Wednesday, December 12, 2012
The Big Question ll
Before
we get into the “big question mark” again let’s take a look at where
the market stands today. The first graph attached shows a continuation
of the trend we have been talking about for months. All Orange County,
all single family and condominium, all price ranges sold 2389 units in
November and moved into December with only 4176 units of active
inventory—1.75 months’ worth.
Looking
a little deeper at the next two graphs, all Orange County, single
family and condominium priced under $850,000, ended the month with a 39
day supply of inventory. That speaks for itself and requires no further
commentary. However, in the next graph is a noteworthy statistic. In
that same market segment, with such a remarkable “turn rate” the average
days on the market of the inventory at the end of the month is 61 days.
This tends to highlight what we’re seeing at street level, and many of
you are observing also. The houses coming to market priced right and
marketed well are receiving multiple offers and selling very quickly,
while other houses just sit and languish for months in the hottest
seller’s market we have seen in at least six years, arguably eight
years. There are many nuances to it, but it always comes back to pricing
and marketing. I have also included graphs for South County (inland)
under 850 (an incredibly hot market), and the Gold Coast 800-2 million.
Neither requires comment, so I will not.
SHADOW INVENTORY
We
have been looking for months, sometimes in depth, at the “shadow
inventory.” Our intent in doing so is to try to forecast whether there
really is an enormous shadow inventory problem currently being held at
bay to be unleashed next quarter, next year, next____. Obviously such a
scenario would throw all of our thinking and market forecasts out the
proverbial window (and perhaps our pocket book along with it). As we
have discussed there are serious analysts who have predicted exactly
such a scenario all year (actually a lot longer than a year), and
continue to confidently predict so. If you have read even one or two of
my newsletters you know that I do not believe that will happen, in part
because the federal government has quite intentionally worked to “slow
walk” the banks through their “bad assets,” to both preserve the banks’
balance sheets and to shield the housing market from a mass liquidation
of REO (Real Estate Owned) units.
It
can never be overstressed that real estate is always “local.” (Just ask
someone who went through the early 90s in Orange County.) While
“national” data is always worthy of study, if your real estate
aspirations are in Orange County, then Orange County data is primary to
you. As well reported on Dec. 3rd by Jeff Collins in the
Orange County Register (sourced to CoreLogic and DataQuick), for the
year ended October, 2012, 1 out of 95 Orange County homes with a
mortgage, had been foreclosed during that one year period—1.05%. And, at
the end of October 1.5% of all Orange County with mortgages were in the
“foreclosure process.” There’s lots of ways you can use those numbers,
but you would have to be way into the “glass half empty” camp to reach
for the panic button because of them.
Note
of interest: The Phoenix market, which some of you know I am very
optimistic about, during the same year ending October this year saw 1 of
every 23 homes with a mortgage foreclosed upon (compared to our 1 in
95). HOWEVER—here’s the dramatic part—at the end of October this year
only 1.7% of Phoenix homes with mortgages were in the “foreclosure
process.” That is a stunning turnaround in the space of one calendar
year!
Going the other way is Orlando, where during the past year 1 out of 31
homes with mortgages were foreclosed upon, but at the end of October
this year 11.1% of homes with mortgages in Orlando were in the
foreclosure process. One out of every ten houses in Orlando is currently in danger of being foreclosed upon—a very somber statistic.
NOW, TO THE SAME BIG QUESTION MARK AS LAST MONTH
We
were talking about the fiscal cliff last month; we’re talking about it
again this month. Hopefully we won’t still be talking about it in
January and February. (But, don’t bet that we won’t) Here’s one of my
statements last month:
“I
have a forecast in which I only have about a 60% confidence, which is
that after a frustrating amount of bluster and grandstanding, as well as
genuine anger in those doing the negotiating, they will extend some
level of the current cuts for several months. I suspect the top rate in
one form or another is going up immediately (elections matter). Will the
deal worked out during the “extension” really do the job or just
produce more tinkering at the edges and window dressing with the real
problem passed to another administration and another congress. I do not
know.” Since I struggled with how to say it better I’ll just re-use it for another month.
If
our nation’s leaders do produce some hamstrung kind of agreement that
manages to end the paralyses of uncertainty, but does little to
earnestly put our house in order long term it will be a shameful lack of
national leadership. But, that might well be the final outcome. While I
could write volumes about the tragedy of this scenario and its long
term damage to our nation, the impact on Orange County real estate for
the foreseeable future would be negligible, and the coming year would
look optimistic indeed. (I’ll leave the discussion for California’s
unique and twisted definition of fiscal leadership to another day.)
Though
the above scenario is perhaps discouraging, the possibility that
concerns me most is one in which the parties involved find a way to
prolong the debate, the drama, and the uncertainty for another three,
four, five months. The paralyses of uncertainty has been a serious drag
on our economy over the last five months, and if they find a way to
avoid the admittedly hyped drastic consequences of doing “nothing” by
instead just keeping the debate, drama, AND THE UNCERTAINTY alive and
running into next year I fear it would choke back the national economy
for the entire year, and harbor some really negative longer term
consequences. The markets probably wouldn’t let them get away with this
scenario, but we shouldn’t dismiss it as impossible.
I
think the first scenario is the more likely one. The latter is the
scary one (keep a close eye on it if this one takes off). But—for all of
us “glass half full” folks—there is the one truly good scenario that
I’m praying for—and can only wish I had enough confidence to actually
predict. That is the one where our national leaders will come together,
craft a serious long term fiscally responsible compromise (not
necessarily before the end of the year) that will truly restructure our
awful tax code, truly restructure our runaway entitlement programs, and
truly tackle the lobbyist and bureaucracy driven issues of waste and
inefficiency in the operation of our federal government, with maybe even
a new found recognition that the Tenth Amendment is still in the
Constitution. (Maybe that last one is just Christmas joy overcoming
reality.) Should they rise to this occasion I can scarcely express the
burst of enthusiasm that would flow through me, and I believe the entire
nation!
CLOSING WITH THE QUOTABLE WINSTON CHURCHILL (just a few)
•You can always count on Americans to do the right thing—after they’ve tried everything else.
•The
inherent vice of capitalism is the unequal sharing of blessings; the
inherent virtue of socialism is the equal sharing of miseries.
•We
contend that for a nation to tax itself into prosperity is like a man
standing in a bucket and trying to lift himself up by the handle.
•A lie gets halfway around the world before the truth has a chance to get its pants on.
•A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.
•Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy.
•However beautiful the strategy, you should occasionally look at the results.
(I recently did a short study of Churchill’s magnificent “We Will Fight On the Beaches” speech
delivered to the House of Commons on June 4, 1940, immediately
following the Evacuation of Dunkirk. The Evacuation of Dunkirk had given
the British a huge emotional charge at a very dark time in the war,
when defeat looked more likely than victory. Churchill’s speech was long
and detailed, but one of his most powerful, closing with these
emotionally electrifying lines.)
•We
shall not flag or fail. We shall go on to the end. We shall fight in
France, we shall fight on the seas and the oceans, we shall fight with
growing confidence and growing strength in the air, we shall defend our
island, whatever the cost may be. We shall fight on the beaches, we
shall fight on the landing grounds, we shall fight in the fields and in
the streets, we shall fight in the hills; we shall never surrender.
AS WE PAUSE AND PONDER THIS TIME OF YEAR
REFLECT ON AND CELEBRATE THE BIRTH OF THE SAVIOR
I WISH EACH AND EVERY ONE YOU
A MERRY AND BLESSED CHRISTMAS
Saturday, November 10, 2012
The Big Question
I BEGIN THIS MONTH BY BEGGING YOUR MERCY. ON OCTOBER 30 I
EXPERIENCED A COMPLETE SUDDEN COMPUTER CRASH. ALL DATA, I BELIEVE, IS RECOVERED
EXCEPT FOR THE ACTIVE MAILING LIST FOR THIS NEWSLETTER. I HAVE RECONSTRUCTED IT
FROM SCRATCH. IF YOU ARE RECEIVING THIS FOR THE FIRST TIME AND DON’T WANT TO
RECEIVE ANOTHER PLEASE REPLY WITH “REMOVE FROM MAIL LIST” IN THE SUBJECT LINE.
IF YOU HAVE HAD A RECENT EMAIL ADDRESS CHANGE AND THIS IS COMING TO YOUR OLD
ADDRESS PLEASE REPLY WITH THE CORRECTED EMAIL ADDRESS. THANK YOU.
THE TREND IS NOW BEYOND DISPUTE
Earlier this year I started talking about my “street level”
observation that the Orange County housing market seemed to have bottomed
sometime around the fourth quarter of 2011 and had begun a noticeable
“firming,” if not yet a definable recovery. We followed that in this newsletter
through the spring and summer, moving from a street level observation to an
increasingly strong trend line.
In the spring the news outlets seemed to all remain asking,
“when will housing bottom?” (The major national news was still reporting that
“California” would be buried for a long time to come—remember?) By the end of
summer many news outlets were catching up to the reality of what was actually
happening on the ground. (In all fairness the Orange County Register was
reporting on the strengthening market, dropping inventories, and clear recovery
taking place substantially ahead of their competitors, local or national.)
The three graphs attached are so clear that one only has to open
and absorb, so I have added no comments to them. However, if you will allow me
one note, in the graph for “south county under 750” (essentially inland from
the coast, from Irvine south) the trend line of active units in the market is
nothing short of stunning, ending October with a 26 day supply of inventory.
That is 26 DAYS, friends! It wasn’t but six months ago that we were celebrating
a 3 MONTH supply with enthusiasm.
WHERE IS THE “SHADOW INVENTORY”
We have discussed the shadow inventory at length in this
newsletter. There are still those waiting for the “shadow inventory shoe to
drop” and take the housing market down the tubes. I don’t dispute many of the
numbers used to calculate the actual lender owned or notice of default units
out there. Those are somewhat quantifiable. If you recall one of my more
emotional statements on the subject a few months back I think those forecasts predicting
large numbers of foreclosures based on nothing more than the number of
houses “under water” are mostly pure baloney. And, for those housing units that
are actually owned by a lender, or in the foreclosure process, the federal
government has made it quite clear that they intend to “slow walk” the banks
through that disposition process precisely so they don’t have to take those
losses all at once, and now. They will succeed with that strategy—just do a
quick study of the South American debt crises when they used exactly the same
strategy.
THE
SECOND MOST ASKED QUESTION IN THE LAST MONTH (OR TWO)
I have been asked quite a few times lately a question that
generally goes like this, “Are and/or how much are prices up this year?” That
question is really aimed at how much more, if any, is my house worth now than
it was a year ago? The Case-Shiller Index does about as good a job as possible
at trying to answer that question, but can only provide a somewhat wide scale
and generic change of index sort of answer. The only way to really answer the
question is from that street level perspective of watching it. It isn’t
scientific, it can’t be supported by a DVD full of statistics, and it certainly
can’t be quantified by a computer model.
With that caveat in mind here is my best answer to that oft
asked question. In south county one or two bedroom condominiums seem to me to
be up at least 20% this year, and if someone said 25% I wouldn’t argue with
them. South county single family homes in the sweet spot of under $750,000 are
up a good 8-10%. And, here’s the kicker, the gold coast homes under $2,000,000
are up about 10%, and the right house in the right location might well sell for
15% more than at the beginning of the year. And, as the charts above tell us
and, as the OC Register is accurately reporting, the crucial factor is simply a
lack of supply.
THE MOST
ASKED QUESTION IN THE LAST MONTH (OR TWO)
The words “fiscal,” and “cliff” are now a proper noun and title
with a “the” in front; “THE FISCAL CLIFF.” I have been in many conversations
about what I think (or everyone within ear shot thinks) will happen, and what
that will mean to the housing recovery. I have and always will be as honest and
unvarnished with you as I possibly can. I do not know what will happen. I have
a forecast in which I only have about a 60% confidence, which is that after a
frustrating amount of bluster and grandstanding, as well as genuine anger in
those doing the negotiating, they will extend some level of the current cuts
for several months. I suspect the top rate in one form or another is going up
immediately (elections matter). Will the deal worked out during the “extension”
really do the job or just produce more tinkering at the edges and window
dressing with the real problem passed to another administration and another
congress. I do not know.
If the above forecast is close to the way it actually goes down
then I suspect that things will continue along the same trends we have seen all
year. The housing recovery will continue, mostly because of pure structural
supply and demand issues. If they blow the deal on the fiscal cliff completely,
then it could really set the housing recovery on its heels for a while.
However, if they really roll of their sleeves and honestly go about making
major changes that will promote growth and give everyone confidence that they
know and can count on both the tax code and on regulations being sane for the
next four years, then I think the economy will take off, confidence will take
off, and housing will take off in a way that might be downright scary
(accelerating too fast would be long term unhealthy).
HOW DO
YOU MAKE IMPORTANT DECISIONS IN THIS SITUATION
I suggest you make decisions based on the fact that our leaders
are rational adults intent on doing the right thing, even if that definition
varies. (I believe that statement is accurate, by the way. Anyone laughing,
just quit it now—you’ll hurt my feelings.) If they do lock horns and go over
the fiscal cliff taking us with them, then you will have missed your
opportunity to sell your house already. If you’re thinking of buying, first
time homeowner, OR investment, and you think this issue gets solved then buy
now—call me the first chance you get. If you are thinking selling and buying as
a move up situation, then this is your kind of market—DO IT SOON. If you think
Washington will just plain blow it and we are headed over that cliff then do
not do anything now. It may cost you10% more if you get into the market in six
months, but your peace of mind will be worth it.
Thank you. If you would like to discuss any of these market
conditions, or if you would like me to zero in on something particular you’re
welcome to call or email any time.
Mike Shepard
DRE # 00524405
First Team Estates
900 Glenneyre St.
Friday, October 12, 2012
Fascinating Times
Sunday, October 7, 2012
NOW THE “HEADLINE NEWS” HAS EVEN CAUGHT UP
At
the beginning of the summer I wrote that “the statistics have caught
up” with what had been happening “on the ground” in Orange County real
estate since February. I used graphs showing sharp inventory corrections
across the board, and striking inventory shortages in various market
segments in various cities in Orange County. As the summer wore on we
had to recognize that the sales and inventory numbers were clearly
breaking out of the range of “anomaly,” and into the definition of a
“trend.”
Over
the last month it was hard to miss the numerous news reports; big
cable, major network, local papers and countless blogs “caught up.” And
they caught up fast. I don’t think there has been one day in the past
month that I haven’t seen a report talking about the strength of the
real estate market, often with the word “surprising” in the description.
The first graph attached to today’s report clearly shows the length and
strength of this trend in Orange County.. (While the story might be the
same, better, or worse in markets all across the country I am, for this
report, focused on our market here in Orange County.)
DRAMATIC SHIFT IN DISTRESSED INVENTORY
Continuing
the discussion from last month on the “shadow inventory,” a topic that
seems to quickly creep into every real estate discussion, please take a
look at the last two charts attached. The two 4 year charts of active
listings, versus pended sales, versus sold, the first being for all
distressed* resale residential in Orange County, and the second for all
standard resale residential sales in the county just have to grab your
attention. Digging through the data a little deeper yields some
interesting data points. (The graphs show total active inventory, not
new listings.) As the graphs show, standard sales have been generally
increasing, and distressed sales have remained fairly constant. But the
dramatic shift has been in distressed* listings coming to market. For
the six months ended at the end of August, in 2009 there were 4352 new
distressed listings, in 2010 it was 4484, in 2011 it was 4050, and this
year it was 2819. These are Orange County statistics. But, since we are
impacted by the national news and opinions let’s take a look at a few of
them.
*Distressed properties include all houses in foreclosure, in notice of default, and short sales.
THE
FOLLOWING THREE PARAGRAPHS MENTION AN ANALYST NAMED A. GARY SHILLING.
HE IS ONE OF THE MOST ARTICULATE OF THE “BEARS.” I DISAGREE WITH MOST OF
HIS ANALYSIS AND FORECASTS, BUT
HE IS A HIGHLY RESPECTED ANALYST WITH A PRETTY GOOD TRACK RECORD,
NOTWITHSTANDING SOME GLARING MISSES. BUT, ALL THE OUTSPOKEN FORECASTERS
HAVE THEIR SHARE OF MISSES. I’M RELUCTANT
TO SINGLE OUT ONE ANALYST BY NAME, BUT DO SO WITH RESPECT, AND I HOPE
THAT COMES ACROSS IN THE FOLLOWING DISCUSSION.
The
state lawsuits ended the “robosigning” mess in February (coincidentally
the month that our positive trend lines seem to begin). This was
supposed to set in motion a big new round of foreclosures, put on hold
during the lawsuit, which would flood the market with a huge excess
inventory of housing that Gary Shilling keeps saying is inevitable.
(Gary Shilling gets and deserves a lot of credit for accurately
predicting the housing crises of 2007/2008. However, we should remember
that in July, 2011 he confidently predicted, based on what he insisted
was still two million excess housing units, and that an imminent 20%
collapse in home prices would lead the nation into a severe recession in
early 2012.)
However,
as the nightmare of 2008 was coming to an end the most aggressive
estimates I remember were three to three and a half million excess
units. For four years the industry has built a half million below the
norm (that’s the long term norm, not the exaggerated norm of the early
2000s). So, we have absorbed something around two million of the excess
already. In last month’s report I got into the discussion about all the
owners who were upside down and, it was assumed by many experts, would
“strategically” default. But, it turns out that “HOME” means something a
lot deeper to an American homeowner than a line on their balance sheet,
and the percentage that are using the “strategic default” is pretty
small. Now, as we move into the fifth year of our “housing crises” it
appears that there’s a concerted effort by the FDIC and the major banks
to “slow walk” their way out of the rest of their “special assets”
(foreclosures). Bottom line; every time I try to get into the “shadow
inventory,” I keep coming up with numbers, at least for Orange County,
that, if they all came to market at one time, would amount to several
months of inventory, not the several years that Gary Shilling, and
others, to be fair, keeps talking about.
The
bulls and bears who analyze, write and speak on this shadow inventory
usually have lots of acronyms after their names and really expensive
software programs to do their analysis. (Yet they still come up with
exact opposite conclusions.) Gary Shilling could be right about another
two million units of “shadow inventory,” and another 20% drop in housing
prices, and about a major recession starting earlier this year
accompanied by a major stock market correction. But, if you followed him
in July, 2011, you lost a lot of upside opportunity in both real estate
and the stock market while hiding your money under your mattress. One
of the reasons I’m writing this is to try to interject some street view
common sense into the constant parade of the “talking class” on our 24
hour news channels. We have to be careful, but there’s a point where
careful turns into paralysis, and usually at the exact wrong time.
#1 QUESTION I HAVE BEEN ASKED DURING AUGUST
Over
the last month I have been repeatedly asked one or another version of,
“What will happen to the market when school starts and the summer
selling season ends?” Great question—at least I thought. To answer that
frequent question I started “digging deep” into ten years’ worth of
numbers. To my surprise I found only the very skimpiest of evidence
showing a hard pattern of the strong summer sales period versus the
weaker fall/winter sales period. Further, there were numerous months
completely out of sync (a strong month during the winter or a weak month
during the summer), further undercutting this already weak pattern.
(There is a more recognizable pattern in “listings” than in “sales.”) No
doubt a statistician could pick out a pattern with some percentage
predictability attached. But, for a normal person just trying to make a
decision on buying or selling a home I could not find a pattern anywhere
near strong enough to use as a factor in your decision making process.
Further, if a person did want to use the listing pattern it is clear
that 2012 is a contradiction. The “pattern” style increase in the number
of listings in the second quarter certainly did not happen this year.
We
now head into fall with a shortage of listings in the most sensitive
price ranges in broad sections of the county—glaring shortages in the
lower priced condominium market. From my perspective—from street
level—it looks like we’re likely to see slowing sales in the next two or
three months, but not because of anything having to do with the end of
summer or the beginning of school. The sales this fall will be impacted
more than anything else by a shortage of the inventory! What a change!
#2 QUESTION I HAVE BEEN ASKED DURING AUGUST
You
might have guessed it, “What will happen after the election?” This
election can have a profound impact on who and what economic philosophy
occupies the Executive Branch, the House of Representatives and the
Senate at the national level, and some pretty important economic
decisions at the state level. If you and I were sitting together we
might spend several hours dissecting the different outcomes of this
election. And, hand-in-glove, the aptly named “fiscal cliff” ties
directly to this election. For sure, it is impossible to watch your
choice of cable news without seeing multiple political commentators
waxing eloquently on this subject. Whether there will be any kind of
fundamental shift in supply and/or demand in the 1st or 2nd or 3rd quarter of next year as a result of the election outcomes is still pretty foggy to me.
I
have read dozens of expert forecasts—political, economic, and combined,
with very different conclusions and forecasts. Most all of these
pundits have an exuberant confidence in the accuracy of his/her
forecast. The pessimistic “bears” have ample logic for their scenario.
But, the optimistic “bulls” have equal logic for theirs. Since they are
noticeably contradictory there will have to be about as many wrong as
right. In the true spirit of the talking class we will certainly know
which ones are right a year from now—they will remind us. (Ironically,
many of the ones who are wrong will find a way to spin the results to
make them look right after all.) I have to report one simple answer to
you; I don’t know what the results of the election—or the fiscal
cliff—will be in the next few quarters, or the impact on the 2013/14
housing market. (You can also put Europe and China under my “I don’t
know” heading.)
The first Professor of Economics was hired by Harvard University in 1871.
Prior to that “economists” had to “live their talk,” so to speak, and
reside in the world of their theories. I wonder if creating a whole new
class of the “academic economist,” a class of “expositor in theory,”
residing in the comfort of lifetime tenure followed by generous
pensions, and shielded from “living with one’s mistakes” has served us
well. F.A. Hayek said, “We shall not grow wiser before we learn that
much that we have done was very foolish.”
IF YOU’RE SITTING ON THE FENCE YOU HAVE TO SERIOUSLY CONSIDER THIS TIMING OPPORTUNITY
I’ve
read reports that even though this has been a good summer in various
markets around the country, we’ll continue to “bounce along the bottom”
for another year or so. There are still experts, expanded upon above,
insisting that we are about to be hit with a huge inventory of “shadow
inventory” which will pressure prices again. But here’s the reality of
what the numbers are telling us about the last six months, and where we
are today. If you’re thinking of SELLING, this is the most
favorable market for you in at least six years. Might it get even
better, or worse, or just bounce along? Yes, it might. If you’re
thinking of BUYING, particularly using financing, this is the
most favorable market for you in at least four years. Might it get even
better, or worse, or just bounce along? Yes, it might. Looking back on
my own career, or my whole life for that matter, I have let slip many a
good opportunity in the here and now by over-thinking the unknowns of
tomorrow. Repeat: We have to be careful, but there’s a point where
careful turns into paralysis, and usually at the exact wrong time.
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Contact Information
Michael Shepard
Estate Represenative
Mobile: 949-395-6640
Email: mikeshepard@cox.net
First Team Realestate
Laguna Beach, CA
Estate Represenative
Mobile: 949-395-6640
Email: mikeshepard@cox.net
First Team Realestate
Laguna Beach, CA
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