Neal's Blog

January 31, 2010

As we start a new decade in Real Estate I am struck by how much it has changed in the last 10 years. We often forget that even with a bubble that no one could have seen or 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, etc.; 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 housing 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 (Moody’s, Amherst, etc) yet the lenders and servicers will tell you it won’t happen? There is more information than ever and still more confusion than ever. Although 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 five 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 two 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 be having two 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. Three 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 a short sale. There is no bankruptcy, loan modification or magic answer for 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” (Home Affordable Foreclosure Alternative Program) 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 ForeclosureRadar.com 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 inventory 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. Ten years ago there might be 5-10 investors there to possibly buy. Today it is not uncommon to have five 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 its 90 day “anti flip” rule for FHA financing. This means that investors who 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 Government imposed new regulations on appraisers designed to eliminate some of the “funny business” that occurred 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 five 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 five 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 separate 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 $300,000-$400,000 range move up to $500,000 to $600,000 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 $600,000 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 95/5. 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 States sold two 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 government 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 at least in Santa Clarita -- a market in which there were often five buyers for every new listing under $400,000 -- buyer credits especially were not really needed. Watch instead maybe for 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 under-price 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 seven 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 seven 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.