From Sunday's L.A. Times: a lot of potential home buyers are sitting on the sidelines

Sunday's L.A. Times had a really interesting article about how some home shoppers are calling it quits, believing that prices have peaked.  Read the entire article here.  Here are some of the more pertinent quotes:

"A belief that the price slowdown will lead to a price drop could become a self-fulfilling prophecy, experts said."

"Many who are struggling to afford a home in California would welcome a significant price drop, if it wasn’t accompanied by an economic collapse. But experts say such a prospect is unlikely, given that homes don’t appear to be in oversupply. The state has a well-documented housing shortage."

"Other factors argue against a crash. The California economy is still posting robust job growth,despite the shadow of a trade war with China, which has become a big market for goods produced in the state. Whereas last decade’s housing boom and bust were driven by questionable lending, loan standards are much tighter today. And as much as prices have risen, the jump hasn’t been as sharp as it was in the early to mid-2000s.

“We don’t have a debt problem. We don’t have an overbuilding problem. We don’t have an economic problem — prices are not going to fall,” said Christopher Thornberg, founding partner of Beacon Economics, who called last decade’s housing crash".

The real estate market is back

According to today's L.A. Times, the real estate market is back.  Click here to read the front page story.  How is this different from other reports that the market is on an upswing? This actually quotes housing economist Christopher Thornburg, who has been one of the gloomiest forecasters, saying that things are looking up.  Corollary prediction: by the end of today, you'll be sick of hearing about how the market is back.

Since I know you don't believe me, here's...

This is from non-client friend Joselle about her brand new purchase and what she had to go through to get it.

"It's a little 1950 house with some nice period details. Big lot (for L.A.) It's... in a lovely neighborhood in Sherman Oaks. We will be just the third owners! It was the 4th house we bid on. Each had many offers. We lost one even though we went $110,000.00 over asking price! Crazy market here!"

Her purchase price is in the high $400's.

Another explanation of how it all happened -- population estimates were very inflated

For your Sunday reading, here's an article from the Arizona Republic (I'm in Phoenix). This is a fascinating look at how a government's own statisticians can be way off the mark in estimating future populations, and the serious consequences those predictions can have. It looks at the community of Buckeye, which was a hell hole and not even a suburb yet when I grew up in Phoenix. Somehow, however, the estimators predicted that this place would have a population of 2 million by 2030, and it began to grow accordingly. Now, it's ground zero for the foreclosure bomb (although I have to say, the other vast suburban metro areas of Phoenix don't appear to be hit that hard at all).

More from the LA Times clipping service here...

And here's another great column from today's L.A. Times about timing the real estate market.

Don't open the champagne yet, but pending sales are on the rise

Let's not get too excited yet, but today's L.A. Times reports that pending sales rose last month. Here's the link to the story. The numbers are national, not local, but that would dovetail with what I've been seeing. Increased lending equals increased home buyers, equals increased sales. The end of the article contains a quote from L. Yun, the spokesperson for National Association of Realtors. I'm not sure he's right about a rebound in 2010, but let's dare to dream.

NYT: Letter from Buyer to Seller, and Response

Friday's New York Times featured a sample letter from a potential buyer to a seller of a home they wanted to buy. And the response back from seller to buyer. The title should link to the entire article, but here are the highlights:

Dear Seller:
I’m writing to let you know that I would like to make a bid on your property. I love the area and am committed to buying a house nearby. And your home fits my needs.
But given that my offer is well below your asking price, I also feel I owe you an explanation.
First, consider the big picture. Nationwide, home prices in the first quarter of 2008 fell 14.1 percent compared with the same period a year earlier, according to the Standard & Poor’s/Case-Shiller U.S. National Home Price Index.
That’s the biggest decline in the 20-year history of the data. And just in case you’re wondering, during the housing downturn of the early 1990s, the decline was never worse than 2.8 percent.
Not only that, earlier this month, the National Association of Realtors pointed to the huge number of existing homes on the market. As of the end of April, the total number was 4.55 million. At the rate people are buying right now, that represents an 11.2-month supply.
So buyers have options right now. A lot of them. I’m no different. Your home is great, but it isn’t unique. Few homes are. I know this may be hard to hear, since you’ve spent years creating memories here. But you may be waiting a long time if you hope to find a buyer with the same emotional connection that you have.
My mindset is hardly unique. We’ve all been reading the headlines. The accompanying articles appear prominently in major newspapers and sit on the Web pages where people check their e-mail every day. Everyone sees them, and the psychological impact is real.
Has your real estate agent laid any of this out for you? Maybe so, and you didn’t want to believe it. But it’s also possible that your agent, afraid of offending you and losing the listing, simply doesn’t want to initiate that sort of discussion. It may be worth sitting down for a candid reassessment.
It will be tempting to view my low bid as an insult. Please don’t make that mistake. Your home is genuinely appealing, and I wouldn’t have written this note unless I was serious about buying it. Getting a firm offer in this market is an accomplishment. So congratulations!
Oh, and one more thing. You presumably need someplace to move. My guess is that you’ll find these same points compelling when it’s your turn to buy. You just might succeed in buying for a better price, too.
I look forward to hearing from you soon.
Yours Truly,
The Realist

Dear Bidder:
Thanks so much for your note. I’m truly glad that you like our home as much as we do. You’re right that my family and I have many great memories of this place, and we hope someday you will, too.
And I just want you to know that I’m not insulted in any way by your offer. The fact is, none of us are very good at buying and selling homes. We don’t do it often, and as much as we know we’re not supposed to let emotions get in the way, it’s hard not to. After all, few people buy or sell anything else as expensive as a home in their lifetimes.
That said, your offer disappointed me. You seem to believe that I’m not aware of how bad things are out there or that I’m in denial. But I do read the headlines, and I priced the house accordingly. I knew I might have to wait awhile to sell it.
I should point out that your data draws on what has already happened in the housing market. Instead, I’d ask you to consider what’s about to happen.
One big reason for the falling prices is that it’s harder to get mortgages. Lenders went from giving money to anyone with a pulse to demanding higher credit scores and larger down payments. All sorts of buyers simply couldn’t make the numbers work anymore.
That may now change. Starting June 1, Fannie Mae and Freddie Mac, which buy mortgages from lenders and help make it possible for them to lend more money, are loosening restrictions on the sorts of loans they’ll buy in many markets. That is supposed to make it easier for people to buy a home with a down payment of 5 percent, or even less. Many more qualified buyers should mean more bids, and I’m willing to wait to see if it turns out that way.
I know you talked about having choices, but presumably we wouldn’t be engaging in this correspondence unless you liked my home best. Given that, I’d ask you to think about something: How often do you find a place that you can actually imagine living in? Sure, there are a lot of other properties out there. But an increasing number are in foreclosure and probably have problems lurking within the walls. So don’t let fear of a falling market keep you out of a home that you truly want.
It’s probably obvious by now that I’m not going to counter with a particular number. This doesn’t mean that I do not want to negotiate. I’d just like you to consider what I’ve said and see if you find it convincing. In the meantime, other shoppers who are interested in my home now have a price to beat. So thanks for helping me out with that.
Just one more thing. Please take another look at whatever mortgage calculator you’re using and see how your monthly payment will change if you brought your price up a bit. It almost certainly is not going to be enough to break you. But it may be enough to get us to a deal.
I look forward to your reply.
Yours,
The Undaunted

I'm reprinting this because I think it is indicative of the current mind-set out there in the real estate market. Of course, all markets are local, and I think any buyer writing such a letter should use local stats. I also think that sellers should almost always counter, even if an offer seems low. You can't win unless you get in the game.

3 Ways Sellers Sabotage Their Sales

The current real estate climate here in Southern California has changed considerably, as we all know. It is a buyers’ market now, just like it was a sellers’ market a short time ago. These days, there are fewer qualified buyers, lower house prices and more inventory. Somehow, though, many sellers have just not gotten the message, no matter how loudly it has been broadcast. If you’re a seller, here’s what not to do.

1. Price your home according to what you “need” to get in proceeds
I can’t tell you how many times I’ve heard, “If we price it that low, we won’t have the money to buy a new house.” Or, “We need to get X amount of dollars because…well, we just need to.” What a seller needs to get and what a home is worth in any market are two different things. I’d love for you to make a fortune off your sale and retire, but that’s probably not going to happen, and you need to price your home according to your local market now. To price your house correctly, look at comparable sales. “Comps” are those sales closest in time (no more than 90 days old), closest in size/amenities, and closest in distance. Then, listen to advice from broker caravans and also see how many showings you’re getting. The less showings means the more over-priced you are. The sooner you adjust your price to reflect the market, the more likely you are to get maximum proceeds. The longer you wait to appropriately price your home, the less likely you are to realize profits in a declining market.

2. Assume that the Condition of your Home Doesn’t Matter.
It’s tempting to think that buyers with vision will see past your home’s defects. Nope. They can’t and they won’t. Buyers these days are very educated. Buyers are watching the fix-up shows on HGTV, visiting model homes, going to open houses, and looking at beautiful interior shots on the internet. You’re competing with other homes, so please do what you can to make your home show really well, starting with the outside. I’m not asking for a remodel, just garden, clean, clear, paint, contemporize and repair if necessary. See my showing tips page for ideas.

3. Refuse to Work with Offers.
As a seller, you may receive offers that you think are too low. Don't get mad. You’re probably right – it is too low. But I’ve heard several rationales for dropping an offer: “We haven’t been on the market long enough,” and “Those buyers don’t realize how nice this house is,” etc., etc. If the buyers didn’t really like your home, they wouldn’t have put in an offer in the first place – and these days, they have plenty of choices. They, too, want a good deal, and are probably willing to negotiate. You’ll never know what that offer can work into unless you submit a counter offer, or two, or five. Don’t let your pride get in the way of a sale – work with every offer that comes your way. You can’t win unless you get into the game.

Home Ownership Deception Scheme

There was a great post from Maggie Knowles on LALand this weekend about the housing crisis. Maggie has given me permission to print it here:

The mortgage crisis has never been about home ownership. There are 6 major players in this scheme, the home ownership deception scheme.
1. Brokers, 2. Lenders, 3. Investment Bankers, 4. Rating Agencies - and the ones they lure 5. Investors and 6. Borrowers (you could think of 1-4 as fishermen and 5 and 6 as fish). 1 thru 4 have no skin in the game and they are working for Wall St. and have made off with billions of dollars.

After the high tech boom, the housing market was the next investment vehicle that Wall St. was going to push.

Before 2007, real estate was the best investment in America. How does Wall St. take advantage of that? They package mortgages together and sell them at a higher return. "They can't lose, they're the best investment in the world!" There was a high demand, but there was one problem - there wasn't enough product (borrowers - there were only so many people who had 20% down, high credit ratings, etc.)

Where do you get more product (borrowers)? Start creating products that a wider market can qualify for. So first came the A. sub-prime loans, then came the B. high-rate "strangulation" ARMS (interest rate only goes up, not connected to LIBOR or Prime Rate) where payments will double no matter what happens in the market and principle is never paid down, then came C. a negative amortization product (where principle grows and is never paid off), then came D. Option ARMs, then came E. no doc loans. (I may have missed some data regarding these loan products, but you get the idea.)

The point is, the loan products are defective by definition. When you recognize that these are defective products and this is orchestrated to generate billions of dollars out there for the four players in the middle (1 thru 4 above), then what's the solution?

Just as I Bin Sayin' about Blight...

I've written here before about how awful foreclosures can be -- not just for those home owners getting foreclosed on, but for communities having to deal with the blight that many foreclosures bring, as well. And I've been contradicted both here and in other blogs. But today's LAT has a great article on this very thing -- suburban blight. Click here to read.

Just as I was saying on foreclosed renters...

Check out my Jan. 31 post with questions about foreclosed rental properties. Lo and behold, today's L.A. Times has a front page article on that very thing -- and it ain't pretty. If you are about to rent a single family home, here's a tip: ask your landlord how long they've owned the property and how many other properties they own. If the answer is "less than two years" and "none," reconsider renting there -- they may have gotten in the game too late with too little experience to be able to keep/maintain the property.

Even Some Republicans Want More Regulation

If you're a regular reader of this post, you probably know that I'm in favor of more regulation of the financial and securities markets. And apparently I'm not alone. Ben Stein writes a very readable weekly column in the Sunday New York Times business section. NYT labels him "a lawyer, writer, actor and economist." He's also a big-time Republican, and as such, one would think he'd be big-time anti-regulation. But no! Check out this quote from Sunday's piece:

"Is anyone ever going to wake up to the fact that there is a lot of larceny in the human heart and that there are a lot of sheep waiting to be shorn and that regulation is not a bad thing? Or will we just lurch from massive meltdown to massive theft and on and on? Is anyone ever going to get it? Anyone? Anyone?"

Thanks, Ben.

Need for More Regulation in the Financial Markets

Here's a link to an excellent article about the credit crisis from this week's New Yorker Magazine. While many economists were cheering on the run-up in housing prices, here's one expert that was dubious. Here's a quote regarding the need for, yes, more regulation: “apt intervention and institutional structures are necessary for market economies to be successful.” The article continues, "Rather than waging old debates about tax cuts versus spending increases, policymakers ought to be discussing how to reform the financial system so that it serves the rest of the economy, instead of feeding off it and destabilizing it. Among the problems at hand: how to restructure Wall Street remuneration packages that encourage excessive risk-taking; restrict irresponsible lending without shutting out creditworthy borrowers; help victims of predatory practices without bailing out irresponsible lenders; and hold ratings agencies accountable for their assessments... As Minsky believed, “Economies evolve, and so, too, must economic policy.”

Another cool blog...

I just learned about Real Sedated -- thanks, Dana! I'm envious when I say that it's much funnier than this site.

We know, we know -- it's a declining market

There's a great article in the L.A. Times Real Estate section today about the current real estate market. Yes, prices and sales are declining. What makes this article different from others is the experts quoted: Thornberg from UCLA's Anderson school and the Dataquik's Jon Karevoll. These two are widely considered to be experts' experts. Here are a couple of excerpts:
". To hear Christopher Thornberg of Los Angeles consulting firm Beacon Economics tell it, home sellers can expect the bad times to get worse, and to stick around for a while."There will be close to a 30% decline" from the peak, Thornberg said. "Prices will continue to go down in 2008. I think between 2009 and 2011, we will have what you call a 'bleeding phenomenon' where prices stay flat, which means they lose value in real terms." Losing value in real terms occurs when appreciation fails to keep pace with inflation.Thornberg's advice for would-be sellers and those struggling to pay readjusted mortgages: Get out now."If you sit on the sidelines, it is going to get worse," he said. "And if you want to sell your house now, price it down big time."Paying the piperBefore launching Beacon, Thornberg wrote reports for the UCLA Anderson Forecast, which warned as early as 2001 that easy credit was propelling home prices to unsustainable levels. Now, he said, homeowners are paying the price."
And "DataQuick analyst John Karevoll says the uncertain state of the national economy makes forecasting a tricky proposition."Jobs, growth in the economy, interest rates -- all of these things are highly volatile," Karevoll said. "It's almost impossible to make a reliable prediction because of the volatility of these numbers."If the United States manages to avoid a recession, Karevoll said, prices will probably stabilize this summer or autumn -- well short of the 30% decline suggested by Thornberg."First, we have to digest this bad apple we ate with these sub-prime mortgages," he said."
So where does this leave sellers? I think sellers should consider selling only if they have to. If you are happy where you are, if it works for you and your family, consider staying put.

Discount Brokerages? Oh, Puleeze...

I sent the following letter to the L.A. Times editor:
Re Sunday's L.A. Times Real Estate section article about discount brokerages, I think it would have been only fair for the Times to have disclosed that its parent company, Tribune Corp, owns Help-U-Sell. Also, an excellent reason to use a full-service broker instead of a discounter appears right in the Times Homes advertising section: unlike the full service brokerages, discounters won't purchase print advertising for their listings because it costs them too much. Nor do the discount brokerages do much on-line advertising as the full service brokers do. For home sellers, now more than ever, media exposure is the path to sales and that means much more advertising than just a sign in the yard and a box of flyers. The question should be not why a seller would want to pay for full services, but why a seller would throw away money on a discounter instead of paying a percentage point or two more and getting the services they truly need.

Dragnet

Yes, this has to do with real estate: did anybody but me watch CW's 60-hour retro marathon over the weekend? On a Dragnet rerun from 1968, Sargeant Friday is grilled by Officer Gannon about getting married and settling down. This takes place in Gannon's Eagle Rock traditional, which looks to be about, oh, 2000+ square feet. Sargeant Friday retorts something along the lines of, "I'll think about it when I meet a nice girl and then I'll buy a house like this for $8,500." If this was a more-or-less market price for 1968, the value of homes has risen 100 times since then! I guess that's why they call it a bubble...

How Bad Is the Real Estate Market, Really?

Well, it's not good now here in Burbank, Toluca Lake, Studio City, et al. Buyers are waiting it out on the sidelines. It was a bad August and it's a bad September -- showings are way down (like, to zero on some properties), sales are non-existent and jumbo loans are hard to come by. I have been educated and entertained by the comments on the L.A. Times real estate blog, L.A. Land, and highly recommend it for a pulse-taking of what buyers (or at least buyer-bloggers) are thinking. But all real estate is local, and just as we think we've got it figured out, it changes. "Inventory" (homes coming on the market) has begun to shorten. The Fed just reduced rates. And there's talk on Capitol Hill about letting Fannie Mae and Freddie Mac buy up jumbo loans. So stay tuned, folks -- October should bring yet more shadings and changes.