Does Recent Market Activity Align With Reality?

Historically, December and January are slow months in residential real estate but the historical norm didn't apply to anxious Westside/South Bay buyers wanting to take advantage of record low interest rates, FHA financing, tax incentives and sellers finally giving into a 20-25% price correction from market heights.

The market is the hottest it has been in over 3.5 years with the term "multiple offers" becoming a normal phrase out of a listing agents mouth while buyers are flowing into open houses priced under 2 million dollars like the economic collapse at the end of 2008 never happened.

Homes and condos priced below $850,000 are seeing a ton of traffic. This past weekend, condos in my office that have been on the market for over 30 days priced between $400,000 and $800,000 had 40 to 60 perspective buyers checking them out. Last year at this time, condos not considered new listings would be lucky to draw the attention of 5 to 10 people for an open house.

Even the high end ($2,000,000+) house hunters are getting serious. Thanks to a proliferation of all cash buyers (mostly international) combined with a weak dollar properties in areas like Malibu and Beverly Hills are finally moving at a faster pace.

The top producing agent in Malibu closed out December with $26.5 million in sales, one of his best months of the year. Cash-rich buyers looking to capitalize on lower prices have rushed into the market in recent weeks and the sales pace has continued through January.

For the first time in 2 1/2 years, the median price has posted a year-over-year gain in 2 1/2 years according to MDA DataQuick. This activity has lead to the median home price in Southern California to rise 4% higher than it was in December 2008.

Will this surge last?

The major question on many people's minds is whether this is going to last. In my opinion, it will only last as long as government incentives are in place and the dollar continues to weaken. Unfortunately, that is not a good mix for the economy in the long run and reality will have to set in at some point. The government incentives and record low interest rates created an artificial bottom that will eventually have to be broken before true progress can be made.

A strong discount in the market has already occurred and I am not saying it is a bad time to buy. However, buyers need to make sure they are looking at least 5 years down the road and not getting too caught up in the incentive hype which is driving much of the market (under a million dollars). Some experts worry that once certain government policies and programs wind down the housing market could falter.

Some buyers are so concerned with getting the tax credit and taking advantage of interest rates that they want to put in offers on properties that do not really fit what they want.

Home purchasers have to realize that finding the right home for your needs is far more important than an $8,000 tax credit. Furthermore, once the tax credit is gone a very good chance exists that the purchaser will get that credit back in a reduced purchased price on the property that truly fits their needs.

Christopher Thornberg, principal of Beacon Economics, states "The bounce in the housing market is due to government policy, not due to fundamentals," he said. They only delay the solution -- they only delay the healing process."

When you combine these programs expiring with banks taking up to 18 months for foreclosures to get through the system along with shadow inventory (i.e- Bank owned properties or seriously delinquent properties not listed on the market), the housing market is not where it needs to be yet to make a realistic recovery.

On a macro level, 64,000 listings are currently available on the MLS for Southern California compared to 160,000 in 2007. Without looking at the details, one would think this means total stability in the market. However, a closer look at the shadow inventory shows us a scary back-log with 160,000 properties not part of the current inventory. Not all of these properties will hit the market due to loan modifications but even if just 60% of them become available it will drastically change the landscape of the market. This inventory has to work through the system before we start to see a stable recovery.

The fundamentals of buying a home, especially in an uncertain market must be followed. A home is purchased to live in and not as a tool to get rich quick or a status symbol. A home buyer should be purchasing because the home fits their needs for at least the next 4 to 6 years, the monthly payments are aligned with their income, they can take advantage of the tax benefits of owning a home and they will be happy if they make a 2-3% annualized return when they sell.

In the long run owning real estate in South Bay/Westside areas is one of the best leveraged investments one can make if the proper fundamentals are used.

Mortgage Rate Update

The typical interest rate for a 30-year fixed-rate mortgage was virtually unchanged this week, hovering just under 5%, Freddie Mac said on Thursday.

The rate edged down from 4.99% to 4.98%, according to the weekly Freddie Mac survey, which assumed that borrowers had a down payment of at least 20% and paid 0.6 points in upfront lender fees and points. Buyers often pay higher points to obtain a lower rate.
The average rate on a 15-year fixed mortgage was 4.39%, down from 4.40% last week.

Shaodw Inventory Doesn't Just Pertain To The Residential Market

The shadows that will eventually hit the residential market are starting to show in the commercial market as well. Overall office vacancy in the fourth quarter of 2009 in Los Angeles, Orange, San Bernardino and Riverside counties was 18.5%, a substantial jump from 14.4% a year earlier, according to commercial real estate brokerage Cushman & Wakefield.

Right now, many firms have shrunk but are still renting the same amount of space they had in better economic times.

"All the vacant space out there still doesn't reflect all the jobs that were lost," said Whitley Collins, regional managing director of real estate brokerage Jones Lang LaSalle.

Shadow space, as leased but unused space is often called, is impossible to measure accurately, but there is surely enough of it to slow the commercial real estate comeback. Office leasing growth usually lags behind economic recovery by six to nine months, Collins said. A local office market recovery might be as much as 18 months behind the economy now because of shadow space.

Less Inventory In Santa Monica Than 2005-2006

Santa Monica currently has less single family residences for sale than in 2005 and 2006 when the market was very strong.

Of the 13 single family homes listed in December, 5 are either in escrow or have sold. The median single family list price in Santa Monica this week is $1,595,000. Despite recently falling prices, the price per square foot has stayed reasonably flat. This implies that there's a portion of the market being priced at a premium.

11/3/09 Caravan Notes

The market is definitely starting to slow down in anticipation of the holidays. Only 1 new listing was available to look at in Pacific Palisades...1 in Mar Vista and 2 in North Santa Monica.

Deal of the week: 2312 27th Street, Santa Monica. About a 1.5 blocks south of Pico, this 1,5698 sq. ft., 3 bed/1/5 bath Spanish home on a 7,644 sq. ft. lot needs quite a bit of upgrading but has a solid floorplan and features that really enhance its value. The work shop/bomb shelter underneath the home is not counted in the sq. ft. and easily adds about 800 sq. feet of usable space. It has nice yard space leading toward a garage with a work shop attached allowing the perspective buyer to either gain more yard space or upgrade what is in place. I expect this property to get multiple offers. Today's open house was very well attended.

Talk about slashing the sales price: 23 Oakmont located in Brentwood on one of the nicest streets on the Westside debut on the market at the end of last year for 21.5 million. It is now listed at 12.95 million. The architectural estate is 11,000 square feet and sits on 2 acres of land. . .

Home to Track: 2158 La Mesa Drive, Santa Monica, CA 90402: We should learn a lot about the high end home market by tracking the sale of this beautiful 1928 Spanish style home located on coveted La Mesa Drive. In late September of 2007, the property was listed for $5,500,000 and immediately sold in multiple offers for $6,332,000!

The current owners have done a few upgrades to the home (plumbing, some roof, resurfacing floors) but nothing that would be considered significant (100-150K worth of work?). It is now listed for $5,795,000 (came on the market November 1st) and had a very well attended open house today. The property is on the Santa Monica resources inventory list but it will not affect value of the very inviting 6,430 sq. ft. home.

The eventual sale of this home will provide great insight into what the market has done over the past two years in a superior location. . .

What Happens When The Shadows Go Away in 2010?

Bi-line: Only a small portion of homes that are bank owned or in the foreclosure process have hit the market on the Westside. . .what will happen when they do? Will the banks continue to be able to artificially keep inventory down?

Since the beginning of the summer the Westside real estate market has shown signs of price stabilization and some zip codes have seen an increase in the median price. The inventory of available homes has dropped and multiple offer situations have been popping up in every price range especially under a million dollars.

Though prices have dropped about 20-30% on the Westside (% depends on which Westside micro market you are referring too) over the past year, the recent price stabilization seems a little counter intuitive considering the California economy is on shaky ground and the unemployment rate continues to grow.

However, the government and financial institutions have done a marvelous job of propping up prices. According to a Goldman Sachs report released last Friday, the Government’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise.

The report goes onto further state "the government over the past year has slowed the pace of foreclosures through moratoria and the drive to modify mortgage terms to keep more borrowers in their homes. It also has pumped up demand for housing by giving tax credits to many first-time home buyers and by driving down mortgage interest rates. As a result, home prices in some areas have risen in recent months, particularly for homes that appeal to investors and first-time buyers. Bidding wars for the more attractive bank-owned homes have become common."

With the recent announcement that the tax credit program will continue and even be enhanced through the 1st part of 2010, the price stabilization is expected to continue through the beginning of next year. However, as I have explained many times in these reports, the Westside and the high-end market in general operate on a different scale than the rest of the market and the alarming back-log of shadow inventory building up in higher price ranges is startling.

Currently, Santa Monica has 236 properties that are either bank owned or in some part of the foreclosure process according to a foreclosure activity search through First American Title. Of those properties, only 20 are active on the Multiple Listing Service "MLS" and 6 are already in escrow. Couple this with about 30 properties being marketed as "short sales" on the MLS that are not currently in the foreclosure process and you almost have the same amount of properties showing economic strain than are currently available on the market.

Of the 65 bank owned properties in Santa Monica, only 8 are on the MLS. 107 properties are supposedly up for auction (they usually never get to that point) which means the properties are at the end of the foreclosure process. Undoubtedly the banks are working feverishly with property owners to modify mortgages and that will help knock these numbers down but they are still going to increase inventory in 2010. Bank of America expects 5 times as many foreclosures in 2010 and Citibank expects 3 times as many.

Low interest rates and increased inventory will make 2010 a good time to buy on the Westside. I will talk more about this in my 2010 forecast which will be out in late November.

Here is "shadow" inventory information for the Palisades, Brentwood and Culver City.

Palisades: 70 properties in foreclosure process. 4 active on the MLS and 4 are in escrow. Of the 17 bank owned properties, only 1 is active on the market.

Brentwood: 96 properties are in the foreclosure process. 6 are active on the MLS and 4 are in escrow. Of the 15 bank owned properties, only 2 are on the market. Culver City: Scary…173 properties in the foreclosure process.

Culver City only has 75 homes listed on the MLS, 12 of which are distressed properties. The potential shadow inventory is twice the size of what is on the market.

The Distressing Gap Between New and Existing Home Sales

Please click on the graph above provided by the Calculated Risk Blog to get a detailed look at new and existing sales since 1994. An alarming gap has opened up over the past few years.

Though the market has been picking up, the activity revolves around existing home sales and not new home sales which positively impacts the overall economy on a more significant level. The gap was initially caused by distressed sales but more recently the gap has been widened as a result of the first-time home buyer tax credit.

Hopefully this gap will begin to start closing over the next few years...