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.

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Sean Egan, considered to be one of 6 Wall Street experts that ‘predicted the fall of the financial giants’ says that the housing market is incapable of a recovery until we ‘clear out the garbage’.  I couldn’t agree more – and this point always takes me back to the same frustration.  If there were real solutions in how banks were processing the glut of short sale inventory, we could expedite the cleanup and expedite the recovery.  Unfortunately, that is not happening.

One portion of the ’60 Minutes’ piece that had me roll my eyes just a bit was the acupuncturist – turned real estate investor that was supposedly clueless about those Option ARM loans she used on her multiple investments.  She was putting 20% down, but didn’t ask questions about the loans she was using.  Why?  She was busy. “Busy looking at properties.  All day.  All the time.” Give me a break.

The arguments were a bit one sided and accomplished what the media loves to do – speak to people’s fears.  Consumer confidence is a facet of recovery and  pieces like this don’t help.

That being said, there is no denying another wave is coming.  If the Alt-A and Option ARMs are with folks like our acupuncturist friend, then clearly there is reason for concern, but I believe that there are a good deal of folks who understood their loans and investments.  Maybe I’m wrong.  Time will tell. I also think there are a good deal of these folks who will likely refinance these notes given the current low interest rates.

Mr. Egan cites the NAR stats of record supply.  That’s a statistic that you must evaluate locally.  Steven Thomas, President of Altera Properties, noted recently on his blog that demand in ’07 was ’51% less than it is today’.  Mr. Thomas goes on to state, “Last year the inventory was at 16,128 homes, 3,740 additional homes compared to today, 30% higher.  Two years ago the inventory was at 12,661, 273 additional homes compared to today.”

As we have mentioned here, in the lower price points we are seeing significant movement and dramatically less inventory.  The upper price points are not enjoying those bits of good news.

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.

So what is a ‘good deal’?  Let’s examine the potential opportunities.  There are 3 types of listings that are predominately found in the active market today:

1. Short Sales
2. Bank Owned (or REO’s)
3. Traditional Sellers

Short Sales: A short sale is a listing in which the seller currently owes more than the home is worth in today’s market.  I have discussed the process of a short sale in other locations on this blog.  Do your homework here if you are interested in this type of purchase.  It is a process that will take time and not every short sale will actual sell.  Some seller’s don’t have a legitimate hardship (required for a bank to approve their short sale).  Some will go into foreclosure after weeks of tying up a buyer(s) hoping to buy that home.

Is this a good deal?  Maybe.  Remember, they are usually priced very low to attract offers.  A bank won’t even consider a seller’s hardship until they have an offer.  This may mean that the home is priced far below what the bank may ultimately take.  And if the home is in disrepair, you’ll need to add the cost of repairs into your calculation.  A short sale will take time, patience, and a little luck.  I have seen some ‘good deals’ here but you’ll need to go into the process with ‘eyes wide open’.

Watch for rising interest rates in the meantime.  This can impact your affordability.  Also, watch the market.  What may seem like a ‘good deal’ now, may not seem so great in 4 months when the short sale has been approved if the neighborhood values continue to decline.

Bank Owned or REO’s: This is generally some of the most aggressively priced inventory on the market in Orange and Riverside Counties.  The banks don’t want to carry the inventory and they are priced to move.   The decline in prices have reached a level that has become affordable again for the first time buyer and appealing to the investors.

Steven Thomas, President of Re/Max Real Estate Services recently said in his Market Time Report, “For those looking to find a great “deal” by offering to purchase a property far below the asking price of a distressed home, good luck.  Your chances are much greater in winning the California lottery….The sales to list price ratio, how close a home is sold compared to the asking price, is between 99% and 100% depending upon the price range.“  He continues to make the point that the way that they are priced is already a deal.

After recently working with a buyer on the purchase of a single family home, we consistently found ourselves in multiple offers on bank owned homes – and not just 2 or 3 offers.  Often times there were 10 + offers in place within 48 hours of listing.  Who was awarded the purchase of those homes?  Cash is king here my friends.  Those with cash down, few contingencies, solid credit, and a strong offering price came away with the home.

Traditional Sellers: Some parts of the market are moving more slowly than others.  The bulk of the distress sales, 93% according to Steven Thomas, are under the $750,00 price point and subsequently there is a great deal of pressure on prices in those lower price points.

Are there good deals with traditional sellers?  The short answer – Yes!  Most people that are listing their homes today understand that it is clearly a buyers’ market in Orange County.  They generally know that it won’t be easy and those that are motivated to sell, are pricing their homes to compete with the inventory.  And often times that inventory consists of short sales and banked owned homes, especially in the price points under $750,000.

The bonus on many of these, there still is pride of ownership.  Is a bank owned home still a good buy if there is $50,000 in cosmetic or structural repairs?  Maybe, but maybe not.

The Bottom Line: Seriously consider the potential for a great value from a realistic, traditional seller.  You’ll have the benefit of full disclosure from the seller (which you don’t have in bank owned homes), you’ll have the opportunity to request repairs, you won’t be competing with the buyers that are focused on – “I want to buy a foreclosure’, and you won’t be dealing with the unknowns and long waits of the short sale process.

If you find the great deal you’ve dreamt about in a short sale or bank owned, by all means, go for it.   But be an educated buyer and understand the process and expenses when determining if you really have a good deal!