Last week those in the know seemed to be saying that the recession was over. The LA Times cheered that Southern California's Vital Signs are Improving and the Southern California housing market was about to hit bottom. But toward the end of the week the news was not quite as good with state unemployment numbers reaching above 12% and a few economists hedging their bets. Irwin Kellner from Money Watch theorizes that maybe it ain't over til it's over and I think I agree with him. Much as I would love to see our Beach Cities real estate market stabilize I'm having a hard time believing that the real estate market in California has reached the bottom with such a high unemployment rate and the state in so much financial turmoil. Employment and financing are going to be major issues that must be resolved before we begin to see a return of a normal market
This real estate market is different then previous markets and consequently may be harder to call. I suspect that we will see the home market bottom by city and sub areas within each city. As an example I think that we may have seen the bottom in February of this year for the lowest priced single family homes in Manhattan Beach ( $750,000 or less), Hermosa Beach ( $700,000 or less) N. Redondo ( $600,000 or less), S. Redondo( $700,000 or less) and El Segundo ( $650,000 or less). We may also be nearing the bottom for entry level townhomes/condos in the Beach Cities. I think we will see properties priced in Manhattan and Hermosa from $800,000-$1M reach their lowest level by the end of the year. The rest of the markets will level at different times over the coming year. I also think that reaching the end of the market will not signal an uptick in prices. Most price points will remain flat with the exception of Strand and walk street properties near the Strand which seem to have a life of their own even in a down market.
While it may be true that the South Bay employment market is doing better then other parts of the state we are not out of the woods yet. I know a number of folks who may have jobs but have lost of lot of perks. Many companies will not be paying an end of the year bonus to employees that was a standard benefit. Others are changing more for health care benefits. If you are on a salary plus commission your commission percentage may be significantly lower. If you own a company you may be paying yourself less if the company income has decreased. In other words a lot of folks just simply are not making the same amount of money they were a few years ago.
Consumer spending continues to be below expected levels in all categories. Home buyers are still expecting prices will continue to decline a bit more and continue to make offers the listed price. These are not necessarily buyers who think the market will drop another 25% but rather those who think there is a little more to be discounted... maybe another 5%-10% before we see the bottom of the market. That's not to say there are not some homes that are receiving multiple offers with prices above the listed price but these usually were often priced below market value. Having multiple offers doesn't always mean the offers are over the listed price. It isn't unusual to have multiple low offers if buyers feel the price is on the high side.
One of the big issues affecting the housing market is that banks are still very leery when it comes to extending credit to buyers on a purchase loan or homeowners looking to refinance. If you are not a straight salary W2 employee banks are not going to be your friend. In our market many of the people making the most money are commission based and banks don't like 1099 folks very much.
We have been so consumed with foreclosures that a major problem in our market is often overlooked... owners who want or need to refinance and can't qualify. If you are self employed you might find that with all the new rules and regulations many of the assets you took for granted no longer count as much when a lender reviews a loan package. Prior to September 1, 2009 if you had a lot of assets in stock, bonds and other accounts lenders gave you 100% of the value of those funds. Since September 1, 2009 lenders will only allow you 70% of the value of the assets toward qualification which means you just lost 30% of your financial power.
I spoke with a few lenders last week and the general consensus of opinion is that there are going to be more problems with upper end housing well into next year. With values having declined by 25% +/- in most of the Beach Cities owners may find it difficult to refinance. Another issue is that if your income has changed or if you are commission based you might not qualify for a new loan even if the payment is lower on the same amount of money because of rule changes. Most of these people will not wind up in foreclosure but they may have to sell at a discounted price if they can't refinance.
While it is true that inventory has decreased and sales picked up over the summer, the fact is that the decrease was not all due to properties selling. A number of sellers just decided to wait the market out while others opted to rent their homes for a year or two. As we come to the end of the year sales volume is again declining compared to previous months. I expect that the 4th quarter will be better then last year as the financial markets are not in as much turmoil. However until lenders losen credit a bit more and consumers decide to start spending I don't think we have seen the end of the recession or the bottom of the real estatre market.
5 comments:
I think your prognosis is reasonable, though there are at least a couple of other factors worth factoring in. First are the national statistics that show the pace of defaults is as high as ever, it's the length of the foreclosure process that has slowed things--see yesterday's article in the WSJ, "Delayed Foreclosures Stalk Market" as excerpted by CR here--
http://www.calculatedriskblog.com/2009/09/wsj-delayed-foreclosures-and-shadow.html
"The question is whether the flow of these homes onto the market will resemble "a fire hose or a garden hose or a drip,"
There is the chance that the stalling tactics will reach their limit and the tide will crest and the hose will spurt.
Second is the wave of coming Option ARM reset/recasts starting right about now. You look at all those Option ARM recast charts, and they are hard to ignore. A lot of analysts think the mid to high end is going to take a big hit, and that would increase the pressure in the hose, particularly in SoCal where so many of the ARMs are concentrated and the economy is weak.
Fourth quarter is going to be really pivotal, because that's when the recasts are set to take off. If the numbers reflect the beginning of the ARM recast charts, those are going to have more weight and the bearish predictions of a increasing slide will gain validity. There's going to be a psychological impact as well as the likelihood of more foreclosures and short sales. On the other hand, if things just loll along, it'll support the "drip" theory, and the idea that the market is absorbing the overflow, in which case, things are more likely to level out.
Among buyers, there's more than two categories. There's the ones who expect a 5-10% drop, there's the ones who expect a 25% drop and then there's the ones like me who want to play it safe and wait for more data to come in and give an idea which direction we're headed. I suspect there's a lot of us. Until then, unless there's a remarkable deal, there's just not much incentive to take the risk. Though nobody can be certain where the bottom is in terms of prices, chances are sales will pick up either way once the data starts coming in.
Anon 4:43,
All your points are valid. Mortgage resets are going to be the key. So far the Beach Cities haven't see big numbers of NOD's which are the first step but that could change if people can't refinance or if we see more unemployment at the upper levels.
Right now I see the inability to refinance because of tight credit to be the major problem. Most owners in the Beach Cities have the ability to pay if loans are available.
You have a lot of company as far as buyers who are playing it safe. Even those who have decided to buy are being very careful about where they buy and how much they spend.
scary to think that credit just may not "loosen up". 20% down payment, strong credit scores, strong qualifying income requirements, strong personal assets, little revolving debt. I think it's more likely the future will require all borrowers to have all the above rather to have false hope that banks will miraculously loosen up. Think about what that will mean for the local market in the next 3-5 years.
Anon 9:15,
Banks have currently gone overboard with some of their requirements which border on downright silly.
Banks should continue to require a decent downpayment, high FICO scores and reserves but some of the antics they put buyers through are ridiculous.
Kaye called the bottom. Wow. Let's hope you're right...
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