Monday Morning Coffee – Post tax credit

Good morning,

Hope you all had a great weekend.  We slowed down a bit this weekend after a crazy last week trying to help sellers and buyers take advantage of the expiring federal tax credit.  Most people in the industry we talked to were seeing the same thing we were – and all are hoping it continues into the summer. 

I took a quick look at the numbers for San Diego in April, and though I have not had time to blog on the results, here are the highlights:

• 2939 homes sold (this will rise a bit as agents finish reporting).  This is up 9% from last year and overall we are up about 2% year-to-date over last year. 
• 10,534 homes on the market at the end of the month.  This is the highest it has been since the low number of 8200 last October, but is still 24% below last April.
• Active numbers are seriously skewed right now as last May, short sales were considered Active if the bank was looking at offers and this year there is the classification of Contingent for those homes.  If you add the Active and Contingent homes together, there are about 8% more homes on the market this year than last year.
• The market has been severely skewed by the tax credit.  Under $800k, there are 3.3 months of inventory on the market in San Diego.  Over $800k (where buyers have not been motivated to purchase by a $6,500 tax credit) the inventory in San Diego is over 13 months.

I think the tax credit was a very large issue in driving the lower end of the market, but the lack of availability of jumbo loans was also a factor.  While the expiring tax credit will likely slow down sales at the lower end of the market, the increasing availability of jumbo loans will help the top end pick up a bit.  I expect (which means it won’t happen) is that by the end of the summer we will see the low end at about 5-6 months inventory and the highend at about 9-10 months of inventory.

Speaking of the high end, take a look at this gorgeous home we have in the Silver Saddle area of North Poway.  4 Beds, 3,600 sf with a pool and absolutely stunning sunset views.  It is also a great entertaining home that can easily handle 100 guests on a nice summer day.

That’s it for this week.  The coffee is a little different this week – and appologies to those of you who thought last week’s was not uplifting.  My intention was that it showed to value what you have because there is no guarantee your loved ones will be there tomorrow.  A couple of people thought it was too depressing – sorry, it wasn’t meant to bum you out.  This week is more of a look at a the humanity that can come out of the most inhumane situations we face and that compassion in any place is an amazing healer:

  ANOTHER WINNER OF THE NOBEL PEACE PRIZE

 

John Gebhardt’s wife, Mindy, said that this little girl’s entire family was executed. The insurgents intended to execute the little girl also, and shot her in the head…but they failed to kill her. She was cared for in John’s hospital and is healing up, but continues to cry and moan. The nurses said John is the only one who seems to calm her down, so John has spent the last four nights holding her while they both slept in that chair. The girl is coming along with her healing.

 James Gates U. S. Navy

Have a great week!

Scott Voak

858 688 0189

San Diego Home Sales – March Numbers

San Diego Resale Activity

March, 2010

An early look at San Diego home sales for March shows sales almost even with last year (2664 in 2010 vs 2717 in 2009).  As 2010 numbers are preliminary, I expect that by the time all San Diego Real Estate agents convert their escrows to solds, the 2010 number will by higher than 2009 by a small number. 

The number of homes actively offered for sale in San Diego at the end of March fell by 37% when compared to a year ago.  This number has been consistent all quarter but will shrink dramatically next month and then swing positive in May as we are entering the period where the inventory had it’s large contraction last year.    Current inventory is sitting at 10,011 homes (up from 9,584 in February).  

Homes in escrow are almost identical to last year and about 8% above February. 

I would expect that this month we will see closings in the 2700-2900 range, above last year as buyers rush to take advantage of the dual state and federal tax credits before the federal credit expires at the end of the month.  Because the $8,000 federal credit is good for buyers who are in escrow by April 30th, I expect the number of homes in escrow to rise as we are seeing multiple offers on all reasonably priced listings under $650k.   I believe the overall result will be solid sales and prices in April and May with some softening into the summer (when compared to historical numbers – June may have more sales than April, but not as many more as is typical)

February San Diego Sales Numbers

February San Diego Home Sales

Looking at February sales numbers, there were 2059 homes sold (includes all types and relies on the hope that agents have listed homes sold as “sold” in mls). This is an 8% reduction from last year and combined with January’s 10% reduction, puts us about 400 homes behind last year at this time. The trend is likely to continue, as there are also fewer homes in escrow than there were last year.
The slower pace of sales is more than offset by the lower number of listings (37%) than we had at this time last year. This makes sense as inventory really started to dive last year in April as the banks were actively holding off the foreclosure process. Inventory was down at the end of February compared to the end of January by about 5% (550 homes), but there is already an additional 400 homes on the market on the 6th of March.
The graph below shows the last 6 years activity (I’m going to have to go to a quarterly graph soon)

San Diego Home Sales (MLS)

A couple of interesting points to see when it is graphed out like this:

1. Sales volume (demand) has remained fairly consistent since late 2006 with the exception of the specific issues we had in the mortage markets in September of 07 and November of 08. 
2. The increase in March 09 was when the Fed started purchasing mortgages (which is supposed to end this month).
3. The drop in sales in January (last month) can be attributed to two factors:  First, there were a lot of closing in October and November as people were trying to beat the expected expiration of the tax credit (which is now been pushed to April contract/June close).  Second, new mortgage rules have stretched out closings past the normal 30 days.  You can see this in the fact that at the same time closings have fallen, homes in escrow increased – the activity is there, the government just put a kink in the hose with all the new regulations.  I expect we will see a strong March in terms of closings as these homes work their way through escrow.

An interesting chart to look at takes a look at inventory levels over the last several years.  For the chart below, I am measuring inventory of San Diego homes differently than others do.  I am including all homes that are Active on the market, plus those that are Pending and Contingent.  The reason for this is twofold:  The Contingent designation is relatively new.  In the past, these homes might have been included in Active or Pending, so there would be errors either before or after the Contingent designation was created if I did not capture all the activity.  Also, there are buyers with offers on multiple shortsale homes and they aren’t going to close on more than one of them.  Showing all the homes that are available and in some stage of closing vs those that close each month helps mitigate this factor. 

San Diego Home Sales - Inventory Levels

Note: Inventory is calculated using a 12 month average of sales.

At first look, the graph doesn’t provide much interesting information.  But when you look at the % change in inventory, you can see that it started to rise in the second half of last year.  While this is akin to saying “things are getting better because we are losing fewer jobs every month,” it is a start of a change.  It shows that inventory is reaching an equilibrium on its own and the creates the possibilty that when the stimulus and tax credit expire, we may see inventory start to climb on its own – with or without the banks releaseing foreclosures.

Monday Morning Coffee – What happens when the Fed stops buying Mortgages?

Monday Morning Coffee

What Happens when the Fed stops buying MSBE’s?

Januray 17, 2010

Good morning,

I hope you had a great weekend.  We were very busy as we had 18 friends over for dinner on Friday night and went to the San Diego Association of Realtors Installation Dinner where our friend Mark Marquez was installed as President on Saturday night.  So now, it is a race for bed!

Updated my blog earlier today with a post on what is going to happen when the Fed stops buying MSBEs in March.  The short version is that the market will slow, interest rates will rise and they will step in again to resume purchases, but on a smaller scale with rates up about 1% over the year.  The long version is here.

We have a new couple of new homes this week, but due to lingering issues with the office move, I do not have single property sites up for them yet.  Both are short sales:

Palomino Plan 3 in 4S – 4550sf 6 bedroom home with a 4 car garage on a very large lot.  It is priced at $900k.  We have offers on this and will probably be off the market early in the week.

Canyon Ridge Plan 2 in 4S – 3600+ sf 4 bedroom home with an loft and an office over the garage.  This is also a large lot and has a pool (but there is an issue with underground water that needs to be dealt with or at least acknowledged).  There are no showings on this until next weekend when we will have an open house (owners are packing).  It is priced at $800k.

That’s it – I will have single property sites for them next week.

Enjoy the Coffee!

This week I am revisiting a story I posted last year for an update.  It’s the one about the autistic basketball player and hits home for Cori and I as Zach’s Fragile-X puts him on the autistism spectum.  As he is getting older, his issues are becoming more pronounced and we gain more respect every day for both our own son and other families that navigate the world of autism/Fragile-X every day.  He is almost 4, and although I prefer he take up soccer to basketball (due to my own limited skills), any way he can have a moment like this would be worth it.  Videos like this are a great source of hope for parents who have handicapped children.

Have a Great Week!

Scott

What Happens When the Music Stops – Interest Rates?

The current real estate market has been a nice surprise (if you aren’t surprised, you weren’t paying attention this time last year).  However, is it going to last and what happens if it doesn’t?  I think there are two factors to loook at.  Back in August or September I wrote that the administration and Congress were likely to extend the First Time Home Buyer Tax Credit to try and help the economy going until they were able to at least get healthcare passed (see posts from that time frame for the full logic).  Surprise!  In October, it was announced that not only was the credit being extended through the first quarter, but it was broadened to include more people.  Plus, the Fed was to continue buying MBSEs through March.  These actions (the Tax Credit and Fed purchases of MBSEs) are largely responsible for the current recovery.  Each of them is working on different factors that are driving the market.  In this post, I am going to talk about Mortgage Backed Securities (MBSE) and the effect they are having on interet rates.

 MSBEs were a major contributor to the mortgage meltdown.  When a bank makes a lot of mortgage loans, the package them up and sell them as a “pool” of mortgages.  This pool may be worth $200-$500M.  By securitizing the pool, it can be split into many pieces.  The idea was that this allowed investors to buy a piece of a lot of mortgages rather than all of a single mortgage. 

 The thought was that this limits risk.  After all, one homeowner might lose his job and go into foreclosure, so by putting his mortgage in with 200 others, it lessened the blow.  Since this made investing in mortgages a “very low risk investment”,  hedge funds and other aggressive investors would buy MSBEs using 10% of their own money and then borrow 90% from banks making a spread.  If you are interested in the math, read the next section, otherwise jump ahead:

• Hedge Fund invests $10M of its own money and borrows $90M at 4% (paying $3.6M in interest a year)
• Same Hedge Fund uses the $100M to buy MSBEs paying 5% or $5M a year in interest.
• After paying the interest, the Hedge Fund made $1.4M a year but only invested $10M
• 14% Return.  That’s leverage. 

Making 14% in what is supposed to be a risk free investment is unheard of.  So, they demanded more mortgages and to make them available, the banks had to relax standards.  Instead of 20% down, a good income and good credit, nothing down with decent credit and your word that you had a job was good enough.  Nobody figured that making $700k loans to people with a fake income was going to be a problem.  And, since the loans were so easy to get, everybody got a house or three, driving the market up insanely. 

When the market collapsed, the Hedge Fund above couldn’t make its payment on the $3.4M because the borrower with fake income couldn’t pay his mortgage.  All of a sudden, the banks realized that the 90% they had loaned the Hedge Fund was gone (bye bye Shearson) and the companies that insured these MSBEs had issues too (bailout for AIG). 

For our discussion here, the important point is that this frenzied investing in MSBEs drove the availability of money up and therefore allowed home prices to go up to a point we had a bubble.  When the bubble popped, nobody wanted to buy MSBEs anymore.  Not to mention, that the banks didn’t know (and still don’t know) how much of their money was gone – since the loans are securitized, everyone owns a piece of the mortgage and nobody can really tell which ones are good and which ones are bad. This is when the entire world credit market frooze and the Fed had to inject large amounts of money into the system.

One of the things they did was to steop in and announce they would buy a few mortgages (currently about $14B a week).  Well, with the Fed guaranteed to buy this many loans, banks have been willing to write the loans again.  AND, since the Fed is using your and my tax dollars, they don’t care too much about the return them make, so the loans are at a very low interest rate.  (When you hear that the Fed is subsidizing interest rates, this is what it means).

Here’s the problem.  The Fed is going to stop buying these mortgages at the end of March and someone else will have to step in. 

Now, think real hard.  How many foreign countries can you think of that have a lot of excess cash?  Really rich people that would jump at a 5% return?  Not many.  To get people other than the US Government to buy these mortgages, the return on them will have to go up.  Which means the interest you and I pay for a mortage is going to go up.  How much?  Well, if you were sitting on $100M to $200M, what kind of return would you want?  Before you answer, consider also that investors want a higher return if the risk is high.  After all, if you might lose your money, you want to make more on it than if you know it is safe. 

How risky are mortgages?  Well, consider what the administration is doing to help people with these loans.  They are “encouraging” the banks to reduce the principal and interest rates.  Sounds great for you and me, but it is basically telling the investor, “Listen, I know you were promised 5% but it just isn’t going to happen.  We want you to drop your return and, by the way, reduce the amount you are going to get paid back by 20% (principle reduction).  So you are going to lose money rather than make money.”  Since this has happened before, you would be stupid (and probably wouldn’t have $100M lieing around) if you didn’t think it could happen again.  Since you know that this could happen, would you invest in the mortgages for a 5% return?  How about 6%?  7%?  Me either.  Not a lot of people are going to be lining up to purchase these mortgages.  Which means rates will have to go up significantly. 

In my converstations with Pwastim (People Who Are Smarter Than I Am), he says that the market is expecting rates to go up between .5% and 2% in 2010.  Ouch.   Here’s the other problem.  Even if rates go up, I think it will be hard to find $14B a week of investor money.  This means that banks will raise rates AND make fewer loans. 

What does this mean.  Basically that this was a very long explanation for the following recommendation:

If you have a mortgage or are buying a home.  Get a 30-year fixed and pay the points to buy down the interest rate.  You will not see interest rates like this for another 5-15 years if ever.  Plus, in another post I will talk about inflation and why you will look REALLY SMART in 5 years if you do this now.

First Time Buyer's Tax Credit Extension – The Good and the Bad

Now that the tax credit has been extended and the details of the extension are out (I know, I should have posted this last week, but hey, I have to work too) I think there are a couple of things about the extension that are worth noting both for the short term and the long term.

In the short term, I think we will see an increase in activity in the $650k – $800k price range.  Prior to the extension, a couple became ineligible for the credit if their joint income was over $150k or if they had owned a home in the last two years.  The extension removes the limitation on not owning a home within the past 2 years, but more important (speaking in terms of the San Diego market where prices are higher than they are on a national level) is the increase in income levels.  Over the past six months, we have seen prices of homes (focusing on North County) that are under $600k increase about 4-5% while homes above that level have come down 2-3%.  I believe that this is a result of the tax credit and that the gains will now also be seen in homes from $600k to $800k.  This will help move some of that inventory over the first quarter and hopefully stabilize prices.

In the long term, I think that the program is similar to most of what the government is doing – pushing today’s problems into tomorrow.  NAR estimated that 40% of all home purchases have taken advantage of the tax credit.  That most likely means that people who are on the fence or who have to stretch to qualify, are doing what they can to buy now rather than wait a year.  The problem with that is that in a year we are expecting more foreclosures to hit the market as the Pay Option Arms (Pik-A-Payment Loans) reset in large numbers and we start to see the fallout of failed loan mods done over the last year.  So right as we are seeing an increase in inventory, we will have a shortage of buyers because a large number of them took advantage of the tax credit and purchased early.

So what?  Who cares if the price moves up now or later?  Well, I think it would be better for the market to have it be level to slightly down for two years and build a stable base rather than go up 5-6% to create a feeling that we are recovering only to have it fall back again a year later.  The first helps build stability (although not a happy stability) while the second shakes people’s confidence further.   It’s like the Cash for Clunkers program.  It produced great 2nd quarter numbers for the auto industry.  It was a short term fix that politicians could point to and say, “See, we know what to do.  Trust us to …”  Problem is, auto industry numbers going forward are going to be worse because the people who traded in their clunkers in the second quarter won’t be purchasing again.

So although the tax credit makes things look better and makes us feel better short term, it’s more like a drug fix than a solution.  There’s nothing in the bill that will help build a healthy economy and help with the housing recovery unless Congress continues to extend it indefinitely.

Monday Morning Coffee -

Monday Morning Coffee – Tax Credit Extended

November 2, 2009

Good morning,

I hope you had a great weekend.  Just a couple of quick notes – a few weeks ago I mentioned that I thought the government would extend the first time home buyer’s tax credit in an attempt to keep the economy rolling so they can keep their agenda moving.  I also said it wouldn’t be done until late October or early November.  This time, I was right on both counts as it was passed by the Senate last week and is expected to get Obama’s signature this week. 
Don’t know if you caught this on the news, but this guy had the market pegged.  Cori said he’s pretty good looking too.

We accepted an offer on one of our silent short sales in 4S, but still have a very nice condo in Torrey Highlands (3 beds, 2,000 sf with about 400sf of additional storage off the garage that is not included in the sf).  If you are interested, please let me know.

We also will have a short sale in 4S listed this week.  4 beds, 2344sf in Garden Walk.  Let me know if you would like an early peak at it.

Enjoy the Coffee!

How To Love Yourself

Stop All Criticism – Criticism never changes a thing. Refuse to criticize yourself. Accept yourself exactly as you are. Everybody changes. When you criticize yourself, your changes are negative. When you approve of yourself, your changes are positive.

Don’t Scare Yourself – Stop terrorizing yourself with your thoughts. It’s a dreadful way to live. Find a mental image that gives you pleasure (mine is yellow roses), and immediately switch your scary thought to a pleasure thought.

Be Gentle And Kind And Patient – Be gentle with yourself. Be kind to yourself. Be patient with yourself as you learn the new ways of thinking. Treat yourself as you would someone you really loved.

Be Kind To Your Mind – Self hatred is only hating your own thoughts. Don’t hate yourself for having the thoughts. Gently change your thoughts.

Praise Yourself – Criticism breaks down the inner spirit. Praise builds it up. Praise yourself as much as you can. Tell yourself how well you are doing with every little thing.

Support Yourself – Find ways to support yourself. Reach out to friends and allow them to help you. It is being strong to ask for help when you need it.

Be Loving To Your Negatives – Acknowledge that you created them to fulfill a need. Now, you are finding new, positive ways to fulfill those needs. So, lovingly release the old negative patterns.

Take Care Of Your Body – Learn about nutrition. What kind of fuel does your body need to have optimum energy and vitality? Learn about exercise. What kind of exercise can you enjoy? Cherish and revere the temple you live in.

Mirror Work – Look into your eyes often. Express this growing sense of love you have for yourself. Forgive yourself looking into the mirror. Talk to your parents looking into the mirror. Forgive them too. At least once a day say: “I love you, I really love you.”

Love Yourself .. Do It Now – Don’t wait until you get well, or lose the weight, or get the new job, or the new relationship. Begin now — and do the best you can.

– Louise L. Hay Educational Institute

Have a Great Week!

Scott Voak

858 688 0189

Monday Morning Coffee – Silent Short Sale

Monday Morning Coffee

Good morning!

 I hope you had a nice weekend.  Ours was busy as we mixed family time in with a lot of showings and appointments.  The market is staying heated with buyers trying to beat the expiration of the tax credit (which will be extended).  I wanted to address two items before we get to the Coffee this week:

Last week, I talked about a new Loan Re-Write program as an option to foreclosure.  This week, I want to talk about another option.  Many people are turning to a short sale to help lessen the impact on their credit and allow them back into the market in two years (instead of five with a foreclosure).  The problem with a short sale, is that they can take a long time and your home is advertised as a short sale so all your neighbors know you are going through the foreclosure process.  Furthermore, most agents are using a strategy of pricing the home low to drive traffic – which is not only very disruptive to a family, but often results in an offer too low for the bank to take seriously.  So, the house gets opened back up for another parade of showings.  Only this time, it has been on the market for 90 days and buyers start to think there is something wrong with the house or that it is going to be too hard to get closed.  We have come up wi th a better way (for the homeowner) to do a short sale.  We are going to call it the Silent Short Sale.  If you or someone you know are considering a short sale, please check in with me prior to starting an overly disruptive process that can be done much more effectively.

 Quickly looking at September’s numbers shows a continuation of the trend we have been seeing.  Inventory is down considerably over last year and continues to fall a little every month.  Closings are up a couple of points over last year and look to be fairly even with August.  I expect October to stay strong and then November to start to tail off for the holidays.

 We will be putting one new home on the market this week.  It is a 3 bedroom 2,344 sf home in the Cedar Creek development at 4S Ranch.  It is a very nice home and Cedar Creek has some of the lowest Mello-Roos in 4S.  It will be priced in the low $600k range and I will have photos for you next week.  If you want an early peak, let me know.

 That’s it for this week – Enjoy the Coffee!

ATTITUDE IS EVERYTHING

 By Francie Baltazar-Schwartz

 Jerry was the kind of guy you love to hate. He was always in a good mood and always had something positive to say. When someone would ask him how he was doing, he would reply, “If I were any better, I would be twins!”

 He was a unique manager because he had several waiters who had followed him around from restaurant to restaurant. The reason the waiters followed Jerry was because of his attitude. He was a natural motivator. If an employee was having a bad day, Jerry was there telling the employee how to look on the positive side of the situation.

 Seeing this style really made me curious, so one day I went up to Jerry and asked him, “I don’t get it! You can’t be a positive person all of the time. How do you do it?”

 Jerry replied, “Each morning I wake up and say to myself, ‘Jerry, you have two choices today. You can choose to be in a good mood or you can choose to be in a bad mood.’ I choose to be in a good mood. Each time something bad happens, I can choose to be a victim or I can choose to learn from it. I choose to learn from it. Every time someone comes to me complaining, I can choose to accept their complaining or I can point out the positive side of life. I choose the positive side of life.”

 ”Yeah, right, it’s not that easy,” I protested.

 ”Yes, it is,” Jerry said. “Life is all about choices. When you cut way all the junk, every situation is a choice. You choose how you react to situations. You choose how people will affect your mood. You choose to be in a good mood or bad mood. The bottom line: It’s your choice how you live life.”

 I reflected on what Jerry said. Soon thereafter, I left the restaurant industry to start my own business. We lost touch, but I often thought about him when I made a choice about life instead of reacting to it.

 Several years later, I heard that Jerry did something you are never supposed to do in a restaurant business: he left the back door open one morning and was held up at gunpoint by three armed robbers. While trying to open the safe, his hand, shaking from nervousness, slipped off the combination. The robbers panicked and shot him. Luckily, Jerry was found relatively quickly and rushed to the local trauma center.

 After 18 hours of surgery and weeks of intensive care, Jerry was released from the hospital with fragments of the bullets still in his body.

 I saw Jerry about six months after the accident. When I asked him how he was, he replied, “If I were any better, I’d be twins. Wanna see my scars?”

 I declined to see his wounds, but did ask him what had gone through his mind as the robbery took place. “The first thing that went through my mind was that I should have locked the back door,” Jerry replied. “Then, as I lay on the floor, I remembered that I had two choices: I could choose to live, or I could choose to die. I chose to live.”

 ”Weren’t you scared? Did you lose consciousness?” I asked.

 Jerry continued, “The paramedics were great. They kept telling me I was going to be fine. But when they wheeled me into the emergency room and I saw the expressions on the faces of the doctors and nurses, I got really scared. In their eyes, I read, ‘He’s a dead man.’

 ”I knew I needed to take action.”

 ”What did you do?” I asked.

 ”Well, there was a big, burly nurse shouting questions at me,” said Jerry. “She asked if I was allergic to anything. ‘Yes,’ I replied. The doctors and nurses stopped working as they waited for my reply. I took a deep breathe and yelled, ‘Bullets!’ Over their laughter, I told them. ‘I am choosing to live. Operate on me as if I am alive, not dead.”

 Jerry lived thanks to the skill of his doctors, but also because of his amazing attitude. I learned from him that every day we have the choice to live fully. Attitude, after all, is everything.

 Have a Great Week!

Scott

A Tale of Two Markets

It was the best of times, it was the worst of times.  Ok, I couldn’t resist.    Ever since I told my investor clients to get out of the market in May of 2005, I have pointed to the end of this year as being the bottom for San Diego housing prices.  I felt really good about that until the end of last year when Fannie Mae put a moratorium on foreclosure activity.  I thought that could delay the bottom of the market to the end of 2010.  Now, all the news we hear has a positive spin and has made me wonder if I was wrong then or if I am wrong now.  There are a couple of sectors of this market that are sending mixed signals and need a little digging into to understand.
First, homes priced under $700k have been selling like crazy with multiple offers while the higher priced homes are not moving nearly as quickly.  In fact, two of the last three homes we have sold around $700k have received offers for more than we were able to get the home appraised for.
Second, while the press is reporting that the end of the recession is near, banks are telling us to get ready for a large wave of foreclosures that should start in the next month.  This second wave could be enough to send the market back into a dive.  In truth, we are starting to see a few, but nowhere near a significant number.  To try and figure it out, I spent some time going through some numbers.
First of all, as many of you know, I do not like the statistic of the Average, or Median, Sales Price (rather than go into detail, if you scroll through the posts for an entry titled The Problem with the Median Price, you will get the idea), so I am not going to talk about specifically about price levels.  But, I will look at a couple of other interesting statistics.  First of all, let’s look at the inventory of homes for sale over the last year and a half.

This chart shows we have gone from a high of almost a year of inventory down to just four months of inventory in one year (inventory is calculated as total homes on the market divided by homes sold in previous 12 months times 12).  That is a very remarkable reduction in inventory and shows that in fact the market may be turning around.  However, four months of inventory is not the level at which we should see multiple offers and homes selling over appraisal, that happens when inventory is under two or three months.  So, I wanted to see if the inventory levels were similar across all price ranges.  Guess what?  It’s not.

This data is as of June, 5, 2009 from the SANDICOR MLS.  A couple of things to note.  First of all, below $600k inventory is severely constrained.  In fact, if you look at the numbers in red, there are more homes in escrow under $600k than there are on the market – hence the frantic pace of offers we are seeing below that price level.  However, look at homes over $1M and you can measure inventory in Years not Months.   There are simple and complex reasons for this.  The simple is that there are still loans available with 3.5% down up to FHA limits while at higher price points, you need to have 20% down.  The complex reasons require a different forum and someone a little more advanced in global economics.  So, while interest rates may not be as low as they have been, the fact that at lower price levels money is still available is helping those homes sell.

Next I wanted to see if the inventory drop is due more because people are buying more houses or there are fewer houses for sale.  The news reports will have us believe that it is because more people are buying houses.  Let’s look.

First, notice that the home sales have been fairly steady over the last 12 months with the exception of the holiday period.  The reports of increase sales for the past few months have been because of the drop you see from September 2007 to May of 2008 when the mortgage crises first hit.  The Real Estate industry reports sales compared to a the same period 12 months previous, and since sales were so low a year ago, sales now are reported as high despite being farily normal.  This chart clearly shows that the drop in inventory the last year is not due to increasing demand, but from a supply that has gone from 20,000 homes to 10,000 homes for sale in about seven months.  So, the recent reduction in inventory (as measured by homes-for-sale divided by sales-per-month) is because there are fewer homes for sale, not because there are more homes being sold (within the last twelve months).

So, why are there fewer homes for sale?  With more research – and a guess or two, I came up with three reasons.  First of all, there are typically three sources of home sales:

1. Individuals selling their homes.
2. Builders selling homes.
3. Banks selling foreclosures.

The number of individuals selling their homes has been the largest segment of San Diego’s home sales (at least as measured by the MLS data above) over the past several years.   However, with values down significantly, people are not selling unless they need to due to job loss, bad loans, job transfer, divorce, etc.  In fact, almost 50% of the homes for sale by individuals are short sales right now, showing that it is truly “need based”.  I do not expect the number of sales by individuals to rise that significantly until values rise again – people are staying put, and unless the number of short sales increases or prices rise significantly, I do not expect that substantial additional inventory will come from individuals selling their homes (there will be a seasonal rise due to summer, but nothing that will have a long term effect on the market).

Builders represent a substantial part of the market that goes untracked by the MLS.  It is pretty easy to tell that builders have dramatically slowed down their construction and sales.  Builders are releasing and selling homes on the order of 2-3 a month per project rather than 2-3 a week (those that have not closed down completetly).   I have spoken with a couple of builders in the last week, and they are seeing the same increase the rest of the market is.  The issue with builders is that from the time they decide to ramp up production, the first homes hit the market in 7-10 months.  So, even though they will start to increase production, we will not likely see the homes available before the first of next year.

That takes us to the banks selling foreclosures.  The following chart shows the number of NODs (Notice of Defaults) and Trustee Sales scheduled in San Diego over the last year-and-a-half.

This chart is very revealing and shows a lot of why the market seems to be overheated.  Notice that in September of last year when the banking meltdown occured, the number of NODs filed fell by almost 2,000 a month for three months.  Correspondingly, the number of Trustee Sales scheduled fell.  If we look at the number of homes affected in the eight months since the meltdown (shown by the area in pink under the 2,500 line between September and May) the total is slightly over 5,000.  This would put inventory levels at 15,000 homes today instead of 10,000.  Add to this the fact that NODs jumped over 3,000 in March while the Fannie Mae moratorium was still in effect (the moratorium is on loans issued between 2003 and 2007 on owner occupied homes with Fannie loan – a significant number) and we can anticipate the possiblity that those numbers will go higher.   The other thing about the homes scheduled for Trustee Sale is that most of them get postponed, either because of the moratorium or because the banks are trying to work out a resolution (short sale) with the owner.  For example, even through there are only  1500 -2000 homes that have been initially scheduled in any month, enough have been put off and re-scheduled that there are about 1600 a week currently scheduled for the next three weeks.  When the banks start pushing forward with those, inventory will start to rise about a month later.

Ok, so what does this foretell for the market?  Good question.  My thoughts are that the San Diego market is going to develop along two different paths.

In the sub-$600k market prices are going to rise through the summer as it will be later this summer before the foreclosures start to hit the market in significant volume.  Then, once the summer season is over the foreclosures will start to increase the inventory and the builders will start adding homes to the market late in the fourth quarter.   I am looking for a 5-8% increase from May’s prices to pricing we will see in September/October closes and then an easing into next year.  Where it goes after that depends on how many homes are forced into foreclosure and what goes on with the broader economy.

Above $1M, the market is going to stay soft.  When you look at the number of homes on the market and realize that to buy a $1M home now, a buyer needs good credit, $200,000 cash, an income around $180,000 (assuming $1k a month in auto/credit card debt),  not own a home they need to sell and believe that the market is not going to fall anymore.  Considering that we have over 2200 homes priced over $1M on the market and are only closing about 100 a month, I expect another 10-15% slide over the balance of the year in this segment.  The main wild card here is if loans become easier to get for the higher price range.  If that happens and you open up the $1M+ segment to people with $50k or $100k to put dowh, then this segment should do better.

In between, you have those homes priced in the $700k to $1M range.  They will be caught in an interesting position where the homes below them are pushing up towards the $700k point and the homes above are coming down.  I think in this area, performance will be dictated by neighborhood although the critical factor is going to be the ease of getting loans.

How Far Have We Fallen? Part 2 – 4S Ranch

It has been about a month since I posted my analysis of downtown San Diego and spent this week looking through the numbers for 4S Ranch.  For those of you who don’t know where 4S Ranch is, it is a master planned community that consists of roughly 4,000 homes (including the nearby communites that were built a couple of years earlier, but that are similar enough that they are included).  There are a couple of reasons for looking at 4S:

• It is a new (sales started in 2002) master planned community
• Because it is newer, there are a lot of loans made since 2004 when banks were playing fast and loose with money.
• Foreclosures have been moderate, but are poised to quickly increase.
• Because it has a lot of “troubled loans”, trends seen in 4S have and will lead the San Diego market by about four to six months.
• Because of the positives in the neighborhood (Poway schools (2 elementary, 1 middle and a high school in the neighborhood), easy access to I15 and Hwy 56, numerous parks and trails, and close proximity to employers and shopping – not to mention the great weather), 4S Ranch is likely to bounce back faster than some of the other master planned communities that do not have all these positive attributes – so we will see the turnaround start in 4S before San Diego in general.

I have tracked quartery sales in 4S, every quarter since the beginning of 2005 and it makes sense to break the market into three broad categories:  Detached Single Family Homes, Detached Condominiums, Attached Condominiums (For those of you familiar with the area, detached condominiums include: Tanglewood, Summerwood, Garden Gate, Garden Walk and Amante.  Everything else is self explanatory.)  So, let’s look at each group independently.

Single Family Detached Home Sales

These homes break into four categories by square footage (Ivy Gate is broken out as its own category based on uniqueness of the homes and lots and the fact that mortgage fraud that occured in almost 1/4 of the innitial purchases skews the current foreclosure numbers).  The two smaller catgories peaked (based on price per square foot) in the second quarter of 2005.  The two categories of larger sized homes peaked a couple of quarters later.  Since their peaks, each grouping of homes has fallen between 26% and 34%.  The drop in the last year has been between 9% and 12%.

Detached Condominiums

These homes break into four sections by square footage.  The peak prices are consistently in the third quarter and prices are off between 25% and 30% since then.  In the last year however, the drop has been between 3% and 7% as these homes fell in price first as models similar to both Tanglewood and Garden Gate came on the market in Amante and Garden Walk at lower prices than the re-sales were getting.

Attached Condominiums

The attached homes did not peak until the first quarter of 2007.  That is due largely to newer product that was superior coming on the market in late 2006.  Since the peak two years ago, the condos have fallen between 17% and 22%.

Same Home Sales

There were 25 homes that sold in the fourth quarter of 2008 that had also sold in the previous three years.  Rather than list each home, I will provide a quick summary:

• 9 of the 25 homes were foreclosures and 5 were short sales.
• The largest drop from the last sale was 31% and the smallest was 5%
• The average annual drop for all the homes sold in the fourth quarter that had also sold in the previous 3 years was 9.4%.
• Of the 11 homes with the largest annualized price reduction, 10 were foreclosures or short sales (the 11th was one of the aforementioned Ivy Gate homes).

Summary

The 4S Ranch neighborhood has seen a drop of roughly 25-35% since the peak of the market in late 2005.   A large percentage of the homes that sold in the fourth quarter that had been purchased within the past 3 years sold as foreclosures or short sales.   When the banks are involved through either a short sale or a foreclosure, they price the homes lower than the general market.  This can be specifically seen in two homes that were purchased from banks by investors and flipped within 3 months.  Each was re-sold for 26% over the price paid to the bank (these were purchased using agents on the mls, not at the Trustee Sale).  Given the amount of built in profit in those two sales, one can estimate that the true drop in the market is less than the 25-35% shown by the numbers because the current numbers include a high percentage of bank properties that are being sold at less than market value (it also means there are isolated opportunities where the banks are making large mistakes that investors can profit from).

Forecast

Prices are firming here in the first quarter and should remain strong until about April thanks to the moratorium on foreclosures by Fannie Mae and other banks.  We are starting to see more foreclosure homes hit the market now as the moratorium (for most of the banks) is over.  The inventory will start to rise in late spring, which could lead to downward pressure over the summer again.  I am going to take a risk and stick to my forecast that the fourth quarter of 2009 will end up being the bottom and that starting in the third quarter there will be a nice 1-2 year window of opportunity for investors in the neighborhood.