So I buckled myself up, and sat in front of the computer for a few hours to extrapolate some of the data from the Multiple Listing Service (MLS).  For a numbers geek like me, it’s pretty interesting stuff. And if you’re not a numbers geek…you might be surprised to find, it’s not entirely boring.  Work with me here…

The Good

There is no doubt that certain communities have been more resilient over the course of this housing crisis than others.  In my recent post discussing the  product profile for new residential construction in Orange County, I discussed the uniqueness of the Irvine market.  It has some of the lowest distress numbers in South County and a buyer demand that is consistently selling out the newest construction projects.  Year-to-date they have had less than 7% of all closings listed as bank owned (foreclosed) property and 22% short sales.  With less than a combined total of 29% for properties closed that were ‘distress’ so far this year, Irvine is one of the strongest cities in the county.

The strength of the Irvine buyer demand may be attributed to the nationally renowned schools, the proximity to Chapman University and University of Irvine, and the attractive commute to many Orange County employers.

My suspicion is also that the buyer profile may have been stronger.  I’d need to do further research, but given the large amount of new construction sold during the boom years, I’m a little surprised to still see a relatively low default rate, or distress market, as compared to other areas in South County that grew up in the boom.

The Bad…Or At Least ‘Not So Good’

Some of the other cities have seen significantly higher numbers of distress sales – bank owned properties and short sales closed.

Lake Forest has seen some fairly dismal numbers at nearly 60% of their closings either bank owned or short sales, with a slight improvement this year so far at 55.9%.  It’s also interesting to note that while some cities (Mission Viejo and Rancho Santa Margarita) seem to be seeing a slight improvement in the percentage of equity sales (owners can sell for a price that covers mortgages and costs of sale) this year, Laguna Niguel and Aliso Viejo have seen decreases. Why?

We’ve seen that some of the higher price points have been stronger for longer.  In other words, it’s only been more recently that we’ve seen short sales or bank foreclosures to any great extent in the higher price points.  These neighborhoods may now be feeling that pinch.

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The Really Ugly

It’s interesting to examine the nature of the neighborhoods that have the highest number of distress inventories.  Upon examining a couple of the neighborhoods, it’s clear to me there are some very real reasons for the challenges some of these neighborhoods are facing.

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It’s important to know the following about the this chart – Ladera Ranch numbers include their gated community of Covenant Hills, and San Clemente’s overall numbers include their newest addition of Talega in their calculations.  For discussion, I’ve pulled out the specifics for both Covenant Hills and Talega.

It’s hard to ignore, out of the cities I profiled, the only one that didn’t have a lower percentage of bank owned homes (foreclosures) was Lake Forest, and certainly Lake Forest has really struggled with high numbers of distress throughout this market as well.

Growing Up In The Boom

I’m particularly interested in the makeup of Ladera Ranch, Covenant Hills, and Talega in this crisis, however.  These are neighborhoods that experienced unprecedented demand, and in the early years, unprecedented appreciation.  The product was new, architecture was unique, planning was exceptional, and it was highly appealing to the buyer profile of the day.  But the one commonality these neighborhoods also face is the fact that they literally grew up in the boom.

And in the case of Covenant Hills (which I intend to explore further in a future post) you have a community, a luxury one at that, that was just in the beginning stages of it’s launch.  And while the construction of the planned community, high-end tract homes, has nearly completed at this point, the high number of available empty lots slated for luxury custom builds, remains vast.

And when you have entire communities that are built in a boom, the overall impact of that bust can be devastating.    For a small community like Covenant Hills – the high end of Ladera Ranch – to see nearly 64% of it’s year-to-date sales as distress, the impact cannot be overstated. With Talega suffering over 60% of it’s closed inventory year-to-date as distress sales, there can be no question that this has dramatic impact on value.

Is There a ‘Good Deal’ for a Buyer Here?

Without a doubt, there are opportunities to get a ‘good deal’ in these neighborhoods.  In some of the hardest hit neighborhoods, prices have fallen and distress inventory is high.  So if a ‘deal’ is the goal, they are certainly here.

But I’m curious about your perspective as a buyer – and I’m interested in your feedback.  If you find a property that is 50% off it’s peak in Covenant how do you respond to that?  Do you feel like it’s a better deal than the property that is only 30% off the peak in another neighborhood – some parts of Irvine for example.

It’s an interesting concept to consider.  Every buyer I talk to has one request in common – a good deal.  I think that’s an important thing to define in your search for a home.  Is the ‘deal’ the predominant factor, really?  Is the long term value of the community a consideration?  Do the amenities impact your decision?

However, one may consider the long term prospective recovery in Covenant Hills as a real opportunity.

It really begs the question – from a buyer perspective, what do you consider a ‘good deal’ in this environment?

Short Sales and Volume

Some things to note from the above numbers, in 2008 the foreclosed/bank owned homes were the more common distressed property available.  In 2009 the tide shifted and short sales played a much more significant role, one which grew further this year.

Also, it’s interesting to note volume.  Nearly across the board, the number of sales increased from 2008 to 2009.  Jury is out for 2010 – but my personal opinion, given the expiration of the Housing Tax Credit, things may be fairly quiet for the 4th quarter of this year.

Jon Lanser with the Orange County Register recently did a post breaking down the number of sales and the change in median price per zip code that might be interesting to check out.

When you are looking to buy a home in Orange County, or anywhere else for that matter, it is critical to drill down into the numbers for the sector of the market that you are looking at.  Orange County numbers are wonderful benchmarks to know, but our market is made up also of submarkets within the OC.  It’s important to understand Absorption Rates, Average Days on Market, price per square foot, sale price to list price, etc.

For every buyer I’m working with, I try to do an analysis that really tells the story of the market they are hoping to buy in.  This allows them to have a realistic picture of the market and compete effectively for the home they hope to buy.

If you are a seller, these numbers will be important to you too.  Even if you are not a buyer or seller right now, hang in there.  This may seem dry, but I’ll try to make it fun.  There is a story told by the numbers every time! 

Today, I did some research for an investor I am working with in Rancho Santa Margarita.  She is looking for a condo around $250,000 that has at least 2 bedrooms and 1 car garage.  I looked at the numbers for Rancho Santa Margarita between $200,000 and $300,000, with a minimum of 2 bedrooms and 1 garage – Active, In Escrow, and Closed Sales going 90 days back.  (I recently did this analysis for a Mission Viejo buyer and only included sales over the previous 30 days, but in this instance that would have been swayed too heavily by the holidays).  Here’s what I found for this submarket:

Active Inventory – 47 Listings

• 34 Short Sales or 72%
• 9 Bank Owned or 19%
• 4 Traditional Sellers or 9%

In Escrow – 22 Listings

• 9 Short Sales or 41%
• 9 Bank Owned or 41%
• 4 Traditional Sellers or 19%

Closed Sales in the Last 90 Days – 27 Listings

• 10 Short Sales or 37%
• 10 Bank Owned or 37%
• 8 Traditional Sellers or 30%

Analysis of Closed Sales

• Short Sales:  Average Days on Market – 96, Sale Price to List 102.17%, $256.47 price per sq. ft.
• Bank Owned: Average Days on Market – 35, Sale Price to List 98.89%,  $248.17 price per sq. ft.
• Traditional Sellers: Average Days on Market – 33 (there was one outlier here that if removed would have made it 14), Sale Price to List Price 96.43%, $263.35 price per sq. ft.

Hey wake up! This is fun – really!

So what does all this tell us?

I’m a little surprised to see that some short sales are getting done in this price range.  We still have a large swing in the percentage of active inventory versus closed sales within the short sale market, but maybe the banks are starting to pull it together.  I’ll be watching.

It’s also still clear that the traditional seller is able to secure a slightly higher price.  The swing was much greater in the Mission Viejo analysis I did earlier, but it is still there.  Why?  I think buyers still love to have full disclosure from a real seller.  They also tend to be properties in slightly better condition.  And the best part – you submit an offer, and a real live person actually responds in sometimes as soon as 24 hours!  Wow!

Still the best ‘deal’ going is the bank owned home.  Just beware, is it still a ‘deal’ if you have to put in a lot of money after the close?  Maybe yes, maybe no.  Each property will require individual analysis to make sure that one is really getting a good value for the home.

Hope this helps my investor – and you.  If you ever are in need of a little Microscope on the Market – just let me know.  Just make sure you’ve had your coffee first.

Price point is really one of the big players in this discussion.  The movement that is taking place is great if you are a seller in the below $500,000 market.  With the limitations in lending and lower pool of qualified buyers, sellers in the upper price points have to be prepared for a longer selling cycle.

When we talk about Absorption Rate, we are talking about how many months it would take for the existing buying demand to consume the total inventory if no other homes were to come on the market.  I recently calculated the Absorption Rates for some of South Orange County’s cities, but to get the truest picture of each marketplace, I thought it was critical to break it down by price point.

This is how it looks:

Notice, for example, Laguna Niguel.  It will take 14.42 months to exhaust the supply of inventory with current demand in the over $750 price range, yet homes in Laguna Niguel under $500,000 will only take 5.7 months to absorb. It’s important to note that Laguna Niguel has one of the lower rates of distressed property rates in the county and have a much higher median sales price overall.

Steven Thomas of Altera Real Estate, reported in his Orange County Housing Report that 69.4% of all the Lake Forest inventory are distressed sales.  Buyers and investors alike are targeting the distressed part of the market as opportunities.  Part of the reason that Lake Forest is enjoying one of the lowest overall absorption rates in our market is the high percentage of distress inventory and the related demand.

If you are considering buying, or selling your home, and want to know more about what these numbers might mean to you, don’t hesitate to let me know.  No arm twisting here – just happy to answer questions.
*These numbers are from SoCal MLS figures in the first week of November and
the closed sales in the proceeding 30 days.

For the rest of you that might be curious about what I have in mind, I’ll share with you some of what happened to me this week.  Brace yourself because I feel a rant coming on….

As I have said countless times on this blog, short sales are a HUGE factor that is driving our market prices and inventory in Orange County.  For example, 64% of the active homes on the market today in Rancho Santa Margarita, under $500,000, are short sales!  In Mission Viejo, 50% of homes active on the market today under $500,000 are short sales. 

These short sales have offers that have been submitted to banks and are just awaiting approval.  They may have multiple offers.  This is buyer demand that is waiting and the last thing we need in this market is pent up buyer demand waiting.

I’d like to share with you a story about one of my short sale listings.  Within 72 hoursof listing the home back in May, I had 4 offers for asking price, and over.  We submitted them to the bank, along with the package from my seller that clearly qualified for a hardship.  The following dialogue is from this week between my short sale coordinator and the the banking institution’s (a very common and well known lender) negotiator.

My Short Sale Coordinator:

“We now had 4 buyer’s who have cancelled, including the last offer we submitted due to the fact that this process has taken almost 6 months.  We just can’t keep buyers around that long and we can’t keep the value the same for that period of time.  Values are dropping.  We do have another offer, but it is lower than any offer we have received.

“At this point we, as long with the seller, are at a loss as to what to do.  Do you have any suggestions, or any time frame that we can tell buyers?”

The Bank Negotiator:

“I will have to cancel this file because the buyers are no longer interested.  I suggest faxing in the new offer.  Because it is a new offer it will be considered a new file.  Anytime you have a new buyer it starts all over.  A short sale can take 4 - 6 months.  When you send in a  new contract the time frame starts all over. ”

The negotiator goes on to say that they are trying to make time frames shorter and the last response time was 30 days.  But in my experience, that response is inconsistent at best and clearly, they aren’t willing to commit to anything better than 4 to 6 months.

So what’s my big idea?  Let’s save a big bailout expense.  Forget giving money to banks with no accountability for how they use it.  Instead, let’s create an efficient, streamlined method of handling the massive number of properties that are in foreclosure and that are short sales. 

In the case of my listing, it may take one year to get a buyer in that property and a closed sale.  In the meantime, values are detrimentally impacted,  inventory remains misleadingly high,  property condition deteriorates, and suffering sellers can’t restart their lives.  If you shorten this process to 90 days, can you imagine the positive impact on our market?  Just think, 6 months ago I had 4 buyers that wanted to pay full or over list price.  Today’s buyers are thinking about 20% less than that.  THAT is a huge reason prices continue to decline in Orange County and in many parts of the country.

Maybe this is too simplistic.  Maybe this addresses only part of the problem.  But, if we are looking at some of the real, on the ground solutions for the much touted ‘Main Street,’ this seems like a great place to start.  Like I said, to those influential individuals and government institutions dying to hear my Bailout alternative, I’ll be standing by waiting for your call.

There is still tremendous volatility in the banking industry and financial markets but there are some bright spots.  We have already begun to see a slowing of the pricing free fall.  Distressed properties, bank owned inventory, and entry level price points are frequently seeing multiple offers all over Orange County.

Steven Thomas of Alterra Real Estate has released his housing report noting that inventory has dropped to its lowest point in 18 months.  Last year at this time, inventory was 27% higher and two years ago it was 16% higher.   Clearly, the message has been heard by would-be sellers and those that don’t have to sell are opting to stay put.

Thomas says, “This is simple Economics 101, as prices fall demand rises and the number of sales increases as a result.  As the United States government fixes the financial system and money starts to flow again, we can expect rates to drop considerably, including in the Jumbo loan arena, homes about $700,000.  Falling rates lowers monthly payments, which is similar to falling prices.  We can expect demand to increase and the number of sales to increase as well.  This may be six months from today, so right now is probably the most opportunistic time to be a buyer.”

Jonathon Lansner quoted the consultants at Real Estate Economics of Irvine as predicting housing rebounding within 18 months.  REE writes, “Though the index has been trending in positive market territory (an over-correction), the severity of the short term impact of price-slashed distressed properties, tightened credit and extremely low market psychology will continue to hinder market conditions for the balance of 2008.  The over correction will eventually serve to restore buyer confidence.”

William Shopoff, CEO of the land-investment firm the Shopoff Group was recent interviewed by Jeff Collins at the Orange County Register.  Shopoff’s prediction, “I would expect a market bottom to occur in the later half of 2009, possibly extending into 2010 for the Inland Empire.  I think the recovery will take some time once we reach bottom.  I would expect the $700 Billion Government package…will provide the needed liquidity to the markets to provide support but the bigger problem is supply/demand imbalance at present.”

What’s the my prediction?  The Planeta Prediction for the last couple years has been Spring ’09.  I knew that ’08 would be a tough year because generally speaking, election years tend to slower.  That in addition to the already poor housing conditions heading into ’08, I was prepared to buckle my seat belt for a long ride.  I didn’t foresee the financial crisis and that may very well push out my prediction.  We will continue to be plagued with distress sales until we absorb foreclosures that continue to hit the market.  But, I do think that we’ll see a much stronger Spring than we have seen the last couple of years.

I find Shopoff’s comment interesting about inventory imbalances in light of the low inventory reported by Steven Thomas.  That is a big factor and I see it playing out in some of the areas that I most frequently work.  Las Flores and Wagon Wheel markets, in Rancho Santa Margarita and Trabuco Canyon respectively, have the lowest inventory that I can recall seeing in years.

So, if you are watching for recovery, or even stabilization, we may be seeing the first glimpses on the horizon.  Don’t get me wrong, clearly we aren’t there yet, but if you are targeting the bottom, keep your eyes peeled.

There is a relatively new site that can assist buyers in ‘finding a walkable neighborhood’.  The site is www.walkscore.com.  It will score an address from 1 to 100 on the walkablility to restaurants, grocery stores, entertainment, schools, libraries, etc. 

I recently put in the address of my newest listing, 35 Paseo Simpatico.  The Walk Score was 86 out of 100!  That may be one of the highest I’ve seen yet.  This home is close to the Library, shopping, restaurants, parks, grocery stores, movies…..My house on the other hand, typical suburban home in Las Flores, had a Walk Score of 8 out of 100.  Has me missing Ashland just a bit……somebody will luck out on 35 Paseo Simpatico!

Updated July 17th:  Someone just shared with me http://drivescore.fizber.com/.  This provides a score of accessibility of a property.  35 Paseo Simpatio scored 88……My own home scored 82 out of 100.  Clearly Paseo Simpatico is much closer to everything so I’m not sure the score is as valuable as the Walk Score, but my ego was soothed just a bit.  For what it’s worth…

Times have changed and there are limited options for first time buyers that aren’t coming away with a ton of equity from the sale of their last home.  Fortunately, there is FHA.

The Federal Housing Adminstration, or FHA, provides mortgage insurance on loans utilizing FHA approved lenders.  The buyer must qualify but only needs a limited down payment. The key here is that if the buyer is looking at condos, the complex must also be FHA approved.

I recently took a listing in Rancho Santa Margarita.  It’s a well priced condo by RSM Lake.  A 2 bedroom, 2 bath home with a 1 car garage, it’s one of the few traditional sellers in that price range.  No waiting for the banks – but with no FHA approval currently on the complex, we have cut some of the great first time buyer pool that would be great for this home at $285,000.  In the meantime the Brisa Del Lago is working on getting that approval again.

And therein lies the problem.  Whenever a complex has had a litigation of any kind, they loose their FHA approval and must go through several steps to regain that FHA approval once that litigation is settled and work completed.

Because FHA lending has not been an issue for some time, many complexes not only let their FHA approval lapse, but once the litigation was resolved, many of the homeowners associations never renewed the applications.  No one complained because no one was applying for FHA loans.

The Homeowner Associations owe it to the homeowners to get this issue resolved sooner rather than later to maximize the buying pool for their homeowners.

If you are a buyer or an agent looking for a condo, check to make sure it is approved by FHA.  If they are not approved, hope is not lost.  Find out if your lending can do a ‘spot approval’ for that one unit.  More and more lenders are working on this while condo’s are processing the applications for renewed approval with HUD, U.S. Department of Housing and Urban Development.

Orange County condos and homeowner associations are working on this but it will take some time to catch up to the changing buyer pool and lending restrictions.