Straight Digs

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Is the media calling the Orange County housing bottom?  Here is a summary of recent news articles from the Orange County Register on the housing bottom over the last month:

October 7, 2009–The California Association of Realtors said home prices hit bottom early 2009 and forecasts that the median home price will rise 3.3% next year.

October 14, 2009–Prices and sales rose together, year-over-year, for the first time since September 2005.  15th consecutive month with year-over-year sales gains.

October 20, 2009–Aliso Viejo is the hottest housing market in Orange County with a market time of 1.2 months to sell all current inventory.  For all of Orange County, market time is down to 2.4 months from 4.76 months a year ago.

October 24, 2009–September national home sales had largest increase in 26 years and jumped 13% in the West.  Deutsche Bank chief economist calls the bottom.

October 28, 2009–Three Orange County cities, San Juan Capistrano, Lake Forest, and Tustin, are in state’s Top 10 price gainers in September.

October 29, 2009–UCLA economists project Orange County median price to rise next year by 15.9% to 16.6%.  Projected price increases to be smaller 2011-2015.

November 4, 2009–Expected market time for Orange County short sales is 56 days compared with 7 months a year ago.  Bank owned homes current inventory is just 21 days.

As with the housing peak, no one is going to perfectly call the housing bottom and no one can predict the future.  However, today the Orange County housing market is moving in the right direction, as reflect in the media reports.  If it continues, we will see price and sales increases in the future.

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We get an uneasy feeling when describing to a new client what the current market is like.  It is hard to convey that in this so-called “buyers market” they will probably compete in multiple offers on every home they offer on. That is, assuming they are buying in the starter range up to $500,000, which is where most of the buying activity is these days.

So it comes as no surprise to us, though it may to those new to the market, that a Garden Grove bank-owned home recently garnered 135 offers.  Don’t get us wrong, 135 is a big number.  Too big.  The bank/agent created a lot of work for themselves underpricing it that much.  Recent comparables sales in Garden Grove sold for between $450,000 and $525,000 so pricing it in the $300,000’s just created a lot of work for everyone.

But here is the thing: most of the offers we have written this year have been on properties with multiple offers.  The skeptic in us says, “maybe the listing agents are just saying they have multiple offers.  Maybe they’re bluffing.”  Problem is, that while we are closing some of them, some of them . . . too many . . . are closing without us.   It’s not a bluff.

Scary anecdote part II, increasingly “all cash” buyers are winning the multiple offer game.  There were 25 “all cash” buyers on the above-mentioned Garden Grove home.  With banks wanting a sure thing, they are often willing to accept less for an “all cash” buyer whether it is for a bank-owned home or for approval on a short sale.  We have represented some of those “all cash” buyers this year and have seen first-hand that in that position you are in the driver’s seat in this market.

If you or someone you know is in the market to buy now, hang on, because eventually you will win one of those multiple offers.  And if you find a home you like without multiple offers at a good price, run don’t walk to offer on it.

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Orange County housing inventory is relatively low right now.  Trendgraphix shows that as of May 2009, there were 11,694 homes for sale in Orange County.  That is the lowest that number has been in over three years (February 2006). 2006 is generally considered the peak of the Orange County market.

Some parts of Orange County are experiencing extremely low inventory.  Aliso Viejo, for example, had 263 homes for sale in May according to Trendgraphix, also the lowest since 2006 (January), but that number is just over the number for May 2005 when the market was booming.

Why is inventory so low?

Low prices are a key factor.  Prices declined dramatically in 2008, but have been stable all this year.  The median price has held steady from January through May.

Low interest rates.  Rates were as low as 4.75% for a while driving a lot of buyers on the fence into the market place.   Despite a recent rise in rates, they are still below 6% for conforming loans (up to $729K) and that has helped keep a lot of buyers buying.

Fewer short sale properties.  Short sales continue to pop up especially in the under $500,000 range.  However, many homeowners are electing to try loan modifications to save their homes rather than short sales or foreclosures.

Fewer bank-owned homes.  Rumor has it that banks that have foreclosed on homes are holding on to those homes and slowly releasing them on the market to keep demand up for their homes.  This is the so-called “shadow” inventory theory.  Makes sense to us, though carrying costs will catch up to the banks eventually.  We can’t remember a bank-owned home that did not get multiple offers recently.

Fewer equity sellers. Equity sellers are getting a premium over distressed sales these days, because they can be easier sales and because there are so few of them.  Homeowners who are selling these days have a need (growing family, job change, etc.) rather than just wanting to sell to get money out.

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Kelli Hart at the Orange County Register reports that at least half the active inventory in Aliso Viejo as of February 19 was distressed properties.  A poll taken on that site shows that as of this writing about 60% of the readers felt that this was a bad sign and about 40% took it as a good sign.

There’s a third possibility: that statistic alone does not tell the story.  It has been the case for a while now that a significant portion of the Aliso Viejo home sales have been distressed properties.  As we posted in October of last year, the majority of homes selling in Aliso Viejo in October were distressed sales.  That continued in Q4 with 58% of the Aliso Viejo home sales being distressed sales.  So the statistic by itself says nothing new.

What is new is that Aliso Viejo homes sold in the fourth quarter of 2008 (176) were up by 59% compared to 2007 (111 sales).  That general trend has continued as sales in Aliso Viejo in the first two months of 2009 (87) are up 36% from the first two months of 2008 (64).

None of these statistics is the only one to consider.  Each one has to be considered the context of the others to be meaningful, but the sales trends are unexpected good signs in today’s market.

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In our office meeting recently, agents griped about appraisal issues they are currently facing in Orange County.  While appraisals are generally going more smoothly than they were during the rapidly increasing market of say 2005, some appraisals are causing problems.

The buyer’s lender usually requires an appraisal of the value of a home to determine if it is worth at least the purchase price.  So, if a home is purchased for $500,000, it would need to appraise for $500,000 or more or the lender could refuse to lend on the home.

The most typical problem occurs when an appraisal comes in below the purchase price of a home.  So, in the above example, if the appraisal came in at $475,000, we would say that home “didn’t appraise.”  Depending on the lender’s policy, the lender could either decide not to lend on the property or the lender could lend up to the applicable percentage of $475,000.   So, if the above lender is willing to lend up to 80% of the value of the home, the lender would be willing to lend $380,000 ($475,000 x 80%) rather than $400,000 on the home. 

Even if the lender is willing to lend, however, oftentimes the buyer is unwilling or unable to go forward.  The buyer often decides the appraiser is “right” about the value and asks the seller to reduce the price or the buyer will “walk.”  Sometimes a negotiated, in-between amount is worked out. 

If the buyer wants to move forward, the buyer will have to make up for some of the cash difference in value.  In the above example, the buyer would need to bring to close of escrow an extra $20,000 to make up for the reduction in value ($500,000 purchase price less $380,000 loan amount is $120,000).

Usually, appraisals come in low when comparables are hard to find or are low due to foreclosure or REO activity.  When the last 3 sales in the area occurred 6+ months ago, the appraiser could be hard pressed to find comparables that make sense for the area.  If the last 3 sales were foreclosures or bank-owned homes, the prices could be low relative to the value of an “equity home” in the area.

Sometimes, lenders are rejecting appraisals because of the quality of the appraisal.  Recently, we sold a home where the appraised value came in $25,000 over the purchase price, but the lender did not approve of either the wording of the appraisal or the comparables used.  It took a second appraisal worded differently to impress the lender.

The key with any appraisal issue is to have experienced representation whether you are the buyer or seller.  If you are the seller, a good agent will prepare you for the possibility of an appraisal issue in advance and will present your best case to the appraiser.  If you are a buyer, a good agent will have thoroughly explained the comparables so you are comfortable about your offer relative to other homes selling.

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Half of Aliso Viejo’s housing inventory consists of short sales and bank-owned homes.  As of July 9, 2008, the MLS showed Aliso Viejo active inventory at 286 homes.  Aliso Viejo REO homes or bank-owned homes totaled 25 homes.  Finally, 118 Aliso Viejo homes were short sales or “subject to lender approval” sales.  Combined, 143 homes were either bank-owned or short sales, which is exactly half of the Aliso Viejo inventory.

As we pointed out in a previous blog post, short sales are not selling quickly.  In the last 3 months, 24 short sale homes closed escrow (sold) in Aliso Viejo.  At that pace, it would take about 15 months to sell all of the current short sales in Aliso Viejo. 

It would appear that short sales are an extreme buyer’s market and a great opportunity for buyers today.  However, it is still generally difficult to negotiate a short sale.  Banks are overloaded with them and don’t have the resources to handle them adequately.  Our recommendation is to only work with them if you have an abundance of time and patience and are keeping an eye out for deals in the other markets.

35 Aliso Viejo bank-owned homes sold in the last 3 months, which means it would take about 2 months to sell the active bank-owned inventory in Aliso Viejo.  Bank-owned homes continue to be an extreme seller’s market.  With our clients, we have seen multiple offers on many bank-owned homes.  Banks are pricing their homes aggressively attracting many buyers.  We don’t recommend you focus all of your attention on bank-owned homes, but often these are the best deals in town.

133 Aliso Viejo homes that were neither bank-owned nor short sales sold in the last 3 months.  We call these sales “equity” sales, because the homeowner has equity left after the sale.  At that pace, it would take just a little more than 3 months to sell all of the Aliso Viejo equity sales. 

Believe it or not, the equity market in Aliso Viejo is a balanced market.  If it only takes 3-4 months to sell your home in today’s market, you are a happy seller.  As a buyer, you can still find great prices relative to last year.  This is a balanced market, because sellers in this category have been much more aggressive with their pricing in the last few months as they have had to compete with the increasing numbers of short sales and bank-owned homes.

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According to a post on the Lansner blog today, demand for Orange County housing is up from both last year and earlier this year.  Also, Aliso Viejo and Mission Viejo were cited as the hottest markets in Orange County measured by having the largest number of homes sold relative to standing inventory.

For buyers who are active in Aliso Viejo and Mission Viejo, this may not be news.  Multiple offers, especially with bank owned properties, are occurring.  If you are in the price range up to $1.0 million, expect the market to be more balanced in these areas than you might find in north Orange County or in the over $1.0 million market.

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The Los Angeles Times blog recently posted a story on a bank auction.  The video accompanying the story tells the tale of a Ladera Ranch home once sold for $1.2 million auctioning at an opening bid of $429,000.  We think the story and video highlight a few important points about bank sales:

The list price is not necessarily the price the bank will accept.  Okay, this is obvious in an auction with a starting price, but it is also true on the MLS.  This particular home at 3 Magnolia was also listed on the MLS at the $429,000 start price.  Our phones rang off the hook and we had to explain that this wasn’t going to be close to the final price.  The agent for the home pretty quickly pulled the home from the MLS, by the way, when she tired of 70 calls a day.

More importantly, the final price might not land anywhere near the listed price as was the case with this home.  The bank does not have to accept any offer.  This goes for MLS listed homes as well.  If there are one or multiple offers, the seller can choose any one of the offers or none of them. 

With an auction or MLS listed property, there are no secret great deals.  This year we represented a client who lost a bidding war with 32 offers and another who won a bidding war with 28 offers.  We represent another client’s offer on a home right now that will probably get an astronomical number of offers as well.  When it is obvious to you that a property is priced $50,000 to $100,000 below the last sale last month, there will be other people to whom it is obvious too.

Auction or no auction, keep in mind, that if your offer is the one that is accepted, it is almost always because you were willing to pay more for the home than anyone else.  When you submit an offer that is accepted, it’s likely because you were the highest bidder.  Get OK with that concept, by knowing the last sales in the tract and for similar homes and knowing your maximum.

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Congress is working on the Foreclosure Prevention Act of 2008.  Among other provisions, the one that directly affects Orange County buyers and sellers is a proposed $7,000 tax credit for buyers of foreclosure properties.  We believe this will not be beneficial to our local market.

The $7,000 would be a credit, not a deduction, so we are talking about real dollars.  With inflation, $7,000 today (or within one tax year) will be worth at least $8,000 to $10,000 in 5 years.  So a buyer would put a premium on foreclosure properties of $8,000 to $10,000 if this bill passes.

If foreclosure homes were glutting the market, an incentive like this might make sense.  Maybe.  “Get them off the market so we can all get on with our lives” would be the refrain.  But foreclosure properties and short sales account for about 1/3 of the Orange County market.  That is a significant number, but that still means the majority of homes will not have the incentive and it will be that much harder to sell a home through a conventional sale.

It was not clear whether the bill refers to properties already foreclosed upon only or somewhere in the foreclosure process.  If it is the former, banks would have that much more incentive to foreclose on a home.  Also, bank owned homes comprise a much smaller percentage of Orange County homes (less than 7%), so again this will not benefit the vast majority of sellers.

And buyers currently do not need incentives to buy foreclosure homes.  Foreclosure homes are the most popular homes on the market.  We get more calls and emails about foreclosure homes than other homes by at least a 10 to 1 margin.  Of all foreclosure homes, bank owned homes are not only getting more showings, but, according to one estimate, they are selling four times faster than other Orange County homes.

We do not think Congress needs to provide an incentive to buy bank owned homes.  If they do want to provide some form of incentive, an incentive to buy ANY home would be preferable.  That would at least level the playing field amongst sellers.

  Photo by D’Arcy Norman

Earlier this week, the Lansner blog reported that bank-owned properties were seeing a lot of activity in the marketplace.  That’s a big change.

About 6 months ago, Countrywide held a seminar for Realtors (R) describing Countrywide’s practices regarding loss mitigation, short sales, and bank-owned properties or “REOs.”  At that time, the Countrywide REO department said they weren’t just going to give away homes by pricing them very low.  Some agents that work REOs got upset with this stance, because their REO homes weren’t selling and they pointed to the banks glacier-like movement on price as the culprit.

Today, bank-owned homes are selling.  As an example, in the Aliso Viejo area for homes up to $400,000 (logically, the hottest price range under the old conforming loan limits) there are 93 active homes and 33 in escrow, about a 3 to 1 ratio.  We consider this niche a sellers’ market.  There are 8 bank owned properties active and 8 in escrow in that same price range, a 1 to 1 ratio.  The bank-owned market in this niche is an extreme sellers’ market.

Why are they selling faster?  Having seen many of the bank-owned homes in question, we can assure you that the homes aren’t selling because they show better.  Nor, as one commentator to the Lansner blog suggested, are they just in more demand because people are looking for bank-owned properties.  Our clients want bank-owned properties, because they are generally priced well they tell us.  If they find a bank-owned that is overpriced, they don’t generally ask us to show it to them.

We believe the answer is that bank-owned properties are just better priced.  They are consistently the lowest priced home in our clients’ searches.  And, unlike short sales, bank-owned properties negotiate in a relatively short period of time.  There aren’t enough out there in Aliso Viejo, Irvine, Laguna Niguel and other South Orange County cities to make it the focus of a buyer’s search.  But if you’re a buyer in these areas, especially in the starter price ranges, you’re sure to run across them. 

Also, sellers need to be cognizant of what the bank-owned properties in their neighborhood are selling for.  Those may become the next comparable sale for their home.