Market Update - Stats

What is happening in the Market?

For the past year, the market has been relatively flat. I expect this trend to continue for a long time. There will be some minor ups and downs, but I do not expect to see any significant movement for the foreseeable future. Many conflicting economic forces are acting in the market and will likely continue to keep our housing values in a relatively tight range. Let me begin with the positives that have helped to stabilize our market. Then I will address the negative pressures that are working against a rise in value and that still present a significant threat to a recovery.

The Positives

On the positive side, we are seeing some stability for the first time since the point where the market began dropping in 2006. For those of us living in the Villages of Columbus, there has been a drop in pricing between 15 to 30% from the highs experienced in 2006. Although this has been extremely painful for many people, this drop has been less than that experienced in some surrounding communities where prices have dropped as much at 50% from the highs of 2006. Interest rates continue to be very attractive. Many buyers recognize that the drop in the market combined with the attractive rates makes for a good buying opportunity; especially for those looking at long term ownership.

Price Per Square Foot & Three Month Moving Average

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If you look at the graph above, you can see that the our property values have been relatively stable over the past year. Month to month dips are much less significant than the overall trend. Once the market stabilizes, it should lead to an improvement in lending. Lenders are reluctant to make investments where the underlying value of the property is in decline. As a result, it has been very difficult for buyers to get capital to make purchases. Lenders often require 25% down, and that has kept many buyers out of the market. In the higher end of the market, the difficulty of acquiring good financing over the $729,000 conforming standard has limited people from purchasing higher end properties. As the market stabilizes, it will give lenders flexibility to offer more financing options. Real estate is highly dependent on the ability of purchasers to acquire good loans. Therefore, if more options are available, more people will be able to enter the home ownership market.

As of this writing, the State of California just approved at $10,000 dollar tax credit to families who purchase a home beginning in May 1, 2010. Two pots of one hundred million each have been set aside to support this credit for new and existing home purchasers. This is set to begin just as the federal government stimulus credit of $8000 ends on April 30, 2010. The positive here is that the government seems determined to play a role in stabilizing the real estate market. The reality however, is that this is artificial stimulation that is not fundamental to a sustainable recovery which comes from economic growth. Long term recovery will take time. It is important for the pessimists to remember that real estate is cyclical. But, it is specifically cyclical over an upward trend. The threat of deflation, even in this poor economic climate has largely passed. Therefore, there is no reason to believe that the macro economic trends of the last centuries will not continue and that housing will not experience an inevitable recovery.

Just don’t expect this recovery to happen soon. Our recovery looks more like a boxer who has taken a big punch, wobbled in the legs, looked like he was going down, but now has shown some signs of recovery and stability. Expect him to be in survival mode for a long time as he recovers his senses. At the very least, I am confident that we are near the bottom of the market and that makes it a good time to buy for those who are able. However, I do not want to overstate my optimism, because there are some very significant negative factors which could (I hope not) drive another small dip in the market. I believe this is a remote possibility but in all probability we will be in for a long ride of relatively stable home values without any significant increase or decrease.

The Negatives

Real estate values are directly related to the health of the general economy, and the general economy is more tied to real estate than most realize. Stabilization of real estate is good for the economy, but it is very difficult to stop a downward cycle. Orange County has not been as severely affected by the economic downturn as have the surrounding Los Angeles and Riverside Counties. The latest data shows that we have a 10.1% unemployment rate as compared to 12.5% in California and 15% in Riverside. (http://www.oclnn.com/orange-county/2010-03-10/business/orange-county-unemployment-hits-record-mark) We cannot have a meaningful recovery in housing until there is a meaningful recover in the general economy. In December, we actually saw an improvement in the unemployment rate as it dropped from 9.6% to 9.1%. However, most recently, these numbers have been revised and we currently stand at 10.1% with an expectation that unemployment will continue to modestly rise over the coming months. There are some overall positives in the Orange County Business community which may lead to a recovery towards the 2nd half of the year. But we must understand that a housing recovery will be intimately linked to a recovery of the general economy.

While interest rates are at historical lows, there is good concern that they will rise. I expect that the federal government will try to keep rates low until a recovery has taken hold of the overall U.S. economy. They have been investing billions to artificially stimulate lending and keep rates attractive for businesses and home purchasers. The government will slowly remove supports that have kept the interest rates low as the economy improves. If the government does this well, they will do this without causing a dramatic affect on the housing market. This means that they will be removed in such a manner that housing will remain stable. If they wait too long to raise rates, it will spark heavy inflation. Inflation would be good for current homeowners, especially those locked in with good long term low interest rate financing. But it also destroys long term wealth and savings. As interest rates rise, affordability will decrease. People will have to pay more each month for the same priced property. Before we can have any true appreciation in the market, these artificial price supports will have to be removed and the market will have to stand and then run on its own. Our government is highly leveraged into this housing recovery, and it will take a long time for it to deleverage itself and let the real market forces of supply and demand act without artificial support. This will take time.

My largest concern relates to the affect the drop in values has had and will continue to have in our housing market. We cannot sprint back up in home values because there is far too much lingering pain in the market that needs a lot of treatment. An enormous percentage of owners in this market now owe more on their home than what it is worth. In reality, people in this position are not owners at all, but renters. They do not have any equity in the property and therefore there is no real ownership position for them in their homes. These families have to make some very difficult decisions. Many have stopped paying their lenders. In the end, they would rather become renters with a lower monthly payment than psuedo homeowners (but economic renters) with a high monthly payment. Most of these owners are limited by the economic circumstances surrounding them. Many are sitting on 2^nd loans that have adjusted and now carry interest payments that are in excess of 10%. These payments are extremely high and far more than current market rates. But these families do not have the option of refinancing into better rates and terms because the value of their home will not allow for a refinance.

I have access to data which enables me to see the distressed properties in our neighborhoods. The picture is not pretty. Far more homes are in default or near default than most people know. I have plotted the Tustin addresses on a map so you can get an idea of the picture that I see. This is a map of the pre-foreclosure (in default), and distressed properties (bad loan to equity situations) within the city of Tustin for the month of March 2010.

There is at least three years of inventory that must go through a revaluation process. When people owe more than their home is worth, it not only affects the homeowner, but the general economy as a whole. These people are often under such financial strain that they are not meaningful participants in the economy as a whole. Lenders have been slowly adjusting to this reality and the government has been playing pin the fix on the donkey. There is no magic bullet that can alter the reality that a huge number of families are upside down with their obligations. There is plenty of blame to go around, but the right direction is to work through this inventory with realistic fixes as soon as we can. The process is getting better and more streamlined. Homeowners underwater should seek a loan modification with their lender. If that is not successful, they should do a short sale. When these avenues fail, the property goes to foreclosure. Modifications and Short Sales are preferable to the homeowner and the lenders – so expect a lot of these in the coming years. Because of the massive amount of homes facing these challenges, it will take many years to address all these issues and remove this quicksand from keeping our homes mired at their existing values.

For those living in the Villages of Columbus, you can see from the chart below that after market sales have been increasing significantly as you would expect from any new home community. However, the vast majority of these sales have been distress situations, especially since most of our homes were purchased between at or near the peak of the market. It will take time for our own community to work through this imbalance.

Number of Closed Sales

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Although the market has stabilized, the repercussions of the drop in the market will be felt for years to come. The best thing for all of us to do is to honestly address the current market and make prudent real estate decisions in whatever circumstances we find ourselves. As always, I am ready to help.

Dan