In the 18 years I have sold Real estate, it’s not much of a stretch to say that the last 45 days have been the most unbelievable I have ever seen. It gets to the point that no matter how incredible the news-Wamu and Wachovia gone, Lehman done, AIG, Fannie, Freddie, the market up 600, down 900…we keep waiting for another shoe to drop. I have always considered it my job to report to people what is happening with home prices. Often, I examine areas that affect pricing-loans, interest rates, new construction, population growth, business development etc, so that we can understand and predict what will happen in Real Estate. These days though I must admit, I can feel out of my league. As I study the trends of lower prices, problems with loans, concerns about job security, rising bankruptcies, and certain parts of the market just NOT MOVING, I really wanted to get a “big picture” on what is happening and more importantly what probably will happen. I got my answers last week in Miami. Before I get to that, a quick look at Santa Clarita over the last 60 days. Many of the trends I mentioned in the mid year report have continued:
1. Inventory continues to drop-we are now under 1500 homes for sale. As slow as it is, this is actually not the “oversupply” of 2400 homes from one year ago.
2. The percentage of homes for sale that are foreclosures or “short sales” continues to rise. Over 50% of the homes for sale are in these categories-that is why prices continue to fall.
3. We have basically lost the “move-up” buyer. Santa Clarita is an area in which growth has always been driven by people buying up in size and price. This starts with a first time buyer. Those buyers are actually plentiful in today’s market but they are not buying properties that lead to multiple transactions. Looking for value, the first time buyer is buying a foreclosure or short sale and those sellers ARE NOT BUYING ANOTHER PROPERTY. Few sellers in the $450,000-$700,000 range are selling and buying the $650,000-$950,000 home as the numbers below point out.
4. Because of the lack of “move up” buyer transactions, the $700,000 plus market is slower than I have ever seen it. In our valley today there are about 600 homes in escrow. Of these only 23 are priced over $700,000!! Only THREE are over 1 million!! Even when I sell a property in this range, there are so few “comparables” that appraisal is always a dogfight. So where IS the market?? Under $400,000 we have 376 properties in escrow. From $400,000-$500,000 we have 128. Of those in escrow (and what is in escrow now tells us where the market is now), 82% are short sales and foreclosures.
All of these trends are more pronounced now than when I commented on them 45 days ago, and will likely continue into next year. Why this is happening, when it will subside, and how we differ from other areas are all questions I had for the experts at the REOMAC conference last week in MIami. This is a conference for lenders, servicers, preservation companies and realtors serving the Default industry. In a nutshell it’s a big foreclosure conference, seminar, training and networking oppurtunity. I was there for all those reasons. The keynote speaker was an economist known for being extremely accurate in analyzing and predicting trends affecting the Housing and Financial markets. Dr Christopher Thornberg explained what happened, why it happened, what is happening now and will happen in the next 3-4 years. His position is that we are paying for past sins and to a large extent, no matter who is President, it’s going to be tough for awhile. There was so much covered but here are a few high points:
1.Today’s housing bubble is the worst we have seen in decades. There is approximately 3 million excess properties that need to be absorbed before prices will rise. He predicts that prices will actually hit bottom (depending on the market) from mid 2009 to beginning 2010 but that buyers will be so fearful and cautious that increases in sales and prices won’t really occur until a few years after that.
2. Why this happened is complicated but is a combination of Government policies designed to increase home ownership starting in the late 1990’s combined with the fraud and greed of the 2001-2006 period with the lenders and the buyers of their loans on Wall Street. The Government policies relaxed guidelines for buyers that arguably never should have bought homes but far worse was what followed. In 2000-2002 the stock market crashed. Investors flocked to the strongest return-Real Estate. Buyers soon were greeted with “stated income” loans (“just lie about your income”), zero down loans (“no commitment there”), and “no doc” loans, all designed whether purchasing or refinancing to result in products that the lenders could sell to eager buyers on Wall street. They had fancy names for these new products, and pooled them into securities that today make short sales and loan modifications almost impossible. The high risk factor was ignored because the value of the properties used for these loans kept going up. Consumer spending was at an all time high because home owners just kept refinancing and pulling cash out. Looking back it’s almost hard to believe how little the general public knew or understood about what was really happening-it seems obvious now. The point is that with the crash in values the party ended and the default rates started to soar. For this reason the 700 billion bailout really is not aimed at the Housing market, it’s aimed at the Financial market. According to Chris, the Fed will basically decide in the next few years who gets the money and who survives. Don’t expect that it will do anything meaningful to stem the tide of foreclosures-there are too many of those and too many more (mostly small and medium sized) banks that will go out of business.
3. “Back to affordability”. This means a return to fundamentals in lending. A down payment, good credit and verifiable income is what has always been until recently and will be again to get a loan. Consider how out of whack we got-in 1999 the average price in LA County was 199,000. With 10% down a buyer making $62,000 could buy that property and have 35% of his income go to his house payment. As incomes rose, interest rates fell and housing prices shot up. By the end of 2002, the average home was over $300,000 and represented about 40% of the average income-riskier but not dangerous. This is where prices should have stabilized-a 3year run up in prices is a typical historical market trend and 40% should not be exceeded for affordabilty. Because of low teaser rates and the new loan products mentioned above and fueled by greed and speculation, traditional affordability went out the window and by 2005 the average home in LA County was 577,000 and represented 71% of the average income. Simply stated-THAT DOESN’T WORK.
4. “Stagnant Consumer Spending”. With the lack of credit, elimination of home equity lines and tougher guidelines, growth will stay weak. We will be in the recession that Chris says started in January until 2010. Consumer spending (no more cash to pull out of the house), will be very weak. My friends selling cars and in retail can attest to that. Plenty of belt tightening to be sure.
5. Chris feels the next area to be affected will be Commercial Real Estate-especially retail. Todays cap rates are unsustainable in this economy.
6. State and local Government will face challenges from lower property tax revenues.
7. Unemployment will stay up, the dollar will continue to strenghten, ineterest rates will stay about the same and exports will rise. Too bad few can afford that trip to Europe now!
8. Foreclosures will continue despite an obvious attempt by the lenders to loosen guidelines recently on short sales and a serious effort to work on loan modifications. The problem with loan modifications is that often you cannot change the term because of the way the security was packaged and sold on Wall Street. It has a time limit that cannot be exceeded by simply extending the life of the loan in a loan modification. Worse, is that for most, even with a lower interest rate the client still cannot afford the new payment and has little incentive to try when the value of his home is tens of thousands of dollars below it’s value. Hopefully short sales will become easier so that these properties aren’t abandoned and left to drive values down further.
There was a lot more and obviously I am giving a short version here, but the point is we have a real mess to clean up. Fortunately, a lot of people seem to understand this now and will do their best to do so. As to prices?? Chris says “prices will come down until people can afford homes again”. Seems logical. Today in Santa Clarita, the average home is now in the mid 400’s and probably fairly close to that old guideline of 35% of the average income, which explains why we have 376 homes in escrow under $400,000. If we can reduce the number of foreclosures and replace them with “regular” sellers that want to sell and move up, that is when we’ll see the market resume normalcy.