difference between a foreclosure and a short sale, with the message being foreclosure “good”, short sale “bad”. Foreclosure “good” in the sense that it had one owner (a bank), one decision maker, was vacant, the price was real, and you could get an answer in typically less than a week to an offer. Short sales, at the time were none of those things.

   Today, short sales are still a real problem. They often have more than one bank with a lien on the property, the sellers are often in the property with no real motivation to properly disclose or take care of the home, and answers to offers still take months and often result in a “no”.  The biggest problem remains pricing. Buyers do not understand that it is very common that an agent will price a property artificially low to generate calls and offers. This price sometimes has no basis in reality, it was decided by the agent and the seller (who sees no proceeds when it sells, and they usually leave it up to the agent) and is very often much lower than a bank will accept when they do their appraisal. This obviously has and will continue to confuse the public because a buyer using the internet to look up proprty has NO IDEA which homes are “regular sales” and which are “short sales”. So good information and education about short sales–for buyers and sellers that compete against them–remains one of the most important areas to discuss in Real Estate.

   So what has changed?? As much as anything it is an industry attitude toward short sales. 2008 was such a devastating year to Banks and loan servicing companies that they now realize that selling a problem asset (that’s what they call “homes”) PRIOR TO the foreclosure process is MUCH LESS EXPENSIVE than going through the foreclosure process and potentially dealing with evictions, further decline in value, dead lawns and everything else that is part of taking the property back as an REO. In fact, in meetings that I have had with several large Banks there is an industry wide push toward “preapproved short sales” in which the appraisal is done by the Bank, the owner is evaluated for the short sale (it’s kind of like a reverse loan application–the seller proves that they CAN’T afford the home), and an agreement is reached BEFORE the home is put on the market. This type of “new short sale” will hit the market this year with a couple of pilot programs and if it helps the lenders reduce losses, expect the whole industry to follow.

 In the mean time short sales continue to confuse the public. One of the biggest problems is that appraisers now use them as competing listings when they do appraisals, EVEN THOUGH THE LIST PRICE MAY BE MUCH LOWER THAN THE BANK WILL ULTIMATELY ACCEPT. For example, I sell a property for $435,000 which represents market value for a nice Valencia home. The appraiser actually can make adjustments for condition (usually poor) for the closings in the neighborhood which are often most, if not all, foreclosures. The problem comes up when some agent that will likely never sell a home in that area again, and has no regard for property values prices a model match at $349,000 and the appraiser uses that as a “competing listing”. This happens almost every week  and is making it difficult for buyers to get loans when the property doesn’t appraise, even when I have multiple people making offers at market value. Hopefully the “preapproved short sale” with a guaranteed, confirmed price will help eliminate confusion in the market place. In the mean time we deal with the system–as confusing and frustrating as it is–for short sales. The Banks are improving their response time and multiple lien holders do seem more open to “working it out” so that the property can sell “short sale”. If you are a buyer though, it’s probably best to stay away until your agent tells you, “the bank has approved this price”. Until then it’s a time consuming crap shoot.

SO WHAT WILL HAPPEN IN 2009? NEAL PREDICTS AGAIN!

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.

Economic Stabilization Act

The headlines about the 700 billion dollar bailout plan were displayed dramatically on the front cover of almost every major news outlet in the country only a few weeks ago; history in the making. The largest governmental intervention in the economy since the depression. But soon the pervasive media focus shifted from that to the coming election and poll frauds, and it left many of us scratching our heads wondering what, exactly, they were going to do with all that money and how it would effect us.

The answer to many of those questions remain…unanswered. But my friend Laura Langen from Southland Title put together, in my estimation, the best summary of what was signed into law,  what effects it will have in the next few years, and how those effects will ultimately impact the consumers at the end of the chain. You can read that by clicking the link below.

Emergency Economic Stabilization Act of 2008.

The bottom line is if the Fed can use the cash to free up some of the frozen credit markets, it will start to put some of the wheels of our economy back in motion that have recently come to a grinding halt. Theory and application however, as we have learned time and time again, do not always form a parallel track, and it will be interesting to see what the law of unintended consequences will have to say about it all.

Santa Clarita Real Estate Update or “Why I flew to Miami to understand this mess”

 In the 18 years I have sold Real estate, it’s not much of a stretch to say that the last 45 days have been the most unbelievable I have ever seen. It gets to the point that no matter how incredible the news-Wamu and Wachovia gone, Lehman done, AIG, Fannie, Freddie, the market up 600, down 900…we keep waiting for another shoe to drop.  I have always considered it my job to report to people what is happening with home prices. Often, I examine areas that affect pricing-loans, interest rates, new construction, population growth, business development etc, so that we can understand and predict what will happen in Real Estate. These days though I must admit, I can feel out of my league. As I study the trends of lower prices, problems with loans, concerns about job security, rising bankruptcies, and certain parts of the market just NOT MOVING, I really wanted to get a “big picture” on what is happening and more importantly what probably will happen. I got my answers last week in Miami.  Before I get to that, a quick look at Santa Clarita over the last 60 days. Many of the trends I mentioned in the mid year report have continued:

1. Inventory continues to drop-we are now under 1500 homes for sale. As slow as it is, this is actually not the “oversupply” of 2400 homes from one year ago.

2. The percentage of homes for sale that are foreclosures or “short sales” continues to rise. Over 50% of the homes for sale are in these categories-that is why prices continue to fall.

3. We have basically lost the “move-up” buyer. Santa Clarita is an area in which growth has always been driven by people buying up in size and price. This starts with a first time buyer. Those buyers are actually plentiful in today’s market but they are not buying properties that lead to multiple transactions. Looking for value, the first time buyer is buying a foreclosure or short sale and those sellers ARE NOT BUYING ANOTHER PROPERTY. Few sellers in the $450,000-$700,000 range are selling and buying the $650,000-$950,000 home as the numbers below point out.

4. Because of the lack of “move up” buyer transactions, the $700,000 plus market is slower than I have ever seen it. In our valley today there are about 600 homes in escrow. Of these only 23 are priced over $700,000!! Only THREE are over 1 million!! Even when I sell a property in this range, there are so few “comparables” that appraisal is always a dogfight. So where IS the market?? Under $400,000 we have 376 properties in escrow. From $400,000-$500,000 we have 128.  Of those in escrow (and what is in escrow now tells us where the market is now), 82% are short sales and foreclosures.

     All of these trends are more pronounced now than when I commented on them 45 days ago, and will likely continue into next year. Why this is happening, when it will subside, and how we differ from other areas are all questions I had for the experts at the REOMAC conference last week in MIami. This is a conference for lenders, servicers, preservation companies and realtors serving the Default industry. In a nutshell it’s a big foreclosure conference, seminar, training and networking oppurtunity. I was there for all those reasons. The keynote speaker was an economist known for being extremely accurate in analyzing and predicting trends affecting the Housing and Financial markets. Dr Christopher Thornberg  explained what happened, why it happened, what is happening now and will happen in the next 3-4 years. His position is that we are paying for past sins and to a large extent, no matter who is President, it’s going to be tough for awhile. There was so much covered but here are a few high points:

1.Today’s housing bubble is the worst we have seen in decades. There is approximately 3 million excess properties that need to be absorbed before prices will rise. He predicts that prices will actually hit bottom (depending on the market) from mid 2009 to beginning 2010 but that buyers will be so fearful and cautious that increases in sales and prices won’t really occur until a few years after that.

2. Why this happened is complicated but is a combination of Government policies designed to increase home ownership starting in the late 1990’s combined with the fraud and greed of the 2001-2006 period with the lenders and the buyers of their loans on Wall Street. The Government policies relaxed guidelines for buyers that arguably never should have bought homes but far worse was what followed. In 2000-2002 the stock market crashed. Investors flocked to the strongest return-Real Estate. Buyers soon were greeted with “stated income” loans (“just lie about your income”), zero down loans (“no commitment there”), and “no doc” loans, all designed whether purchasing or refinancing to result in products that the lenders could sell to eager buyers on Wall street. They had fancy names for these new products, and pooled them into securities that today make short sales and loan modifications almost impossible. The high risk factor was ignored because the value of the properties used for these loans kept going up. Consumer spending was at an all time high because home owners just kept refinancing and pulling cash out. Looking back it’s almost hard to believe how little the general public knew or understood about what was really happening-it seems obvious now. The point is that with the crash in values the party ended and the default rates started to soar. For this reason the 700 billion bailout really is not aimed at the Housing market, it’s aimed at the Financial market. According to Chris, the Fed will basically decide in the next few years who gets the money and who survives. Don’t expect that it will do anything meaningful to stem the tide of foreclosures-there are too many of those and too many more (mostly small and medium sized) banks that will go out of business.

3. “Back to affordability”. This means a return to fundamentals in lending. A down payment, good credit and verifiable income is what has always been until recently and will be again to get a loan. Consider how out of whack we got-in 1999 the average price in LA County was 199,000. With 10% down a buyer making $62,000 could buy that property and have 35% of his income go to his house payment. As incomes rose, interest rates fell and housing prices shot up. By the end of 2002, the average home was over $300,000 and represented about 40% of the average income-riskier but not dangerous. This is where prices should have stabilized-a 3year run up in prices is a typical historical market trend and 40% should not be exceeded for affordabilty. Because of low teaser rates and the new loan products mentioned above and fueled by greed and speculation, traditional affordability went out the window and by 2005 the average home in LA County was 577,000 and represented 71% of the average income. Simply stated-THAT DOESN’T WORK.

4. “Stagnant Consumer Spending”. With the lack of credit, elimination of home equity lines and tougher guidelines, growth will stay weak. We will be in the recession that Chris says started in January until 2010.  Consumer spending (no more cash to pull out of the house), will be very weak. My friends selling cars and in retail can attest to that. Plenty of belt tightening to be sure.

5. Chris feels the next area to be affected will be Commercial Real Estate-especially retail. Todays cap rates are unsustainable in this economy.

6. State and local Government will face challenges from lower property tax revenues.

7. Unemployment will stay up, the dollar will continue to strenghten, ineterest rates will stay about the same and exports will rise. Too bad few can afford that trip to Europe now!

8. Foreclosures will continue despite an obvious attempt by the lenders to loosen guidelines recently on short sales and a serious effort to work on loan modifications. The problem with loan modifications is that often you cannot change the term because of the way the security was packaged and sold on Wall Street. It has a time limit that cannot be exceeded by simply extending the life of the loan in a loan modification. Worse, is that for most, even with a lower interest rate the client still cannot afford the new payment and has little incentive to try when the value of his home is tens of thousands of dollars below it’s value. Hopefully short sales will become easier so that these properties aren’t abandoned and left to drive values down further.

 

There was a lot more and obviously I am giving a short version here, but the point is we have a real mess to clean up. Fortunately, a lot of people seem to understand this now and will do their best to do so. As to prices?? Chris says “prices will come down until people can afford homes again”. Seems logical. Today in Santa Clarita, the average home is now in the mid 400’s and probably fairly close to that old guideline of 35% of the average income, which explains why we have 376 homes in escrow under $400,000. If we can reduce the number of foreclosures and replace them with “regular” sellers that want to sell and move up, that is when we’ll see the market resume normalcy.