I’ve been somewhat reluctant to participate so I’ll start with this disclosure:  Until recently, I have followed politics superficially at best, I have limited understanding of how housing policy is decided upon, and I generally think Hahn derives some pleasure from his consistent ‘sky is falling’ outlook.  That being said, I will credit Hahn with a breadth of understanding on the topic, and a careful consideration of the political underpinnings.  He inspires me to become significantly more aware of the way the political environment impacts the industry and overall economy.  Clearly, in today’s environment, a superficial understanding falls far short.

And while I try to avoid politics here, the current market environment makes it unavoidable.  The current administration policies have pushed us closer to Socialism than we’ve seen before in our history -  whether it’s Wall Street, the automobile industry, or health care.  The housing market appears to be next.

Much of what I deal with on this blog tends to be local market considerations.  Yet, there is no question that the changes that are clearly coming down the pike have the potential to have a massive impact on the housing market – nationally, and locally, so I feel like it certainly has a home here.

Housing Policy Changes in the Air

July’s housing numbers rocked the nation.  They had been expected to be low given the expiration of the home buyer tax credit, but sales down 27%…that was a little steeper than had been anticipated.  In the days following, it created a tidal wave of response. I saw articles come out on, and offline, both indicating this was nothing to worry too much about, as well as those that would make one decide not to get out of bed again…ever.

There’s no question, housing policy is one of the most important matters impacting our economy today.  And certainly significant change is coming.  As Treasury Secretary Timothy Geithner states, “This administration will side with those who want fundamental change. It is not tenable to leave in place the system we have today.“  It’s the specifics of that change that are of interest and of concern to me.

‘Fundamental change’ is too ambiguous at this stage.  I’m interested in seeing change that reflects a solution to the existing problems.  What parts of the ‘system’ that got us here – are not ‘tenable’?  Let’s come from the three C’s of home ownership perspective:

1. Capacity – the ability to repay the loan (employment history, salary)
2. Credit – the history of how one has paid back debt
3. Collateral – the value of your home (recently justified by overbloated appraisals brought about by easy lending practices)

What if we simply embrace these simple tenants:  make quality loans, with credit worthy individuals, on quality property.  In the past decade, had we not swayed from that simple idea, it’s highly likely, we wouldn’t be here.

No More Mortgage Interest Deduction?

Since Hahn has one more of the dismal outlooks, I think it’s interesting to examine it from his ‘worst case scenario’ environment.  In a recent post, he speculated on some of the possibilities:

1- The mortgage interest deduction will be eliminated, or at least sharply scaled back
2 – Fannie/Freddie will wind down participation in the single family residential market, and raise participation in multifamily housing (aka, rentals)
3- The 30-year fixed rate mortgage is headed to the ash bin of history; I rather expect the “new normal” will be something closer to a 10-15 year adjustable rate mortgages that adjust every year or even every quarter.
4 – Down payments are headed up, up, up from its current levels (some FHA loans are still requiring only 2-3% down); Bill Gross of PIMCO has said that if he were funding mortgages, he’d require a minimum of 30% down payment.  I think that’s where we’re headed.
5 – Some form of national regulation for rentals, in order to (a) encourage rentals by those who would otherwise be first-time homebuyers, and (b) protect renters from eeeeevil landlordz.  It may be as heavy handed as a national rent control regime, or (more likely) an expansion of Section 8 to include far more “middle-income” units.

Are These the Changes That Repair Housing?

There are some valid arguments for some of the preceding speculations.  As  Hahn states, “…the overall impact is to decrease the pool of buyers, drive housing prices lower, and have fewer transactions.“  This may in fact be a requirement of the overall recovery.  There were less buyers, lower prices, and less transactions when stronger lending practices were in place.

However, when the Housing Policy changes are considered I wonder about this simple statement of fact from Mark Zandi, Chief Economist for Moody’s Analytics, “…when housing values are falling, nothing really works all that well in our economy.“  Our economy cannot possible heal with a crippled housing market.  And some of these speculations from Hahn only seem to me as the types of things that can only further cripple the housing market, in an extreme way.

While Hahn is rather fluent in politics and rather adept at speculation, one area of expertise I have is in understanding the profile of today’s distressed homeowner.  I know what it’s like to sit across the kitchen table from someone that is faced with these very real and personal set of circumstances.

Lest the Pendulum Swing Too Far in the Other Direction

I will grant you, in the early days of this crisis, those faced with short sale scenarios or potential foreclosure, might have been the higher risk buyer profile.  They may have been the 100% down buyer.  They may have had the ‘Neg-am loan’ or some other questionable loan program.  They may have been the buyer that had borderline qualifications coming into this game.

However, the Orange County homeowner of today that sits across from me at the kitchen table is often the one that put a fair amount of money down, they may have been highly qualified, excellent credit, documented income sources, and yet, with the decline in values, personal circumstances (divorce, long term unemployment, relocation) they are forced into a financially devastating course they couldn’t have anticipated.  And these homeowners ask the same question nearly every time:  ‘How long do you think it will be before I will recover enough to be able to buy a home again?‘  They ask this because they value home ownership.  Remember, they were not in this market for a quick turn on their money.  While some bought houses, the short sale/foreclosures we are seeing today are the buyers that bought homes.

These individuals consider home ownership as part of their claim to middle class.  They certainly consider it part of their ‘American Dream’ and they fully anticipate their ability to reestablish that claim.   They are voters.  They have historically been high income earners.  And I highly doubt they will be interested in satisfying themselves with long term rentals as their housing solution.

And why, in the course of establishing a National Housing Policy, would we take measures that serve to cripple the ability for those individuals to own again, cripple the potential recovery, and cripple our ability to recover some economic stability – because clearly, they go hand-in-hand.

The Meaning of Home Ownership in The United States

It’s interesting to look at the psychology of home ownership in this country.  The big land rushes of the late 1800′s illustrate the deeply ingrained desire to own a chunk of dirt to call your own.  That desire is something you can’t simply legislate away, and I really believe voters’ voices will be heard when you start hacking away at their long term ability to grab that golden ring once again.  I think it will take more than a Time Magazine article to convince them that home ownership is not all it’s cracked up to be.

There was a time when home ownership was valued for the sake of owning a home, and not much more.  Then came the profit taking in the later 80′s as home prices soared with the onslaught of dual income families.  The late 90′s and early 2000′s brought easy money and get-rich-quick buying, leading to our current collapse.

But I still believe, most folks want to own their home, they will take a mortgage to buy it – maybe even without a mortgage interest deduction.  Prices may fall.  Maybe we’ll adjust our expectations.  Maybe we’ll begin to be satisfied with a slow appreciation over the life of a homeowner, rather than the promise of a lifetimes wages in a year or two of owning a home.

Kicking the Dog While It’s Down…

Some of the things Hahn is speculating may indeed come to pass, in one form or another.  But, I think there is value in considering the fact that kicking the proverbial dog while it’s down, may not be the answer.  Bill Gross, with PIMCO, states, “Policymakers should quickly re-engineer a refinancing opportunity for all mortgagees that are current on payments and are included in GSE securitized mortgages.“  There are some solutions that could be examined that help sustain those that are currently impacted and in turn further housing and economic recovery.

The pendulum may have swung too far in encouraging home ownership, but it would seem a mistake to me to have it swing so far the other way that we eliminate the ability for our middle class to recover and reclaim their ability to own once again.

BTW Rob – it may satisfy you to know, this may be one of the longest posts I’ve ever written.

I launched this blog in May of 2008 in an effort to bring information to present and future clients that was the truest representation of what I could provide about the Orange County real estate market.   The constant drone of the Realtor community – “It’s a great time to buy” was making me feel a disconnect with my colleagues.  In early 2007, it was a tough market to sell a home and buying made sense for a handful of clients.  This became a place for me to share information about locations and internal markets within South Orange County specifically.

In the Beginning

When one launches a blog such as this, you go into it knowing that what you write initially falls on deaf ears.  I didn’t mind really.  I love the writing, I love the authenticity of it, and I love the platform.  Information about the vast changes in real estate to share with readers was easy to come by….and over time readership grew.

So What Happened?

The last three months have posed challenges and sadly, I let the distractions get in the way of my beloved blog.  I admit that I abandoned my blog as of late.  With a friend’s passing, an increase in very active buyers, and summer with my kids, I let it get the better of me.

When someone first starts a blog, the hardest part is starting.  It’s the momentum that keeps you engaged once it begins.  I have found that starting up again is just as hard.  But today is the day!

So Welcome Back!

For my readers (if you’re still there) and for those just coming on board, I’m back in the saddle again.  Back to the stuff that connected us before, back to the OC real estate voice.  Thanks for continuing to come back.

Today’s Microscope on the Market focuses on the Laguna Niguel real estate market.

Homes Under $500,000

In the under $500,000 market, Laguna Niguel does not vary from any of the cities I focused  on in South Orange County with a whopping 63.9% of the active properties in a short sale situation.  Couple of things to note – it would appear that there is significant movement with 71 properties in escrow.  Sadly, 38 of them are short sales and those can sit in escrow for 60 to 180 days and that can skew the perception of significant movement.  Notice only 18 have actually closed escrow in the last 30 days.

I want to also point out the very low number of bank owned inventory.  Pay close attention to this number in the coming months.  It will increase again based on the end of the moratorium on Notice of Defaults.  Filings are back up to levels prior to the moratorium so watch for this number to increase.

Also of note, despite the large supply of short sales, buyers still look to bank owned homes and equity sellers for their purchases by a significant degree in relation to the supply.

Homes $500,001 to $750,000

Again, despite the large number of short sales, buyers love bank owned inventory and it doesn’t last on the market and their is still a significant demand for reasonable equity sellers.

Homes Over $750,001

As I noted in Coto last week, there is just very little in the upper price points that is moving.  At this rate of consumption (12 homes a month), we have a 12.25 month supply of homes.  If nothing else were to list in this price range, it would take us over a year to consume the existing inventory with current buyer demand.

The good news in Laguna Niguel – there is very little bank owned inventory and very few short sale listings.  That can be good news for values in the coming year.  I’m not suggesting any appreciation guys – but even with slow sales, these folks may have the financial strength to hang on.

If you are sizing up a purchase or sale, looking for an opinion on ‘the bottom’, this is worth 13 minutes.

Steven Thomas, President of Altera Real Estate recently released his latest Orange County Housing Report and it is definitely worth taking the time to review if you are curious about how the 2008 housing market finished and the possible outlook for 2009. It’s a very comprehensive summary.

I would encourage you to review the charts for Active Listings and Pending Sales. I love the way that it visually lays out the ’05, ’06, ’07, and ’08 numbers for comparison.

One thing worth noting is that current inventory is way down – 11,842 homes off the March peak of 15,617. Homeowners have definitely taken to heart that selling will not be easy and pricing is critical. If they don’t have to sell, they generally are opting not to.

The biggest facet of our current market is the distressed inventory. As I’ve continued to repeat here, one of the indicators that a recovery is on the horizon is declining numbers in the distressed sector of the market. Right now, Thomas states that 46% of all the current inventory are distressed sales; 76% of those are short sales and 24% are foreclosures.

So where is the demand? Believe it or not, it is a strong seller’s market when it comes to foreclosures and they are selling at 101% of asking price.

Short sales continue to be a frustrating facet of the market because they continue to stay active on the market while a bank approves the offers they have pending. This creates negative and misleading numbers when one analyzes the active inventory. These offers can take weeks, even months, for the bank to approve. The sale to list price on short sales is running at 97%.

If you have questions about how these numbers impact your buying or selling plans, I’m happy to discuss it with you.

1. The coming election will likely slow buying activity. Based on past real estate years it’s likely to be a bit slow with buyers taking a ‘wait and see’ approach.  We also are moving into the seasonally slow period of the market.
2. Consumer confidence is still a big issue.
3. With prices having gone down for so many months in a row, there is little urgency to buy right now.   In past years, buyers felt a rush to buy before prices climbed higher.  Now, the opposite is true.
4. With foreclosures still coming onto the market, there is still inventory that must be absorbed before a recovery can begin.
5. Economic uncertainties that can directly or indirectly impact buyers’ ability to buy or secure financing.
6. Limited financing options and stringent qualifying requirements limit the buyer pool.

That being said, there are things that seem promising:

1. I don’t see prices making a dramatic drop from here.  In the last year the median sales price for an Orange County home has fallen 28% in a year.  There may not be much more room to fall.
2. Investors and buyers that have been waiting for the right time to enter the market are beginning to jump off the fence.  The recent buying spurt of activity shows that the demand is there when the price is right.
3. Interest rates have stayed relatively low and those interested in taking advantage of those rates are making the leap.

Time will tell.  Stay tuned.

The Associated Press release states that the housing bill is ‘intended to provide mortgage relief for 400,000 struggling homeowners’.   Supposedly, homeowners can get in touch with lenders to have their loans modified to a lower 30 year interest rate – government backed.   Which homeowners exactly?  Couple of caveats:

• Homeowners’ debt-to-income ratio must be greater than 31%
• Borrowers must be able to prove they can repay the loan
• The value of the loan cannot exceed 90% of the value of the property (duh?! This is part of the problem!)
• Another biggy – Lender participation – totally voluntary!
• FHA has a 3.0% refinance fee on this with a 1.5% annual surcharge.  Not sounding like much of a deal to me…
• Oh, and at the time of sale, (my favorite part – hear the sarcasm please) the seller is only entitled to 1/2 the appreciation.

Then there is the much touted $7500 tax credit for first time buyers.  This is a tax credit – but to be clear, it’s really a interest free loan to be paid back over the course of 15 years.  And if you sell prior to that time, it’s still to be paid in full that tax year.  Most first time buyers aren’t buying the home as a long term residence, hence the term ‘starter home’.  I guarantee they won’t be loving that loan when it comes due no matter how much they may love it now.

And then there is the Capital Gains revision which is not getting a ton of press from what I can see.   Conventiently for lawmakers, it’s in the very last pages of the nearly 700 page document where most people are nearly asleep when they get there. 

The Capital Gains exclusion the homeowners and investors have enjoyed will be in place for the remainder of 2008.  It stated that a homeowner could take the gain from the sale of the a property tax free (up to $250,000 if single, $500,000 if married) as long as you had lived in the property 2 out of the last 5 years.  Many people have kept their homes as rentals for as much as three years to benefit from this law.

This has changed as of January ’09.

The new calculation is as follows:

Given this, let’s look at example.  If you have a $100,000 profit from the sale of your home and you’ve lived in the home for 2 of the last 5 years, your Capital Gains Exclusion is $40,000.   Your taxable gain is $60,000.

Currently, the federal tax on capital gains is 15% (but watch the coming election; that may very well change).  So for the example, it would be $9,000.  California currently will tax the gain as ordinary income adding another $3600 to $4200 on top of this.  What would have been a $0 tax liability, is now a $12,600 to $13,200 tax liability under the new provision.  I’m not loving this relief plan just yet. 

(Heads up:  Please consult a tax advisor for calculations of Capital Gains and Income Tax.  I am not an Accountant.)

For those homeowners in California, owners of Orange County real estate specifically, this is a conservative calculation.  There are many of us that have lived in our homes for enough time that there is sizable gain, even with the price declines we’ve seen.  $100,000 may be a conservative gain for many.

For additional explanation on the Capital Gains side of the bill you can go to see Brad Nix’s site, or even better, take a look at the bill.  I’m always interested in your feedback.  Maybe someone will come up with something I haven’t appreciated yet.

Oh, oops, one thing I do like (it’s not perfect but I’m satisfied), the conforming loan limit although reduced from $725,000, has been permanently placed at $625,500.  We needed that 2 years ago, but thank you.

As for the relief, I don’t think this will bring it.  Unfortunately, this is a market cycle – albeit a tough one.  Let it runs its course.  I’m not sure this is the kind of help we needed.

Unfortunately, the numbers are likely to get worse before they get better.  The nice pick up in the market that we saw in May and June(characteristic of some summer buying activity) had some wondering if the bottom was in sight.  But July’s Indymac crisis brought showing activity to a near stand still.  New escrows have dropped dramatically and we may have seen the summer buying activity come to an early end.

The road is likely going to continue to be rocky for sellers in the coming months.  With the election fast approaching, past election years have shown us that buyers like to take a wait-and-see approach to the real estate market. 

Aren’t I just full of good news on this Monday morning!

I’m not sure the philosophy ought to be much different in the housing market.  Yet the fear, the challenge in the financial markets, and the negative remarks from friends and family is keeping buyers out of the market.  But how long do you wait on the sidelines?

May 29th, Jonathon Lanser had an interesting article in his blog about the 15.4% decline we’ve seen and that a recovery may not be until 2010.  Clearly not good news. 

The worst of the decline may very well be behind us – but the recovery is not here yet.  Maybe this is the window of opportunity.  Michael Carney, the Cal Poly Pomona professor who heads the Real Estate Research Council of Southern California said, ”Once we get people thinking prices will go back up, we will see a fast turn. There’s a lot of money ready to go.”

It may not make sense to wait for the ‘good news’ that prices are rising again and if Carney is right, how quick can you get in on that ‘fast return’?

Today, both sellers, buyers, and definitely Realtors are very clear about Short Sales.  It impacts everyone, at every level of the process.  And in truth, the poor, reactive approach the banks are taking to this epidemic problem is really only hurting them, and consumers, here in Orange County and across the country.

To truly understand all the implications here, it’s important to understand the process.  Please note, this varies from bank-to-bank and there are currently no industry standards to the process.

• Seller determines they are in a Short Sale position and must sell.
• Sellers apply for a Hardship Package from the bank.  A consumer can complete the package verifying they have suffered a hardship (loss of job, divorce, illness) and can no longer make the payment.  They also must show they do not have other assests to cover the shortage.
• The package is submitted to the bank.  Here is where the problem lies.  Banks likely will not even consider the Hardship Request until a seller supplies them with an offer.  And this is where I think the banks are really hurting themselves and consumers.  Lets talk about that…..

If you are a seller and have been told that your hardship package won’t be looked at until you bring an offer with it to present it to the bank, what do you do?  It’s often at this point that agents are brought into the matter. 

As an agent, you have a seller in distress, possibly in foreclosure, and in need of a quick sale.  What will the bank take?  No one knows.  Will they approve the hardship?  Maybe, maybe not.  Precarious and odd position to be in as an agent.  Where do you price the home to get a quick sale?

 Let me give a hypothetical, but not unrealistic circumstance.  For this example let’s assume the following:

Home’s Value Based on Recent Sales:  $500,000

Amount Owed:  $575,000

Closing Costs:  $35,000 (may include unpaid taxes and HOA dues)

# of competing homes on the market: 25

Now – an agent knows that getting Agents to show their Short Sale Listing will be difficult.  Why? 

1. Some of these agents have been working with these buyers for months or more.  They know the short sale process sets up their clients for heartbreak and delays a successful transaction.  In addition, Agents commissions are often severely cut.  While the brokerage fee may say 3%, it may actually be only 2% or less. 
2.  The bank may take weeks to respond.
3. There are likely multiple offers due to the low price (we’ll get to this)
4. A hardship may never be approved in the first place.
5. Their impatient buyer will still be looking in the meantime and possibly want to move on to something ‘better’ making this sale an exercise in futility.

So how does an agent attract showings to their Short Sale Listing?  A low price!  It looks like the best deal in town.  In our example a $425,000 list price wouldn’t be unrealistic.  The seller doesn’t care where it’s priced anymore.  The bank has given no guideline.  The agent has to generate offers to submit to the bank for consideration of that Hardship Request.

Time is of the essence in these situations.  Pricing it agressively, they will get many offers of anxious buyers looking for a deal and NOW they have the offers to submit to the bank so that they will consider the seller’s hardship.

In the meantime, traditional sellers and other bankowned homes are forced to compete with the short sale.  In all likelihood, the bank will never approve the sale at that price but at least you get the hardship approved and you can reenter the market at a bank approved price of, in our example, $475,000.  In the meantime, traditional sellers have been competing with $425,000.

The implications:

1. Listings remain in ‘Active’ status while waiting for the bank approval.  They aren’t really ‘Active’ but meanwhile it misrepresents the inventory to be higher than it is.
2. Traditional sellers are competeing with lower and lower prices that may not every even sell at that price.
3. Banks create their own comps for future Short Sales, Foreclosures and Bank Owned inventory.
4. Buyer demand is pent up while they wait for the word from the bank.

Why don’t banks take a proactive approach?  Review hardship requests first.  Reach out to delinquent sellers and disuss Short Sale options.  Establish an approved Short Sale Price before the home ever enters the marketplace! 

This type of strategy would serve their own interest, the sellers they are servicing, the buyers they are hoping to sell to, and the agents working in the industry.  Reactive is not working!  It’s driving prices down, misrepresenting inventory, and impacting consumer expectionations and results.  It’s a no win for anyone.