Mike Shepard's Realestate News Letter: 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.

Mike Shepard's Realestate News Letter

July 6, 2012 Realestate News Letter

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