Hello Everyone I wanted to share a letter from the President of our Company "Prudential California Realty". I think it explains the current Real Estate market in a way we all can understand. Hope you enjoy....
To: Clients of Prudential California Realty
Date: January 27, 2009
Subject: A look at the opportunities in today's S. California Market
Dear Prudential clients:
As the owner of the firm, I have written a number of these letters over the years so that our sales professionals could share my thoughts directly with you, our client. I have typically written them when I sense a profound shift in the real estate market. This is one of those times.
First some background. I am the owner, along with my wife and partner, of the Prudential California Realty operating throughout Orange, Riverside and San Bernardino Counties. We have 9 office locations with approximately 875 real estate professionals. In the markets we serve we are, in almost every case, the single largest real estate firm in that market. I have been in the real estate business since 1972 and have owned my own firms since 1987. I have been through every up cycle, down cycle and in between cycle since 1972 and so what I write to you comes from the experience of being in this business for some 37 years.
What you are about to read is my personal opinion based on my 37 years of experience. I could be right or I could be wrong but it is my heartfelt opinion. My past letters to our clients have been very timely and proved to be quite accurate. I hope the same holds true for this letter.
The past three years have been the most challenging times in real estate I have ever witnessed. The mortgage business meltdown led to a meltdown on Wall Street. Wall Streets meltdown led to a worldwide scrutiny of financial assets. It has led to bailouts of Wall Street firms, banks, huge mortgage firms and the outright liquidation of some of the largest mortgage lenders in the US. The meltdown was caused by one thing more than any other. Aggressive lenders lent money to people who had little or no capability to pay this money back. These borrowers probably knew this when they were getting the loan but with rising prices there was always the hope that they could just sell the property for a great profit or refinance when they needed to. This worked...until it didn't. When prices got out of reach for most of the buyers, the music stopped. When the market slowed, people who could not afford their homes could not sell them because the buyers had been priced out of the market. Prices began declining. Price declines devalued the mortgage securities held by Wall Street and other firms. When the securities declined in value, Wall Street started selling the securities off. The volume became so fierce there were no buyers for these securities. This caused lenders to stop originating as many loans because new loans were harder to sell into the market. This became a vicious cycle. When lenders slowed the lending and tightened up on the terms, more buyers could not buy. Therefore more sellers could not sell. They began losing their homes to foreclosure. This depressed neighborhood prices further and a downward cycle was in full swing. The result of all this is the market we have today.
I think it is helpful to recognize, whether you are selling your home today or whether you are buying a home today, (or both), that we are really dealing with 2 distinct markets. For simplicity purposes I will define them as market A or market B. Market A is those homes priced under $500,000 in Orange County and under $300,000 in the Inland Empire Markets. Market B is those homes priced over $500,000 in Orange County and over $300,000 in the Inland Empire Markets.
I will address Market A first because that is where a huge opportunity exists for buyers today but the perception is all wrong about the state of the real estate market.
Before I get specific about Market A, you need to understand "where you get your news" is many times very relevant to how you feel about the real estate market. The national media is headquartered in either New York City or Washington DC for the most part. California actually began its descent into troubled real estate markets about the time Hurricane Katrina hit in August of 2005. For the next few years, the news only got worse in California and a few other markets in the nation. (Notably: Las Vegas / Phoenix / South Florida). While these markets were tumbling you did not hear about it much in the national media. On the east coast, and Manhattan in particular, until just a few months ago, prices were still increasing and buyers were plentiful. When the historic Wall Street firm, Lehman Brothers was allowed to fail, its impact was felt quickly. Within a week of that happening, Bank of America swallowed Merrill Lynch. Wells Fargo bought Wachovia. JPMorgan Chase bought Washington Mutual. All of these events threw thousands of highly paid people out of jobs and the jolt to the New York real estate market has been swift. This riveted the media's attention on the real estate market and how bad it was. What is not taken into account however is that California's market is actually improving. There were more sales in 2008 in California than there were in 2007. Yes, prices had declined from prior years but the fact is, sales were and are up. Yes, many of these homes, particularly in the Inland markets were and are foreclosures. Nevertheless, sales are up. You won't start hearing this from the National Media for a few years because their "home markets" just now are going into what California has been in for three years. The constant stream of "bad real estate news" is enough to make most rational people think that the market is so horrible that they won't go near it.
So, back to those with an interest in Market A:
The bottom of the market for Market A properties was in the last quarter of 2008. Every day you wait to buy a house in 2009 will cost you more money than the day before, the week before and the month before. If you were waiting to buy at the bottom of the market, you missed it. The only question for you now is this: "Do I still buy while the market is low or will I wait until there is another market frenzy and buy then at the top of the market?" Let me repeat my second sentence: Every day you wait to buy a house in 2009 will cost you more money than the day before, the week before and the month before. The question for Market A buyers is this: "Can I get the house at all?" It is no longer the 2008 question.... "How great of a steal can I get on a house?" The question is no longer, "How much under the list price will I be able to pay? The question is, "How much over list price will I have to pay to get this house?"
If you are a Market A buyer and buy a house today, you will have purchased that house for a lower price than what the same house will cost in a few months. Understand that even with getting a good price on the house today, it is likely that you will have to pay above the listed price of the property today.
Here is what is really happening on the ground and in real life in real estate. Prices have overcorrected in Market A. Interest rates have been driven by the government to historic lows. When you combine low prices with low interest rates it is like lighting a match to gasoline. Its effect is very powerful. There are more buyers entering the market each week in Market A. Every week you wait to buy, you will be competing with more buyers. The sooner you buy the smarter you will look in a few months.
When your Prudential sales professional counsels you that it will be critical for you to pay over the list price to get the home, they are giving you good counsel. They are not trying to drive up their income by getting you to pay more. They are trying to get you your dream house. I cannot begin to tell you how many buyers have lost two or three fantastic homes because they refused to believe their agent and made low or even absurd offers, thinking the market was ripe for them to steal a house. In Market A we are seeing multiple competing offers on every good property. If you like it...you can be pretty sure others like it for the same reasons you do. Usually the people with the best offer that win the property have already been down this road and lost two or three other homes they really loved. Only then did they really "get it". While that has worked for the past few months, it is about to get really serious.
The inventory levels in Market A are shrinking. Where a year ago there would be thousands of homes in a given market for sale, today there are hundreds. This is going to get more and more serious each week over the next few months. Combine too many buyers in the market, extreme low interest rates and a depleted inventory and you have the match that will light the gasoline and send prices up fast.
Now be clear. Prices will not increase to the levels we saw in 2005 and 2006. The lenders and the appraisers will not let that happen again. Your agent will explain the difference between conforming and jumbo loans and that is a critical reason the prices will go up...but not out of sight.
The point I want to make to our Market A buyers is simply this: Every day you wait the prices are going to be higher. You can believe me or you can test my statement and make low offers on houses you don't get. This takes time, sometime weeks and weeks is enough time for prices to go up even more. Market A buyers do not have the luxury of time right now. That was 2008. This is 2009 and everything is different. Buy a home now and I can tell you that you won't get as great a price as you would have in 2008, but you will look really smart in 2010 by buying now.
No doubt, some of our Market A homeowners with their homes for sale are reading this and grinning. Yes it is good news. Your home is going to sell for more money than it would have last year. Yes, it will sell for more money in a few months than it will sell for today. If you are not buying a larger and more expensive home when your current Market A home sells, you can possibly wait and get more money in a few months. However, if you are buying another home, the home you wait to buy will likely cost far more in a few months than the increase you could get on your current house by waiting. A lot depends on the price of the home you have to sell. Everything is tied to whether you are in a Market A price range or a Market B price range. This ties back to the financing loan limits and the available pool of buyers. Work closely with your Prudential agent to determine the best pricing strategy for the home. Price it too high, and you get no showings, let alone offers. Price it too low and you just cost yourself money. Price it just a little under the current market and you will likely generate a lot of offers for well over the listing price. I can only be general in this letter but your agent can give you counsel about your specific home in your specific neighborhood and city.
There are two very important steps to take if you are a Market A buyer right now. You must, and I emphasize must, get yourself pre-approved for a mortgage. Not pre-qualified but pre-approved. Your Prudential agent will help you with this. This is critical not only for you and your agent to know exactly how much home you can buy, but it is critical when it comes time to present your offer. If there are six offers on a property and your offer comes in without your loan being pre-approved, it will get knocked out even if your offer price is fine. Work with a lender your agent trusts and don't go shopping for your own loan. You can shop rates etc. after you are pre-approved if you don't think you received the best deal. Your agent has working relationships with lenders they trust and lenders they know can close loans. It does you no good to get into an escrow on a property and then two months later find out the lender you chose can't fund your loan. You have now lost your home and will go back into the market to buy with prices two months higher.
The other step is to have faith in your Prudential agent. They know the market and they will be able to tell you the values of the properties they show you. They will usually have knocked many homes out of consideration for you before they begin showing homes to you. Work with them on the correct process to buy and you will have great results.
Now, let's move to the Market B market which again, I have defined for this letter as Orange County properties priced above $500,000 and Inland Empire homes priced above $300,000.
This is still a very challenged marketplace. For those homeowners who did not have a large down payment and who purchased their home in the past three years, the chances are good that there is more owed on the home to lenders than the home can sell for right now. This is the case throughout many California markets. For those homes that are on the market where the owner owes more than the property is worth, we are faced with The Short Sale. Short sales are just that. The property will sell for less than the mortgage(s) owed on the property. (Therefore...short). A year ago the market was overloaded with short sale type properties and there are still many on the market. Agents and clients do not like dealing with them because you never know what is really happening. You present an offer, the seller says yes to your price, subject to his/her lender approving the price and the amount the lender is going to discount. In the past year we would have buyers waiting for months to get an answer only to get a negative response two months later. This was incredibly frustrating for the agents and their clients. The agents and buyers would typically keep looking for a home during the waiting period and often, when they found one they knew they could buy and the seller could sell without lender approval, they dropped out of the first sale and purchased the home they knew they could get a decision on. Lenders typically will lose a lot less money on a short sale than they will on a foreclosure. Common sense would tell you that they would react quickly to keep a ready, willing and able buyer in a transaction. However, common sense has not prevailed in the past year. Part of the problem was simply that the lenders were overwhelmed and didn't have enough staff to process requests and no guidelines on how to decide once the request did get to the right person. This is beginning to change. In the past month or so we are seeing some lenders respond very quickly to short sale requests and it is my belief that over the next year or so this process will become much more streamlined.
Market B is challenged by much more serious lender issues. For the buyer, the ability to get a loan is more difficult. Because it will be considered a Jumbo Loan and not a Conforming loan, there are very few institutions that will buy these loans. Therefore, the underwriting of a loan, in other words the scrutiny of the borrower, is much more involved. If a bank can't sell the loan they are going to keep it on their books or in their "portfolio." If it is in their portfolio, they are going to make extra sure it is a solid loan. In addition to the more stringent qualifying criteria, the interest rates are also higher, sometimes as much as a full percentage higher than the conforming loans that we use for Market A properties.
Market B has other challenges as well. First being, there are far more people who are in the Market A category as a buyer than there are in Market B. For the past few years the move-up market has been much weaker than in years past. Until Market A homeowners could sell, they did not have the ability to "buy up" to a Market B priced home. Over the months ahead, as you have already read, this Market A home seller is going to be able to sell his home more easily than he/she has in the past few years. This means there will be many more Market B properties selling as these people move up to the Market B price range.
That being said, there are still huge amounts of inventory in the Market B price ranges. This is a market where buyers will continue to make low offers and the homeowners should consider them if at all possible. If you have an interested buyer in your Market B property, don't lose them. Supply and demand will take time to correct this market. Until thousands and thousands more of Market A homeowners get their homes sold and closed, the Market B homes will continue to languish on the market. We have seen many of our buyers instruct our Prudential agent to make multiple offers on various properties. In other words, they will make offers on 4 homes, for example. They are very inflexible with the home seller and usually will not accept any kind of a counter-offer. They are pretty sure one of the four home sellers at least will take their offer as it is written. They are probably right for another six months or so. After that time, the lower ranges of the Market B price tiers will begin to sell much faster and the competition will shift from sellers competing with other sellers to buyers competing for single homes. It is possible that will happen in 2009 towards the last few months of the year. It is certainly not the market we see right now.
If you are in a position where you need to sell your Market B home, then price it aggressively and get it sold. If you don't need to sell or don't care if your Market B home sells, take it off the market for a year or so. Prices will firm up and you will be able to get more money at that time. However, don't be fooled. Lenders will prevent the prices from rising to the levels we saw in 2005 and 2006. Don't think that by waiting your price will skyrocket from its current value to some astronomical number. It won't. It will be higher than you could sell the home for today, but not to what it used to be worth.
Market B buyers and sellers need the counsel of their Prudential agent more than ever. There are excellent strategies to pursue if you are a buyer and there are good strategies to pursue if you are the home seller.
While I realize my letter is not nearly as upbeat for the Market B homeowners as it is for the Market A homeowners, it is my job to report things to you the way they are, not the way we wish they were. You need to know this. The market is better and is getting stronger each month, even in the Market B price ranges.
The housing industry led our country into the current recession and housing must be stabilized and "fixed" before the recession can end. Real estate led the market into recession and real estate will lead it out. The government certainly "gets it" and whether you agree with the policies or not, a torrent of money is coming into the real estate market in the next few years. This torrent of money will ultimately lead to inflation and a rising of interest rates to combat inflation. People who buy houses now will get the best possible price for their home and then as inflation kicks in, they will be paying off their mortgages each month with far "cheaper" dollars. Inflation is usually only good for people who own "hard" assets such as real estate. If you leave your money in "soft assets" such as money market accounts etc, inflation rips away your spending power. Knowing this is coming should make every possible homebuyer want to buy now at the best possible price. Make sure to get yourself a 15 or 30 year fixed-rate loan. Sit back and watch the value of your home grow as you pay the loan down with cheaper dollars over time.
The last area I will cover is the unemployment issue. Within a month or so California will have an unemployment rate at or exceeding 10%. How is this going to impact housing? Not much. Simply because there are still great prices and great interest rates. While 10% unemployment is not a good thing, remember this....90% of the people are still employed and they will take advantage of the market to buy low and lock in their purchase with a nice long term fixed interest rate loan at a very low rate.
I know this has been a very long letter. I have tried diligently to give you a coherent look at the real market we have today in real estate. Could I be wrong? Sure. Things were better in 2008 than they were in 2007 with respect to the numbers of houses sold in California. Things will be better in 2009 than in 2008. Better in 2010 than in 2009. Again, this is for the amount of homes being sold each year. If the years ahead are going to be better and better, it only makes sense to complete a purchase now while the prices and interest rates are so favorable. Could something change this scenario? Sure. A national meltdown in the financial system could change everything. Possible, but not likely. Another terrorist incident in the United States? Depending on the severity of such an incident, it will have an impact but probably not long term. Remember, after 9/11 the government did everything possible to stimulate the economy and they did it.
I want you to know how much I personally appreciate you choosing our firm to buy or sell your home. There are many fine real estate companies and we are honored to have been chosen to help you achieve your housing goals. I can assure you that as a group, our team of Prudential sales professionals are the best in their markets. They work long hard hours on behalf of you, our clients and will go the extra mile for you time and time again. I hope you are very happy with the service you receive from your Prudential agent. I feel very fortunate to have him or her on my team.
Whether you find yourself in Market A or Market B the days, weeks, months and years ahead are much brighter than the recent years.
I would welcome any questions and comments. Email me at RichCosner@mac.com
Thank you for doing business with Prudential California Realty.
Most sincerely,
Richard D. Cosner
President
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