Southland Homes Sales Perk up: Market Now Being Carried by Distressed Sales.
This weekend I was listening to a real estate radio show that plays on FM radio here in Los Angeles while trying to escape the blistering heat. Now that we know that Fannie and Freddie are going to be a little more lax with their requirements and some people think this is much to do about nothing, these hosts had a diverging opinion. They were absolutely adamant that this was the booster shot needed to resurrect the declining Southern California market. In fact, they were licking their chops to squeeze people in starting this June. Mind you these are the lenders and the agents here. These are the folks that will put people into these loans. I also remember these same folks a few years ago pushing Option ARM mortgages and interest only loans yet now have some sort of collective amnesia.
I’m surprised by some of the people that think Southern California will avoid fraud because of the proprietary risk based underwriting software from these agencies. Clearly these people do not understand the extent of what is going on or are Pollyanna in their views. Keep in mind Countrywide also had proprietary underwriting software as well. If the argument is about keeping a lid on fraud this simply makes it a little easier to open the jar. Fannie and Freddie are already stretching the limits of their capitalization and this will only add further stress.
There was absolutely zero reason for raising the caps into the stratosphere since as I will discuss, the ultimate method of increasing sales is lowering the price! If the lifting of caps was to aid the higher priced markets, there is now no need. The Southern California median home price is $385,000; which means that the old method of conforming loans was enough to cover the entire region. The lifting of caps is simply a stealth way of shifting inflated bubble mortgages from private lenders to the public. By the way, these hyperinflated mortgages have the highest risk of default since they are now in a negative equity position by definition of the current median price. The bail out is already occurring.
The incentive for fraud is through the roof. Many now defunct brokers and lenders are shifting into becoming REO and foreclosure specialists. The fox has now eaten the hen and is the leader of the Hen Eaters Anonymous group. Back to the radio show, they state that they welcome all calls but whenever a caller starts to go negative, “yeah, I bought an investment property in Las Vegas and financed it as a primary home but now I’m losing about $1,200 a month in cash flow and…” the host chimes in, “okay, what’s your point? I recommend you find a person at a casino at a discount to cover your cost and don’t lose that home okay? Thanks!”
It is also important to note the fraud that occurred behind the scenes. Fake pay stubs, straw buyers, inflated appraisals, and other absurd shady tactics became mainstream. What is to stop a team of folks from over inflating a price of a home, using a high FICO’d borrower to cover the note, and then financing another property? You know what has been the best fraud prevention? Flat out stopping the secondary mortgage market. If you have all the right paperwork you can still get a stellar mortgage in today’s market yet the only problem is there isn’t many who do qualify at least in the legit way of doing business.
The government sponsored entities now think after a few months that they have a handle over risk assessment as noted in a LA Times article:
“The FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a “risk-based” system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid-1990s.
The agency’s move, which will cover new applications including “jumbo” loans up to $729,750 in high-cost markets through December, will bring the FHA in line with the private sector’s main approach.
Brian D. Montgomery, the FHA’s top official, outlined the impending change in a speech here May 8 at the annual conference of the National Assn. of Real Estate Editors.
Under the old approach, he noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented a low risk of default on loans and an inappropriate subsidy of applicants who were likely to default.
A study of an entire year’s applications turned up the additional fact that the FHA’s lower-income borrowers typically had higher FICO scores than those with larger incomes.
“Is it counterintuitive? Yes,” Montgomery said.”
Bwahaha! Yes, the private sector has been doing a fantastic job pricing in risk. And this amazing find is nothing more than pre-cliff diving euphoria. What about all those Alt-A high income Option ARM borrowers that will now lose their high paying finance or housing related jobs? Will they still be prime after a few years? This again fails to recognize the absolute reliant nature of our economy on FIRE (finance, insurance, and real estate).
Let us move on to some rosier news. Southern California actually saw an uptick in sales. Can this be the much anticipated bottom?
Southern California – News Flash! Homes Sell When Prices are Lowered!
You would think that people were stunned to realize that lower prices actually increased sales. It wasn’t the Hope Now Alliance, FHA Secure, or any other of those absurd crutches but a simple economic approach. Lower prices will bring people back into the market. The question is, was this the actual bottom or a temporary plateau before we head lower? Let us look at the data first:
| All homes | Apr-07 | Apr-08 | % Change | Apr-07 | Apr-08 | % Change |
| Los Angeles |
7,225 |
5,016 |
-30.6% |
$540,000 |
$435,000 |
-19.40% |
| Orange |
2,682 |
2,166 |
-19.2% |
$629,000 |
$500,000 |
-20.50% |
| Riverside |
2,987 |
3,186 |
6.7% |
$409,000 |
$295,000 |
-27.90% |
| San Bernardino |
2,049 |
1,667 |
-18.6% |
$370,000 |
$265,000 |
-28.40% |
| San Diego |
3,436 |
2,809 |
-18.2% |
$490,000 |
$400,000 |
-18.40% |
| Ventura |
890 |
771 |
-13.4% |
$572,000 |
$445,000 |
-22.20% |
| SoCal |
19,269 |
15,615 |
-19.0% |
$505,000 |
$385,000 |
-23.80% |
*Source: DataQuick
The first place I want to draw your attention to is that the increase in sales from last month occurred predominantly in areas that saw the largest nominal drops in prices:
| All homes |
Mar-07 |
Mar-08 |
%Change |
Mar-07 |
Mar-08 |
%Change |
| Los Angeles |
8,353 |
4,263 |
-49.0% |
$540,000 |
$440,000 |
-18.50% |
| Orange |
3,130 |
1,663 |
-46.9% |
$629,000 |
$506,000 |
-19.60% |
| Riverside |
3,680 |
2,691 |
-26.9% |
$420,000 |
$306,250 |
-27.10% |
| San Bernardino |
2,476 |
1,534 |
-38.0% |
$369,000 |
$265,000 |
-28.20% |
| San Diego |
3,218 |
2,108 |
-34.5% |
$490,000 |
$395,000 |
-19.40% |
| Ventura |
999 |
549 |
-45.0% |
$566,750 |
$430,000 |
-24.10% |
| SoCal |
21,856 |
12,808 |
-41.4% |
$505,000 |
$385,000 |
-23.80% |
| jump in sales | % Increase over last month (county specific) | |
| Los Angeles |
753 |
17.6 |
| Orange |
503 |
30.2 |
| Riverside |
495 |
18.3 |
| San Bernardino |
133 |
8.6 |
| San Diego |
701 |
33.2 |
| Ventura |
222 |
40.4 |
Now you need to remember that there is always a bump during this time of the year simply due to seasonal causes. But from looking at the above percent increases, you can see that there were strong jumps in Orange, San Diego, and Ventura Counties. Interestingly enough, these counties have also seen some of the largest nominal drops in their median home price. Los Angeles County is off by $105,000 from one year ago and Orange County is off by $129,000. Those are big price declines. Yet we also have to remember that sales hit all time record lows for Southern California so an increase without perspective doesn’t really help.
Let us look at Los Angeles County since it is the largest and spans over 88 cities. Here is the sales history versus median home price charted for you to take a look at:
What you’ll notice is consistently a seasonal dip in sales during the winter. This uptick is nothing out of the ordinary. In fact, it is a typical spring pattern. The real litmus test will be once we are fully into August and September; if we do not have a few strong months from now until September, the market will literally implode from fall into winter.
The current housing bottom meme going around is probably spreading because of a lack in definition to what constitutes a bottom. It can be that we are nearing a lull in sales and inventory but that does not necessitate a bottom in price which I’m sure is what most of us are interested in. What use is it screaming we have an inventory bottom when prices may fall 10, 15, or even 20 percent more? Sales are usually a leading indicator in terms of predicting future prices. Let us do a bit of quick sales math:
Current SoCal Inventory: 146,337
April 2008 sales: 15,615
Months of Inventory: 9.3 months
Still not a healthy market. Normally a healthy market is around 6 months of inventory. Do you really see monthly sales jumping up to 24,389 anytime soon? Not likely given that we have an onslaught of REOs that will soon make their way onto the market:
More notice of defaults are actually going into foreclosure which will add to the inventory but also depress prices since these usually go for lower than market rates.
The market did improve from last month in terms of sales but I wouldn’t be quick to call this a bottom.
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20 Responses to “Southland Homes Sales Perk up: Market Now Being Carried by Distressed Sales.”
With this information, I can only guess that Q4 will be a much better time to buy. I am a novice at this game, however. Looking for some help from the peanut gallery. Here’s my situation: 29 years old, first time buyer, gross monthly income 6000/mo.,789 fico, have 90K in a CD at the moment. BTW, no debt except for a car payment of $550. Currently renting in fullerton for 1100/ mo.(month to month). Would like to purchase a SFR in north OC (lets just say Brea for arguments sake!) in the 450-500k range). People, what should this guy do!!!
When the bank buys the house back at auction, doesn’t that show up as a “sale” in the stats? And that very same house doesn’t show up as inventory until the bank puts the house back on the market, right? So….wouldn’t that have the effect of inflating the sales numbers and also hiding “shadow” inventory from view?
This is my understanding, but I guess I’m looking for confirmation. Thanks..
Adrian,
I am no expert, but from what I know…. Q4 of ’08 will be too early.
Why? In my opinion it is about the # of foreclosures, as long as they are increasing qtr over qtr, no sale. With all the toxic options arms etc, and also who knows what coming down the pike, just look at oil prices, $129 a barrel.
Thanks,
MTB
Ha! Excellent piece, doc.
People who point to this MoM increase as evidence of anything whatsoever are trualy insane. These are the same people who tell you gas prices went down last month due to seasonal adjustment (It did??? On what planet?) and that speculators are the cause for the run-up in oil.
My best guess is that these new (non)limits on down payments will have minimal impact becuase anyone with less than 20% down will still need PMI and those firms – the ifrst on the hook should they fail – will be the ones to apply the brakes. At least I hope so; if they don’t well, all bets are off.
To El Guapo:
Also, don’t forget the shadow inventory that comes from new home sales that cancel. If you recall, when a contract is signed for a new home that is counted as a sale, even if the buyer cancels the next day. The rationale is that they figure the house will sell SOMEDAY, so eventually it will even itself out. Well, with cancellation rates running at 30% or higher over the last year you can figure there are at least another 8-10K new homes on the market that don’t show at all and add to the supply.
Adrian,
I am in a very similar circumstance, we have almost identical income as well. I dont think it would be a good time to buy in brea yet considering we haven’t really had a steep decline in prices. Maybe whittier or la habra would be a safer bet. Im waiting at least until 2nd quarter 09
Adrian
Look (window shop) at houses EVERYweek in a specific area for 2 years. You’ll know what to do by then. Get rid of that car payment. Use that money to build more savings, or spend it on an appreciating asset. That will also help your credit score. Look at enough houses, and your expertise will surpass your realtards.
This is off topic, but Adrian and Surfaddict are inspiring me to write.
(Both you guys need to keep renting. Adrian, your income is too low for you to comfortably afford that kind of mortgage payment–you can “afford” it, but you’ll make up for it in living off ramen noodles. Keep in mind that houses, even new ones, are black holes for money. Plan on the plumbing exploding.)
OK, so what I really want to talk about is renting. As some of you may recall, I was quite perturbed back in February when my landlord got foreclosed on. We hung out for a while at a friend’s empty place, then moved a couple weeks ago into another rental. Met the neighbors recently and found out the reason their lawn looks like hell is their landlord is being foreclosed on…they gotta move, just as I did, even though they’ve been regular rent payers and responsible tenants. They don’t wanna move, but they can’t afford what the bank is saying the house will sell for. The two for sale houses across the street are bank owned, have lower prices, and have been empty for over a year, according to this neighbor. So obviously this house is going to sit empty for a year. I’m just thrilled. The gophers and other pests are thrilled. The neighborhood kids given to minor vandalism are also thrilled.
Fer chrissakes! WHY are banks so damn stupid? This family is happy to keep paying $2K a month for this place. Just like I woulda been, at my old place. And I bet there are thousands and thousands of us deposed renters, getting booted out of homes that we’d be a lot happier to just keep on paying good money to live in. This shuffling of renters because of overextended* landlords is causing an awful lot of irritation, broken up school years, extra expense, and overall resentment. I mean, we’re paying for other people’s poor judgement. (*or stupid, depending on how you see it)
Part 2
Okay, I’m done ranting about wannabe landlords getting in over their heads and messing things up for decent renters.
What we renters need is a modern, updated checklist of things to ask a prospective landlord. Besides the usual questions about utilities and such, I’d propose some of the following.
-What kind of mortgage do you have on this house?
-When will it reset?
-When it resets, will your monthly mortgage payment be larger than the rent we’ve agreed to?
-If the difference will be significant, what impact will it have on my renting this place?
What else?
I was reading the WSJ today. “Where Home Prices Are Holding Up.” In today’s LA Times Biz section the headline reads: “At the Luxury end, home prices are Falling”. Both papers use the same data, with the LA Times winning on coherence and truthfulness. This variance in reporting is astonishing. Read them both and send your thoughts to the WSJ. I just did.
Jes –
Excellet points. In fact, why not take it further? There are tons of businesses that look to insulate landlords from deadbeat tenants via credit checks, etc….why not do the reverse? For $50 we check out your landlord, see what kind of credit/mortgage he has and make sure he isn’t already in default. Heck, I bet you could even get the landlord to pay given the dearth of tenants these days.
My $.02
DTS
Wasn’t the increase in sales due to the recent foreclosure auction by REDC? They had one in April and have another one in June for Southern California. That must be helping the spike is sales.
The real estate industry’s official tally of inventory is flawed. According to their propaganda machine inventories were falling in late 2006 into 2007, and look where we are now.
I’m noticing that a lot of new listings in Redondo Beach are just old repeats from 2006 and 2007 that didn’t sell when they were listed before. Those old listings “disappeared”, thus reducing inventory. But that original desire to sell apparently has not disappeared.
Assuming El Guapo is correct, which is my understanding as well, it would stand to reason that not only are house “sales” inflated, but the median price as well. If the bank has a $600,000 mortgage balance on a house worth $400,000, they are “buying” it for the full value of the mortgage balance when they foreclose. That not only represents a false sale, but an inflated price as well. I have checked a number of foreclosures on Trulia and they simply state the house “sold” recently and the sale price listed was much higher than the REO listing was showing it for.
If this is wrong, inquiring minds would like to know since this appears to be a common assumption.
From an economic standpoint, in a large community, the median income needs to be able to afford the median price of a house. That has not been true in California in a long time. By this measure, prices are no where near the bottom.
Jes, maybe tenants should add a clause in their lease or rental agreement that holds the landlord liable for any expenses incurred by the tenant should they be forced to move owing to the landlord defaulting on his mortgage. I think you could even go to small claims court absent such an agreement and win.
Jes
You seem to agree with me, that Adrian should rent for now.
You also make good (basic) point that property should be solvent business case. As an owner, I believe my payment should reflect equivilent rent regardless of house being owner occupied, or a rental. I own because I have been prudent, and want to be able to modify my home as I see fit, but I have kept my mortgage payment in line with potential rents. This way, If i lose my job for example, I could KEEP my house just by renting it out.
I can only comment sighting anecdotal evidence in the Lakewood/Long Beach area….
There are more and more For Sale signs and VERY few SOLD signs popping up. Also see many ‘Reduced Price’ signs attached to those that are sitting. For example, one nice area (about 20 homes total) went from 1 home listed at 699k to 4 listed in a period of 2-3 weeks. Looking at one of the foreclosure sites, it seems that a couple more will be hitting the market soon.
Another interesting thing is that more and more of the for sale homes are vacant and looking more run down each week. Also seeing more vacant homes just sitting there. Walk aways?
I seriously question reports like these when my own eyes tell me otherwise.
Adrian – you can NOT afford a $400,000 -500,000 house. CAN NOT DO IT – no matter what the Used House Sellers say. You write that your income is $72,000 a year of $6,000 a month. What you can afford is a monthly payment of $1,860 for mortgage (principal and interest), real estate taxes and insurance. With a 6% 30 year mortgage (and assumiing about 1% of property value for real estate taxes annually and insurance at around $50 per $100,000 of insured value), that $1,860 will only cover a mortgage of $247,600. To avoif Private Mortgage Insurance (PMI) you have to put down 20%. With a $247,600 mortgage, that means putting down $62,000. Total price you can afford = $62,000 + $247,600 = $309,600.
***** Nearly 30 years ago, we were at the age you are now and had just about the same household income (actually about 15% more.) Our mortgage, insurance and taxes were $1300 a month – and it took careful budget management. We were not taking 2 week vacations or ski trips – and forget Europe and new cars. Houses EAT money – furnace at $2000, water heaters at $1000 (parts and labor), roof needs repaired ($5000 +), fertilize the lawn, powerwash the deck, ……….. What happens if you have to pay for your own health insurance? What happens if you marry and your wife loses her job and you have to pay her COBRA to keep her coverage? What happens if you lsoe your job and only have around $28,000 left in your savings after buying the house? (And don’t say it can’t happen – it does hapen regularly.) You would have what – 6 -7 months or so spending at $4000 a month for mortgage, taxes, insurance, car insurance, food, utilities, COBRA and other necessities – before you are flat out of money. Better to save up at least 1 years living expenses that would also cover a mortgage, taxes, insurance and upkeep plus paying your own health insurance through COBRA. With a $1,860 PITI, that means having at least $50,000 – 55,000 left in the bank AFTER the downpayment.
******There is a lot of talk about mortgage, taxes and insurance not exceeding 31% of gross income. 10 years ago the rule was not more than 28% of gross income. 20-30 years ago it was not more than 25% of gross income – the standard we had to meet back then. And 25% was a lot more manageable than 31% – but still meant careful management.
****Sit down and make up your real budget. Assume you have to pick up your own health insurance (typically $350-600 a month.) Put in everything – car insurance, electric, saving 10% of gross income and then see what you can REALLY afford. These formulas of 28 or 31% of gross income or buy only 2.8 times more than your income ALWAYS end up saying you can buy more house than you can actually afford when you look at your real expenses.
**** Being retired, I now have the time for good works which include mortgage foreclosure counseling for my county. The income and proposed purchase prices which you gave in your post bear a strong relationship to some of the cases in the foreclosure counseling program.
When I was dropping off my fabulous wonderful son (yeah, I know all mom’s feel this way about their sons…) at school today several of the parents were talking about trying to sell their homes (again) saying things should pick back up this summer. Two were underwater but confident prices would zoom back up as the economy gets back to normal this summer and that they would all upgrade into nicer homes in good school districts and avoid the rise in tuition at our little montessori school. I worry about them. I kept my big fat contrarian mouth shut.
When I look on homes.com for zip codes in my neighborhood seems like there are many foreclosures and pre-foreclosures and only one or two homes for sale. How accurate is that information anyway?
And these home auctions….who is buying these homes? Investors? Or people looking to actually live in the home?
If there is even a hint the prices are stabilizing (based on comps from foreclosures) then the banks will start foreclosing on more people that are “coasting” rent-free. Those homes will hit the market and keep prices down or cause a further decline. Just like farmers when everyone is growing the same thing nobody makes money.
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