Mike Shepard's Realestate News Letter: November 2012

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.

Laguna Beach

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