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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It happens all the time.  Mortgage fraud, according to the L.A. Times, has run rampant in the industry and Congress has decided to do something about it.

The FBI, Justice Department, and other government agencies have been given $500 million in funding to investigate and prosecute those who participate in mortgage fraud.  According to a Mortgage Bankers Association report, most fraud occurs on the mortgage application.  In California, faked bank statements or deposits are particularly prevalent.

Because we don’t usually deal directly with our clients’ loans, we don’t often see the kinds of mortgage fraud detailed in the L.A. Times.  However, in this current short sale market, our buyers have been approached by the sellers of properties to pay them money outside of escrow to get their offer accepted.  This is a clear case of mortgage fraud as the seller’s lender would not allow such a payment if it knew about it.

Mortgage fraud has always been illegal.  Now it has teeth.  Consult your agent and lender before doing anything that you think might be fraudulent.

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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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We had an offer rejected today by a bank.  It never feels good to have your offer rejected, but at least in this case we were expecting it.  We thought we would explain our expectations, because we think it says a lot about the current market.

First of all, lets get clear what “rejected” means.  An offer can be rejected, technically, by initialing a box at the bottom of page 8 of the standard California contract.  Much more common is what happened in this case, when we received no response until we called the agent and she said the seller had rejected our offer.  Either way, a rejection signifies that the seller has reviewed the offer and a counter offer will not be coming.

This property was priced in the $430,000 range and we submitted an offer for $350,000.  In South Orange County, in 2008, for properties priced under $500,000, the average discount is about 5% off of the list price.  So, for a $430,000 property, you could expect to pay about $410,000 on average.  In Ladera Ranch (know your markets), the average discount is about 3%.  So, on average, looking at Ladera Ranch, you could expect $10,000 off of list price.  On this information alone, I would suspect at best a counter offer was coming.

In this case, the bank had multiple offers.  There was at least one full price offer in the mix.  You would think in an extreme buyers market that full price offers would be rare, but of the 45 Ladera homes sold this year up to $500,000, 14 sold for full price or more.

The lesson is that bank-related properties (short sales, REOs, etc.) are what everyone is looking for, so be prepared for possible multiple offers close to, at, or above full price.  And if you are going to submit well below asking, be prepared for rejection.

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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.

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One of my buyers understood from the news that there were a ton of foreclosures on the market so he didn’t understand why I didn’t show any to him.  I had to explain that there were none in his search.  Lesson #1:  It is possible, just possible, that the news overly stresses the rise in foreclosures versus foreclosures as a percentage of the whole market in Orange County.  Lansner recently reported on this percentage to his credit.

For that same buyer, a bank-owned property eventually came up in Rancho Santa Margarita and was the scariest of all the homes we visited.  Another buyer was interested in a bank-owned property in Aliso Viejo.  Other than backing to a major road, having large cracks in the back patio facing a slope, and generally needing an interior overhaul, it was great.  Lesson #2:  Foreclosures might, just might, be priced right when they are priced well below comparable sales.

Another buyer wanted to buy a short sale my wife helped them find.  After submitting an offer, the lender took nearly two months to counter.  Then the lender countered at full price.  Only through persistence did this home sell.  Lesson #3:  Short sales are not for everyone, especially those looking to move quickly, but perseverance will always secure the deal.

It is true that some buyers are not buying.  I have pointed buyers to deals that are $50K below the last sale and they sometimes come back with, “I’ll wait until it is $200K below”.  My motivated clients on the other hand are happy with $50K below.  Lesson #4:  Maybe, just maybe, happiness is not waiting for the bottom.