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….

Will the New Refi Plan Stabilize the Market??

aRemember when you were growing up and your parents or teachers said ” if you do this, then you can have that? ” In Real Estate it might be something like IF we get rid of all the distress sales, THEN we can have price stability and the eventual return of appreciation again.  That is the way life is supposed to work, right? We like to know that if we do something, something else will naturally follow.  If I eat right, I stay in shape, If I follow the rules, I stay out of trouble, If I treat my clients well, they tell their friends etc. Well for 6 years now I have been commenting on a Real Estate business that has not been at all predictable. Starting with The Bush Administration the thinking was IF we make short sales easy to do, sellers will use them as a way out of being upside down. Wrong. Lenders will tell you that fully 60% of people in default never even speak to their lender about options. They don’t return urgent calls and ultimately resign themselves to foreclosure. Then the Obama adminiatration started a series of programs under the umbrella of  “HARP” and “HAMP”, the making homes affordable solution. IF they offered loan modifications, then everyone can stay in their homes and ride out their negative equity situation. Wrong. Only about a third (800,000) of the over 2 million people that the program was created for have taken advantage. Not bad, but not what they hoped for, and the people that did it will tell you it was a nightmare trying to get it done. Even more will tell you they were turned down. My experience is that a majority of those people then give up trying to stay. Remember, IF the goal is stopping foreclosures, then what will actually  work?

   The problem, as so many smart people will tell you, is that none of the many approaches discussed seriously address the elephant in the room. That is that so many people are so far upside down in their homes, they have no prayer of ever being right side up. I see it every day, people that bought homes for 600,000 with little or nothing down, that are worth $400,000 today. As program after program failed to stop the foreclosure crisis we finally started hearing about principal reduction in 2010 and this year it has come up more and more. Of course this infuriates people that have are not upside down (“if someone is upside down, we shouldn’t just reduce what they owe”) and really creates a huge potential problem because the majority of people that have no equity have not stopped making their payment. So IF we want to minimize foreclosures, help people stay in their homes and stop price declines, WHAT do we do to achieve it?

   Barring real principal reduction, which is politically challenging and logistically difficult with investors and the complicated mortage backed securities they hold, we may finally have something that will actually help. Last week Obama announced a program which actually identifies the real problem-Negative Equity. The plan is to allow people to refi EVEN IF THEY ARE SERIOUSLY UPSIDE DOWN. Never before has this been approached, and with todays fantastically low interest rates, it allows  people to refi into a low rate, save on their monthly payment and ride this out. Theoretically it will also give them more purchasing power to stimulate the economy but that is a side benefit. The real benefit as I see it,  is people will finally have an incentive to not give up, reducing the ammount of distressed properties on the market and leading to price stability sooner. So, IF homeowners can refi that $600,000 loan into a 4% interest rate, stay in a home for less than renting, and not just dump it, THEN we can have less distressed homes on the market and stability can be achieved sooner.

  Of course there are some holes in it, the most notably being that it only applies to Fannie Mae and Freddie Mac loans. Many loans in Santa Clarita have different investors. Also, the program only applies to loans under 729,900 and it is only for people that bought before June 2009. This eliminates a few more. Lastly, potential candidates have to have a clean payment history. Many of the potential target homeowners do not have good payment histories if they were advised to miss payments to force a loan modification.  Still, for the first time we have a program that doesnt care if the home you bought for 600,000, with a loan of $600,000, is now worth only $400,000. Appraisal DOESNT MATTER. You can refi at todays low rates. Further, if you have 2 loans, you can refi into one loan. In the above example that might look like this; you did 80/20 financing with a first of 500,000 and a second of 100,000. If you want to refi into one loan for 600,000, then you can do it. This is groundbreaking in it’s recognition of the big issue-upside down people having no option in the past if they wanted to stay. More of this please. Now for those that don’t want this option can we please have a short sale program that allows people to understand the process, the repurcussions and doesn’t force them to wait 3 years to buy again if all of their other credit is sterling? THAT will really help solve the problem. “If you want stability and buyer confidence to return, then you have to do this too”. But this refi plan is a good step in the right direction. Should you or someone you know need details on this program please call me or your lender for specifics.

The Year is half over and buyers and sellers are more confused than ever!

I have suggested in my last few posts that there is so much information available about statistics and trends in Real Estate that we should be more clear on where the market is going than ever. I have also stated this is not the case because for every story with something positive (foreclosures at lowest numbers in 4 years, prices up in May and June), there is an equal negative (unemployment unexpectedly higher, closings off 30% from 2010).  Because Real Estate is about numbers, and numbers can be easily manipulated, I like to share what I know is happening right now in Santa Clarita and what I think we will continue to see for the next few years. Hopefully this explanation will eliminate confusion for buyers and sellers alike so that they can buy or sell with confidence. Or at least I hope it does. I call it the “20-60-20” rule of Real Estate, and understanding which group the home you are thinking of buying or selling falls in, explains a lot.

20% of the homes still sell quickly and for top dollar. Buyers especially know this because buyers looking to buy a high quality home in a good location for a fair price can all tell you about bidding wars and homes selling with the seller requiring that the appraisal contingency being removed because all of the comparables in the area have sold for less. These are homes that are clearly better than the competition due to upgrades, lot size, view, location or all of the above. For example, I recently sold a gorgeous home in Saugus for $910,000 with all of the above features. There really was nothing “comparable” and homes of this square footage typically sell in the $700,000’s. Yet there were 4 offers and a very happy buyer and seller. Last week in Northpark Valencia we had 2 offers on a remodeled 2200 square foot home that sold for $25,000 over the asking price. Both buyers removed the appraisal contingency and agreed to other seller contingencies. Why? Because they were smart enough to know that quality is tough to find and there are always buyers for quality. With all of the negative out there it is important to know that this is happening and will continue to happen.  These homes, and many others, represent the 20% of the market that sells QUICKLY and for TOP DOLLAR.

60% of the Homes still sell but they take LONGER than ever and price and marketing are critical. This 60% is where a lot of the confusion comes in. There are currently about 1100 homes for sale in Santa Clarita. For a valley of 200,000 people this is not a high number. Yet many of these homes will take months and months to sell for 2 reasons. First, buyers are very picky and if a home is just “ok” they will look but often not offer. Second, a majority of homes in this category are short sales. Meaning they can take months and months and months just to get an answer and often the answer is “no”. They may get an offer in the first month, but by the time the bank answers with price and terms it will accept, that buyer is gone. Then the agent has to start all over, sometimes with a “pre-approved price” that may no longer be such a good deal. Every agent that handles short sales has been frustrated by banks taking forever to get their valuations and approvals done, only to have to re-market the property in a market that has changed. My record is 13 months for a fixer upper in Valencia, that when we started was a $350,000 house and when we finished was $305,000. All of this because the bank simply could not respond in a timely manner. The other part of the 60% is “regular sales” that are nice enough  homes but are not priced or marketed aggressively and in this market, those sellers have to wait. And wait. And wait, until there isn’t much they compete against and a buyer wants what they have. This happened recently in Bridgeport where there were a dozen properties for sale in late 2010 that were slowly absorbed and not replaced by new listings. In May, two  properties that had been for sale for over 10 months finally sold because the buyers wanted Bridgeport and there wasn’t  anything else to choose from. So, 60% of the homes will either be “take forever” short sales or “just ok” regular sales that will sell but NOT quickly and NOT for top dollar.

20% – Uh, oh! Can you imagine what these must be? These are properties that unless they are priced well UNDER market, they just don’t move. There are over 100 homes for sale right now in Santa Clarita that have been on the market for over 2 years. This may get worse, especially in the condo market as many complexes have lost their FHA approvals and FHA buyers represent 75% of all condo buyers. Losing the majority of our buyers means watch out for prices here. This 20% can also be unique properties in terms of floor plan or location. I am thinking of a fixer in Hasley that has a nice view and property, but access and floor plan are not for everyone. It has been on the market over 600 days. Want to sell it? REDUCE the price! I am also thinking of dozens of short sales that you can only “drive by”. You can’t actually show it and the agent and/or the seller are pulling who knows what kind of shenanigans to hold onto the property and avoid foreclosure. These properties are “listed” but they aren’t really “for sale.”  They ultimately sell and often for a below market price but how many buyers want to deal with uncertainty for over a year? Not many.

So you can see why buyers and sellers are more confused than ever.  I have had new buyers basically not really believe me when we tell them that a property will go quickly (its in the top 20%), and then they see it with their own eyes and don’t make that mistake again. I have had sellers that want to be a “little high” or not reduce after 30 showings and no offers. They are in the 60% that 5-7 months may be how long it takes. Sadly, I  have had sellers call me, frustrated with their agent because they have been on the market over 6 months with few showings. The agent didn’t tell them what they needed to do to no longer be in the bottom 20%. Unless they price it well under market, condition will have to be addressed, buyers are too picky. Knowing which category your home is in can really help you know what to expect in a market that will likely stay this way for a while!

A Real Estate Top 10 list you can really use!

I sold my first house in May 1991, 20 years ago. The business then was in many ways easier to understand and predict, especially with respect to values. In California for example, when we go up we go up a lot and when we come down, the same has been true. Appreciation of over 20% or depreciation of over 20% in a single year happens more here than any other state. So you can see why being able to look at trends and make value predictions is important for a good agent when advising clients. In 1991, the business was also much more labor intensive – offers were presented in person, cell phones were rare, and the internet and email didn’t exist. If a buyer wanted to see property, they relied 100% on the agent to pick the homes to view, often from a book published every 2 weeks. Think about it! Still, with all the tremendous improvements in the amount of information and statistics, it is amazing to see just how difficult it is to fully understand what is really going on in the market today. In large part, this is because of government involvement in the supply and demand cycle of Real Estate. Loan modifications, principal reductions, moratorium, robosignings – the attempted clean up of the housing bubble has clearly lengthened the process of hitting bottom and made what to expect impossible to predict. This uncertainty, I believe has also contributed to a bit of gridlock in the market. Buyers want to buy but are weary and sellers want to sell but “not until the market improves”. For many, they don’t realize that time may be 4-5 years away. In an attempt then to explain why this is and what is happening in our valley right now, I have put together the 10 questions I am asked the most, with an answer and an example to illustrate the point. This will be a simple, clear way to communicate with you some important updates.

1.”How is the Market?” Oh my goodness does everyone want to ask this. They care, but some more than others. Some have resigned themselves to not really pay attention until they have to. Some “have to” sooner than they thought they might. The answer for our Valley is that “the market” is slower than I would ever have expected. The best way is always to illustrate with numbers. Last year we sold about 3500 homes in Santa Clarita. Year to date we are on track to sell 2100. For the first time in 20 years-ever-I have seen the amount of closed escrows go DOWN each month from January through April. Through the first 16 days in May we have closed 32 homes. 32!! Honestly, these numbers are so low, you would think it has to be caused by more than just gas prices and job uncertainty, and I believe it is the gridlock described above. Believe it or not, in many areas we actually desperately need new listings of quality, but sellers are afraid to sell.  This leads to question #2…

2. “When will prices go up?” For many the answer is years. The simple reason why is that until the distress sales are replaced by regular sales in which the seller asks a higher price and gets it, this will not happen. The numbers here are as follows. By most experts reckoning, there will be over 11 million short sales and foreclosures that sell between 2006-2015. Through 2010 we had closed on 6.7 million of them. If we close 1 million a year (optimistic probably), then 2015 should be when the majority are done and normalcy resumes.

3. “So what is selling?” What many people don’t understand is there is a RED HOT investor market. Cash sales currently account for over 30% of the sales in the US – higher than ever before. These are often beat up foreclosures that cannot be financed and trustee sale “flips”. There is a lot of money out there for such homes because they positively cash flow as rentals and smart people understand one other trend. Home ownership is at its lowest point in 15 years and rental pricing is on the move up again. So, if I put a single family home on the market under $300,000, I can expect multiple offers almost every time.

4. “How do I buy at Trustee Sale?” I started working with an investment company that looks at every property that goes to auction in LA County in 1994. They have agents that cover different areas, they give us the homes going to foreclosure sale each night for the next day, and ask us to value them. If the opening bid is a lot lower than fair market value, they buy it and hire me to sell it for a profit. In the last 4 years the amount of competitors to this Company has gone from 4 or 5 to 50 at these court-house step sales. Yet, for 95% of the people this is never something to do on your own. There is huge risk involved (no inspections or disclosures – what is the real condition?) and you need CASH to buy. Further, many sales are cancelled at the last-minute. The idea of buying 25% under market is always attractive, but for most, the time, money and risk involved mean this is not for them.

5. “When will the Shadow Inventory hit?” The reason everyone asks this goes back to the concern about values. Most people figure there is at least one last “wave” of foreclosures that will go cheap, then the market will slowly stabilize and start to go up. I could write a book on why this wont happen all at once but suffice it to say there are government intervention reasons, big bank accounting reasons, manpower reasons and a few others that will make this a 4-5 year process, not a 12 month one.

6. “Should I buy now or wait?” As I suggested before there are many buyers out there that are motivated to buy. There aren’t as many as we need to stimulate the market like a year ago, but they are out there. Many are asking themselves this question, and the “cold feet” in the middle of escrow factor is higher than I have ever seen it. The reality is that if you want homeownership (most don’t want to answer to a landlord, especially in a rising rent environment), a tax deduction, stability and the idea of appreciation over a long period of time, you should definitely buy now. If you are going to be concerned if values drop a bit in your neighborhood and that will eat you up more than the benefits described above – wait.

7. “What actually is selling?” Great question. To understand why distress sales have such an impact, look at ANY neighborhood in Santa Clarita and look at the “pendings.” These are homes in escrow. Without fail, over 75% of the homes will be short sales and foreclosures. Often it is over 90%. The reason why, again, goes back to values. Buyers think they get better value buying short sales and REO’s, even though the experience is often challenging.

8. “Are regular sales still happening?” Yes. The best example I can give comes from this weekend. A new $895,000 pool and view home came on the market in Stevenson Ranch. It fit a need and received 2 offers, going slightly over list price – in 3 days. About 40% of the homes for sale in Santa Clarita (about 500 homes) are “regular sellers”. As I tell my sellers, about 20% of the sales right now are relatively quick, market value sales when the property is priced properly and shows better than the competition (like the 3 day sale described above). 20% are inferior in condition and/or location and must be priced UNDER market to have a chance – buyers are too picky. 60% are in the middle and will likely take 3-5 months to sell just because that is the way it is. Some won’t have the patience.

9. “Is there any good news on the horizon?” Of course! There is always good news, and think about this for a moment. The largest group of home buyers ever is coming into the market in the next 10 years. There are 7 million “millennials” that will be home buyers – bigger than the baby boomer group.  Their  entrance should roughly coincide with the end of the distress sale cycle and beginning of appreciation at prices that should be quite affordable. Look out for 2015…..?

10. “How are you doing?” I think people ask me this, in a Real estate context, because so many Realtors have left the business.  This will continue big time in the next 3 or 4 years, especially if 2000 homes sales annually becomes the “new normal”. Well, for reasons I am not entirely sure of, last year I was the #1 agent in California for Remax, something I have never done. I think it is more because, everyone else is down so much and we are consistently selling the same amount of homes each year. It is also though I think due to the great place that I sell homes – Santa Clarita continues to be very desirable,  and the tremendous amount of loyal clients that I have here. What a blessing!

2010 Real Estate Review-Why 2011 will be more of the same!

For 15 years I have started the New Year with a review of the past year in Real Estate and offered some suggestions on what we might see in the year(s) ahead.  Reviewing a year like 2010 may be harder than any year before it.  The first half of the year had unexpectedly strong buyer demand (fueled by government incentives) and the second half was much slower than expected as the stimulus ended and inventory rose every month from June on.  I would describe 2010 as “confusing.”  As I have suggested before, I have never read so many news reports on Housing that would seemingly contradict each other.  Many well respected analysts have published convincing articles explaining why housing in many areas is “undervalued.”  Could that include Santa Clarita?  Yet, in the very next article I would read that there are over 7 million homes in some stage of foreclosure which will keep values down until 2020.  2020?  That would be the longest slide in home prices in history!  It is true that there are more homes with no equity than ever before but how many of them will actually be foreclosed on?  No one knows.  And if this is what will keep values down for so long why is the foreclosure inventory still only about 10% in Santa Clarita?  Confusing.  In your neighborhood you probably noticed a sale that suggested prices were stabilizing, and then see a short sale that was $50,000-$100,000 below everything else in the tract.  Confusing.  What is not confusing though is the clear fact that until the distress sales become a much smaller part of what is available, prices will have no upward pressure.  That is why for 2011 I would expect that we will have a market that is a lot like 2010 – over 60% of the homes closing escrow will be either short sales or foreclosures and that is what will keep prices from rising.  However before jumping into some details to explain why this year will likely be a lot like last year, let’s acknowledge the fact that never before has the Government been more involved in the business of Real Estate, and what Washington does can have a big impact on inventory and prices.

 Just as the first half of 2010 was stronger than expected due to buyer incentives, 2011 could be positively affected price-wise if Government forces the Big lenders to better aid homeowners with loan modification and to avoid foreclosure.  Will this happen?  Who knows?  Understand though that the thought of massive foreclosures and short sales is what still keeps many buyers on the sidelines or keeps them from buying “regular” sales at higher prices.  If short sales alone were somehow removed from the market, our inventory would go from 1200 homes for sale to about 600 and prices would go up.  This won’t happen of course but you can see how the huge political pressure to work with distressed properties could affect us.  If some policy gave the perception that those 7 million underwater homes were unlikely to ever come to market, we would immediately see more confidence that price stability was at hand.  And if such a policy did happen, the number one reason prices stay soft, short sales, would become a fraction of what they are today.  So, in the old days, I would report on supply and demand, new construction, buyer confidence and report to you what the New Year might bring.  This year we have historically low rates, lots of investor buyers in the lower price ranges, reasonably low inventory, almost no new construction and still no sign of obvious price stability!  Here is why 2011 will be more of the same.

 Real Estate is more than just numbers these days.  Perception is critical, and I will say that buyers do seem to feel that if we aren’t at “bottom,” we are at least close.  While it might seem silly to even try to predict the future – especially with what Washington may try to do, I think it is pretty clear that the market we have now is likely to be the market we will have for awhile, at least the next 2 years.  That is a market in which prices neither go down a lot nor do they rise.  What is no longer confusing – or debatable – Is the fears that we had in 2008 are no longer a concern.  In 2008, we were rightly worried that the banking system could collapse.  This month we have seen Chase, Wells and Citi report record earnings.  Only Bank of America reported a loss and that is due to write offs from bad loans, something that for most of the big lenders, the worst is close to over.  Their balance sheets are strong and a huge key to stability is the perception and reality that lending is safe.  Loans are not difficult to get – IF you have good credit.  Further, there have been recent articles proclaiming homes are undervalued – with very valid explanations as to why.  Builders tell me that some of the prices in Santa Clarita are so low that they couldn’t build the same home at what it sells for today.  So if the lending system is on firmer ground, prices are so low, new construction doesn’t really exist to siphon buyers away from resale homes, why aren’t prices yet going up?  It’s funny, I feel like we are in 1997 when the 7 year slide in prices was about to be over, nobody knew it, and a few years later everyone said to me “why didn’t you tell me to buy then?”  Only time will tell if now is like then.  So why won’t the 5 year slide in prices (we peaked in May, 2005) be over in 2011 and likely not for even a few more years?  Simply stated it is because there are still a lot of distress sales to come that will keep prices suppressed.

As long as 25% of the homes in Santa Clarita are upside down, and a portion of them will certainly be sold over the next 2 years, there will be no strong force to move prices up if demand stays the same.  Expect to see some sales that are clearly top dollar for their neighborhoods, right alongside sales of similar models for 10-15% less due to inferior condition, less desirable location or just because short sales always sell at a discount because of the headaches to all concerned.  In late summer I posted 5 sales in 5 neighborhoods that showed my “standard sale” next to either a model match or comparable short sale for 10-20% less.  Basically the same home!  This will continue as long as short sales represent 50% of the 1200 homes for sale in Santa Clarita.  Some history may be helpful here.  This exact same situation occurred in 1997-1999 as the last of the short sales and foreclosures were absorbed in the 1990-1998 price slide.  The difference this time is that the prices are higher, the losses are greater and there are far more homes under water.  Still, I believe that cries of foreclosure “shadow inventory” that will swamp the market won’t happen either.  The big foreclosure wave of 2007-2008 (where foreclosures represented 25% of the inventory) that drove prices down has ebbed to half of that for 3 years now.  There is no reason to think that foreclosures will represent more than about 12% of the homes for sale anytime soon, and they are not being priced as aggressively as they were in 2007-2008 either.  Let’s finish with some numbers and trends to better understand.

 2010 had just under 3,500 closed sales, up from about 3,220 in 2009.  For perspective, the “boom years” of 2003-2005 had over 5,000 closings each year.  Prices were relatively stable in the first half of 2010 (arguably rising slightly in the lower price ranges), before edging lower in the last 6 months. The stimulus and tax credits had more of an impact than we thought they would.  September to mid December was markedly slower than expected – less buyer calls, showings, offers and opened escrows.  As I write this in mid January though, we experienced a remarkably active late December which will go toward suggesting what I think we will experience for at least the next two years.  Simply, a market that goes in cycles with brief periods of low inventory that will have some sales at strong prices that suggest recovery and stabilization only to be followed by some sales that suggest a still declining market.  I am seeing every month areas that had lots of foreclosures or short sales a year ago with virtually nothing for sale today.  If a motivated buyer wants to live in that neighborhood and there is no “low ball” distress sale to choose from he must, and will, pay “retail.”  Popular areas like Westridge, Stevenson Ranch and even hard hit Tesoro, have had and will continue to have, nice move in condition “regular” sales at prices 10-15% above inferior condition model match distress sales.  This will confuse those that don’t understand it but it has been happening for over a year and will continue.  Why will this occur?  Because this market, though completely different from some of the problems we had in the 1990’s, is in some ways exactly the same.  

Consider that from mid 1990-1998 prices either fell dramatically (20% in the second half of 1990) or very slowly edged down before stabilizing in 1998 and then starting a slow appreciation in 1999.  It took 9 years!  During that time there were fits and starts – sales that looked like the worst was over, only to be followed by some new foreclosures or short sales that were lower.  From May of 2005 until today prices have had BIG drops (20% in the first 6 months of 2007) and long slow periods of decline-about 8% over 2010.  I have told many people that our inventory is actually relatively low (about 1200 homes for sale in a valley of over 200,000 people) but buyer demand is still tempered by uncertainty. The market will stay this way for one big reason – short sales that are consistently priced below the “regular” sales, suggesting to buyers and appraisers that stability is not yet at hand.  More than anything else watch the percentage of short sales and distress sales – as they start to go noticeably down we are nearing stability.  This really looked to be happening in the first half of 2010, but not in the second half.  This is the reason why, though there are many more positive signs than a few years ago, it will still take a few years to weed through the distress sales before prices may rise again.  

2011 – more of the same!

Real Estate’s Ever Changing Short Sale Climate!

As we wind down 2010 in Real Estate there have been big changes in how short sales are being negotiated that ultimately will affect how long this market will continue. First, just the amount of attention given to short sales in 2010 was more than ever before. For regular sellers, they likely had an appraisal or even a sale affected by lowball short sales happening in their neighborhood. For Banks and investors, they invested huge capital into processing short sales as they were inundated with short sale requests by upside down sellers. Buyers continued to be frustrated by prices that were too good to be true and turn times on offers that still require many months in most cases. Many buyers will now tell their agents, “don’t even show me a short sale!” Finally, realtors continue to be confounded by how to best process them and to understand why some are approved and some are denied. This yearend report will be for every one of these people because the simple reality is that short sales will dominate the market for at least the next 3, and possibly 4 or 5, years. Today, short sales represent 47% percent of the active inventory in Santa Clarita (535 listings). Short sales represent 64% of the homes in escrow. So, with Santa Clarita still a valley that has about 24% of its homes in a no equity or negative equity position, like it or not, we will have to deal with each upside down property one home at a time – for a long time. For this reason we need   more timely and accurate information that can be shared with everyone.  Bank of America has a new guideline?  Hafa is having little impact? Chase is charging off seconds after 2 missed payments? Let’s get the word out; this way people know what to expect BEFORE they start and don’t waste everyone’s time!

So what is really happening with these transactions? Let’s start with something I tell every potential short seller that wants to hire me- “There is no manual.” There is no clear, consistent set of rules for how they work. The reality is that some transactions are easier and some lenders are better than others. Wells Fargo used to be impossible to deal with and today they are clearly the easiest, most responsive major lender to work with.  Next, is my standard disclaimer, “I am not an attorney or tax professional and am neither qualified nor allowed to give such advice.” The opinions I am sharing are from our recent experiences in helping people attempt to keep their homes or sell them short of what is owed with no further recourse. We have a team of legal and tax professionals which handle the questions sellers have about what their choices are, we handle the negotiations when clients decide that short sale is their best option. So, because it seems every month there is something new to learn, here is a basic primer for people who may be wondering what to do with an upside down property and what they might expect if they do put it on the market.

Let’s start with a few basic tips to be aware of:

First, if you have one loan a short sale is much easier than if you have 2 or 3.

Second, if you have 2 loans and they are your original loans from when you purchased, not a refinance, you have far more leverage with your lender to be fully released from your obligation.

Third, if you have 2 loans and the second has “Mortgage Insurance” your short sale will far more often be denied.

Fourth, if your loan was not sold off and is what we call a “portfolio loan” it means that we deal directly with the lender; they are not representing some unknown, unseen investor. These short sales typically go much quicker and are far easier on the seller.  Many Credit Unions are great to work with because they own the loan. The way to find out if your loan is still owned by The Bank of America, Chase, Wells Fargo’s of the world is to ask a loan counselor if they have “delegated authority”. If so, they likely own it. Unfortunately, only about 10% of the time will this be the case.

Fifth, if you have not missed a payment but might in the future (due to job or income changes), many lenders will now approve short sales without missing payments when they perceive that hardship may occur in the future. This is considered “imminent default” and in 2010 we successfully closed short sales with no payments missed for the first time.

Sixth, we are definitely seeing less willingness on the lenders part to delay foreclosure sales. Wells Fargo stated in October they will give one extension for short sales in escrow past the scheduled foreclosure sale and that is it. We all have seen homes that have been in short sale escrow for many months. It appears that this will happen less in the future. This means that it behooves sellers to get an offer at least 90 days before a property in default is scheduled to go to sale.

Seventh, sellers that have “recourse loans” (in which the loan is a refinanced loan or a second in which cash was taken out), need to be prepared to bring something to the table. Lenders are rarely letting them off the hook with no seller contribution. Further, lenders such as Chase are evaluating loans in default after 2 months, determining if they are upside down and if so, selling them to collection companies. These Companies are impossible to negotiate reasonably with. For this reason, sellers with second loans that are recourse are now being advised to not miss payments so that a negotiation with their lender can occur before it is “charged off”. 

Eighth, the big “HAFA Hoopla” of last Spring that was supposed to speed everything up and give seller’s a financial incentive to short sale has been no help at all in doing so. If anything, our experience is that it adds an extra layer of bureaucracy that actually slows down the process and we are advising clients that want a quick answer to actually opt out of Hafa.

Ninth, lenders heard the criticism about short sales being underpriced and are now getting their appraisals done faster and often advising the agent to adjust prices accordingly.  Clueless realtors that price homes too far under market are often raising prices tens of thousands of dollars once the Bank tells them they won’t accept such a low price.

Last, most major lenders are now doing short sales electronically, in which financials, offers and other paperwork is emailed.  They will require 2 years tax returns, financial worksheet, pay stubs and a letter of explanation as to why the short sale is being requested.  Getting this information to them accurately and completely means that a negotiator (the person that ultimately conveys the acceptance or rejection) can answer that much sooner. This change from manual to electronic really helps expedite information to investors that ultimately call the shots. Bank of America, the largest processor of short sales switched to this early in 2010. They are better, but still the lender that takes the longest.  Ask your lender if they are doing this.  Let’s finish then with a basic breakdown of the most common short sale situations.

1. Purchase money/1 Loan: this is the seller that bought a home, DID NOT REFI, and has one loan on their principal residence. They are upside down and maybe tried to modify their loan without success. This is generally the EASIEST short sale to do. The big change is that earlier this year the lender would not talk to you without a “seller’s package” (their financials and hardship letter) and an offer. Today, some lenders will actually pre-approve a price and terms and often CALL ME before the home is on the market. They realize that it is in everyone’s best interest to sell instead of keep the home and I have even had people that hadn’t missed a payment get approved for these. Some lenders (Wells, Citi, GMAC, Credit unions) are much faster than others (Chase, Bank of America). All lenders though are much better than a year ago.

2. Purchase Money/2 loans: Any realtor will tell you that when there is a second loan in which there is a large loss it takes a lot more work. The first lender wants any and all of the proceeds with only a very modest contribution to the second. When Bank of America is the first loan they rarely will approve any more than $3,000.  When there is a second loan, it is usually a HELOC or similar “recourse loan.” If the first is paid off with no shortage and the second gets a good portion of the money repaid, they almost always go through. If the first is also short and the second gets little or nothing, look out. They will usually demand a minimum of 20% pay off in exchange for letting the seller off the hook (Settlement). We have recently been successful in getting these types closed with 10% going to the 2nd lender. That is usually best case in exchange for release of the obligation.

3. One or Two Loans with a Refinanced Mortgage or HELOC: Who didn’t refinance in the last few years? Many potential sellers do not understand that an original purchase money loan and a refinanced loan are two COMPLETELY DIFFERENT types of short sales when it comes to recourse. They are still doable but the lender is in a much stronger position to demand seller contribution because of potential recourse. Many lenders (especially Chase) will sell their loans to collection companies very early in the default process (sometimes after only 2 or 3 missed payments) and getting those loans approved as short sales once “charged off” is next to impossible. Short sales on 2nd/Vacation Homes can still be done, but because they are not a “principal residence,” some of the tax rules and recourse rules are tricky. The agent must ask for a full release in the negotiation to avoid seller obligation down the road.

For homeowners that have 3 loans, the negotiation almost always involves some contribution from the first lender to the second AND a seller contribution to the second and the third. We see these rarely and they are very challenging. As always, sellers that have consistent, open communication with their lenders have the greatest success and least surprises.

My advice to anyone who wants to sell and is upside down is to hire an experienced, professional team. Attorney, CPA and Realtor are all crucial advisors to a successful Short Sale transaction.

What Every Seller Must Know-The 2 Types of Buyer’s in this Market

A friend of mine that sells Real Estate in the Bay Area was commenting to me recently how it seems to be taking much longer for his listings to sell, in almost all price ranges. Another realtor friend in San Diego shared that the amount of showings he has on his listings has gone down considerably, especially in the last 75 days. Every week I meet with the top agents in Santa Clarita at a network meeting and the consensus there  is that even the large under $400,000 thousand buyer pool we had 6 months ago seems to have all but evaporated. When you are contemplating selling anything, and especially Real Estate, it is important to know what to expect before you start. How many buyers are out there? How long might this take? How much room should I expect for negotiation? What should I do to make my home more attractive to buyers?  For each home the answers may differ slightly, and knowing the answers is one of the most important services any good realtor can offer. What is happening RIGHT NOW, not 3  months ago. The only real way to do that is to see all the listings, talk to all the listing agents about their traffic and offers and know what the homes in escrow actually sold for.  What is the buyer pool for a new listing and as importantly, are these buyers motivated? Are there buyers waiting for a home like yours and, if so, at what price? Lastly, are these serious, motivated buyers or are they offering on multiple properties as so many buyers seem to do these days? These are the 2 types of buyers to be aware of. First, some important perspective….

   As a seller, the first thing to understand is that we are still spoiled. Back in the 1990’s it was perfectly accepted that homes would take 6-12 months to sell. Many agents wouldn’t take a listing for less than a 9-12 month commitment from a seller. Showings, and offers, would go in cycles and it was not uncommon to have perfectly nice homes not have a showing for weeks at a time. Even though everyone accepts that the market isn’t appreciating the way it used to, they aren’t accepting that homes are going to take LONGER TO SELL because there are less buyers. We have all heard the stories of homes selling in 3 days, a week, 4 hours and it DID happen. But that was based on a market we may not see again for a long time. It was based on 100% buyer motivation. Buyers would do anything to buy quickly because to wait meant they would have to pay more. That doesn’t exist today, in fact many buyers are perfectly willing to take their time. More on that type of buyer in a minute. For now, lets accept what nobody in todays “I want it now world” wants to accept-selling is going to take longer, and maybe much longer. Consider the following statistics. First, the amount of homes has gone up every week for 13 weeks in a row. Next, the average time it takes to get a buyer that sticks is way up in all price ranges. Finally, the amount of new escrows has gone down each month since June. Now, none of these facts are “the sky is falling” information. I am fairly convinced that the end of tax credits in Spring has something to do with this but so does a number of other factors including that this typically happens this time of year. Also, as I have recently mailed out to a number of people, I am still selling nice, “regular sale” homes for much more than competing short sales because there is always demand for quality. It is clearly however, taking longer to do it.

    Which brings us to the topic of this post-what are these two types of buyers and what does it mean to sellers and the market overall? To keep it simple, the two types are buyers that “have” to buy now and those that maybe want to buy now, but only if the deal is good enough. For example, a buyer that has just sold their home and is selling because they need a larger (or smaller) home is a “now” buyer. They aren’t waiting for anything, they are motivated because they sold and have to buy. 5 years ago, most of this type of buyer were moving up, today more of them are buying down. Either way, this is the type of buyer every seller wants to view their listing. Next, is the buyer that is renting and is tired of it, or living with family or friends and decided “now is the time”. They may even have a deadline to reach, such as the end of a lease. This buyer is often a first time buyer but not always. The bottom line though is they are another “now” buyer. If the right home comes up, they are offering. Contrast these motivated, “now” buyers with the buyer that can buy, they are qualified, but have absolutely no time-table. they can and will buy only if the home and price are perfect. Often this buyer makes multiple offers on short sales hoping to get that great deal they can tell their friends about. If they have to wait 6 months for an answer-no problem. Almost any agent can tell you about a buyer they know that has been looking for over a year-or more. That is  this type of buyer, for sure. Now, for a seller that wants market value, this buyer is probably not your buyer, and in this market there are a lot of them. I am fully convinced as the short sales and foreclosures are absorbed over the next few years, this buyer will help lead the next cycle of stability and appreciation. As they start to sense that the great buyers market is nearing an end, their motivation will increase and they will become “now” buyers. Unfortunately, that time is still clearly years away.

   To sum up then, sellers need to know the difference between these two buyers. When we give feedback to our clients it always revolves around the buyers that viewed their home’s motivation-are they “now” buyers or not? If the feedback that is given can’t answer what they want AND when they want it, the buyer is likely not the type you are looking for. All sellers will have both types view their home. Knowing the difference between the two, and accepting that the process takes much longer,  is the key to success.

Why can’t anyone agree that we have hit “bottom??”

When people say we live in uncertain times (in terms of the economy) they aren’t kidding.  In the last week I noticed Time Magazine’s cover with one arrow going up and one going down. The point? That none of the brilliant minds in business can agree if we are headed for a double dip recession or if the worst is over. Last Sunday’s LA Times had a feature story from a number of experts essentially agreeing that no one can predict what will happen with the stock market and the economy even though corporate profits are way up and many of the usual indicators are overwhelmingly positive. Which brings us to my favorite topic – the Santa Clarita Real Estate Market. As you can imagine, the question I am asked most often is, “Have we hit bottom?” Often my clients will TELL ME why we have or haven’t. If I were to line up the 20 top agents in our valley (whom I happen to network with every Tuesday), 10 would tell you why they are sure that the worst is over; the other 10 would argue just as convincingly why we have one more drop before bottom. No one knows of course, but if we aren’t there yet, I would suggest we are pretty close. In fact, I can show dozens of recent sales in the under $400,000 price range that suggest APPRECIATION of at least 10% in the last 2 years. It is at the mid-point of the year where I typically report what we have seen and what the second half of the year may be like. In short, we have less activity and fewer buyers out there than 3 months ago. Inventory has gone up and new sales down in the last 45 days. Many suggest that the federal tax credit that ended in April took away a lot of the buyers that may have bought in May or June. Looking back, that seems true. Still, this is ALWAYS the time of year that things start to slow. So here are FIVE things that are definitely happening right now that there is no disputing – FOUR reasons why you should have some confidence and ONE big reason why we wont have any real appreciation anytime soon.

1. Buyer confidence is much stronger than last year and infinitely stronger than 2 years ago. Everyone knows that confidence is that hard-to-measure critical component of Real Estate. In 2008, for every 20 buyers that I spoke to, 15 would tell me that they would not even consider buying until the market stopped declining. I get that maybe 2 out of 20 times now. In fact in the last 2 years, it is far more common that I hear frustration from buyers that cannot find a home and that they have been looking for months. Which leads to….

2. The second foreclosure wave never hit and virtually every insider agrees that it won’t. Don’t be mistaken, there are plenty of foreclosures that will come to market in the next 3-4 years. They are coming very slowly and steadily. Just ask the 100’s of Asset managers that have been laid off in the last 2 years. This is critical because it was the wave in 2007-2008 that took values down no less than 20% in 12 months. Without hundreds of foreclosures driving prices down each month, stability can occur. Need more proof? In 2007, foreclosures consistently represented 25% of the active inventory and active inventory was much higher than today. Currently they represent 9% of our inventory and we have 30% less homes for sale than in 2007.

3. Buyers are willing to pay “retail” again. We currently are in a market split between “regular sellers” that have equity and want market value and distressed properties that are often in inferior condition and sell for less than market value. In 2008, over 70% of the inventory AND THE HOMES THAT SOLD were either foreclosures or short sales. 2009 was about the same. Today over 45% of the homes for sale are “regular sellers,” the highest it has been in 4 years.  Often they are priced beyond what they will likely get but every week a buyer steps up (often because they are tired of waiting months and months for offers that they made on short sales or being out bid on a foreclosure), and pays “market value”. The more this happens, and the trend is increasing, the closer we will get to having enough sales to show the appraisers that there is a market for nice homes and they can bring appraisals in. This is an absolutely critical part of creating stability in the market. A little history here may help. From 1990-1997 Santa Clarita was in a slow price decline with foreclosures and short sales taking values down. In 1997 and 1998 the trend of buyers buying more “retail” properties occurred and by 1999 we had our first quantifiable price increases across the board. The negative equity problem of the mid 90’s went away and we had virtually NO SHORT SALES from 2000-2006. Should this happen again, we might expect some appreciation in 2-3 years, especially in higher demand areas.

4. Somewhat linked to the above is an obvious sign that buyers are not only paying more “retail” for regular homes that are easy to purchase, but a clear willingness to pay more for quality homes again.  I have often shared that the problem with the Zillows of the world is that they cannot quantify the very things that buyers will pay more for. Exceptional locations, views, privacy, upgrades, cleanliness, rare floor plans – all of these are features that buyers may, especially if they cannot find what they are looking for, pay a premium for. I have successfully sold these types of homes for significantly more than “average” homes in the same tract for 20 years. The last 3 years have been very difficult to get premiums, either because the buyer was scared to pay it (#1 above) or the appraiser wouldn’t bring the value in. Here are 3 examples:

  1. 29329 Hulsey, Plum Canyon. This newer section of Saugus has been dominated by distress sales. When I put this home on the market, every pending sale and closing, with one exception, was a short sale or foreclosure. Comparable square footage homes were selling in the mid 400’s, yet we sold this property for 510,000 to a move up buyer (another good sign) that needed to buy now.
  2. 23379 Camford, Northbridge-Valencia. Northbridge hasn’t had the amount of distress sales that other parts of town have but this property closed yesterday at 725,000 and was only the second closing in the area over $700,000. The first was another home I sold around the corner for 715,000. Realistically, the appraisal doesn’t come in on Camford if I don’t get the one on Beaumont closed. Both “regular” sales and both help show that quality (both homes are beautiful) still sells when comparable sized distress properties are $60,000-$80,000 lower.
  3. 26810 Stonegate, Westridge-Valencia. I could probably use dozens of examples in Westridge alone  to demonstrate the  huge spread between quality and distressed homes because this area was primarily built at the height of the market and many homes have been walked away from. It is, however, arguably the most desirable part of our valley, and certainly has the most expensive homes with the “Customs.” This property is in escrow at 1,200,000 and it is worth every penny. Comparable square footage in the area has recently sold in the 800,000’s!  Myself and the buyer (a fine local realtor) both knew that the appraisal would not come in and it was excluded from the contract. When it closes, it will help many refinance their homes and clearly show other prospective buyers that quality still commands a premium and give them confidence to do the same. Crucially, I had the home on the market a year ago and didn’t get nearly the interest then, at the same price.

5. I hinted at the beginning that I would finish this post by suggesting that we will likely not have any obvious appreciation for a few years. I have already touched on a few of the reasons why, but the overwhelming reason is agents pricing short sales below market without any knowledge or care for what they might get and then hounding the bank to accept the offer. Make no mistake, all agents price short sales aggressively. Still when obvious fraud or self-interest is the reason (and this wont stop anytime soon with 30% of the homes in our valley having no equity), there has to be some kind of checks and balances. Consider my last 2 homes as example of what I mean.

    25817 Meadow Lane ($890,000) and 25820 Arbor Lane ($905,000) are both regular sales that closed in the last 10 days in Southern Oaks. While they were being marketed, a MODEL MATCH came up for $750,000 to Arbor. Same floor plan, same pool, same location – SAME EVERYTHING. For $180,000 LESS! The agent would not accept offers from other agents that may have helped get the price closer to market value and sold it himself for under that ridiculous price – $730,000. In the same neighborhood, another home comparable to Meadow Lane came up at 905,000. I wrote an offer the same day that the listing agent presented his own offer. My offer was for 910,000, his for 842,000. Guess what the sales price was? If this makes you mad (and it should), this is the garbage that will stop stability and ultimate appreciation from occurring when it naturally would. Remember there is no Real Estate police that will take an agent’s license should they not do what is best for the neighborhood, the seller and the lender taking the loss in a short sale. Can you imagine a home not being able to be sold at market value because an agent basically prevented it? Sadly, this is occurring every day. Until it stops there will continue to be a wide split between “regular” sales and “short” sales – a split bigger than it likely could and should be. Without this one distressing fact I could safely predict “bottom” being hit a while ago; with it, I just can’t yet say it with confidence, even with all the other positive signs outlined above. Stay in touch!