Here we are – the conditions in real estate market are as close to normal as they have been for a couple of years. The recent changes:
1. The Fed stopped buying MBS, and mortgage rates are on their own.
2. The federal and state housing-tax-credit offerings for resales are complete. If a buyer isn’t in escrow by now, with closing planning for sometime in the next 3-4 weeks, they will likely miss out on the state credit.
3. HAFA has been underway for a month, with no noticeable benefits reported.
4. No major foreclosure moratoriums in effect.
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But most everyone would agree that we haven’t seen a true normal market since 1997-1998.
THE NEW NORMAL – the market conditions that will stick around to prevent us from ever being normal again (or at least for a long time to come):
A. Government support of mortgage market – good or bad, it’ll be with us forever.
The low-down-payment benefit doesn’t affect much of the North SD County Coastal market though, only 8% of this year’s purchases have been FHA or VA.
Fannie/Freddie conventional loans are very popular, but they require 20% down payment and full qualifying, unless a PMI company is willing to take a chance on you. Hopefully those requirements ensure that today’s buyers are solid, and less likely to default.
The government’s support looks like it’s here to stay, and part of the new normal.
B. Low Sales – The supply and demand curve wrestles with low inventory of quality homes at decent prices. Buyers wonder if they should wait, but the stagnation doesn’t seem to be getting much better – and many appear to be taking the plunge:
The new normal includes ready, willing, and able buyers completing a purchase in spite of not having all the answers, and wondering if there will be further erosion. It used to be a safe bet that real estate always went up, but we may never believe that one again.
C. Low foreclosures – Since 1/1/09, there have been 422 North SD Couth Coastal SFRs that have been successfully auctioned on the court house steps, or about 26 per month. In a fairly affluent area with population of approximately 225,000 people and low sales in general, I guess we can call it part of the new normal that the market will absorb 25-50 foreclosures per month.
D. Fraud and Deceit – There appears to be no changing the fraud and deceit being inflicted upon the marketplace by realtors. Having to deal with it, is part of the new normal.
E. Break from Fundamentals – Mr. Umpteenth keeps banging the wage-inflation drum as the only way prices could sustain, but the trend of buyers using big money continues. Having ample funds offsets the need for a high-paying job to afford a house.
Last year there were 17% of the detached buyers in NSD County Coastal region that paid all-cash, in 2010 they are 22% of the total. Where all the big money is coming from, and the likelihood of it drying up could be a whole other post, but because the trend is continuing makes it part of the new normal – for now.
F. Partial Transparency – the MLS is out in the open, but it is only part of the marketplace. There are 25-50 trustee sales every month of SFRs to which most buyers don’t have access, and the short-sale scammers who put together their own deals without being on the open market are limiting the supply to buyers.
G. Lots of Non-Payers – There are only 401 SFRs in North SD County Coastal that are on the auction list, but you get the feeling that many more are riding the free-rent program. Unless servicers add more staff to handle the load, it’ll be part of the new normal that people will be able to live in their houses for months or years without making mortgage payments.
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The new normal is likely to produce more of the same results we’ve seen; frustrating inventories, lack of clarity, and data scattered everywhere.
The wild, wild west is the new normal!
“Having ample funds offsets the need for a high-paying job to afford a house.”
A present value concept that too few seem to understand.
In view of the “new normal” that Jim describes, I would never be either a buyer or seller without retaining the services of a lawyer. Another poster in a previous thread stated something along these lines. I believe it was in reaction to Jim’s difficulty in getting the keys for the new owner. I would want the lawyer to review each and every document including the original listing agreement. It definiely is the wild west out there. Thanks, Jim, for raising our level of awareness.
In many states retaining a lawyer for real estate transactions is normal. In California, it isn’t but may become so given the present circumstances.
Jim – you wrote:
Since 1/1/09, there have been 422 North SD Couth Coastal SFRs that have been successfully auctioned on the court house steps, or about 26 per month.
Is that both third party sales and back to bene’s or just the third party sales.
Thanks.
Both back-to-bene and 3rd-party purchases.
Undeniably good news. Adios bottom feeders!
Still way more blue and green dots than red dots on Foreclosre Radar. And despite BofA’s announcements the rate of foreclosures doesn’t seem to be drastically increasing.
Could be shaping up as a long, slow summer, at least for me.
Mr. Umpteenth keeps banging the wage-inflation drum as the only way prices could sustain, but the trend of buyers using big money continues. Having ample funds offsets the need for a high-paying job to afford a house.
Strong hands, limited supply. That won’t last.
I get that there are lots of people in North County with money who don’t need to wait for wage inflation.
I’m guessing this isn’t as true for surrounding areas, however. (Stated without proof or data.)
I’m wondering if this could eventually bleed buyers away from North County who can no longer justify the increasing premium.
1. The Fed stopped buying MBS, and mortgage rates are on their own
Not quite.
“Fannie (40+ billion)and Freddie (84+ billion) have purchased a combined $125+ billion of 120 day delinquent loans that they guarantee.”
My sister was at Bank of America in Encinitas last week looking at loans. The loan officer kept telling her about the “new programs” for low down payments coming out in June. “Just wait until June” She kept telling my sister so they could afford $500,000 and put less money down. It sounded like 2005.
I’ve heard that there’s also going to be a loosening of the requirements for jumbo loans too. Anyone else heard that?
rates aren’t really on their own for several reasons:
1. fed rate still artificially low at ~0%, which means banks are buying lots of fed bonds with money the fed is giving them (in addition to the large amount of bonds the fed buys from itself on the open market to make it seem like there’s real demand). Kind of like banks saying they paid back tarp… they paid it back with money the government gave them to pay it back.
2. freddie/fannie still exist and are flooding the market with artificially low rates in a system that can’t work by definition.
The fed put 5-10 TRILLION into the markets this past year. Are they going to do it again this year? What happens if they don’t? (And then what happens to rates?)
JTR – My first acquisition threshhold has always been finding real estate (commercial/residential) that can be purchased significantly below replacement costs.
Until it crosses that threshold I would keep waiting. Remember that housing has traditionally tracked inflation up/down and all the inputs of the house (excluding land) have historically tracked with inflation as they are all commodities.
Thus, if we can get a home at cost and get the land, and permits, etc for free that is pretty comfortable with a long term view.
Thus, if we can get a home at cost and get the land, and permits, etc for free that is pretty comfortable with a long term view.
Where do I sign up? 🙂
RE: “I’m wondering if this could eventually bleed buyers away from North County who can no longer justify the increasing premium.”
Or how about it increased the number of renters?
Sorry, meant “increases” not “increased”.
keep looking hard and negotiating hard.
We’re under contract for a hotel that cost $600k/room to build 24 months ago for $175k/room.
sniffing on a custom home that cost $450/sf to build (incl land) for $275/sf (hard const alone costs were $300/sf).
Just have to get dirty fighting for them as good investments don’t just fall from the sky like many folks expect them to do.
We end up buying only 1 commercial project out of every 100 we’re shown…
Anyone else wondering how many young retirees the view & stench of oil will chase our way?
Waiting to feel….
Have you heard anything about raising the jumbo conforming from $697,500 (for San Diego) to something higher?
Jeeman,
From a real estate news letter I receive:
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I (Scott Voak) think the tax credit was a very large issue in driving the lower end of the market, but the lack of availability of jumbo loans was also a factor. While the expiring tax credit will likely slow down sales at the lower end of the market, the increasing availability of jumbo loans will help the top end pick up a bit.
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That’s all I know.
The payments on a $700k loan, even at a lower rate, are still staggering to me.
#12,
Everyone said that when the Fed stepped aside, rates would skyrocket. I know, it’s only been a month, but rates have hardly budged.
I should also add another new normal, the Fed keeping rates close to zero for the forseeable future.
Really can’t say if this is a one day event or will be something more but LPS, who is a outsourcer of REOs for many banks just dropped 609 REOs in California today, all from Bank of America. Guess that means BAC has been sitting on foreclosed properties and who knows how many they have in their little piggy bank. About 40 of the 609 are in San Diego County today. Normal California daily assets for LPS is around 20-30 as a point of reference with 2 to 3 in San Diego County.
Jim – #21 – I equate the mortgage bond market to the release of a new home community. You have a lot of pent up demand at a price point and once they open the people rush in and a handfull of homes get bought keeping prices strong.
The developer then gets overconfident that they sold 6 homes in 1 weekend so that means that in 10 weeks they’ll sell 60 homes….and so on and start raising prices even in a low demand environment.
Bonds/Rates are the same..there is a big pile of low yield money’ waiting to step in and fill that void the gov left…thus keeping bond values (and rates) level. If they had stepped in before the gov exited, then their excess capital would have bid prices up and rates even lower which would have depressed the yield below their needs…cannot compete/outbid the government who has no positive yield requirement (heck -20%/yr is probably cause for a promotion in the gov)
This ‘easy low yield money’ will soon be exhausted and the well will run dry of low yield cash…once that happens, then the patient bond buyers will see prices drop and once/if their yield requirements are met they will step in.
Thus, I didn’t expect an overnight jump but rather a lull, then 3-6 months out then begin a steady rise. It will not be large in abosolute rate terms, but will be large in relative % terms due to the low comparative current yields…
“I should also add another new normal, the Fed keeping rates close to zero for the forseeable future.”
Agreed. The famous ARM reset graph we know and love is the same one the Fed is looking at. And judging by the last ten years, there’s no reason to believe they’ll raise rates anytime soon.
Excellent post Jim.
I see the situation the same way.
Thanks for keeping us well informed.
#12 here… the point is that the fed, despite what they say, have not removed themselves from manipulating rates down, they have the banks doing their bidding with the money they’re giving to them, and with the pathetic / criminal / foolish enterprises know as Freddie and Fannie. I know it’s hard to believe that the Fed is playing fast and loose with the truth, but…
The real x-factor is if the euro zone is so screwed that it actually makes the US look better by comparison (for now) and keeps our rates down as people seek safety. I don’t see that much difference between Spain and California but who knows how long will it take for the sentiment to view it similarly?
Clearfund has it right, you need to get a great acquisition price (and it takes a lot of work) because as rates go up, prices will go down to reach the same monthly payment — and monthly payment is all Americans seem to care about.