October Real Estate News

October 2008 Newsletter

THE BAILOUT HAS PASSED, NOW WHAT?... "Experts say the bailout plan has a fair chance of stabilizing the market." This is a headline from an Associated Press article from September 21^st. Since that article, the bailout was rejected twice before finally passing, and yes, it does have a good chance of stabilizing the economy. Obviously there are many factors at play in the bailout that are interacting with various parts of our somewhat sagging economy. What we are concerned with is how it will affect the housing market. First of all, it will circulate money back into banks for lending. However, the availability of the "free money" that characterized the first six years of this decade is over. Expect money standards to continue to tighten, but at least there will be some money. You can also expect interest rates to stay fairly even, with the government being the primary lender. According to that AP article, "experts say that the government's enormous plan to relieve Wall Street banks of their bad investments has a decent chance of stabilizing home prices, at least in theory."

But don't expect instant relief for areas that had year over year of double digit appreciation, i.e. California. We can expect another year of price decline, although experts agree that 2009 is likely to be the bottom. And relief will mean different things to people with different scenarios. One example is housing supply. If you look at inventory for prices under $600,000, there is only a six month supply. But if you increase that to homes listed around $1.2 million there is a twelve month supply. Increase it again to listings at $2.4 million and there is an eighteen month supply. It would appear that the upper price ranges may take more of a hit in 2009 than the lower ranges, which reflect a lot of bank owned properties. If you are in those upper price ranges and wanting or needing to sell in the next two years, you might want to do it now or risk chasing the market downward.

The other issue that may be affected by the bailout is interest rates. Perhaps this is a subject no one wants to think about, but we should. Certainly increases will not appear right away, in fact interest rates are still between 5 ½ % and 6 ½% (as of this writing) but it would seem difficult to infuse so much cash into our economy without some kind of safeguard to inflation and the chief response is to raise interest rates. So conversely, if you are thinking of buying, now may be the perfect time. Houses may drop a little further, but interest rates may be higher.

WHAT WERE THE ACTUAL NUMBERS... According to the Federal Housing Finance Agency, the drop in U.S. home prices in July was 5.3% compared with a year ago. However, according to the S&P Case Shiller Composite Index, Los Angeles and Orange County combined plunged 26.2% in July '08 compared with July '07. Of course the major reason for the drop in pricing is the prevalence of bank owned property sales. If you look at all of Southern California nearly half of all sales were foreclosures, reflecting a total price decline of 34% according to Dataquick. If you look at volume home sales jumped upward 57% in California for August. Orange County showed an improvement of 18.7% comparing August '08 to August '07. The total number of homes sold for August was 2,713, including single-family, condos, and new construction. There was an unprecedented 1,057 sales in the under $400,000 price range, a whopping 276% increase over that price range in 2007. This reflects the fact that the affordability index has risen from 11% at the market peak, to roughly 50% today. That does promote the makings of a healthy recovery as soon as we clear away the bank owned properties and remove the financing jitters. It will happen. According to Economist Esmael Adibi of Chapman University, it will be, "at least the middle of next year and more likely 2010 before the economy kicks into gear again." He cites job creation with being crucial to re-establishing the housing market and lending making a subtle comeback. We all know that money will never be available like it was, nor should it be. People should have to qualify for a loan and it should be a fully documented process.

WHAT TO EXPECT... No one can predict exactly what the future will bring. Notices of Default crept up 6.4% from July to August after being nearly flat from June to July. There were 2,469 NOD's for Orange County in August. Actual foreclosures numbered 1,427. So roughly one out of every two NOD's ends up in foreclosure. California has not taken as hard a hit as Arizona, Nevada, Florida and Texas. These states have had 3 consecutive months of increase signaling that they have hit their bottom. Can we be far behind?

What I can tell you is that real estate always comes back. It is an historical fact that from the 1970's forward, real estate has consistently doubled every 10 years. But houses were never meant to be day traded and that's where our last market took us, perhaps leaving a bitter taste that is not totally deserved. If you have questions, please give me a call and let's talk about your situation and what is best for you. You may be thinking of selling, or be thinking now is a great time to invest. (Donald Trump has gone on record that he would be buying everything he could in California.) Perhaps you just want to know what the market is in your neighborhood. I would love to hear from you. Have a great month!