SHORT SALES 2010-READ THIS FIRST!

Buyers today have more control over the home buying experience than ever. They choose what they want to see because they have access to property listings online. Yet, very often what they see is not what they get. I  get calls daily  from buyers excited about listings that are neither actually listed (redfin is famous for this), or still available (taking “back up offers only” shows as “active” in their searches even though it is really in escrow).  Which brings us to short sales and the market that we are in today. The purpose of writing this is to let all buyers in every price range know that short sales will make up a large portion of the homes that are available to see and they are the perfect example of “what you see may not be what you get”.  In Santa Clarita today, over 40% of the “active” listings are short sales and that isn’t going to change anytime soon. In fact, I fully expect that the type of market we have today will be this way for awhile. Meaning, less than 1000 homes available, 10-15% foreclosure, 35-40% regular sellers, 35-45% short sales. Until there is a solution to the 15000 homeowners in Santa Clarita that are upside down (owe more than their home is worth), to get out from under, expect it to stay this way awhile. So with that out of the way, what does that mean to buyers of short sales? In short, uncertainty and likely frustration unless you know and are prepared for the following;

1. First, understand that the seller is getting no money and likely has little real motivation to be a “good seller”. Meaning disclosures are often not as thorough as they should be, repairs are rarely addressed, attached items that should be left are taken, homes aren’t super clean at move out. Now, good agents ALWAYS caution their short sellers that they have to follow the rules and  not do any of the above. Buyers that are prepared for the worst will be less disappointed though if it happens.

2. Short sales are completely unregulated for agents and sellers in how they are priced and basically sold. Ask any buyer who has gone through the buying process in the last 18 months and it is rare that they did not make offers and NOT GET the home. This is true of any home on the market-regular sale, foreclosure or short sale. Buyers will tell you then, it is often a “sellers market” and many of them have been looking and offering for months-especially in the lower price ranges. As frustrating as that is, add to it the uncertainty of the short sale listing. Often the listing agent does not have a “complete package” on the sellers financials, lengthening the process when  an offer is received. Often, after months of waiting the answer is “no, the seller does not qualify”. Or, “no, the seller will not cooperate with the lenders terms”. Or “no the price is too low, but we will accept this higher price”. How frustrating would it be to THINK you have a chance at a property only to find out that “the great deal” you thought you were getting will only occur for thousands more and you waited 5 months to hear that? In fact, the latest trend is lenders approving the short sale but coming back with higher prices than the list price. This week I saw Bank of America counter another agents $730,000 listing with an approval at $815,000. Since my regular sellers compete with that, it didn’t bother me a bit!

3. Sometimes though a short sale does go through at an obviously lower than market price. This happens just often enough to get buyers hopeful that it can happen for them, though that percentage isn’t very high. Because truly every short sale has a different lender or investor behind the loan, you never know why they accept  some offers and don’t accept others. Frustrating “regular” sellers will be the competing short sale in their neighborhood at 10-20% lower than their price-that sells. This one reason more than any other is why values will have a hard time rising any time soon. Agents underpricing homes because the seller doesn’t care are not yet  held to any standard for pricing. In fact I have written offers on homes for $60,000 more than an offer that was accepted that same morning with nothing I could do to force the agent or seller to consider it. I bet the neighbors wouldn’t like it if I disclosed his business ethics. For buyers this means be prepared for disappointment and an experience that often runs counter to integrity and transparency.

4.  In Santa Clarita right now there are 728 homes in escrow that are short sale, many since last summer. That number represents 65% of the homes in escrow. The point is that many of those homes really no longer have a buyer. Buyers of short sales will often put many offers out and simply wait for the first acceptable “yes”. Listing agents will keep processing offers even though the buyer has moved on to another home so that they can get the lender to approve it, then market the home as a “preapproved short sale”. Supposedly with a much shorter time frame to get a “yes”. Buyers are wise to have their agents call on homes in escrow more than 90 days and put a “back up offer” in. It may eventually end up being the offer that gets the house.

5. So why would any buyer put up with long waits, uncertainty and frustration? Simply put, because they want a house! There is still a shortage of inventory. Also, because they think they can get a good deal and even if there are no repairs, a lower price is their primary motivation. Is it worth the brain damage to get a discount? Some would say yes, many say never again. For some buyers a long wait isn’t an issue, for many, they don’t have the time.The point is that the buyer’s agent  must ask a ton of questions to really determine what is happening and advise their buyer what to expect. It doesn’t help if the listing agent isn’t experienced or motivated. So with short sales it truly is, “buyer beware”.

“10 For 2010”, Ten Real Estate Changes You Need To Know

 As we start a new decade in Real Estate I am struck by how much Real Estate has changed in the last 10 years. We often forget that even with a bubble that no one could have seen and predicted that average and median prices in Santa Clarita are still almost double what they were at the end of 1999. The big change though is in technology-never before has so much Real Estate information been available to the public and boy do they lap it up! I have never seen so many articles, cable programs, blogs and opinions sure can be controversial. I get it, Real Estate is a big part of the American dream and impacts huge numbers of jobs and of course, confidence. The irony though is that with the public having more access to information than ever, there seems to be more confusion than ever. Today we have record low inventories (673 homes in Santa Clarita today, only 381 are not short sales), yet prices are not going up. Why? In 2009 we had 5.176 million sales (higher than the average of the boom years of 2000-2005!), yet many claim that was due to economic stimulus not real demand. Tell that to the thousands of buyers that agents talk to everyday that have been trying for months to buy a home only to lose out. Why are so many “experts” claiming a wave of foreclosures to hit (Moodys, Amherst etc) yet the lenders and servicers will tell you it won’t happen. More information than ever and still more confusion than ever. Of course no one knows what the next ten years will bring. I do think it is safe to say though that the days of expecting double digit appreciation every year are over. Personally, I wouldn’t be surprised if at least the next 5 years are relatively flat. Because we have over 25% of the 65,000 homes and condos in Santa Clarita in a no equity or negative equity position, it is my belief that, barring new government policy to change negative equity,  the market we are in is the market we will have for awhile. So what does that mean? Here are ten changes from the last few years that will certainly play a part;

1. SHORT SALES WILL DOMINATE;  I have written plenty in the last 2 years about short sales and have changed from not wanting to have anything to do with them to going through extensive training to handle them. I will have 2 open seminars in March and April with lawyers, a cpa and representatives from the top lenders just to help the public understand how they work and what their options are. 3 years ago we had hardly any short sales on the market, today they represent 43% of the homes for sale and 70% of the homes in escrow and this won’t change for a long time. Why? Because never before have we had such a large percentage of homes upside down and the ONLY method available to these  homeowners is short sale. There is no bankruptcy, loan modification or magic answer to people that in many cases, simply bought their home at the wrong time. Because of the complicated way these loans were sold and securitized, almost never does a successful loan modification change the loan balance. Until that changes (highly unlikely for now), the problem of being upside down will continue for thousands of Santa Clarita homeowners for years to come. If the new “HAFA” incentives to short sale show promise, watch for all kinds of additional incentives to homeowners and lenders to go this route, the only route so far for an unhealthy and unprecedented housing problem.

2. SHADOW INVENTORY IS NOT COMING ON THE MARKET; the brilliant Sean O”Toole who created foreclosure radar and writes an outstanding blog, has been saying for over a year that the lenders have neither the balance sheets nor the political will to bring the over one million properties in default to the market. Arguably it is this “elephant in the room” that has kept many buyers on the sidelines waiting for more inventory and more “bargains”. As Sean says, “don’t hold your breath”. For many reasons outlined in my November post, we will likely see these properties come on the market over a LONG period of time if they come at all. There are simply too many reasons  why it won’t happen all at once, or even over the next year and a half. What that means is that the percentage of our invenory that is foreclosure (a modest 10-15%), will likely stay that way for the next 2-4 years.

3. THE TRUSTEE SALE IS THE NEW HOT REAL ESTATE TOPIC; this is literally the sale that occurs on the Court house steps. When a property goes through default, if the lender cannot work something out with the homeowner, they will offer the property FOR CASH as a last step before taking it back as bank owned. These properties are sold for cash, no inspections, often still occupied with the former homeowner. They represent high risk, high reward to investors and interest in them is exploding. Every day in Santa Clarita several properties will be on the docket for sale, often in Norwalk or Pomona. 10 years ago there might be 5-10 investors there to possibly buy. Today it is not uncommon to have 5 times that many prospective bidders all with cash. Very often the sale is postponed for various reasons but just as often they sell, usually for 15-25% below market value. Highly risky, but in a market with so few homes for sale, this is where some creative types are finding their inventory. Recently the Government rescinded it’s 90 day “anti flip” rule for FHA financing. This means that investors buy these homes to resell can now sell them to the largest pool of buyers there is-FHA loan buyers-without waiting 90 days. This will only help the sale of these type properties.

4. THE APPRAISAL PROCESS HAS CHANGED COMPLETELY; in 2009 the Governemnt imposed new regulations on appraisers designed to eliminate some of the “funny business” that occured during the boom with inflated appraisals. As many agents and appraisers will tell you it has had the effect of driving many good ethical appraisers out of the business and often created a situation where the agents involved can have no communication with the appraiser. On the surface this may sound good, however it is now quite common for appraisers to come from far out of the area to appraise and usually they have no information (other than photos online, if any) about the comparables they are using. Often they won’t know why one part of say, Saugus, sells for more than another. They use short sales (that in many cases sell for lower than market value because of a lack of competitive bidding or a lack of buyers willing to go through the aggravation) as “comparable” to regular sales when in many cases they are not. This one area is clearly keeping home prices from enjoying even modest appreciation, especially in the under $450,000 price point where demand is torrid. To illustrate the problem, in 2009 I represented 81 sellers and in 22 cases I had to work with an appraiser to bring the appraisal in. I sold 5 homes with cash buyers that because of a lack of comparable sales, there is no way they would have closed had an appraisal been required. Those 5 closings helped others sell or refinance that would not have been able to otherwise. These new rules (referred to as HVCC), are up for review with Congress in 2010 to make them do what they were intended to without blowing up so many escrows.

5. SELLERS HAVE TO SOLICIT MORE OFFERS THAN EVER; because of the above appraisal issue and a market in which buyers seem to make offers on multiple properties ALL AT THE SAME TIME (!), a seller has to be aware that it often takes multiple offers to get one to stick. The fall out ratio in 2009  was over 30%, an unprecedented number. More than ever, listing agents need to really understand a potential buyer’s motivation and commitment to their offer. Additionally, they better know which comparables support the list price.

6. BUYERS ARE MORE IN CONTROL OF THE HOME BUYING EXPERIENCE; like never before, buyers have access to listings and information. When I started in Real Estate 20 years ago, the agent was almost entirely in charge of which homes a buyer saw, today the opposite is true. Unfortunately, our role is now just as often explaining to a buyer why a home they think is available really isn’t. Many sites will show properties that are no longer for sale or are already under contract. Realtor.com, for example lists properties as available, when their status is actually taking back up offers. For buyers, a good agent helps you seperate fact from fiction. For sellers, understand that your photos online and your agent’s reputation may be the difference between a showing and no showing.

7. THE MOVE UP BUYER IS SLOWLY COMING BACK; I don’t know about other markets, but in Santa Clarita the move up buyer has been the fuel that drives the Real Estate engine. From 1999-2009 I sold more homes in California than any other Remax agent by doing multiple transactions-helping a homeowner sell and buy up. From 2007-2009 this buyer almost entirely went away, not just because the equity that we had historically built wasn’t growing, but also from a lack of confidence. Who wanted to buy a $900,000 home that might be $700,000 in a few years? That sentiment is changing. Because prices have fallen so much, we are seeing sellers in the $300000-$400000 range move up to $500,000 to $600000 and get a LOT more house. They are comfortable with the interest rate and the taxes. Slowly I am talking to more people in the $600000 range that will move up to $900,000 plus. In many cases they are eyeballing properties that couldn’t be built for the price they would pay and they know it. This one trend is key to price stability in the over $800,000 market.

8. THE NUMBER OF REALTORS IS DROPPING RAPIDLY; in 2005 there were over 2.1 million licensed agents in the United States, today it is about half of that. The old 80/20 rule (“20% of the agents sell 80% of the homes”) is now 5/95. I have long supported far greater education and licensing requirements, but it appears this market is doing it for us. In 2009 over 50% of the agents in the United Staes sold 2 homes or less and this trend will likely continue as the number of sales is expected to dip a bit in the next few years as governement stimulus programs end. What this means, more than ever, is know your agents experience and track record. It could mean the difference between getting the home or not getting it. Selling or not selling.

9. GOVERNMENT INCENTIVES END THIS SPRING; and likely will not be replaced. No one knows what will happen in the future, but first time buyer credits especially were not really needed in a market in which there were often 5 buyers for every new listing under $400,000, at least in Santa Clarita. Watch instead maybe, for the incentives to move up buyers to continue. A smart client of mine asked “what will happen when the training wheels come off?”. Meaning if interest rates rise and credits go away. My guess is a slight increase in inventory (we hope) will be met with slightly lower demand, which will actually resort in a more normal buying-selling process.

10. SHORT SALES WILL CONTINUE TO CONFUSE THE MARKET; I guess I couldn’t finish without one more comment on the biggest trend that will confuse and confound us all. I started by suggesting that short sales will dominate because so much of our Valley has no equity. When these owners need to sell they will go “short sale”. The problem has been, and likely will continue to be, agents and sellers with no motivation other then a quick sale to underprice the home and often sell below market value. The reason the lenders are encouraging these sales is because it costs them less to dispose of an asset on a short sale than going through foreclosure-a lot less. Often, the lender will appraise the property (see #4 above), below market value. I did a short sale this fall in Stevenson Ranch in which the owner owed 1,325,000, the Bank appraised it at 770,000 and I sold it for $900,000. $900,000 was a good deal for the buyer but the Bank thought they made out-they didn’t. If it didn’t have the short sale stigma I could have sold it for closer to one million, I believe. The problem we are having is with agents, often from out of the area, that don’t really care about market values here and there are no rules to prevent them from pricing a home anywhere they want. I suggested last year it is up to all of us to police this issue. When I put a short sale on the market, we market for at least 7 days to encourage all offers and realize market value. Few agents do this. Expect more guidelines of this type to be required by the lenders that approve these sales, hopefully sooner than later.

       If you think about all of the trends discussed here-low inventory, foreclosures not coming to market, appraisal changes,  return of move up buyers etc., in almost any “normal” situation prices would be rising, or at least stable. The short sale, often selling for less than it could or should, will continue to be a problem with stabilizing values.  The big picture issue though is the sheer fact that so many people are upside down and there is no real solution to their problem. Like many, I bought a home I could afford and part of me doesn’t want any “easy outs” for people who signed up for a home that went down in value. The reality though is that as of today there are over 7 million homes that are in some stage of default.  Many just want a loan modification, many if their principal was reduced, would stay. Because of this, short sales and foreclosures will be part of our Real Estate discussion for years. Be prepared for looking at homes again as a place to raise your family, not something to count on making us a lot of money.

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

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

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

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

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

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

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

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

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

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

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

Will Short Sales Save Real Estate?

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

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

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

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

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

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

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

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

So why aren’t prices going UP??

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

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

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

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

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

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

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

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

So where is the “Wave of Foreclosures?”

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

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

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

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

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

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

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

The 2 Types of Buyers in Today’s Market

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

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

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

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

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

What Happened to all the Foreclosures??

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

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

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

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

1 Year Later-How Short Sales Are Changing!

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

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

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

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

SO WHAT WILL HAPPEN IN 2009? NEAL PREDICTS AGAIN!

Lets face it, in the 18 years that I have been “reading” the market and reporting to my clients and friends what to expect, I was never further off than in 2008. You can look it up-I felt prices would fall modestly in the most popular areas and up to 20% in the areas hardest hit by foreclosures. The 20% part was close. Newer areas with high foreclosure rates dropped 22-29% in 2008. These are areas like Plum Canyon, Tesoro, Canyon Gate, Creekside Valencia, Stetson Ranch and Fair Oaks Ranch that sold between 2004-2006, where buyers bought at top dollar and often with little or nothing down. More established areas though where people had bought at lower prices and had equity, I didn’t expect to get hit too hard. Well as we all know 2008 hit every neighborhood hard and shook everyone’s confidence in Real Estate. 2008 marked higher than expected volumes of foreclosures hitting Stevenson Ranch, Castaic, Copper Hill North Saugus and other very popular areas that sold primarily prior to the height of the market in 2005. The drop in these areas was between 15-25% in 2008-far more than logic suggested should happen. Why? (I’ll explain in a minute) Are we now at bottom? (In some price points we are close, in others-no),  What will happen in 2009?   The answers to all of this I will now attempt to answer. Also, understand this report is geared just to the Santa Clarita Valley. What is happening here may or may not be happening in other areas. I will try to examine facts which can not be debated or manipulated. So, even though everyone seems to have an opinion where the Real Estate Market may be heading, one thing is certain. Where foreclosures occur, prices fall. Lets analyze then the foreclosure phenomena and accept the fact that when they stop, then stability will occur.

    It is always a challenge to write this report. Those that know me, know that I never “sugarcoat”, I report my perception of the facts so that my clients can make good decisions. Many of my buyers I have been telling for years to wait (the market here peaked in May of 2005, I have probably 20 clients that are waiting SINCE THEN to buy based on my advice). Well, 2009 will be the year for many if they are buying under $500,000.  To understand why so many experts predict 2009 to represent “bottom” it is important first to look at the numbers. Real Estate is always a numbers business and it will be my contention that the “number” of foreclosures will be by far the single biggest factor in establishing price stability. First, the ammount of homes for sale has stayed at about 1400 for over 3 months. This represents only just over a 4 month supply for a Valley of 200,000 people. Next closings in 2008 were up about 10% over 2007 (3042 vs 2876). Median and average prices are down into the 400’s now, meaning affordability is way up. Interest rates for this price point are now below 5%. All of this points to normal inventory, exceptional affordability, selection…so why is everyone so nervous  that values will keep dropping?  Because we have been bombarded with unprecedented turmoil!  Banks going out of business, 401k’s cut 40%, prices of homes in every neighborhood dropping, appraisals impossible to bring in…it’s hard to think positive with all that happening!! Yet, that is probably a “logical” view for lower priced property where stabilty is already occuring. Today, with tough credit and down payment requirements, prices and affordability as good as they have been in 10 years and a foreclosure wave that will stop sometime…this is probably the best time to buy and the safest time for a bank to lend in a decade!! We just don’t realize it yet.

So what about higher price points? The over $500,000 market is trickier to predict and not yet one to suggest total  confidence to buy in. It’s because of the foreclosure question and the reality that rising unemployment shakes confidence as much as everything I just described.  When people are nervuos about their jobs or income, they don’t buy-especially over $500,000.  The reality of 2009, is that if  foreclosures were not as high as 2008 (and I will explain in a minute why they will be), but unemployment rose, prices would still come down in the mid to upper price ranges.  So for those of you too impatient or busy to read the nuances of what will affect values in 2009, here is what I think will happen.

1. Under $500,000 homes will be stable or decline less than 6%. Condos in low foreclosure areas the same, high foreclosure areas drop 5-10%. Under $300,000 homes stable or INCREASE 5-10% (this is already happening in some areas). Newer condos under $300,ooo relativly stable, no increase. Older condos a bit more decline

2.  Homes 450,000-675000 (the new conforming loan limit is 625,000, these homes will be in that range), stable to 10% decrease depending on demand in the area.  Higher foreclosure areas I expect to decrease another 5-15%.

3. Homes 675000 to 900000 will start to stabilize by the end of the year in the high demand areas. High foreclosure areas have another 5-20% to go.

4. Over 900,000 today has over 100 homes for sale in our valley and only 8 in escrow. Simply stated they don’t sell quickly. The good news is that there are very few short sales and foreclosures in this price point. Many sellers should take their homes off the market here unless they are super sharp, and many aren’t. This market is too tough to call but aided greatly by the (so far) lack of foreclosures in this price point, I think it drops probably 5-10% in the Stevenson Ranch, Valencia parts of town, more than that in Newhall, Hasley and Sand Canyon where homes basically STOPPED selling in 2008. The exception to this, as it is in any market, is highly upgraded homes in great locations with hard to find amenities (great privacy, big lots, views etc).

So where did these predictions come from? Well, I show property, preview property, track the default statistics and basically talk to hundreds of buyers, sellers and agents every month. You get a pretty strong feeling for things when its what you do all day every day. At the economic conference at the Hyatt in November all 3 economists predicted bottom in 2009 using very convincing and relevant data. I just think that unless it’s in the lower ranges there will be too many foreclosures for that too happen just yet. Here is why:

1. Loan Modifications are not going to stop foreclosures. THE big talk at Default Conferences and in the media is to keep people in their homes by changing the terms of their loans-lowering interest rates and sometimes even reducing loan ammounts. I represent a Company (Titanium Solutions), that is hired by servicers to have agents (like me) go out to homeowners in default and give them the great news that they qualify for a loan modification. Here is the problem-half the time the homeowner has rented it out and stopped payments. They don’t even live there anymore. Another 25% of the time they are so far upside down, they don’t care about modifying the loan, they have walked away mentally and don’t really have an open mind to modifying and keeping the property. In my experience, only about 25%of the time do they work. For people that are not in default, they work  more often and that is great. Keeping people in their homes is great. But to suggest that loan  modifications will stem the tide of foreclosures, sadly is not going to happen. Rising property values will stem the tide of foreclosures

2. Lower Notice of Default Rates is an illusion. One of the economists at the Hyatt actually predicted “bottom” in Santa Clarita in the spring of 2009 with prices RISING in the summer. Hey, no one would be happier with that than me! However he based that claim on dropping inventory (true), lower interest rates (true, thankfully), and lower Notices of Default in August and September. His claim was that lower default and  lower foreclosures means price stability. That will undoubtedly be true when it happens, as I have said. The problem is that the lower Notices of Default and foreclosures seems to be due more to Senate bill 1137 passed in August than anything. This Bill required lenders to reach out homeowners and have actual communication before foreclosing. Most servicers I talk to acknowledge no signifigant change in the numbers of people in default, just a slow down in the process of getting them to market. Many feel this “artificial” stop in the process will eventually lead to those homes hitting the market in 2009. I’ll do one better than that though. In 2005 I reported that the market had peaked and commented on how many investors had called me to sell their property while they still could. That large group of homes has by now either sold traditionally or been foreclosed and sold-mostly by 2007. So the investors are through the system but we still have  all the people that bought with little or nothing down  and  the people that saw 2008 wipe out whatever equity they had. These are not investors but homeowners that maybe bought in 2006 (30% of all loans in 2006 were little or nothing down) or pulled money out in 2006/2007 when they still had a line of credit. I am personally seeing many of these situations right now. Hopefully loan modifications can get more aggressive to help some, but as I have said before, many people just walk away when they are upside down, and 2008 made a lot of people upside down.

For these reasons I (and many others), expect foreclosure volumes in 2009 to be similar to 2008. Why then is there more stability in the lower price ranges, where there are so many foreclosures?? Because of….

3. The return of the investor. For the first time in almost 10 years a buyer can buy a home for under $350,000, put 25% down, rent it out and have a positive cash flow. Investors realized this big time as prices plunged in 2008 and they, along with highly motivated first time buyers are creating multiple offers on virtually every foreclosure that comes on the market-especially under 290,000 where it REALLY pencils out. As all smart agents know, this is where the market is and it can even be shown that in the last 3 months, prices have bumped UP a bit. Rentals remain strong and for many “big picture” investors, Real Estate is a better choice than the stock market.

 

So what does all this mean? Well, I think 2009 will be a lot like 2008. I expect the number of sales to increase slightly again (people don’t know that 2008 was actually the 8th highest sales year of the last 40 in California for number of transactions). I expect a lot of strength in the lower price points, rates to stay low and slowly people will start to feel bottom and buy with more confidence. By the end of the year the foreclosure numbers will start to subside, leading to eventual price stability in higher price points. Finally,  we must understand that this massive, painful, sobering correction is going to have a lot of long term good for the Housing market. Upside down people will modify or walk away and those homes will “reset” at todays values. Also, we are experiencing about a 5 year period in Santa Clarita of very low building of new construction. As this cycle comes to an end by probably 2010/2011…..? We dare to dream.