How do you know when the Market has changed?

Ever since the internet changed the Real Estate business, speculating on pricing has become a topic everyone likes to be an expert on. My last post shared how strong the market had become by mid-Spring, really changing from a Buyer market to a Seller market seemingly overnight. Well guess what, the market has changed again! The tricky part is understanding how, where and what it means for the balance of 2013. First, some are going to question whether this is even happening. I understand that, because if you read almost any media source it is overwhelmingly positive for future price appreciation. They point out that median prices are up 25% over last year, that there are shortages of inventory in many markets, that homes are being sold without an appraisal contingency and that the amount of distressed sales has greatly diminished! All of this and more is true. Still, here is how I, and many agents that agree with me, know when a market is changing. First, inventory starts to rise. In April, our valley had about 260 homes for sale, a virtual all-time low. Today, there are just over 500. Second, new escrows or “pendings” diminish. In the Spring, we had twice as many escrows as listings, a sure sign that homes are selling as fast as they come on the market. Today, it is much more in balance. Third, great new listings come on the market and don’t sell in the first few weeks. It may seem silly to just expect that, but we do. Other signs include: price reductions, which began in June and have increased in volume ever since; homes taking longer to sell; buyers not accepting counter offers and homes falling out of escrow when buyers walk away. All of these things are happening and are signs of a market going from 100% a Sellers market to much more balanced one.

So the market is flattening out, but not everywhere. If a seller with a $900,000 home, talks to a seller with a $400,000 home, their experience is going to be completely different. The reasons for this are simple. 80% of our sales in Santa Clarita this year are under $500,000. Simply stated, that is where the buyers are. The average time it takes to sell a home between $400,000 – $500,000 is 41 days, over $800,000 it is 148 days and over $900,000 it is 225 days! It is almost like being in 2 completely different markets, and in reality they are, even if they live across the street from each other. So why is this important? Well if you aren’t selling it may not be, but if you do want to move, it is critical to understand the proper marketing  strategy which I believe will  hold true for the next 6 months.

In April, I would tell every potential seller that there are two strategies to pricing your home. Strategy #1 – price it right about where we felt the market was (which was often higher that they expected anyway), and market for multiple offers that take us over the asking price with no appraisal contingency. Strategy #2 – was to price it higher than market value and wait for the market to come up and meet that price. In April, this approach worked for virtually every Seller. Today, however, strategy #2 would likely be the wrong approach for someone in the upper price ranges. They would sit on the market for a month or two, get no response and then be forced to reduce. The problem (beyond the obvious hassle of being on the market so long) is that the longer a home is on the market, the less it is worth in the eyes of a buyer – especially after 4 to 6 months. The right approach, today, for the higher priced Sellers is absolutely strategy #1. For a Seller under $500,000 (especially under $400,000), there are still way more Buyers than there are quality homes. A good property still receives multiple offers and often sell quickly. They can try either pricing approach and, for now, still be ok. Understanding where the buyers are, how each neighborhood is different from a demand point of view and if you can still push your price due to lack of competition is something that is literally determined month to month. For the balance of the year, lower price point homes can look forward to pushing prices and quick sales. However, if you are above $500,000, it is critical to know if this is even possible for you. It many cases, it may not be.

In conclusion, it is relevant to point out that this is all normal! Historically, it always slows mid-Summer with the balance of the year typically being steady, but not spectacular like the Spring. It is funny how easily we can get spoiled, especially after 7 years of price declines! In the Spring I mentioned that the only thing that I could see cooling off the market was rising interest rates essentially raising the cost of home ownership. Well, that happened! If that continues it could affect all price ranges, especially if inventory continues to build. For now, though, this is a lot like most normal markets. Homes should take a month or two to sell. 500 homes, though double three months ago, is still a relatively low number for a valley of our size and is certainly not too many. It is all perspective.  Some Sellers, however, are not aware of these changes.  They have listed at a price that likely is not possible. We started seeing this in May/ June and many are just sitting there today. If they are over $500,000, it is likely that they will need to reduce, or see what 2014 offers.

13 Months later, prices are sizzling!

It was last April that I shared that something very unexpected was happening. Inventory was dropping and we saw buyer confidence rise to levels that we hadn’t seen in years. Everyone expected 2012 to be another year of decline, but that did not seem to be happening. It was 9 months ago that I confirmed the trend with you and shared that as soon as distress sales made up less than 30% of our inventory, appreciation would have to occur, even if we still had lower priced short sales and foreclosures on the market. It was last summer that appreciation became obvious, especially in the lower price points. 4 months ago I offered specific examples of “regular sales” at prices more than 30% higher than recent distress sales and suggested some agents were testing the market to see what was possible. The Tesoro home that I mentioned in that post (priced at 735,000 versus model matches on the same street that were short sales priced at $500,000), will close escrow tomorrow-at 725,000! The point is this-no one that invests themselves in the Real Estate business would have told you at the beginning of 2012 that this would happen. No one. Last summer  I cautiously shared that appreciation had to occur based on the numbers, and I had to force myself to write it! It just didnt seem possible. I point all of this out because today we are in a market that many experts are suggesting is just as hot as 2006! Some are suggesting that we are creating a new “bubble” based on such rapid appreciation. I don’t personally believe that (this market has far less inventory, far less speculation, far more affordability and most importantly far more qualified buyers purchasing), but the reality is that this is the toughest market to be a buyer in that I have ever seen in 23 years of selling homes. There simply isn’t enough for sale, and competition can be fierce for quality homes. This has led to appreciation, especially under $600,000 that even 5 months ago, no one would have thought possible. In fact, what is happening right now is mind blowing, especially in the lower price ranges. It pains me to tell first time buyers that we really have virtually nothing to show them if they are under $250,000 and hardly anything of quality under $350,000. 18 months ago we had plenty! In the upper price ranges however, this is not necessarily the case. Today’s post then will break down four different price points and explain what is happening in each. Also, a note of caution. This rapid appreciation is caused by 3 things-cheap money, low inventory and strong buyer confidence. If the low interest rates go away, what we are seeing right now in appreciation will cool off immediately. For now though, the numbers are shocking.

Let’s start with our market in Santa Clarita under $ 400,000. In our entire valley there are 88 active properties for sale, not nearly enough. The condo market especially has been on fire. I listed a ONE bedroom condo for 165,000 in Valencia that had 5 offers, sold for 185,000, with no appraisal. It had to sell with no appraisal, as many of our sales do these days, because the most recent closing of that model was $137,000. This week I listed a 3 bedroom Peachland condo in Newhall for 165,000. Historically these are not the easiest properties to sell. Recent sales are under 150,000. In 4 days we have 7 offers and are currently at 180,000. In fact there are only 14 properties available in our valley under $200,000. That’s it. So the offers we are getting not only remove the appraisal contingency they often come with these incredibly personal heart felt letters begging the seller to pick them. Sounds like 2006 to me. This part of our market, because there are so many buyers in it and so few available properties will take the 30% appreciation of the last 6 months and probably continue for awhile. Lots more appreciation potential here.

The $400,000 to $600,000 market has also experienced strong appreciation, but it is about 15% in the last 6 months, not 30%. Still, that is a lot and is helping people that were upside down 2 years ago, refinance because they now have equity. Certain parts of town-Valencia, Castaic, Stevenson Ranch and newer Saugus have really seen some great sales. We sold a home in Hillcrest park Castaic for 450,000 that had a model match sale at 395,000 last fall. This range doesn’t necessarily have the crazy multiple offers of the under $400,000 range but it does happen here too. With less buyers and more homes for sale between 400,000 and 600,000 (currently there are 119 homes in this range available), sellers need to be realistic about what is and isn’t possible. Still, smart agents that know where there are holes in the inventory and buyer demand that is going unmet. We are pushing prices and getting it.  Popular areas like Westridge are seeing this because there is literally nothing for sale under $600,000. A recent 2010 square foot duplex in Bella Ventana went under contract at $550,000, $80,000 higher than last fall.

The $600,000 to $800,000 market is trickier. Many agents have put homes for sale over 675,000 in Saugus that are just sitting. Similar with over $600,000 in Canyon Country, though Fair Oaks Ranch, which had just as many foreclosures for awhile as Tesoro Valencia, is really rebounding nicely. With only 42 homes for sale in our valley in this price point, new construction is sold out all over town and prices are up about 12% since last fall. My sale in Stevenson Ranch on Hood Way at $765,000 represents the highest price per square foot in years, and is well over $100,000 higher than it would have been last summer. This is the price point though, where a home doesn’t necessarily sell in a week or two, like under $400, 000. Because of this, agents and their sellers often wonder if they are too high if they haven’t sold in 6 weeks. Especially if the offers received are well below asking, or there are no offers at all. The Hood sale was like that. Virtually every agent tried to explain that it wasn’t worth more than $700,00, and based on the comps, they were right. But this was a remodeled home with a huge yard, and I knew somebody would pay for it. This is where daily study of the market is critical. If you know you have something special, and there really isn’t anything  else for a buyer to choose, eventually you will get it. If competition comes on the market that is lower priced and just as good, you may have to adjust. I had many agents tell me we would never get over $700,000 after submitting their $675,000 offer, but the sheer volume of interest told me otherwise, and it closes next week. There are others all over town that represent no less than 15% appreciation in less than a year in this price point.

The upper end is the toughest to quantify. It is REALLY based on quality of upgrades, size of lot, privacy and location far more than the lower ranges. There are 59 homes for sale in this range, many of which have been sitting since last year. Still, I recently sold a home on Marlowe Court in Stevenson Ranch for 935,000 when there are model matches around the corner listed in the 600’s. Why? Because of a huge lot, views and quality of upgrades. When that one home closes, there will literally be hundreds of people that can refinance that might not have been able to in the last few years. Sellers in this price point though often don’t understand why the market is not as strong as in the lower ranges. It really comes down to far less buyers (demand) and usually there are more homes they compete against (supply). When there is nothing to compete against, pushing the price is possible. This just occured in Robinson Ranch, with the first sale well over one million in a few years and a custom in Westridge going for over 3 million.

 

So what happenns from here? Who knows. The inventory remains under 300 homes, which as I have said before, almost has to mean continued appreciation. Real Estate Analytic Companies have come out and explained why based on their analysis, most markets are still not signifigantly over valued, suggesting the potential for a bit more increase.  Still, the first half of the year typically appreciates the most, often followed by a flat second half of the year.  It happened repeatedly in 2000-2004. Of course this never happened with only 300 homes for sale-2013 may well continue to sizzle.

3 Big Changes Affecting Prices in 2013

For years I have started the New Year with suggestions about what we might see in Real Estate in the New Year. This year, because of what we have been through in the last 7 years and the uncertainty that still remains, I am cautiously optimistic for what may occur with property values. Specifically, there are 3 very recent changes that point to more than what many experts are suggesting will be only “modest” appreciation this year. In fact, if these 3 changes continue, coupled with the low inventory we have experienced for the last 9 months, who knows what may happen! All 3 of these changes have the potential to really affect upward pressure on pricing in all price ranges and in all parts of town.  Read on to understand why.

I made the comment in my last post that appreciation will clearly occur when the ammount of distress sales gets below 25% in our valley. In 2012 it was about 40% of the closed transactions. However, the difference between the first quarter of 2012 (when we had about 850 homes for sale) and the last quarter (when we had about 350 homes for sale) was significant.  We went from about 65% distress sales, to about 35% distress sales, and in some popular areas there were literally NO short sales or foreclosures available at the end of the year. Now part of that is that they sold right away when they were listed, sometimes before they even hit the market. However, this has led some agents, myself included, to take new listings in January at MUCH higher prices than similar homes that sold just a few months ago.

So, trend number one will be new listings, in areas of LITTLE OR NO INVENTORY, being priced a lot higher and being sold with no appraisal contingency. The best example of this occured yesterday in Tesoro. Now, Tesoro Valencia is arguably the area most affected price wise by short sales and foreclosures. For several years there were literally NO regular sales. In 2012 it was still mostly those kinds of sales, but today there is not one home in Tesoro over 2500 square feet. Not one. Recent short sales and bank owned properties have sold between $480000 and 580,000 for over 3000 square feet. Yesterday I listed a model perfect, 3700 square foot view home for $ 735,000. In the private remarks to the agents, it says ‘seller requests no appraisal contingency’, because appraisal for a loan is likely not possible. Yet, I am not wasting my time with this gorgeous home, I started doing this in 2012 and more and more agents are doing it today. Simply stated, we may not get that price right now. It is a stretch to be sure. Buyers are willing to pay more than 6 months ago, but maybe not that much more. We don’t know.But if we get close and the inventory stays this low, and the short sale numbers continue to drop, the next sale likely will hit that price point. Of course, I am betting that I can do it, with patience and good marketing. Critically, buyers are aware of this and are more and more willing to make offers with no appraisal contingency. Buyers feel that they understand the value of their purchase better than the lender’s appraiser. As this continues, prices will clearly rise.

Trend number 2 is even bigger-banks are not approving low short sale offers the way they were. To refresh, remember a short sale is a sale in which the seller often does not care what it sells at. That trend too has been changing, but often enough, they leave it up to the agent who underprices the home, sometimes TOO MUCH. In the past, banks would often approve prices far below market value, keeping prices in a downward trend. That started to change in 2012, partly becuse the inventory was low, and partly I think because bank pricing evaluations have changed. We have been told by 2 banks recently that they will no longer use broker price opinion (meaning agents valuing the property), but a different model. They never tell us this and in the last month my listing coordinator Chad and I have noticed banks responding to offers on our short sale listings  with a counter offer price much higher than the buyer submitted. Importantly, the offer in WAS NOT VERY LOW TO BEGIN WITH. In fact, in the 3 times this has happened, we were told in no uncertain terms that the investors valuation was firm and I could not dispute it. Ironically, in 2 of the 3 cases, there is no way the price they are asking for will the buyer get an appraisal-the comps dont support it.  So it isnt just at market, their requested price is actually OVER MARKET! If this is a trend, it will hopefully clean up the few remaining really lowball short sale transactions happening and lead to a mrket where the spread between standard sales and regular sales for the same model home isn’t 25% or more. As low priced short sales go away, again, prices will rise.

Trend 3 concerns appraisal. More and more appraisers are willing to speak to the agents involved in the transactions to better understand the often huge gap between model perfect regular sales and low- ball,  dead lawn, beat up distress sales. When the appraisal rules changed a few years ago, I couldnt get most of them to talk to me even a little to let me explain. Today, it feels more reasonable. That doesn’t mean it has changed however. Because many homes simply have to be sold with an appraisal contingency (the buyer cannot buy it otherwise), appraisal is still the number one reason prices have not yet clearly risen in many areas. I believe that will change this year, at least a bit. In fact, last month I sold a house in Northpark listed at 435,000. I had 4 offers in 10 days. The best was at 445,000, but none of the buyers had the financial means to remove the appraisal contingency. The appraisal came in at $425,000 and the buyer walked. Back on the market, I received 4 more offers, the highest again at $445000. This time the appraisal came in! Only 9 days later! The deal closed and now my next seller has that strong comp to use to justify their price. Slowly but surely, these are the 3 trends that will make 2013, not a transition year like 2012, but a clearly appreciating one.

Why your neighbor is doing a double move-the new normal in Real estate

As the national media have finally suggested, available homes for sale are at record lows in many markets in the United States. Today in Santa Clarita we still have just over 300 homes for sale, a number so low that prices should be skyrocketing as I write this. But they aren’t and it will take some time for “good comps” to replace “bad comps” and the market to really start to appreciate. I am convinced it will happen and if you want to know when, it will likely be when the percentage of distressed sales is under 25%. We have gone from over 80% distressed sales 4 years ago to just under 40% today, so it is coming. In the mean time we have an opportunity that we have never really seen before. Specifically, we have many “standard” sales selling at top dollar, while in the same neighborhood, ‘short sales” are selling for 10-20% less. This has led to many would be sellers putting their home on the market at “retail’ pricing and attempting to buy at a “wholesale” price. For those willing to put up with the aggravation of how that can work, the result can be a better home, at a lower interest rate and a very attractive price. This is not something we have ever really seen before and I believe it will continue for the next few years as we get the balance of the short sales through the system and return to a market that is more “traditional’. In the mean time, the following is happening….

Up until this year buyer confidence was not high enough to absorb the foreclosures and short sales on the market. That changed this year when many realized that foreclosures were not coming back en mass, investors were buying everything they could and inventory was plunging. We all thought this would happen, just not for another year or two. Well, it happened this year. This has led to the return of the buyer that has always been a dominant player in Santa Clarita Real Estate. This buyer has been largely missing for more than 6 years-the ‘seller/buyer”.

The seller/buyer is selling one home and buying another. Sometimes smaller, but usually larger. They are confident that the market isn’t declining anymore and look at interest rates around 3% that make affordability better than ever. They have a home to sell-and they can likely get top dollar for it. This never happened a few years ago, when potential sellers were discouraged that their home would just sit. Now, if priced reasonably, they can expect immediate buyer interest. The challenge though, is often what do they buy?  Foreclosures are rare, especially desirable ones, and banks will not take offers unless the home you are selling has closed escrow. Standard sellers also can often demand that your home be a closed transaction, though savvy realtors can usually coordinate the sale of the one into the purchase of the next. Many sellers though don’t want to pay the ‘standard sale” price-they want a deal. Enter the short sale purchase. This is where the seller/buyer has the greatest aggravation, and potentially the greatest reward, and it is happening all over our valley. The problem is that short sale purchases are almost impossible to time. it could take 45 days to get an answer, it could take 5 months. The stress and aggravation of waiting for short sales to get approved make selling your home and moving right into a short sale purchase almost impossible. For this reason, I advise such seller/buyers to prepare for a double move up front and trade money for convenience. Many are doing so. Here is what I mean…..

The reasons a potential seller/buyer has to do a double move are threefold. First, in bidding on a home in a multiple offer situation, being totally non contingent makes you a stronger buyer. Next, you dont have the stress of wondering every single day when the purchse will be approved. Approvals on short sales can take 45 days-they can take 6 months. Last, when your short sale offer is finally approved,  the bank typically wants the closing within 30 days-and you need to be able to do exactly that. Short sales are often moving targets and in order to buy one you have to be sold and ready to move when the bank says so. You put up with this because of the lower price that you get for the hassle.

I can give many recent examples of people in Santa Clarita doing this but two favorites illustrate how it can work. I represented a growing family in Newhall that had a nice home and simply needed larger. We made an offer on a short sale for 430000 that would likely have gone for about 480000 if it was a regular sale. The seller accepted that price and off it went to the bank for approval. Banks will typically accept 12% under their appraised value, and the bank did accept after about 50 days. In this case, my buyer had a seller that was willing to let them offer first and sell second because I sold them on the fact that we could sell theirs quickly. This doesn’t often happen but is always worth exploring. We also had to show the bank that we could buy without selling, but that was never our intention. We knew that we could sell ours before the bank approved our purchase offer. I then put their home on the market for $415000 as a standard sale. It had offers immediately from buyers that didnt want the hassle of a short sale, they wanted a clean, easy to buy home. We opened escrow, closed escrow and did a short double move while waiting for the purchase to get wrapped up. In this case it was a hotel for about 5 days, and we almost avoided that. Key to the whole process was the clients willingness up front to do this. Stressful? Yes. However, the new payment on a larger home is slightly lower than the old home.

Even better is the client that sold a Saugus home for $330,000 that had about 1400 square feet. They sold, moved into an apartment and made offers. By the 5th one we got a newer, better built home with a pool, more than double the size, for $480,000. It is scheduled to close next week and they are thrilled. These are homes that easily sold for over $700,000 just a few years ago and they are set until the kids graduate. Their interest rate went from 5.25 to 3.25 and at the end of the day their real cost in doubling their size is just a few hundred dollars more. This opportunity won’t last forever, as short sale pricing  and ridiculously low rates will be gone soon. In the mean time, people are taking advantage.

Inventory Hits New Low-Look Out!

In my April post titled “Where are all the Homes?”, I finished by suggesting that the next 3 months would tell us a lot. Well, it is exactly 4 months later and what might have been a temporary cycle is now an unquestionable shift in the market. To recap, a year ago there were 1100 homes for sale, 6 months ago it was about 800 and in April we had 630. Sensing there might be a late “spring selling season” with lots of homes coming on in May-July, I suggested “wait and see”. Today there are 410 homes for sale in the entire Santa Clarita Valley, the lowest number I have seen since I started tracking in the 1990’s.  Until this year I speculated that because of the relatively high number of short sales and foreclosures in our valley, it would be at least 2 more years to get them through the system and normal appreciation might follow. I no longer think that. Besides what I see in the field (multiple offers on most of my listings, agents begging me to tell them about my listings first for their buyers etc), the inventory is now so low that appreciation will naturally have to follow and in some areas already is. I have been testing list prices at 5-15% higher than recent sales, and in almost all cases we are selling or at least getting offers. Interestingly this is happening in many other areas that took the up to 50% hit in values that parts of Santa Clarita did. Las Vegas, Phoenix, Florida-all of these areas had, at one time 5 to 6 times the number of homes for sale that they do today, same as Santa Clarita.  All three of these areas have experienced appreciation-in some cases up to 30%-from a year ago. We don’t have that yet, but here is what is happening now and why I encourage potential sellers to take advantage of this crazy supply-demand situation.

First, the number of foreclosed properties is the lowest it has been since the crisis began. At one time foreclosures were almost 30% of our inventory, today they are about 7%. When properties do go to foreclosure sale,  the investor buyers snatch them up and banks don’t take them back. These so called “flip properties” then get a nice face lift and come on the market as “regular sales”. Often, because they are usually very nice, they sell for as much as any other property in the tract. So instead of a beat up “as-is” foreclosure we have a nicer move in condition property at a price that can be 20-35% higher than the bank would put it up for. This one trend alone is starting to give appraisers the “comps” they need to bring in values at higher prices and will continue.

Second, any lender will tell you that lending guidelines today are the toughest they have seen in 20 years. With that said, they also believe that because the market is improving and confidence is growing, more reasonable conditions lay ahead. This week I saw a new loan program in which someone could short sale their home (with no late payments) and get a new loan with 15% down right away. No 3 year waiting period. Because a lack of qualified buyers and buyer confidence has been a huge factor in the declines of the last 7 years, this is a trend to watch closely. In fact, I can tell you that in the lower price points there are likely 5-10 buyers for every new listing all preapproved, all eager to buy. No exageration. Buyer confidence is no longer an issue and if you watch the media, what used to be 50-50 negative-positive is now much more toward the positive.

Third, if you combine the lowest interest rates in my 21 year career with prices that are still in many cases 30-40% below the peak, you have the highest affordabilty index since the 1990s. Bouyed by this, buyers are willing to pay a little more than recent sales because even at a slightly higher price, the payment is the same because the rate is lower. If this continues, along with improvements on the employment front, appreciation should follow.

To conclude then, we have a completely unexpected market shift in 2012. A supply that hit 2500 homes in 2008 is now at just over 400. If you want to buy a condo in Stevenson Ranch under $350,000, there are exactly TWO to choose from. TWO. In Valencia, there are 22 in an area large enough to support three times that many. I put a short sale on the market in Valencia at $345,000 (The price of the last sale in the tract) and had 8 offers ending at 390,000. No appraisal contingency, of course. Move up buyers are realizing now is the time but are forced to sell and rent, waiting for a decent property to come on the market. Believe me, I have them in apartments and homes just waiting to buy. Just this week I have seen 9 new listings, all standard sales at prices higher than they would have been 3 months ago. For those that are still worried about “shadow inventory”, foreclosure radar lists 1279 properties that are in default in Santa Clarita. If every one of them came on the market (and less than 30% will), they would in most cases be absorbed immediately, many by the investor flippers described above. Potential sellers, pay attention, your time may be now.

Why Appraisals are killing your deals….

Whether you are selling or attempting to refinance, your success is often ultimately decided by an appraiser. We all know this, I have had hundreds of clients call me over the last 6 years, wanting to refinance, but unable to do so so because their home did not have enough equity. The government knows this too, that is why last year a game changing refinance plan was introduced for many homeowners-you could refi even if you were upside down! Today though I am going to speak only to purchase money loans, where a buyer wants to buy, and a seller wants to sell and move on. These sales-not refinances-are what affect your value as a homeowner. This post will explain why low appraisals are killing many deals-MANY DEALS-and frustrating both buyer and seller alike. Recently I suggested that low priced short sales will actually prevent the market from appreciating the way it normally would. I also suggested that with our inventory extraordinarily low, appreciation would be commonplace if not for the problem with appraisals not coming in, usually because of low priced short sales still hurting values. This post will attempt to tie these two issues together, and give a little explanation as to why this happens. It is not a stretch to say that in June 2012 if more appraisals were coming in at the price the buyer is willing to pay, we would already have quantified appreciation in many Santa Clarita neighborhoods. Remember, “market value” is supposed to be what a willing buyer will pay and a willing seller will accept. They agree on a price only to have  the appraiser essentially tell the buyer they “overpaid”, and kill the escrow. To explain how that happens, let’s start with what an appraisal is-and isn’t.

First, I explain to many buyers and sellers that an appraisal is an OPINION of value. Meaning, if 5 appraisers come out to your home, you will get 5 different opinions of value. There is no “book” that says you give a certain amount for certain improvements. There are instead guidelines that each appraiser interprets and applies slightly differently. In theory, this should mean that if your home is worth $500,000, that 5 different appraisals will come in between $475000 and $525000. For reasons that I will explain however, that is not always the case. So appraisal is opinion, not fact. Next, appraisers are wildly different in their knowledge and expertise in your neighborhood. Very often your appraiser will not have seen the inside or yards of the homes that they put in their report as your “comparables”. Meaning if your home is much better in interior upgrades or superior hardsacpe/view/privacy/pool/lot size to the others that have sold in your area, an appraiser will likely not give you anywhere close to the same “value” that a buyer would (that likely did see all of those homes). Further, the appraiser may or may not even be from Santa Clarita and understand differences in school district lines, construction quality, popularity of floorplans (single stories almost always sell for a premium over 2 stories for example) and other factors that do influence value. The appraisal that comes immediately to my mind was on a Westridge home that I had in escrow, the appraiser used Stevenson Ranch comparables, was unwilling to consider my rebuttal and the deal fell apart. Ironically, it was not a difficult appraisal to bring in, but he wouldn’t hear it. That homeowner is still in that home when he could have been where he wanted. So appraisal competence is not uniform. Also, because of changes to the appraisal business about 3 years ago, appraisers are often prevented from discussing the information they have on neighborhood sales with the listing agent, supposedly to prevent being “swayed” to bring the appraisal in at value. This is strange because appraisers RELY on the agents that sold the homes to accurately desribe the property and you would think that talking to them would be encouraged, not discouraged. It used to be that way, but no more. Last, and to the surprise of many, appraisers do NOT avoid short sale and foreclosure sales in evaluating a “standard” sale. Meaning, if you are selling, the short sale down the street that sold for a lot less than it “could have”, very much influences whether your valuation will come in or not. Short sales and foreclosures are not considered different in any way from your move in condition home, they will be evaluated exactly the same with adjustments made for condition that often do not reflect what a buyer thinks. Meaning, if you are selling and the comparable sales are distress sales in far inferior condition or location, don’t be surprised that an appraiser values the qualities your home offers for a lot less than a buyer would. Many buyers today are aware of the lack of inventory, have seen far too many poor condition distress sale homes and WANT to pay more for quality. Appraisers though, under strict guidelines from the banks, simply cannot make adjustments on their reports to bring in the value that the willing buyer wants to pay. It ain’t necessarily fair, but it is the way it works.

So if that is what appraisals are, what do buyers and seller do when appraisals do not come in at value? First, a buyer can always accept the appraised value and put more money down to satisfy the banks “loan to value” requirement. This happens a lot. Next, sellers can wait for better sales to close in their neighborhoods to show appraisers that their home realy is “worth it”. I have had 4 instances in the last year where agents called on my transaction in escrow, needing it to close so they could get their appraisal in and close their deal. They waited, used our “comp” and closed theirs. That is how-slowly-stabilization and ultimately appreciation will occur. Last, sellers with superior proerties will often take my advice and just market their home only to buyers willing to remove the appraisal contingency entirely. This often means waiting for cash or high down payment buyers. It can take longer, but these buyers do exist. They understand that an appraisers “opinion” of the home’s value will be lower than their own, and accept that. The more often these 3 situations occur in Santa Clarita, the better the comps and the sooner appraisers can have the sales that they need to support values buyers want to pay.

So Where are all the Homes???

In my last post I commented that the reason why prices wouldn’t noticeably appreciate this year was due to distress sales, especially short sales, preventing that from happening. I suggested that as long as we had a lot of short sales, and percentage-wise they are about 50% of our inventory, that “prevents” the normal appreciation we might see. Real Estate is always a supply and demand business and today’s post is going to suggest that something unexpected is happening with supply right now. It is too early to tell exactly what this lack of supply will mean long term, but in any other climate it would be a clear mandate that appreciation was imminent. Of course, after the last 6 years, no one wants to predict anything until it is 100% OBVIOUS. Stay with me here though on some trends that have me more encouraged than I have been in years. Let’s start with pure statistics. Today, in  valley of well over 200,000 people we have 630 homes for sale. That is down from 780 6 weeks ago and from over 1100 homes a year ago. Realtors rarely agree as a group on much, but on this I get 100% agreement in my office and in my network groups-everyone has buyers that they can’t find anything for. When they do, multiple offers, sometimes over asking are occuring. This is especially true in the lower price ranges, but it is happening anywhere that demand exists and supply doesn’t.  I just sold a home in Northbridge Valencia for $735,000 when we haven’t had a sale close to that in 2 years. Finally, to put that 630 number in perspective, the lowest I have ever seen our inventory was in 2003 when it dipped into the 500’s. The highest was about 2400 homes 4 years ago. You don’t have to be an economist to know that if this stays, appreciation HAS to occur.

So why aren’t prices going up? Well, it could be suggested that they are. The home in Northbridge suggests that, but we need a lot more than one home. The reasons why they will still have trouble rising are three fold. First, loans are challenging, not just because of tougher credit and income requirements, but due to appraisals. I just put into escrow a home in older Saugus for $390,000. The comparables are low to mid 300’s. Normally, I would shoot for a high down payment buyer, or a cash buyer, so appraisal can be removed. This is very uncommon though in this price range and for a buyer that wants to live in the home. Cash buyer investors don’t pay top dollar for homes like this, and buyers who simply want to live there rarely have enough cash to waive appraisal. A classic catch-22. The second challenge is that there still is not enough demand to show a clear trend for buyers overbidding and causing prices to rise. Buyer confidence is much higher than it was even a year ago, but there still aren’t enough buyers to clearly drive prices up. Third, the homes that are newly listed, especially the bank owneds and short sales, are priced at or below the most recent sales, not slightly above. Myself and a few other agents are taking our “regular sale” listings and, if they are nice, pricing them higher than recent sales and hoping to get it. Then we hope to get the appraisal in. Enough of those sales and the market will noticeably start to change.

The next 90 days are going to tell us a lot. If inventory stays this low, something has to give. I have had plenty of potential sellers tell me that they want to wait for prices to rise, and I get that. I still believe that is likely a few years away but consider the following. Normal 3 month supply of listings for our valley would be about 1300 homes. We have half that number. The foreclosure “wave” everyone keeps thinking will happen, most people that should know, ackowledge is unlikely. Between robo-signing settlements, the real discussion of principal reduction for upside down buyers, the large holders of properties (Fannie, Freddie, Bank of America) talking of renting them instead of selling them and the fact that foreclosure inventory has dropped 4 years in a row, it seems that isn’t going to lead to a lot more homes. Lastly, and this is key, many people that short sold in 2008 and 2009 are now credit worthy to buy again. Those numbers of potential buyers (more demand), will continue to rise. These are typically highly motivated buyers and the more we have, the sooner the decline stops. As I have suggested, the market will likely bump along for the next 2 years. There will be some great sales that suggest possible appreciation and some poor sales (almost always distressed sales) that suggest we are not out of the woods. The more of the great sales, and the more sellers will get off the fence and test the market. We can argue if we have hit bottom or not. We can’t argue that we just don’t have enough homes for sale….

HOW I PROPERLY PRICE HOMES OR WHY ZILLOW WILL NEVER REPLACE REALTORS

Since March usually represents the beginning of the “Spring Selling System”, I will tackle a topic that seems especially appropriate-how to properly price a home. Let me start by saying that it is about 75% facts and figures and 25% gut instinct. Put another way, ” 25% art and 75% science”.  It is for that reason that all of the great internet webites that are out there can only give a ballpark as to the real value of a specific home when it is put on the market. Even with tract homes, where we literally have exactly the same square footage from one home to the next, there can be huge differences in ultimate sales price, both LOWER and HIGHER than what zillow or other sites suggest. Why is that? Let me give 2 examples to illustrate. A few years ago, I had a “Brighton Village” home in Valencia listed as a short sale. It was highly upgraded and the offer we had for $390,000 was higher than any other Brighton Village that had sold. The bank should have been thrilled with the offer price. To my surprise, they suggested that their valuation was $420,000. Now even if the buyer had been willing to pay that, it would never appraise for that. Shockingly, I found out that the $420,000 valuation came from a computer appraisal, something like zillow, which had used the homes, not in Brighton Village, but across the street in Cottage Hill and Country Gate. They have always sold for more because they are often on good sized lots and as anyone who knows Brighton Village can tell you, the lots there are a fraction of the size. Which illustrates the point, you have to see the homes and know the differences in value based on many factors, not the least of which is lot size. These “computer valuations” are becoming more and more common, so if you need an appraisal or simply want to know what is possible in selling, you MUST have an in person valuation.

Now I know you want the example of the home that is really worth much more than what zillow says, and this happens all the time too. I have mentioned in past posts examples of this, including the Stevenson Ranch home that I closed one month ago for $720,000 when zillow said $565000. That was an extreme example, but $20,000 or $30000 differences occur regularly too. A recent example is a home that I listed in Northbridge for $750,000. It is a complete remodel with pool at the end of a cul de sac. There are 2 offers on it, both in the 700’s. Zillow says $635,000. Why? Well, the science says, price per square foot, pool and not much more. Recent closing have been in far inferior condition, and “comp” this home out about $645000, best case. That is where the “art” comes in. How many homes like this are on the market (none), how desirable is this floorplan (very), how much does a pool add ? (a lot more than in most areas, Northbridge has many buyers with kids that want them). How much more will some buyers pay for a standard sale versus a distress property (I see typically 5-10%), how emotional is the home?(very), how desirable are the upgrades? With this home they chose all the right stuff, neutral and well put together. It is why home staging has become such a big business. So, to properly price homes a good agent has to know these things and a lot more. What are the trends in that neighborhood? What are the homes in escrow for? How many competitive listings are there?How many distress sales now and in the future? Where are the buyers right now? What is the likely buyer? Are prices stable? Still trending down? All of this plus the emotional appeal of the home have to be determined. Add this to the things that zillow cannot quantify-views, privacy, cleanliness, curb appeal, popularity of floorplan, usable lot size and upgrades and you can see why a computer valuation can never determine the real value of your home

 

SHORT SALES…why the market won’t go up soon

  I have spoken to a lot of potential sellers in the last 6 months that think that 2012 might be the year for them to sell. In almost all cases they think that the market will be better than last year. It is understandable to hope for that, the news these days for Real Estate is far more positive than it has been for the last 4 years (foreclosures at lowest numbers since the crisis, low interest rates for the next few years, affordability of Real Estate and buyer confidence the best it has been in a decade). I mean, why wouldn’t prices stabilize or go up?? The answer as to why they won’t, or maybe I should say “can’t” lies in the competitive listing that keeps the market from appreciating-the short sale. Because I spend so much time on short sales, I can forget that the public often doesn’t understand how they work and why they keep prices from rising. To review, a short sale is where the seller owes more than the home is worth and they are getting NO MONEY when it closes. Consequently many sellers really don’t care at what price the property ultimately sells. In fairness, this isn’t always the case. The highest sale in Stevenson Ranch last year was a short sale that I sold for $910,000. The bank was willing to take $750,000, and actually suggested that I reduce the price, even though I had interest at the $900,000 price point. The seller also wanted to maintain the “comps” and agreed with my strategy. Remember, the owner is still the seller, not the bank. The bank approves the price but is not the actual seller. In this case the banks computerized,  “zillow” valuation gave them a reduced sense of value, not factoring in views, upgrades, and desirabilty of that particular neighborhood. Again, they dont own the home, or really know the market trends, so the value that they will ultimately approve is often off a bit.

  So we have a situation in which, often, the homeowner has little vested interest in where the home actually sells. Think about that. If I wanted to go buy a gently used Prius and one dealer offered it at $18,500 and a private party said $14,500 but I would have to wait 3 months for the paperwork to be completed to give me clear title to the car, which would I  buy? In Real Estate the difference in list prices between a “regular sale” where the homeowner deeply cares at what price their home sells, and a short sale, for the SAME MODEL of home can often be $50,000, $60,000 even $70,000. The price isn’t always ultimately approved by the bank of course but often enough, it is. This keeps virtually every neighborhood that has a fair amount of short sales from appreciating. Now in areas that had more stable markets with less default (think beach cities and popular areas with high incomes like Beverly Hills and Malibu), the short sale is a small percentage of listings and sales. Those markets in many cases are stable and will ultimately rise in value first. Because Santa Clarita has a much higher percentage of default (many tracts of homes were built in 2003-2007 and will take years to stabilize), the short sale is a large percentage of homes for sale (about 50% valley wide) and that ultimately sell (about 40% of the closings for 2011).

  To illustrate, let’s say that you have a 2900 square foot home in Stevenson Ranch and you want to know what it might sell for, and how long it will take. You have plenty of equity and would like to downsize or move to a different area. How much you get out of the property is very important to you. Between 2500-3500 square feet there are 14 homes for sale, only 3 are short sales, 3 are foreclosures and 8 are “regular sales”. Not terrible, and pretty consistent with a lot of popular parts of town-about 45% distress sales listed. The killer is in the “pendings” or homes in escrow. This shows what is actually selling and will ultimately become the comparables that your buyer, and your appraiser,  will look at. Of the 22 homes in escrow EIGHTEEN are short sales, 3 are foreclosures and only one is a regular sale. Not surprisingly, the highest pending in that group is the regular sale. This pattern repeats, to varying degrees in most neighborhoods in Santa Clarita.

   This illustration shows why the market is likely to stay where it is value wise for the next 2 years. Short sales will remain a large percentage of the listings and sales in many neighborhoods and will keep prices from rising. Smart “regular” sellers are, in many cases, selling against them at a fair price and then going to buy a replacement home below market value-a short sale.  Just like the 1990’s, this trend will change, just not until the sheer percentage of short sales is much lower.

2012-Why the market will and won’t go up

One year ago, in welcoming a new year of Real Estate, I suggested that 2011 would likely be “more of the same”. What that meant was distress sales accounting for over half the home sales, a little more price decline and about 3000 resale homes sold in the Santa Clarita Valley. All of that occured…with a few subtle changes  that I will share today. The tricky part of predicting for you each January what may happen in Real Estate,  is that there is so much conflicting information being reported about housing. When people ask me what may happen with the market, it is critical to understand that what is happening in Santa Clarita is not necessarily happening in Nevada..or Manhattan Beach. Some markets will take years to recover, some probably already have. So the information I share with you today is Santa Clarita specific-it may or may not be happening elsewhere. Further, there are sub markets in Santa Clarita that, because of high default rates, will take much longer to get rid of the foreclosures and short sales that have brought values down. That is why in some neighborhoods prices may be fairly stable due to lack of inventory, and in others there is still a bit of a further slide to go. Here is what is happening, right now;

   This month all of the big banks are reporting, again, record profits. Huge billion dollar profits. Fannie Mae is predicting increased sales this year over last year. Investors are snapping up property-with cash-like never before. Some markets actually reported stability in price increases last year. How is all of this not leading to even more confidence and much higher sales? Well, threats of more foreclosures, tightening lending standards and negative reports about unemployment and the economy provide the negative counter punch, leaving our local market with a feeling, again, that 2012 will be a lot like 2011.

For Santa Clarita as a whole that likely means another year of slight price declines, 50% distress sales and about 3000 homes sold Still, today I would like to share, when we look beneath the surface some things that are happening in our local market that speak to what may happen in a few years, as we absorb the distress sales and get back to a market in which they represent a small portion of the sales and supply and demand lead to price appreciation again. From my view that looks like 2014-2015, and here is why;

1. INVESTORS ARE SMARTER THAN YOU AND ME. I just love that headline, because as smart as I like to think I am, I learned something about investing this year. First, the point. For the first time in my 20 years of selling homes, 3 things happened simultaneously. Prices continued to slide down (about 8% in SCV for the year), interest rates dropped too, and rents went up. These 3 things created a “perfect storm” for people that actually had money to invest. Basically, everything in Santa Clarita under $350,000 will cash flow with 20% down. I had a client ask me what I was doing with my savings account and when I said, letting it sit safely, he explained his Return on Investment was about 20 times mine. I felt stupid. One buyer looked at a total payment of about $1850 on a $350,000 purchase with a rent of $2250 and said, “thats better than the half percent interest my cds are getting”.  With 38% of the transactions nationally  in 2011 being cash, you can see that the investor buyer is the dominant buyer in the market place, and until prices rise, will continue to be. Multiple offers for these properties are common.

2.  FORECLOSURE NUMBERS REMAIN LOW. The year 2007 saw a wave of foreclosures that took values down 25% in one year. Since then everyone has been literally waiting for the next wave. Some predict a few more foreclsoures in 2012, but the bottom line is we will never see a huge supply of foreclosures at once like we did. If you talked to as many agents that handle foreclosures as I do, you would know that they have been hearing “get ready” for 4 years. Further, the top executives at the lenders say they don’t expect that the millions of homes in default will ever come to market. Some will modify, some will short sale, some will get current, and eventually, slowly, some will come to  market. In 2011 in Santa Clarita, foreclosures made up about 20% of the sales. By contrast, short sales made up about 33% of the sales. The reason why short sales will continue to be a larger number is that for political and economic reasons banks would prefer BY FAR to short sale, than foreclose. For this reason, government is involved like never before.  Nevada just passed a law that makes the rules to foreclose tougher than ever, further delaying those properties coming to market. The biggest banks and the government are doing pilot programs to rent out bank owned properties instead of selling them. Government is involved like never before, and government does not want foreclosures, so… 2007 will likely never happen again.

3.  BUYERS WANT TO BUY, AND WILL PAY FOR QUALITY. Any agent that works buyers in our valley will tell you they are having trouble finding “quality” homes. This is less true in condos where prices are clearly going to continue to slide and slid well over 15% in 2011. But with homes, quality still sells and for top dollar. The headline of this article refers to where houses will go up, hinting that in some areas they will. Let me give you examples of how this can happen. At the end of 2011 I put a home on the market in Stevenson Ranch for $700,000. It had an unusually large yard, tremendous upgrades, privacy, a pool-the whole package. Another agent told them $600,000 and zillow said $560,000. Comparable sales were in the LOW 500’s. They were prepared to not sell but had me out anyway. Based on the lack of quality property, I felt strongly that $700,000 was possible as long as there was no appraisal contingency. 4 offers later, it sold for $725,000. I can cite 2 homes that I sold in Tesoro, one that a friend of mine sold in Westridge, a custom in Saugus, a new listing that I just took in Macmillan Ranch, all of these sold for far more than the “comps” suggest because buyers want to buy and will pay for quality. The more this happens, the closer we get to stability, and appreciation.

4. BUYERS WANT TO BUY BUT WONT PAY FOR INFERIOR PROPERTY; the reason that short sales will keep the market depressed is that agents keep pricing them under market, sellers will not improve them and buyers only offer if it is one heck of a price to compensate for the waiting and the improvements necessary. This doesn’t have to happen, the highest sale in Stevenson Ranch in2011 was a Torcello short sale that I sold at $910,000. Still, this is the exception and not the rule. Short sale prices will keep the market from appreciating because of their volume. Over a third of the sales in our valley are short sales, and we see no sign of that changing (20% of the homeowners in our valley are still upside down). Further, even “regular” sales have to be sharp. I met this week with a family that needs to sell their home and were hoping it was over $500,000. Based on the need to paint, carpet, declutter etc, I know the market won’t bring them anything close, buyers are too picky. So even though the demand for “regular sales” is huge, they wont buy just an ok house. It has to be better than that.

5. AFFORDABILITY IS HIGHER THAN EVER, HOMEOWNERSHIP IS LOWER THAN EVER. In Los Angeles County the median price of a home is under 270,000 and 52% of the people can afford it. This is way up from 5 years ago and have made some proclaim California as “move to state” again. Maybe,  but with the tighest lending guidelines ever, and buyers still concerned about falling prices, we are back under 65% homeownership nationally. This is why rents skyrocketed in 2011. As the brilliant Sean O’Toole said (see nealweichel.com for his posts), if the government had a program for potential buyers with good jobs and good credit (but only one blemish of a  short sale or foreclosure on their record), that would bring a huge number of buyers into the market and stop the self perpetuating cycle of falling prices due to inadequate demand.  How many people would rebuy the home they lost at todays prices if they only could?

So what does all of this mean? A recent study said that 80% of the American people think it is a good time to buy a home. That speaks to a confidence that did not exist, I guarantee you, even 2 years ago. The same study found that 65% of  homeowners think it is not however a good time to sell a home. This speaks to the lack of quality inventory mentioned above. In short, we have a stand off. Not enough regular sellers to meet potential demand, too many lousy listings that are just sitting for months at a time. For this reason, my answer to “hows the market?” is for an investor, “great”. A buyer, “great”. For a seller, it really depends on what you have and where you are. Some markets in California have already rebounded and Santa Clarita’s time will come. It is just going to still be a few years….