Mike Shepard's Realestate News Letter: December 2012

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. 3^rd 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

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