Sunday, August 26, 2012
August 6th 2012 Realestate News Letter
WHAT DOES THE BIG PICTURE LOOK LIKE THIS MONTH
The
Orange County residential real estate market generated some intriguing
developments in the month of July. Last month’s email was written on the
heels of a poor jobs headline, while today’s is written on the heels of
a “depends-on-the-spin-you’re-
One
of those intriguing developments in the last thirty days has been a
sudden awakening of the “universal press corps” to the primary subject
of last month’s email—WHAT’S REALLY GOING ON IN HOUSING. All of a sudden
there seem to be many stories written or reported about “signs of life”
in the national housing market, and increasing stories about various
markets with “inventory shortages and multiple offers.” But, of the
many, many reports I read in a month there are still many experts
talking about the horrors of the “shadow inventory.” And, since that’s
one of the first things that people want to bring up in a conversation
let’s spend a paragraph on the subject.
First
fact: I don’t know how big the “shadow inventory” really is. Second
fact: I don’t exactly know what the definition of “the shadow inventory”
really is. Third fact: Apparently no one else does either, because
there doesn’t appear to be any two “experts” who share the same
definition, the same numbers, or the same formulas for ascertaining or
using the numbers. In a very broad general sense “they” all seem to
agree that it is large “pool” of houses on which there are mortgages
that have not been paid and are in some state of “foreclosure” or
“pre-foreclosure,” plus houses that have been foreclosed upon,
are owned by a lender, who, for some reason, is just holding onto to
them instead of selling them, plus those houses that people live
in who are “upside down” on the mortgage (what they owe versus what the
house is worth), and who are apparently waiting for a “strategic” time
to default. The first group above, foreclosures and pre-foreclosures,
seems to now have some consensus as to definition and the numbers of
units included. The second group, houses being held at bay by the
lenders who repossessed them, seems to be highly flexible, with some
quite reasonable sounding numbers and with some wild-eyed catastrophic
sounding numbers. One of the reasons for being skeptical of these
rumored numbers of “lender owned units about to be released in enormous
quantities” is that we’ve been hearing the same reports over and over
again for FOUR YEARS. Well, it might be true, but it isn’t
information that I can use to run my own “personal economy.” (If any of
you reading this have seen a truly sound formula for arriving at some of
these more off-the-chart scary numbers please pass it along. Since the
stories never go away we would all like to know a “definitive” true
number.)
Now
let’s look at the third group above, and for those of you counting I do
realize that this is a second paragraph. This third group is worth
examining; the folks who are “under water” and most of whom won’t
(according to the cynics) keep paying on a mortgage that is higher than
the value of their house. I personally believe the experts predicting
wide scale defaults on these homes which, in their modeling, will hold
the housing recovery down for many years to come are flat out wrong, in
every way at every level. I think they are wrong in their cynicism that
most people, when they realize their mortgage is higher than their
home’s value will stop paying it. I believe the vast majority of
American home owners have a lot more integrity than that. I believe that
for the vast majority of American home owners the concept of their home
and their family and their place in their community is far more noble
and meaningful—in every way at every level—than the cynical behavioral
patterns predicted by these “experts.” Lastly, not just because I
believe it, but because we are now starting to see data that supports
it, the American home owner is a “breed” never before seen in the
history of the world, people for whom private property, which they hold
title to, people for whom “home” means something far more than lumber
turned into shelter, something of the heart and fiber of the American
dream, and it is not being so casually tossed aside as the cynics
predicted, and it will not be in the future. The cynics predicting that
these Americans will hold back the housing recovery because they will be
defaulting in huge numbers have it all wrong. It’s not because their
math is wrong, but because they don’t understand the faces behind the
numbers, the American character, the American spirit and the American
dream.
WHAT ARE THE TRENDS THAT WILL IMPACT YOUR LIFE—NOW
The
first chart attached to this month’s email tells an interesting story.
Here’s what this graph tells us: for the houses and condos in Orange
County that sold for a price of $400,000-999,000 (what I term the sweet
spot) in the month of July the average “days on market” was 68! Repeat, 68! “Sold” means
closed escrow. That means from the day the house (or condo) was listed
for sale to the time it closed escrow was 68 days. So, what do we get
from this number of 68 days on market? What I get is this; a.) Short
sale escrows are processing faster and faster, b.) Standard sales (and
the financing therein) are processing pretty fast, and c.) The time
between a listing hitting the market and an accepted offer going to
escrow HAS to be very, very fast. Moreover, that’s what I see every day;
it’s what I’m hearing throughout the industry; and it’s what we are now
starting to see reported in the news. Houses coming to market at a
proper price are quickly (very quickly) receiving multiple offers from
well qualified buyers.
Here
are few more highlights from the July numbers. The total sweet spot
inventory (graph attached) shows the inventory at the end of July
continuing at a level just below 2 months. The third graph attached is
one that should catch everyone’s attention, but especially anyone
thinking of selling a condominium in the $200,000-500,000 range. And,
although I’m just attaching the Irvine chart, this 200-500 condo market
looks pretty much the same all over Orange County. Having a 30 day
supply of inventory in this particular segment, the segment that starts
the climb up the “trade-up” ladder is very meaningful. It should, at
this point, be pretty obvious that anyone thinking of selling their
house should consider this a perfect opportunity to act.
Call
to investors: Every week I encounter at least one opportunity that has
slipped under the radar for a variety of reasons, some obnoxious problem
with the property, poor marketing, etc. If you have a desire to
selectively invest in residential real estate please call me. These
opportunities almost all require the following: being able to quickly
break free for a couple of hours to take a look, being able to do a
quick analysis (I will help) and make a quick decision, being able to
provide current proof of funds to complete the transaction, and
sometimes being patient for a long convoluted escrow. These
opportunities come one at a time and anywhere from $200,000 to
$2,000,000. It doesn’t matter if you want to buy just one, or one a
year, or one a month, we should talk.
Interesting
quote put out by TD Bank (original source unknown): “84% of today’s
younger renting generation (ages 18-34) intend to buy a home.” Do you
remember the talking heads just two years ago reporting that the “home
ownership dream of America” is now dead, replaced by a new generation of
permanent renters? NOT TRUE! NEVER WAS, AND WON’T BE! (back to the
fourth paragraph)
Till next month…
July 6, 2012 Realestate News Letter
I
picked up on some trends last year, as an investor poking around at
single family residential homes for rental, that were not supported by
statistical analysis. When I re-entered the market earlier this year, as
a residential agent working for First Team Estates in Laguna Beach the
major media were still reporting on the housing industry with the
darkest of conclusions. (Most of the major media are still reporting
either darkly, or suggesting we could be “close to a bottom.” Jeff
Collins, and the Orange County Register, for one, is more on top
of the recovery story.) But, the “observed” trends were unmistakable,
and finally they are being supported by the statistics. I
have communicated these trends verbally to many of you for several
months, and decided it was time to reach for a broader audience, and do
so with more consistency. Hence, unless you “opt out” you will receive
an update from me at least monthly.
WHAT DOES THE “NEWS” TELL US, REALLY—AND PERSONALLY?
Today’s
unemployment data is lousy—fourth one in a row; the economy is
sputtering; the “market” is down, China is somewhere between “off some”
and “a hard landing;” Spain, Italy, and Europe—we don’t even want to get
into that; and the real estate market is still a drag, but maybe with
some bright spots here and there.
As
I ponder today’s CNBC coverage of the economy my mind takes me back to
when there wasn’t a constant input of news from a uncountable number of
news sources. I started selling real estate in Orange County in August
1975. Mortgage rates were 9%, down payments were 20%, the 73-75
recession was just ending and unemployment was 9%. I had been in
California for three months, and had a brand new real estate license.
The news was on twice a day, and I was too busy to watch it at 6:00, and
too tired at 10:00. So, I didn’t know all the reasons what I was trying
to do was ill-advised, so just did it anyway.
A
couple of years later, with the proceeds from a duplex Linda and I had
owned and sold in Olathe, Kansas, we, along with her parents scraped
together 30% down to buy a fourplex in Garden Grove at something like
13% interest. (President Carter had been elected and was going to cure
the economic malaise with good old Keynesian “government spending,”
producing, instead, what we have labeled “stagflation.”) Before that, in
1976, we had purchased a nice home in a nice neighborhood in Yorba
Linda.
There’s
a reason for telling this little personal story. Besides the striking
similarities to today’s economic climate, the 70s (and early 80s) had a
fair amount of economic misery attached to them. (FYI, in 1981 a gallon
of gasoline sold for the 2012 inflation adjusted equivalent of $3.37—and
that was before the government mandated that 39% of our nations corn
crop should be added to it.) Here’s the point: Top to bottom,
“economics” means something from the standpoint of philosophy, and
certainly from the standpoint of governance of nations. Our economic
philosophy should frame much of our political philosophy. But, it is
easy to get bogged down in those areas of philosophy and governance, and
forget that each one of us has to skillfully use “economics” in the
conduct of our daily lives. We have to proceed through our days, weeks,
months, and years pursuing our goals and plans with the economic
realities around us.
We
did extremely well on the house in Yorba Linda, and on the fourplex in
Garden Grove. (I can only wish to have done as well on some of the
“smarter” or theoretically “better timed” investments I’ve made.) I
wonder if we had the availability of news input then that we have now if
we would have so boldly moved forward—going into a profession that
probably didn’t make sense, and certainly with buying real estate in a
market that called for more caution. My observation over these past
thirty seven years is that if we really dig into the facts surrounding
our daily lives we often find a different set of “economic realities”
than those being reported by the news reporters. (I’ll bet a lot of you
think that it’s impossible to borrow more than 80% of the purchase price
of a house. That’s what the news tells us, isn’t it? But, is that
really true?)
DO THE HEADLINES TELL THE REAL STORY?
At
the end of this email you will find just ONE graph. In this graph you
will clearly see a “trend.” (I’m still reluctant to call it a trend,
though many analysts hold that three months establishes a trend line.) I
would suggest, back to “observation not supported by statistical
analysis” that this “trend” has really been developing since last
summer. By way of personal anecdote, Linda and I purchased a single
family rental in Phoenix in May of 2010, planning to add another after
the first closed. By the time it closed in September (short sale delays)
the market had “slipped out from underneath us.” Not only would the
same opportunity have cost 10-15% more, but the speed with which new
inventory was turning made it impractical to pursue if you weren’t
living there. (The main stream media has only started reporting this
Phoenix story in the last couple of months.) When I subsequently started
looking at single family rental opportunities in Orange County in the
spring of 2011, I saw signals during the summer and fall that things
were changing here too. These “observations” have now become
statistically verified, as the chart shows
I
read dozens of economic forecasts a month (or maybe that many a week),
many of them centered on real estate (residential, residential income,
and commercial), and the most respected minds in that profession
(economics) can’t reach a consensus on what the next quarter, let alone
the next year or five, will bring. The better ones will always add an
extremely accurate caveat that real estate is local, and local markets
behave differently—now, historically, and in the future. That caveat is
often the most important an actionable thought in their whole report.
WHAT DO THE NUMBERS MEAN TO YOU?
As
you look at the one graph below it is easy to see that in the “sweet
spot” of Orange County residential home sales from the 2nd quarter of
2011 to the 2nd quarter of 2012 we have moved from a 5 month supply of
inventory to a 2 month supply. It is impossible to extrapolate that to
the 4th quarter of 2012, or the 2nd quarter of 2013. I’ll leave it to
the economists and analysts to speculate on what comes after the
election, or the Fed’s next move, or the “fiscal cliff” that Congress is
walking. But, I can make one statement with complete confidence—IF YOU
HAVE BEEN THINKING ABOUT SELLING YOUR HOME, OR HAVE TRIED AND FAILED TO
SELL IT DURING THE LAST YEAR OR TWO, THIS MARKET, RIGHT NOW IS THE TIME TO SELL!
If
you don’t fit this four hundred thousand to a million dollar sweet spot
with its 2 month inventory, what does this market look like for you?
The ENTIRE Orange County residential market (no minimum, no maximum) is
down from a 5 ½ month supply to a 2 ½ month supply. You “gold coast”
dwellers (Balboa, Newport, Corona del Mar, Newport Coast, Laguna Beach)
are seeing even more drastic changes in the under two million dollar
market, moving from an 8 month supply of inventory to a 2 ½ month
supply. That’s right, along the coast the sweet spot is up to two
million, and there is less than a three month supply of inventory. (The
average length of time on the market of active inventory in this coastal
<2 million sweet spot is 39 days, 39 days!)
One
last point; whether you’re gathering information to take some specific
action, or whether you’re just an information junkie, I am digesting it
constantly, and would be happy to pass along or look up for you specific
information on specific real estate questions (public issue,
non-proprietary, of course—First Team would probably like for me to
clarify that). Just send me a reply and tell me what you need.
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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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