John's Blog

Market Showing Signs of a Bottom - 2nd Qtr 2008 Newsletter by John Dumke

2008-06-21T18:13:28Z

Recap - Last Year - A sharp correction

In the 2nd half of 2007 market activity and prices fell off a cliff. (see www.LBRE.com for previous newsletters). The correction was so abrupt and dramatic, it ranked as the largest year over year price drop in California real estate history. (See Case-Shiller S&P Stats next page)
But as quickly as the market dropped, it has shown signs that the worst may be over, and a bottom may be in place. At least for single family homes in some Long Beach neighborhoods.

Market uncertainty and the media

With the recent volatility, buyers don't know what to believe. If you listened to the media, you might conclude it was the end of the world for the real estate market. But the media these days is more about sensationalism than balanced reporting, so the average consumer may think the market is weak. In Long Beach, where we focus, this is definetely NOT the case.

Economic health - It's a matter of perspective

An appropriate quote, "When your neighbor loses his job, it is a recession, when you lose YOUR job it is a depression". Certainly the credit crunch and the resulting drop in values has devastated some while others remained unaffected.
Feeling stress are those owners that bought in 2004, 2005 or 2006 with little down or marginal income, or owners that refinanced at the market's peak and used the proceeds to support a lifestyle beyond their means.
But the majority of homeowners that didn't use their home as an ATM will remain unaffected. Many were in disbelief at the markets final ascent. So the recent adjustment wasn't too big of a shock.

Related industries may also feel some pain

The contraction in the real estate market has also devastated those counting on a high volume of real estate transactions, or those benefiting from consumers flush with home equity.
Real estate related services (sales, escrow, title, termite and lending) expanded dramatically during the last 10 years to serve the needs of a hyper active market. The volume of activity is way down (although picking up in the last two months). There has been overcapacity of people in these industries, many of whom will not survive the downturn. Also affected are industries that benefitted from increased home equity, such as home remodeling, residential construction, auto and RV sales.
Depending upon who you listen to, your outlook would vary widely. Rather than listen to the media or individual market participants, let's listen to the market.

Locally supply is low & demand is strong

Putting aside all of the negative media hype and acknowledging that some will be dramatically affected, current supply & demand figures point to a market that is bottoming.

12 month supply of homes, now only 4 months

The market has shifted dramatically from a 10 month supply to a 4 month supply of homes for sale, in just the last two months. Two months does NOT make a trend. But this shift is HUGE and warrants attention. (see charts below for monthly supply and demand).

Supply remains low & is lower than it appears after short sales are removed

If you look at the chart "Unsold SFR Inventory" on the next page, May & June's inventory shows two numbers. About 2 months ago the SoCal MLS started tracking short sales (when loans are in excess of the sales price and sellers can't sell without the lender agreeing to lose money). While the total number of unsold homes is 1,100, there are only 800 homes for sale, not counting the 300 questionable short sales.

Demand has Come Back - And is likely to Stay Strong.

While the market has been quiet. There still seem to be more buyers than sellers. Albeit these buyers have been cautious, they have to be. Banks will no longer just throw money at anyone with a pulse. Buyers must document their income and have a down payment, just like in the good old days.
There also has been quite a few buyers that have decided to wait until next year when they think prices will be lower. These buyers will provide future demand. If the market is currently bottoming, even with tight underwriting guidelines, and a reduced number of cautious buyers, it may only get better if some of these buyers get off the fence. So it is likely the market may have some staying power and not get weaker.

Anecdotal arguements for a bottom - 17 offers

Penny recently wrote an offer on a listing that was slightly underpriced. It was a 1,210sf, 3/1.5 bath home in the Carson Park area of Lakewood. Homes like this have been selling for around $430,000 - $450,000. It was listed for $399,000. A total of 17 offers piled up on the property and the home sold for around $450,000.
This is not the kind of price action of a market that is going down in value.
I have personally had other transactions where there have been multiple offers, and have spoken to several agents that work in the East Long Beach areas that have had bidding frenzies when a listing is underpriced.
Bidding wars on very well priced listings indicates price support and confirm a potential bottom in home values.

But don't expect the market to come roaring back

While the market has shown very strong signs of bottoming, don't expect prices to just bounce back. It will take a while to work through the overhang of future forclosures that will be trickling or flooding onto the market over the next several years.
Loose lending practices allowed buyers with no or low down payments to purchase homes they could not afford.
To determine how long it might take for the market to come back, we simply need to estimate the volume of potential forclosures and compare these with the typical number of sales the real estate market can handle.

How many over extended home owners are out there?

Subprime lending really came into fashion in the second half of 2003 and lasted until the credit crunch, in July/August 2007. The bulk of these stupid loans were during this 3-4 years period, when as many as 50 percent of transactions used marginal subprime financing..
Currently home prices are back to 2004 prices, putting some other home owners potentially at risk:
1) Buyers that could afford their home when they bought, but have no equity. They might they be more likely to walk, especially when faced with financial hardship, a job transfer or relocation.
2) Homeowners that refinanced in the last several years and pulled out more money than the home is now worth.
How long will it take to purge the market of home owners that can just barely hold on. My guess is around 3-5 years.
It took 3-4 years of bad lending practices to create this mess, it could take at least this long to clean it up.
The number of sales will likely be greater from 2003 - 2007, than it will be in the next couple of years.
In addition to potential foreclosures, the markets also has to support normal sales from buyers trading up, relocation, divorce and death.
So going forward if 50% the of sales are sellers caught in the downdraft of lower prices that are stuck with payments the can't afford and the other half are normals sales, and the market is a little slower, 3 years turns into 3-5 years.

January 2008 starts the process

While 2007 was slower, it really wasn't until the last quarter of 07 that prices dropped and loan programs dried up. From this point forward we are now working in a different environment of lower prices and reduced access to credit. It is this combination that has really started the shake out.

Is 5 years too long for the market to return?

Honestly, I don't know. If more buyers can hold on, or more properties sell, or if prices go up to provide some relief, or oil prices go down, maybe we can work through the potential forclosures quicker. I simply don't know the answer. There are to many variables and too many uncertainties. But history does offer some comparisons.

Historically 4.5 years would not be out of line.

Based upon the last cycle when the market peaked in 1990, prices didn't start to go back up until 1996 and didn't reach the previous peak values, reached in 1990, until late 1998. So based upon past cycles, 5 years sounds about right. But even if I am grossly wrong and it only takes 2-3 years to work through the inventory of potential foreclosures, it will still take another 2-3 years before prices climb 20-30 percent and help some owners recoup their losses. But that does indicate that it will be unlikely for the market to simply spring back and undo all the damage done.
While it is very difficult to predict the future, it is fair to say that 2 years will not be enough to make some home owners whole again.

National Housing News Doesn't Matter, Only Pay Attention to Local Numbers Specfic to Your Property.

While we have been specifically talking about Long Beach. The health of particular markets vary greatly, even within Long Beach.
While Long Beach has been less affected than high growth areas, such as Riverside and San Bernadino, within Long Beach certain areas or types of properties are fairing better than others.
Here are some overall rules of thumb for what neighborhoods have seen greater price drops.
Areas that had more first time buyers from 2004-2007 are likely to have a greater correction. More homes sold to first time buyers in Lakewood and North Long Beach than in East Long Beach during the easy money period of 2003 - 2007. Consequently there are more potential buyers that may not have equity or be able to afford their home going forward.
Condos and high growth areas would also fall into this category. More first time buyers during 2003 -2007, will result in more potential forclosures. I am certain that home owners in the inland empire and other high growth areas would love to have our relatively "Slow and Steady" real estate market.
Less desireable areas have been hit harder than more desireable areas. As prices headed out of most buyers reach, many first time buyers competed aggressively for second tier markets, pushing prices of Lakewood homes to right below those of Los Altos homes, and North Long Beach home prices, came in right under Lakewood home prices. As the credit market has crumbled, this compressed accordian has began to unwind, with the lower priced neighborhoods seeing a greater percentage drop.
Overall I would say today's prices are between 15% - 30% off peak values, depending upon your area.
While overall the market has shown a 20% year over year drop in LA County, it is really dependent upon what area you live in and the price range of your home.
Should you have specific questions regarding your neighborhood, we invite your calls.
John Dumke

S&P Case-Shiller Home Price Index

(For more info Google - S&P case-shiller)
Below are the most recent statistics - March 08 (published May 27th). The graphs below shows the percentage of gain or loss.
The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. These indices use the repeat sales pricing technique to measure housing markets.
The S&P/Case-Shiller Home Price Indices are calculated monthly and published with a two month lag. New index levels are released at 9am Eastern Standard Time on the last Tuesday of every month.

Observations

Going from 20-30% appreciation to a 20% loss reflects unprecidented volatility. Most real estate market might have 5-10% appreciation during most years. These numbers are truly boom and bust.
In most markets you can see the effects of subprime lending becoming popular in 2003 and then its departure in late 2007. Especially Phoenix which had a nice orderly market until subprime lending propelled the market upward like a rocket. Los Angeles was appreciating at 10% a years prior to 2003. Then subprime loans were added and LA saw 20-30% appreciation.

Only 4 Months Supply of Homes! - Have We Seen a Bottom?

2008-06-03T19:48:36Z

There is only a 4 month supply of single family homes in Long Beach. This is Bullish. And it is in sharp contrast to last fall when I saw a 10 month supply of homes for sale. Why such a steep change? The main reason is that sales have picked up. While this increase in the number of sales is the main cause, the number of listings has also been dropping. The next chart shows the number of available SFR listings in Long Beach. In the last two months the chart shows two figures. The first if the total number of listings (currently about 1,100) but the second bar is the total number of listings after short pays have been removed (currently around 800). I believe that the 800 figure is a more accurate representation of the true number of "salable" listings, as most short pays don't get approved and they also sit on the market for much longer awaiting some type of response from the bank. In addition, when comparing the number of listings to last year when they peaked around 1,200 - 1,400, very few of these listings were short sales. Anecdotally, I hear many agents have good qualified reasonable buyers, but no listings to sell them. This is also the case with myself. Short of some new financial crisis, we may have already hit bottom. What do you think?

Short Sales - Less than 10% of the Market in Long Beach?

2008-04-22T18:17:42Z

Several months ago the SoCal MLS required agents to specify whether a listing was a short sale or not. It took a while for all listings to be updated, but now this is working well.

There are currently 1140 SFR homes for sale in Long Beach, 302 are designated as short sales, 838 are designated as NOT short sales. 302 + 838 = 1140. So all listings are are present and accounted for.

But how important are short sales in the the Long Beach marketplace? 302 of the 1140 total active listings is 26% of the market. But is it really that high, when we talk about closed sales? I don't think so.

Two factors will make short sales appear more important that they are.

1) Short sales sit on the market longer. If a good salable listing comes on the market and sells in 10 days but a short sale sits on the market for 100 days awaiting lender approval, it might appear that there are 10 times as many short sales compared to conventional listings, based on exposure. While it may not be 10:1, short sales certainly are take more time to sell, if they sell at all. Which leads to the next point.

2) If they don't sell, then the listing is just noise, not actual market activity. Anecdotally, I hear that only about one in five short sales goes through.

So an estimate that short sales are less than 10% of the SFR market here in Long Beach, is just that, an estimate, but it may actually be less.

Once the accuracy of the Short Sale data starts working its way through to Closed Sales, we will really see how important they are.

My point is to focus on real activity. There is such hype about short sale this, short sale that. When in fact they just distract buyers and agents from acheiving their goals.

They appear important because some seem to be great deals and many clog up the MLS, when in fact short sales may be just a mirage.

Read my Current 1st Quarter Newsletter for 2008 - Home Prices Drop Double Digits on only 4 Months! http://www.lbre.com/pages/news/2008/prices_drop_double_digits.html

Short Sales - Like Dating a Married Guy

2008-04-20T03:33:33Z

I am not a fan of short sales. (http://www.lbre.com/pages/news/2008/why_buyers_should_avoid_short_sales.html) . But I am a big fan of analogies. And I finally figured out the most appropriate analogy.
A short sale is like dating a married guy, when what you are looking for is a commitment.
Certainly a married guy may leave his wife. If COULD and DOES happen. But odds are against it, and what about all of the other great guys (other homes) you will miss out on because you are waiting for an unlikely dream.
I am not saying that you shouldn't write an offer on a short sale. But why patiently wait around committed to a seller that can't commit to you. Your smartest move is to stay a free agent and keep looking at all available properties until the time that the real decision maker (the lender) approves the short sale at the price that you wanted.

A Real Estate Correction at the Speed of Light

2008-04-20T03:31:56Z

Having just written my last post, I am reminded of how today's correction compares to the Real Estate downturn of the 90's. And more importantly why the worst may be over.

When buyers just walk away from the table prices fall. Buyer disappear for various reasons. Maybe buyers leave the state to look for work, maybe they loose their job and decide not to buy a home. Whatever the reason may be, when buyers leave the marketplace prices drop. This happened for 4 years in the early 90's.

What took 4 years in the early 90's appears to have occured in only 4 months in late 2007. The last 4 months of 07 were very quiet, there were very few sales and very few buyers.

This is not the case right now. There are actually a lot of buyers looking, not necessarily a lot buyers buying, but a lot looking. When the price is right, they pounce. Multiple offers are not rare for well priced homes or bank repo's.

So maybe it is possible that the correction that took 4 years in the early 90's has been compressed into 4 months, and that the worst is over.

I wouldn't look for prices to shoot up, but I hope that price stability is on the horizon.

More Activity Makes Determining Price Easier Compared to the Last Downturn

2008-04-20T03:29:54Z

During the early 90's buyers were few and far between. Today there are lots of buyers out there making lots of "Low Ball" offers. As a listing agent this has actually made determining price a little easier.

With a greater number of agents and buyers showing my listings, there are people to interview for opinions. The low ball offers also provide valuable feedback.

This has made my job easier as a listing agent , because in provides my sellers with a framework for determining current values. A framework that was not available in the early 90's, when we had much less activity.

Is it possible that prices have bottomed?

2008-04-20T03:28:28Z

Prices may have bottomed because most very well priced listings these days are getting multiple offers. This could just be a temporary blip, only time will tell. I spoke to an agent today that wrote offers for 4 separate buyers last week, multiple offers piled up on 3 of the 4 properties.

I also am getting multiple offers on several of my listings at this point, confirming the activity.

In defense of the bears..... These offers have not been full price, so prices aren't on the rise, that is why I titled this blog, "Are prices bottoming?"

Multiple offers are an indication of un met demand. Buyers that get out bid are an indication of future demand which will support prices.

What do you think?

Market Shows Signs of Good Relative Value

2008-04-20T03:26:43Z

Homes are usually price based on Comparable Property Sales. This method, while the industry standard, can be subject to the "Greater Fool Theory".

It is wise to use additional methods of valuation. Two other methods would be comparing the payment to rental income, taking into consideration tax breaks. And replacement cost.

As an example: I will use a property that is an excellent value. 6029 Loynes in Long Beach, CA. See Our Listings to the left for further details.

Here is why this property is an excellent value.

1) The property would rent for around $2,800 - $3,000 per month. The list price is $569,000. With 10% down the loan payment would be around $3,500 - $3,800 per month, but with the tax breaks the effective payment would be around $2,500-$2,800. In otherword, the property costs less to buy (with tax breaks) than to rent.

2) Replacement cost - The property is 2,159sf. Currently construction costs run around $200 per square foot. The structure alone would cost $430,000 to build and that means you get a golf course adjacent, Belmont Shore location for only $150,000 for the dirt. You simply could not build this property including the land for as cheap as it is selling.

This is just one property, but it makes the point that Real Estate values have VERY QUICKLY returned to a fair market value.

This property would have been around $725,000 at the peak. Breaking out my handy dandy calculator. That gives me a 24% drop (if the property sells for $550,000).

That is just about the drop we had from 1990-1995.

What do you think?

How Long Will This Downturn Take?

2008-04-20T03:24:14Z

While in my last several posts I posed some Bullish Scenarios, my prediction for the future of Real Estate is that it chugs sideways for several years. Maybe two, maybe three. Who really knows.

This is why.... On the demand side, the last two "bullish posts" make a case for buyers being willing to step in a purchase when homes are priced right, and there are quite a few buyers remaining on the sidelines.

But on the supply side, we do have an overhang of WEAK HANDS, buyers that essentially can't afford their home, because they paid too much, and overstepped their financial ability to pay.

The big questions is..... How long will it take to flush out these WEAK HANDS, and move the properties to STRONG HANDS (buyers that purchase at more reasonable prices and can truly afford the home). Two years, 3 years, 4 years. I truly don't know.

However long it takes, it will certainly be less in LA County, were the supply of homes could NOT rise to meet the demand, than in other outlying areas. So the overhang of inventory has not been compounded by new housing developments.

What this means to me. It is time to be looking, and buying, because when all of the weak hands fold and are gone, then we will start to see home prices start to creep back up. But certainly at a more normal pace.

And despite all of the gloom and doom. In LA County, there is just not enough supply to meet demand, and their never will be.

Lots of Buyers Waiting - A Positive Contrarian Indicator

2008-04-20T03:21:28Z

An example of a contrarian indicator. It is a great time to own stocks.... This positive sentiment can actually be negative. Because if everybody thinks it is a great to own stocks, they should be fully invested. Leaving no cash on the side lines to buy.

How this applies to today's Real Estate Market? There are a lot of buyers out there looking, kicking the tires and saying, "I think I will wait".

In otherwords, there is a lot of Guns Loaded and Ready, on the sidelines, ready to step in.

This is in sharp contrast to the downturn of 90-95, when most potential buyers were either being relocated out of state, or were afraid they were going to loose their job.

While we have had a MASSIVE drop in price over the last year, it is likely that buyers will STRONG HANDS will be stepping and buying up the property of the WEAK HANDS.

Which leads me to my next post.