Where We Are and Where We’re Going: Predictions for 2008/2009

Wow, what a difference a few years make! It is at this time of year that I write to you and recap the previous year and lay out what I expect to happen in the New Year. In December 2004 I wrote that 2005 should see a “soft landing in housing prices. At that time, the inventory had risen to over 1400 homes, the demand was slower but steady, financing was available and there were delays in the expected new construction. Myself and virtually all of the top agents I network with-in and out of Santa Clarita-were concerned about the lack of affordability for the first time buyer and felt the 5 year run up in prices surely would now come to an end. As is always the case, more popular parts of Santa Clarita were expected to stay flat or modestly soften, areas where there was more to choose from we expected to decline in the area of perhaps 10%. After appreciation in the area of 200-250% in the previous 5 years, this seemed a reasonable expectation. Well, we all know now that is not exactly what happened.

Against all logic, prices rose about 15% all across Santa Clarita in the first 6 months of 2005, driven by cheap money and speculative greed. A majority of buyers were motivated more by appreciation potential, not necessarily the desire to make their purchase a long term “home”.. As we now deal with the mess that is Real Estate coming into 2008, it is important to note that had prices stayed flat or dropped modestly in the first 6 months of 2005, the fall in 2007 would not have been nearly as painful or dramatic. Unfortunately, for many, 2008 will be more of the same.

Because this is such a “hot topic”, I will try to give as balanced and realistic an explanation as possible. Many people blame the media for creating much of today’s negative Real Estate environment and there is no doubt that is true. I personally know dozens of people ready willing and able to buy-at todays prices-but they won’t until they feel stability and confidence in the marketplace. That is certainly understandable, I would never advise someone to buy anything that will obviously depreciate. However, much of today’s market is not obvious. There is already, in the first 2 weeks of January more calls, showings, and positive feelings from the interest rate cuts among buyers I am speaking to. Also, I believe some neighborhoods will stabilize in 2008, and some never really dropped that much to start with. A few thoughts then before we examine what may happen in 2008-2009.

First, for all the talk of bad loans coming due, anticipated foreclosure rates, builders and lenders in trouble, and other front page stories, never underestimate the importance of buyer confidence and psychology in influencing the market. That fateful 6 months of 2005 was driven by irrational total belief that the market would keep going up! Conversely, in the last 30 months of price decline, by far the last 6 months have been the worst. I don’t think either represents what we will see for the most part in the next 2 years, as we s-l-o-w-l-y see the foreclosure listings get absorbed, and buyers and sellers regain confidence in what everyone admits is a great long term investment. Second, it is hard to argue that cheap, easy loans helped drive prices up. In the last 6 months however, LACK of financing for people that SHOULD be able to get it is causing sales to be slower than they should be, especially for jumbo loans over $417,000. Thankfully, there are signs that this is changing as we enter 2008. With lower rates, lenders able and willing to loan again and increases in FHA loan limits, confidence should start to s-l-o-w-l-y come back. Guidelines and appraisals are tougher for sure, but qualified buyers will find loans in 2008 that were not available in 2007.

Finally, what I am about to share points to a 2008 that will likely be a tough one-prices in most parts of Santa Clarita will continue declining and the number of sales (which is about half what it was in 2004), will be dominated by foreclosures as buyers seek value. For those with a long term view, I expect the next 2 years to offer some of the best buying oppurtunities we have seen in a decade, for those who understand the market. So, since I expect 2008 to be very similar to 2007, lets examine what is happening now and why it is likely to continue.

First, the days of just “any” home selling are long over and price is by far the top reason a home sells in todays market. Only about 8% of homes are actually selling (as of January 16 there are 2245 resale homes for sale with 212 in escrow), and they are homes that are either priced below everything else or priced similar to the competition with better upgrades, yards or location. Why has price become such an overwhelming factor? Lack of confidence. When the first big round of foreclosures hit the market at the beginning of 2007, the banks were not overly aggressive in pricing and were rarely willing to improve the home for sale (paint, carpet, landscape etc.). They simply expected sales-buyers always ask for foreclosures because they think it always means a good deal. By the second half of the year that changed. Almost as if flipping a switch, the foreclosure or “REO” homes started dropping prices signifigantly to move inventory. This caused prices in some neighborhoods to drop 5-10% in a few months as buyers played “wait and see” and lenders tried to find a price that would cause the home to sell. In 17 years of selling homes I have never seen such a large sudden adjustment in prices in so many desirable neighborhoods. I watched homes in newer Saugus that sold for $700,000 in April, sell for $590,000 in November. Condos in Canyon Country that sold for $320,000 in March are listed now at $260,000-and not moving. A popular model in Northpark Valencia that easily sold for $740,000 last Spring just went under contract for $680,000. The biggest drop , both in dollars and percentages occured in the last 5 months.

Will this continue? In some areas, it absolutely will-some parts of Santa Clarita have many homes for sale and few in escrow. When what is for sale is vacant or HAS to be sold (like a foreclosure), prices will fall until a buyer can’t pass it up. As we point to why prices fell so much in the second half of 2007 there is no doubt that the foreclosures and homes in default (short sales), are the main reason why. This will continue until sales increase and the inventory of these foreclosures slows. Most peg this to be late 2008 and into 2009. Next, as “normal” sellers try to compete against foreclosures they are feeling the pain and frustration of an average days on the market SIX times longer than it was in 2004. Sellers in most neighborhoods need to be prepared for it to take months to sell homes not weeks. Yet, to perhaps confuse the issue a bit, it is important to understand that some areas and price points of our Valley are not experiencing nearly the same foreclosure rates and price declines as others. To better understand then what may happen in the next few years pricewise, we can divide our Valley into 3 different types of area.

About 10% of Santa Clarita is actually selling for prices comparable to 2004-2005. Interestingly, this is mostly in the upper price ranges and primarily “in town”-not Tesoro or Sand Canyon. The “Woodlands”, Valencia Summit, Southern Oaks, parts of Circle J and Newhall that offer good locations, yards and upgrades still sell well. Lack of inventory and consistent demand keep prices pretty stable. This has nothing to do with these areas being “better” than others but much more due to examining how these homes sold in the last 4 years, and who bought them. First areas such as these had virtually no speculation-people buy there because they want to live there. Also, rarely did homes sell there with little or money put down. To fully illustrate the point, lets use Northbridge Valencia, a traditionally popular area that would probably not quite be in this group-but parts of it might be. Northbridge prices have probably declined an average of 12% in the past 18 months. In the condos though (Montana, Cheyenne, Rose Arbor) where there were a lot of sales at the height of the market with little or nothing down, the decline has been closer to 25%. In the more expensive Castlerocks, Lexingtons and Sandlewoods where people typically bought for the long term and with more money down the decline has been much less-and will probably continue that way. So even within a neighborhood, how pricing will go in 2008 requires insight and understanding. In Westridge, sales and pricing have been slow and declining for 2 years. Overall, it is definitely not an area I would describe as especially “stable”. However, for that upper end buyer that wants an Oakmont or Custom home with exceptional amenities the price isn’t going to be much lower than it was a year ago-if at all. Across the street though, in Bent Canyon and Montanya, prices dropped 10% in the last 4 months alone due to a higher foreclosure rate, and more speculation. Not too many people “speculated” over one million! Same neighborhood, different supply/demand dynamic, different buyers over the past 4 years, different type of loans, different speculation rate all add up to different price stability. There are buyers waiting for a foreclosure in Oakmont or Presidio (upper end neighborhoods that sell above 1.5 million), and there was exactly ONE in 2007. That isn’t going to drive prices down.

The next area of pricing did not have the stability of above but probably has the greatest oppportunity for value for buyers in the next 2 years. About 60% of our valley is noticeably declining and will likely continue for the next year to some extent. This area declined between 8-20% in the 2007. Again, the price decline had nothing to do with popularity of neighborhood, schools, construction quality or any of the reasons it probably “should”. it is all about abundant supply from speculation that is now in default or a foreclosure. These are some of our valleys most popular neighborhoods but due to a large number of sales in the peak years (2003-2005), pricing that typically saw a lot of activity (500-800,000), and a lot of competition from new construction and foreclosures, prices have been hammered. These are areas like most of Saugus (but not Plum Canyon), most of Valencia, Castaic and parts of Canyon Country. Some parts are closer to 10% and some closer to 20% What will happen in 2008/2009 has everything to do with the inventory now so lets examine it.

First, Northbridge/Northpark, Valencia Copperhill and Stevenson Ranch are in this group but with less expected depreciation. Tesoro and Creekside are in this group but with perhaps more. The reason is, again, due to higher foreclosure rates and WHEN many of the homes were sold. Tesoro/Creekside was dominated by sales in 2003-2005. Northbridge/Northpark had their share in this time but not nearly as many, specualtion rates differed, etc. All of this today adds up to way more homes in default and what I will now address as the single most confusing and frustrating part of any discussion about the market and pricing. That is the “Short Sale” listing.

This is a home listed for sale in which the seller has gone into default. They have no equity and many times no concern really what it sells for. Along comes an agent that needs to get an offer to submit to the bank to see if they will approve the “short”-the difference between what is owed and what the market value is. Some times the bank will allow the short sale and let the owner off the hook-many times they will not and the home will eventually become a foreclosure. The problem with these listings is not that the seller may have to sell it-the problem is what agents are listing them for to attract attention. The list price many times has NO BASIS IN REALITY. It is lower than the bank will ever approve when they appraise it, and creates a false sense in the neighborhoods about what values really are, and to the buyers that think they can buy a home for way less than even the foreclosures are listed for. In short, there is a real problem with these listings in evaluating pricing-they make things appear lower than they really are and there are hundreds of them.

The other factor affecting values in this area is new construction competition. Between June and November, Lennar dropped prices more than 20% in the condo market and 15-20% in their single family home communities in Castaic and Valencia. Pardee was as aggressive in Fair Oaks Ranch. No seller can compete against that without reducing their prices and that is what they did. Between July and November I took 15 homes off the market in CopperHill Saugus, Tesoro, Stevenson Ranch, Castaic and Canyon Country, because prices dropped 10-15% and we could no longer afford to sell. The good news is that Lennar has taken inventory off the market (West Hills), and stabilized pricing on their existing inventory. This will help. Still, with the volume of foreclosures and short sales expected for 2008/2009, this area will continue to decline. When the supply slows, prices will stabilize. In some areas this is already showing the beginning that this is happening. This will definitely occur for all of these neighborhoods, the only debate is when. Complicating this the most is the “short sale” listings -many will become foreclosures, some will not. It is too early to say how much of a decline to expect and of course, some areas will do better than others. A basic rule of thumb though is look at the default rate-the lower it is, the more anticipated stability. These areas then represent great opportunity for buyers-popular neighborhoods, excellent schools, desirable floorplans, price flexibilty and good long term potential. Buyer beware-it won’t last forever!

The third area of Santa clarita is where prices dropped more than 25% in 2007 and foreclosures dominate the market, making stability difficult to foresee soon. Almost always these are areas built in 2003-2006 and where the foreclosure rate is 30% or more of the existing inventory. Simply stated, banks are of the mindset in these areas to drop the price until it sells and who knows where that will be. Some parts of the second group are almost in this area and bear watching. Plum Canyon Saugus for example is in this group-not an especially large geographic area with over 100 properties for sale. Of those, over 50 are short sale or foreclosure. Of the 12 in escrow, 4 are builder sales as the builders compete against the existing homeowners (which is always tough). Of the other 8, SEVEN are foreclosures. Meaning only 1 out of over 100 homes is in escrow with a “normal” seller. This area will probably take awhile to stabilize, as you can imagine. Similarly, Canyon Gate by Golden Valley High School has newer homes that aren’t moving. Of the 12 for sale in that tract, 9 are short sales or foreclosures and worse there hasn’t been a sale in months. Who knows where the market really is for those? Also, many condo developments across Santa Clarita bear watching-many of the buyers for these in 2004/2005 put very little down and default rates in condos is typically noticeably higher than in surrounding single family homes. Some condos, not all. Again, you have to know what you are looking at

….As you can tell then, the market for the next 2 years will be decidedly different from neighborhood to neighborhood and literally tract to tract. For sellers considering selling and buying up, there is every reason in the world to do exactly that. For people thinking about selling in areas with a lot of supply, you may want to wait a few years. And with prices and rates dropping, I have already spoken to more first time buyers in the past month than I did all last year, which is a VERY encouraging sign. If it is one thing I have learned in selling homes for 17 years, Real Estate is all about cycles, and I’ve seen them all. Understanding them and making good decisions-that takes patience and effort. I am committed to both in 2008. Happy New Year!