Dino Padulo

Orange County Housing Report: Waiting on Stimulus

January 22, 2009

Good Afternoon!

With only a small change in the past two weeks, the official beginning of the Spring market will most likely be delayed until the MAJOR stimulus package that the Obama administration and Congress are currently working on is revealed. The stimulus package is targeted for a mid-February launch. Currently everybody seems to be cautiously waiting for change. The stimulus package promises to be nuclear in its reach, and it needs to be to begin to turn around the current economic situation. In 2009, the United States government is poised to be vigilante and relentless in their pursuit to turn things around. We will see foreclosure aid, more financing aid, job creation, tax breaks, small business incentives and more. Legislation and Federal Reserve involvement will be aimed at reducing interest rates and narrow the spread from the low rate that banks borrow money to the much higher interest rates that are passed onto consumers. The good old fashioned pendulum has been out of control. For years, lenders were carelessly lending with no restrictions and now they have battened down the hatches to the point that only the best of the best can qualify for anything outside of a government backed conventional or FHA loan, loans up to $625,500. So, the lending pendulum has swung from out of control lending to too many restrictions and hurdles to adequately meet real lending demand. That is the crux of the issue that our government is painstakingly trying to change. In sticking with the pendulum analogy, the financial market would be much healthier somewhere in between. The real question is just how long it is going to take for the financial markets to thaw and restore the backbone of our economy. One thing is for certain, the government is about to apply a relentless full court press until they have applied enough stimulus to turn the tide. Stay tuned, the government is working on giving the ailing economy a major Valentine’s Day gift.

So, what do the current numbers look like? In the past couple of weeks, the active inventory has increased by 273 homes to 11,560. Last year at this time there were 15,245 homes, a difference of 3,685. Two years ago there were 11,895, 335 additional homes compared to today. Demand, the number of new pending sales within the prior month, increased by 138 in the past two weeks, sitting today at 2,146 pending sales, an increase of 7%. Last year, demand was at 1,219, 927 fewer than today. Two years ago, there were 216 fewer pending sales, totaling 1,930. The expected market time dropped slightly in the past couple of weeks from 5.62 months to 5.39. Last year, the expected market time was at 12.51 months, and two years ago it was at 6.16 months. One thing is for certain, all of the numbers today illustrate a much better start to a New Year compared to both 2007 and 2008. Here’s how Orange County compares to the rest of Southern California:

The number of distressed homes, foreclosures and short sales, dropped by 14 homes in the past two weeks, totaling 5,104, 44.2% of the active listing inventory. Here’s a county comparison of distressed sales:

In Orange County, distressed homes are fueling a majority of the current activity. 77% of all distressed sales are below $500,000 and 90% are below $750,000.

The government is basically underwriting most of the current demand since they are propping up conventional and FHA financing, loan limits up to $625,500. All homes below $750,000 account for 71% of the current active inventory and 91% of demand. So even though 29% of the active inventory is above $750,000, it accounts for only 9% of demand. This is primarily due to the current financial crunch where financing outside of conventional and FHA loans has become very difficult to obtain. Since the government is currently doing nothing to help jumbo financing, these loans are sitting on a lender’s balance sheet. With conventional and FHA financing, the government is currently purchasing these loans to revitalize the flow of financing below the $625,500 limit. Investors are virtually sitting on the sidelines; only the government is currently propping up demand. Homes that fall within jumbo financing parameters, above $750,000, are suffering from no government intervention. This phenomenon will continue until either investors’ confidence is restored or the government steps in. The higher the price range, the slower the market. For homes between $750,000 and $1 million, the expected market time is 8.87 months. For homes between $1 million and $1.5 million, the expected market time is 17.88 months. For homes above $4 million, the expected market time is 116.67 months. There are 350 homes on the market above $4 million and demand is only at 3. In 2008, this range posted its best expected market time in March at 17.67 months. Until jumbo financing improves through government intervention or investor confidence is restored, the upper ranges can expect only slight improvements.

What can we expect in the Orange County real estate market from here? The Spring market will most likely take off after the major stimulus package is passed in mid-February. Demand will continue to improve, the inventory will rise slightly, and the expected market time will drop. Good news for the health of the real estate market is the fact that discretionary homeowners are not being fooled by aspirations of a strong Spring market; instead, most are choosing to not compete. Historically low interest rates will fuel demand as well, and we can expect rates to eventually remain in the mid-4’s, which is unprecedented. Distressed sales will also continue to fuel demand as more and more new distressed properties hit the market. We can expect strong numbers of distressed sales throughout 2009 with the distressed inventory falling slowly but surely. With so much stimulus, low interest rates and increased affordability, the current down cycle, now going on its third year, has a strong chance of bottoming as early as the middle of the year.

Sincerely,
Dino Padulo

Altera Real Estate

3748 E Coast Highway

Corona Del Mar CA 92625

www.dinopadulo.com

949274-3212

Market Time Report: Housing Demand Stronger than a Year Ago

April 3, 2008

Today marks the FIRST time since September 22, 2005 where demand is better than one year ago. The sold statistics, which garner front page headline attention in most media outlets, will not reflect the year over year statistics until May or even June of this year. So, you are hearing it here first, demand is actually better right now compared to last year. You can hear it in our offices too. Here's the scoop from the trenches: increased showing activity, increased open house activity, buyers are writing more offers, multiple offers in the lower ranges and significantly more first time buyer activity. And, most of this activity was already in the works prior to the new FHA and conventional loan limits taking root in the marketplace. Buyers have been methodically entering the market since the beginning of the New Year. We started the year with demand, a snapshot of the prior 30 day escrow activity, at 944 escrows. There were only 1,473 total escrows on January 1^st in all of Orange County with 14,724 homes on the market. That was an inventory of 16.45 months! Since then, demand has increased to 2,286 escrows within the prior 30 days, a 142% increase. Now there are 3,066 total escrows throughout Orange County, a 108% increase from the beginning of the year. Additionally, the active inventory has only grown by 750 homes since we sat on our comfortable sofas and sleepily watched the Rose Parade, bringing the inventory to 15,474 homes. Expected market time has dropped substantially to 6.75 months. Remember, the new FHA and conventional loan limits of $729,750 are just hitting the market now. We are achieving the increase in demand despite a major liquidity problem in the financial markets, meaning loans above $417,000 have been extremely challenging to put together unless a borrower had a lot of money to put down and cream of the crop credit scores. The new loan limits will have a powerful impact on demand. At 10% down, the old $417,000 conventional limit only covered 37% of the current active inventory. The new limits now encompass a stunning 75% of the inventory. The old $367,000 FHA loan limit covered only 23% of the active inventory. The real estate market also has the added benefit of Washington D.C. and every major player that has anything to do with the financial markets focusing programs and legislation aimed at further increasing demand and restoring the financial engine that runs our economy.

Last year there were1,464 fewer homes on the market, but demand was lower by 159 escrows. Demand was dropping fast last year due to the beginning effects of the subprime meltdown that started in March of 2007. Expected market time was almost the same at 6.57 months. Two years ago, the active inventory was at 10,714, demand was at 2,958 and market time was at 3.62 months. Bank owned foreclosures and short sales, homeowners that owe more on their home than the current value, now account for 34.5% of the active inventory. That figure was at 26% at the beginning of the year and 32.8% a month ago.

What about all of the distressed properties in the market place? Bank owned foreclosures are HOT and growing hotter by the minute with an expected market time of just 1.67 months. Two weeks ago that figure was at 2.11 months. Foreclosures only account for 20% of the total distressed market and only 7% of the entire active inventory. Thus, foreclosures are in demand and lenders are calling the shots with multiple offers and no emotional attachment to their "assets." Their market is similar to the heydays of 2004 and 2005 for all of Orange County. Statistically, short sales have an expected market time of 10.60 months compared to 12.05 months two weeks ago. But, these numbers are not a true reflection of what is really going on in the marketplace. The numbers are grossly understated. Short sales are a totally different animal and should be treated as such. Realtors® out in the field keep a home on the market as an active listing through the Multiple Listing Service until they have formal lender approval of an offer already accepted by the seller. Even when a seller and a buyer agree upon the terms of a contract, escrow is not technically opened until formal lender approval occurs. The lenders have to determine whether or not they are willing to take less than the full loan amount currently encumbering the property. And, if there is more than one loan, each and every lender must sign off on the deal in order for an escrow to proceed. Short sales are "subject to lender approval" and can take anywhere from weeks to months. One of our associates reported from the trenches that they just closed a short sale after a seven month delay in a formal approval. That's not even the worst case scenario, as many go unapproved and are instead foreclosed upon, wiping out any and all offers currently written on the property. So, when a buyer climbs into a car and finds a short sale that they have interest in, chances are that the home already has an accepted offer that is somewhere in the "lender approval" process. They too can add their offer to the mix and play the waiting game. Many of these short sales are priced at levels to attract buyers, discounting well below the true market price. In this case, the odds of "lender approval" on even full price offers are slim to none. As a consumer, it is best to do a bit of homework and write an offer closer to the market value, above the asking price, increasing the odds of lender acceptance. With more and more homes acquiring multiple offers, that is exactly what is occurring in the market: offers are being submitted for bank approval above the list price.

Everybody needs to keep in mind some fundamental statistics regarding distressed homes. 75% of all distressed properties, foreclosures and shorts sales, are below $500,000 and 94% are below $750,000. Santa Ana accounts for 20% of the entire distressed market in Orange County, 1 in every 5. Anaheim accounts for another 15%, 3 in every 20. The top 5 in total numbers, Santa Ana, Anaheim, Garden Grove, Orange and Lake Forest, account for 49% of all distressed properties, virtually 1 in every 2. With the exception of Orange, all have average list prices below $500,000.

What are FHA loans? The Federal Housing Administration (FHA) offers loans to consumers with some credit blemishes and/or a small down payment. A buyer can put down as little as 3%, all of which can be a gift. FHA is NOT subprime and has been around for years. This is not a program that the government cooked up to replace the void left by the sudden absence of subprime. Rather, with prior FHA loan limits well below the median sales price in Orange County, subprime filled the void. FHA loans require documentation and the buyer must actually qualify.

Buyers, what to do? Slowly but surely, more headlines are starting to illustrate improved demand and a great time to buy. It will take the better part of the next 60 days for the recent increased activity to start changing the tone of the headlines and stories completely. The facts are the facts; the lower ranges, where most of the junk loans occurred, are turning up the heat first. The increased loan limits should restore demand all the way up to $800,000. As liquidity is slowly restored to the financial markets, the upper ranges above $800,000 will in turn start to gain momentum as 2008 plods along. Demand has slowly improved as value has seeped its way back into the market. The conditions are perfect to purchase now and into the horizon: motivated sellers, plenty of homes to choose from, rates are low, new loan programs are available and there are great values out there right now. As a buyer, do not let price be your only determining factor in choosing to purchase. Price is important, but current favorable rates will not stick around forever. Prior to the financial subprime meltdown and financial crunch, the Federal Reserve was methodically raising rates to counter the threat of inflation. The threat of inflation is now high with all of the easing that the Federal Reserve has had to undertake to jump start the economy and the financial markets. Do not get comfortable with today's interest rates, they WILL eventually increase. As soon as the economy starts humming along again, expect the Federal Reserve to reverse course and push rates up higher. By the way, for every 1% that interest rates increase, it erases approximately all of the benefits of waiting for property values to decrease 10%. The payments are virtually identical.

Sellers, what to do? So far this Spring, homeowners are NOT placing their homes on the market in foolish anticipation of a wonderful Spring real estate market. Thank goodness!!! Quite simply, sellers should continue to bide by a simple rule of today's market: do NOT place your home on the market unless you absolutely must sell and are motivated to do what it takes to procure a sale, with the right price and condition. With only 2,285 successes over the past month, that leaves the vast majority waiting another month or months. In such a competitive market, it is all about price, location and condition. As a seller, you can do absolutely nothing about the location other than take it into consideration in determining price. Sellers do control their price and condition. After carefully determining an asking price, it still may take time, so pack your patience and be prepared to make changes as the market evolves. Unless you are prepared to market your home as a major or cosmetic fixer, great showing condition is imperative in maximizing your proceeds. Last, be prepared on day 100, just as you were during the first week, for a buyer to walk through the door. Set the stage with the lights on, soft music in the background, window covering opens and make sure your home is neat as a pin inside and out.

Market Time Report: Multiple Offers in the Lower Ranges?

March 6, 2008

Good Afternoon!

Yes, it is true. Our reports from the streets substantiate the latest development: the lower ranges, especially distressed properties, are receiving multiple offers. It is difficult to gauge the current real estate market by reading the papers or listening to newscasts. The absolute best way to assess what's going on in is to poll the Realtors® out in the field, writing offers, guiding buyers from home to home, and representing sellers in the marketing and selling of their homes. The reports are in: the lower ranges, below $500,000, are seeing plenty of activity, with multiple offers and buyers losing out on their first choices. The lower ranges were hit the hardest through the subprime shakeup and they slowed first. Logically, it seems appropriate that this range, the entry level, would be the first to heat up. The below $500,000 range accounts for 45% of the current active inventory and 50% of the most recent demand. One year ago, it accounted for 26% of the active inventory and 28% of demand. First time buyers are stepping into the fray with their first real opportunity to purchase in years. Bank owned foreclosures are in vogue and are seeing the most activity. Foreclosures only account for 7% of the total active inventory, but 23% of demand. There currently is only a 2.37 month supply of foreclosures, an extremely valid explanation for all of the multiple offers. When the expected market time is below the 5 month mark, it is a seller's market. Everybody is looking for a deal, but it seems that the banks are in the driver's seat. With the new FHA and conventional loan limits coming, the upper ranges will witness a similar boost in demand shortly.

Demand, the number of homes placed into escrow within the prior month, increased modestly by 73 homes in the past two weeks from 1,820 to 1,893 escrows. Demand is at levels not seen since June of last year. And, according to our Realtors® out in the field, what is NOT reflected in the data is that when a buyer and a seller come to an agreement on a short sale, where the seller's combined loans against the property exceed the purchase price, most homes are not changed in the Multiple Listing Service (MLS) to reflect the agreement. Instead, they remain on the market as active listings until formal lender approval of the short sale. You see, the buyer and seller may agree on a price, but the seller is really bargaining on behalf of the bank since the bank has to take less than what is owed. They are "subject to lender approval" according to the terms of the contract. So, the standard practice of care out in the field is to keep these homes on the market until lender approval occurs. Also, we are not talking a couple of days for the lenders to respond either. On average, they are taking anywhere from 21 to 90 days to respond. Needless to say, demand is currently understated. This should wash out over the next month as more and more lender approvals hit the market. There are over 4,000 short sales currently on the market, 26% of the current active inventory. Short sales only account for 17% of demand (remember, it is currently understated). Accordingly, the expected market time for short sales is 12.28 months.

The current active inventory climbed by only 20 homes in the past month two weeks to 15,412 homes. With the active inventory virtually unchanged, coupled with a slight increase in demand, the expected market time dropped from 8.46 to 8.14 monthstoday. That's a stark difference from the 15.60 month inventory at the beginning of the year. It is still a "buyer's market," just not as deep. Last year at this time there were 12,558 homes on the market, demand was at 2,338 escrows and dropping with the start of the subprime crunch, and the market time was at 5.26 months and climbing. Two years ago, there were 9,562 homes on the market and rapidly climbing, demand was at 2,779 escrows and the market time was at 3.44 months.

What's the difference between the condominium market and the detached home market? The detached home market continues to fare better than the condominium market with a 7.88 month inventory, the first time below eight months since May of 2007. For condominiums, there is an 8.67 month inventory. 31% of the detached home inventory and 37% of the condominium inventory is either a foreclosure or short sale. 67% of all detached homes below $500,000 are either a foreclosure or short sale. For condominiums, 54% below $250,000 are distressed.

What do the new conforming loan and FHA loan limits mean to the Orange County real estate market? The new loan limits are going to have a significant effect on the market. These new limits won't address the troubles everywhere, since they are formulated based on an area's median sales price. So, they will have little effect in most of the country, but they will have a profound influence on California and, specifically, Orange County. Orange County's limits have been established at the maximum amount of $729,000. On a 10% down loan, that will allow buyers to stretch up to $800,000. That will provide incredible liquidity to our market. With 10% down, the prior $417,000 limit allowed buyers to only look up to $459,000. That represents a difference of $343,000! The loans will be available as of April 1, just a few weeks away. Expect demand to increase substantially as many buyers take advantage of this temporary program. Demand should elevate and then remain at higher levels throughout 2008. The increased loan limits will expire on December 31^stof this year. The increase was designed to assist markets like Orange County to get through the current financial crisis, buying precious time for the financial markets to right themselves. That should give the markets plenty of time to restore investors faith in buying pools of non-conventional loans once again. The FHA loan limits will allow buyers with credit blemishes and low down payments to obtain financing. This restores the gap in products with the drying up of the subprime market. FHA financing is a much better alternative to subprime and was common just a decade ago. The problem had been that the FHA loan limit was just too low to provide any help to the Orange County market. The limit had been $367,000 and was virtually non-existent in Orange County. Do not worry, FHA financing is NOT the same as subprime financing. It provides financing to borrowers with some credit issues and lower down payments, but it requires documentation of income and does not allow "payment shock" where a buyer jumps from a low rental payment to a high mortgage payment. FHA has all of the safety gaps and education in place so that buyers do not get in over their heads like they did with subprime financing. So, expect demand to increase substantially due primarily to the increase of both the conventional loan and FHA loan limits.

Buyers, what to do? There was a great article in Time Magazine last month by Dan Kadlec, --titled "Ignore the Headlines!" The article identified something I have been talking about since the beginning of the year, "finance costs will rise as the economy recovers, so trying to time real estate might not pay off." The article then proceeds to give an example of a rise in rates of just 1%. If home prices were to drop by 10% over the course of a year, but rates rise by 1%, the end result will be a wash and renters would have waited a year and saved nothing. If rates increased by 2%, the monthly mortgage payment would be significantly higher. Rates will inevitably increase to stave off inflation. In 2000, conventional rates were 8% and in 1990 they were at 10%. So, do NOT wait for the bottom of the market. Instead, enter the market when the conditions are most ideal: low rates, tons of choices and plenty of motivated sellers. Go find the best home for your family. Also, be aware that for banks in charge of foreclosures, they have the upper hand and it is a seller's market for them. In looking at short sales, many already have an offer submitted to the lender for their approval. Also, the higher the price range, the less motivated sellers are due to financial circumstances. 73% of distressed properties are below $500,000 and 94% are below $750,000. This is worth repeating in every single one of my reports - take considerable comfort in the fact that Southern California real estate has always been a historically wonderful long term investment.

Sellers, what to do? I am always leery that sellers will ignore current conditions and place their homes on the market in anticipation of a great Spring market. Thus far, homeowners have kept their homes off the market, but the Spring market has just begun. There are positive signs in the marketplace for the rest of 2008; however, the market remains a "buyer's market" unless you are a bank. So, do not place your home on the market unless you absolutely must sell OR you are willing to take a hit in value in order to move up in the market to a more expensive home. For the "move up" seller, 10% of a $500,000 home is less than 10% of a $750,000 home. The net result for the move up seller is a positive savings. If you have to sell in this current market, be prepared to do what it takes to be successful. It is all about location, price, condition and time. Price is extremely crucial to procure a sale; the better the price, the better the odds for success. Condition is important too. Since short sales and foreclosures for the most part are in poor condition, homes in better condition can equate to an increase in price and offer a refreshing alternative for buyers. Be ready to pack your patience; depending upon the area, it can take months to sell. Given last month's demand, there are still 13,519 sellers who will not be successful in selling their homes over the course of the next month. Competition is intense. Those willing to remove their emotions to make decisions will ultimately achieve their goals in selling. Remember, a lot of the market is relying on banks to make decisions and they are void of emotions.