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The foreclosure tsunami appears to be on its way – new defaults, re-defaults, and foreclosure numbers are rising, and there’s still the backlog of those who are attempting to loan mod that will eventually get denied.

According to foreclosureradar, there are 4,047 bank-owned properties in San Diego County, and 20,215 outstanding NODs and Notices of Trustee Sales. 

Will the impending flood of REOs depress sales and prices further?

I don’t think so.

I think an increase of foreclosures would IMPROVE the coastal market, turning it into a frenzy-like condition.  The lack of well-priced inventory up and down the coast has been very frustrating for summertime buyers, and they’d love to have a shot at buying a well-priced “bank deal”.

The banks are listing their REOs for close-to-retail too, so sales prices would only crash if they did literally flood the market with new REO offerings.

Here are a few examples for evidence that when a decent REO comes on the market.

There were 28 detached north-coastal REOs that closed escrow in the last 60 days, and their average SP/LP was 100%. Fifteen of them sold for OVER LIST PRICE:

It’s safe to say that sales will definitely improve if REOs flood the market – if the bank-sellers need to lower the price to find a buyer, they will. But frustrated buyers just want to buy a house, and if they have to pay list price, or higher, just to get a “bank deal”, they’ve been doing it. It would take a blunder by the banks – unloading hundreds of REOs at a time – to cause prices to plummet.

People are wondering if a $700 BILLION bailout will have an affect on the local housing market.  From what I can tell, the answer is NO, and it could make it worse.

The money isn’t going to be used to fund more mortgages, it’s going to be given to those MBS investors who are now holding the bag after trusting that they had bought something of value.  Two of the biggest investors are Deutsche Bank and HSBC, and whether they get a payout or not, you can bet they’ll be buying a lot LESS mortgage paper from now on.

So will many of the others who bought MBS, CDOs, and whatever other bad stuff is going to bought by the Treasury.  The best the government can hope for is that those same investors buy Treasuries now, instead of mortgage bits, to help keep interest rates down.

But don’t expect mortgage underwriting to get looser, exotic loan programs coming back, or any other creative financing that helped get us here in the first place.  Those planning to buy a house will have to qualify by traditional standards for a long time to come, and hopefully forever.  So when you hear that this bailout will help the real estate market, be very skeptical.

Let’s filter it down to the individual homeowner.  Will a $700B bailout make it easier to get a loan modification?  Will your lender/servicer now hire more staff to handle loan modifications? 

No way, if anything they’ll be pushing more borderline borrowers towards foreclosure so the bad paper can be sluffed off on the government. Expect more foreclosures, not less.

In short, this Mother of All Bailout Plans is only the next bailout, not the last.  Unless something is done to bolster homebuyer confidence, the market will continue on it’s current path, and the government will be tempted to cook up more plans that probably won’t work either.

Will they ever think of doing something for today’s homebuyer?  The only plan I can think of that has a chance of encouraging buyers is the buying down of their interest rate. 

Using a 30-year fixed rate of 6%, the P&I payment on $500,000 is $2,997.75 per month.

If the ‘Hanky’ included a couple of hundred billion dollars for FHA buydowns, they could fund loans at 4.50%, lowering the P&I payment to $2,533.43, a savings of $464.32 per month. 

For those FHA buyers putting down less than 20%, include the 1.75% funding fee in the loan and add .50% monthly for mortgage insurance and that’ll get the payment down to $2,789.74, which saves $208.01 per month with as little as 3% down.  (But no more down-payment-assistance programs!)

I don’t think that’s enough savings to cause buyers to make irrational decisions – I think they’ll still be plenty picky about what house they’d buy, and how much they would be willing to pay.  But saving a few hundred dollars per month is what buyers want, and currently the only way that is going to happen is for prices to continue downward.  Prices will still head that way, but there would at least be more incentive for buyers to keep looking. 

If Congress fails to approve the Hanky, it’s OK by me.  But if they continue with the bailouts, help the prudent ones too – having ALL taxpayers be penalized to help the few is wrong.

Today is the first anniversary of this blog!

Let’s recap where we’ve been over the last year:

1. The daily inventory of houses for sale has grown from approximately 1,200 to 1,750. The inventory usually shrinks in the fourth quarter, we’ll see about this year.  On December 24, 2005 there were a total of 1,092 active listings.

2.  Closed sales have dropped sharply.

Monthly closed escrows:

Sept. ’04      Sept. ’05       Sept. ’06

      302              330                87  (so far)

We’ll add about 100 this week, but that’s still a big drop-off, considering the size of the inventory.

Year-to-date closings (Jan. 1 to Sept. 24):

      2004             2005            2006

     2,741            2,659            1,922    (27.7% fewer than ’05)

3.  Sellers are slow in getting the message.  The real estate industry has been particularly inept in recognizing the changes in the marketplace.   They rather put a spin on the bubble, than assist people with dealing with it.  I think it’s due to inexperience and ignorance, more than intentional deceit.  If you ask me it’s inexcusable, but at least it helps illuminate the competance of individual agents.  Want to know if an agent is any good?  Just ask him about the bubble, and listen to what comes out of their mouth – their answer will be a great indicator as to how much they can help you.

The #1 goal of this blog is to disseminate accurate data and suggest ways to work with it.

Obviously, looking at these numbers above, I’m doing a lousy job at saving the world of real estate.  But hopefully more individual agents will join in and help educate the clients, especially sellers.

Here how this blog has done over the last year:

Unique users                 27,696

Raw hits                        177,483

Search Engine Hits     50,363

Google PageRank          4/10

I’m not sure what those number mean exactly, but it sounds like a lot of people have been by for a visit.  I am grateful for your attendance and participation – thank you!

Let’s recognize that when talking about a depreciating market, there will always be ‘lucky’ sales.  The right buyer might pay top dollar for a killer one-story house, nestled among a group of low two-story sales.

But generally-speaking, how fast will the market re-calibrate?

Appreciation/Depreciation = change

Velocity = rate of change

My program (superior 5-10%, inferior 40-50%, blended 33%) is the change, and it’s already in place.  Buyers determine the change, and they are thinking these numbers today.

Cote’s program (20% initial change, 7% each year thereafter) is the velocity, or rate of change.  The sellers determine how fast they are going to subscribe to the buyer’s program, and they’ll be slow to catch on.  Hence, the recent 30%-40% drop in sales.  The sales that are happening are a combination of lower and lucky sales.

I think Cote’s 20% initial change will be spread out over 2006 and 2007.  We’ll either have a 10% drop in the median sales price over the next few months, or we’ll see sales slow to a crawl.  It’ll really depend on your neighborhood – where sellers NEED to sell, they’ll lower their price.  Where sellers don’t NEED to sell, or get bad advice, they won’t sell.  Occasionally, they’ll get lucky, but it won’t be the trend.

The peak around here was July 2004, and it’s been flat since.  Plug in your peak price for the 100% mark, whenever that was.

We’ve seen a 2% drop so far in the median sales price, so I have 98% noted for August 2006.

This prediction shows a continued drop off in median sales price until February, then flat to August 2007.

I’m showing flat for all Feb to Aug periods, because that’s the traditional selling season, and once buyers start hearing about the 10% drop from the previous off-season, they’ll come back around to see what’s happening.  Hopefully, some will buy a house.

What happens after August 2009 will depend on rates and how bloody it gets between now and then.  If the mortgage can devise a fix for the resetting ARMs, I’ll guess that we’ll see a prolonged flat spell after 2009.

None of this matters unless you can find the right house though.

I’d like to see the primary focus be on buying the right house.  A house that is so well-suited to your needs that it will last you a lifetime, just in case.

There will be buyers that will find the perfect house for them, but not buy it because they want to wait until prices come down more.  But even if prices continue down, will you be able to find the right house?

You’ll think, if prices were to get better, then I’d get a better house for the same money!  That will be tempered by more competition between buyers, and there are plenty of buyers waiting.  If frustration sets in, and you settle for a house that won’t last a lifetime, then you’ll have to go through this all over again a few years later.

My point – keep looking, because finding the right house is TOUGH!

Admittedly, this prediction and about four bucks will get you a cup of coffee today.  However, if in a few years we look back and I was right, I’ll be happy to take the credit.

From a logical standpoint, there is no way these prices can be sustained – let’s face it, if you want to buy a decent house today you have to spend a million dollars – how many people can REALLY afford that?

But there are intangibles that are hard to assess.  Let’s look at what they are and attempt to assign a value to them, because if we can, we can predict the future.

THE PREDICTION

Let’s use santa monica’s number of 33%.  In the last downturn, most everywhere in Southern California saw prices roll back about 33% between 1990 and 1995.

What about over-shoot?  Aren’t buyers going to be so scared that prices will have to actually go down a little extra, before they have the guts to jump back in?

On June 9th we talked about ‘The Big Split – the Flight to Quality’ (see journal archives).  We’ve seen it happen all year, and I don’t think it’s going to change – that the inferior properties are taking a bath, but the high-quality houses in great locations do a lot better.

Combine the Big Split with over-shoot, and it looks like this:

Inferior properties go down 40% to 50%

Superior properties go down 5% to 10%

Blended rate of decline of median sales price from peak = 33%.

This is where the real estate industrial complex is going to shoot ourselves in the foot – the median sales price will be submarined by the inferior properties.  Where the MSP has been holding artificially high the last 12 months due to fewer sales in general, once the bottom falls out of the inferior homes, the MSP will drop like a rock.

The foreclosures are pouring in right now, and the bulk of them are the inferior properties on the low-end.  The ones that were bought in the last 1-2 years with 100% financing are most susceptible – those homeowners have no skin in the game and are the least likely to find a way to save the house. 

If you are a waiter or landscaper, the only way you can handle an additional pop in your monthly payment is if your parents help out, you add a lot of roommates, or you hit the lotto.  True, there will be plenty on the upper-end in trouble too, but they are more likely to find a way out.  People with more affluence have more resources available to them, and if they have a high-quality home, there are more buyers.

It’s all relative, but if this year is a snapshot of things to come, the low-end is going to be hit harder.  That’s in direct contrast to my previous article on Feb 8th called ‘the big squish-down’.  I thought for sure that the million-dollar market would cause all the trouble, but that hasn’t happened so far.

Three general reasons the high-quality properties will do better:

1.  They’re older houses, owned by older people, with less debt

2.  They have it so good, there’s no better place to go

3.  Buyers are holding out for the good stuff.

Because of these three reasons, the supply-and-demand curve is much more healthy in the high-quality-home market.

THE INTANGIBLES:

A.  If there are serious, meaningful changes in loan underwriting and/or elimination of currently available loan programs, then knock off another 10%.  Not very likely in my opinion, but I’m probably in the minority of those reading this.

B.  Major terrorist attack or earthquake, knock off a temporary 10%, but it’ll come back within 1-2 years.  We were back in business within 3-6 months after 9/11.

C.  Complete failure of pension/retirement systems, and healthcare cost.  Even if you have your house paid off, if those two categories go nuts, you could run out of dough and have to sell your house to live.  God help us all if it gets to this point.  It is possible though, so it’s on the board.

Those are the big three negative intangibles, now for the positive:

A.  Interest rates under 6% would help a lot, and I think they’re coming back.  The recent boom was the hottest when rates were the lowest.  It’s both a financial and a psychological benefit that helps get buyers off the fence.

B.  Sales over the next 1-2 years will be determined by buyers who care more about buying the right house than the bubble.  Whether they are ignorant about the bubble, or just don’t care about the bubble, it doesn’t matter.  If the bubble talk doesn’t bother you, then you probably won’t insist on waiting, or driving the price down another 5-10%, before you buy.  Because people need to live somewhere, there are reasons to buy that can supersede money.

C.  Lower prices should help those who rent to be able to buy – both the first-timers and the bubble-sitters.  Especially the bubble-sitters.  I don’t think there are any previous homeowners that don’t want to own, they just don’t want to buy at these prices.

D.  The OpenMLS would help alot.  If it were easier to find good deals, we’d have more sales.  If there were one centralized, super-duper website open to everyone, not only would it be easier to find deals, the novelty alone would spur activity.  Realtor.com is an embarassment, and the realtor community deserves to be left behind if we can’t do better than that.

 Those four intangibles could greatly temper any steep decline. 

But who cares, all that matters is how you can take advantage, right?

ADVICE FOR SELLERS

1.  If you know you’re moving in the next couple of years, see if you can move your plans up a bit.

2.  You can’t move your house, but see if you can get it into a higher-quality bracket.  Fix it up nice, that’s what buyers want.

3.  Be more attached to getting out, than getting your price.

ADVICE FOR BUYERS

1.   Set your goal at getting a high-quality house at 33% under peak prices.  Who are they, and where do I find them?

         A.  Distressed sellers with both high loan balances and equity

         B.   Long-time owners who still think a half-million is a lot of money

         C.   Dumb listing agents you can take advantage of

2.  Stay educated on the market, especially on recent sales.  That education gives you confidence that you’re doing the right thing when making offers.

3.  Be persistent, but patient.  Be prepared to make 100 offers, and hopefully you’ll only have to make 5-10.

4.  Know what you’re looking for, and keep looking!  A good agent can help.

That’s what I think, what do you think?