More bad news for January

January’s weather isn’t the only thing that’s cold, dark and wet. First the retail sales numbers were reported down for the holiday shopping season. Economists said that Christmas shoppers were dismayed with higher gasoline prices. Spending $50 to fill up your tank of gas is enough to dampen any Christmas spirit. Then the new construction numbers were published by the building industry. It was no surprise that home builders were not building as many new homes. New construction dropped 30 percent from last year.

By mid-month the Realtors reported national and statewide resales lagged behind last year. The Labor Department reported that unemployment increased for December and that started everyone talking about a recession. The discussion of the “R” word caused the stock market to drop and then the new foreclosure numbers got reported by Data Quick.

The number of homes that were foreclosed upon by lenders holding a mortgage in Sacramento County increased 482 percent from 1,283 in 2006 to 7,472 during 2007. Placer County had 1,016 foreclosures in 2007 up from the 171 in 2006 and El Dorado County finished the year with 387 foreclosures up from 41 in 2006.

Across the state, foreclosures totaled 31,676 for the fourth quarter of this year and 84,375 for the entire year. In our 8-county region 1,686 homes were foreclosed upon during 2006 and 10,049 homes were lost in foreclosure during 2007.

In light of all the foreclosures, the median sales price for a home in Sacramento fell to $280,000 in December a 28 percent decline from its peak in 2005. Half of all home sales in Sacramento County are bank owned properties.

In addition to the number of foreclosures, the number of homeowners missing their scheduled monthly payments is increasing. Across the state 254,824 default notices were filed with county recorder’s offices during 2007, up from the 104,977 filed in 2006. In the eight-county region 10,101 notices of default were filed in 2006 and 24,787 for 2007. “We’re still climbing to a peak in foreclosure activity,” said Data Quick analyst Andrew LePage. “We don’t even have a sign of the peak.”
I think I will go back to bed, cover my head and wait for spring.

Weak December sales

The Commerce Department reported that new home sales in December dropped to the lowest level in nearly 13 years. Instead of the million or two we're used to hearing reported at year's end, new home builders only sold about 774,000 new homes in 2007. That's 26.4 percent below 2006, and the biggest year-over-year drop since 1963, when new home sales were first tracked by the government.

Prices fell dramatically in December for both the average (-11.5 percent to $267,300) and the median (10.9 percent to $219,000) price fell 10.9 the biggest drop in prices since 1970. The median is the point at which half the sales are under and half the sales are over.
Completed homes were 40 percent of the inventory on hand, which is a 26-year-high in relation to the pace of sales. There is now a 9.6-month supply of homes for sale at the December sales pace.

The National Association of Realtors had recently reported the first year in decades that the median sales price fell.
New homes costing more than $400,000 fell 50 percent from a year earlier, illustrating that the credit crunch isn't over yet for jumbo loans. And sales financed by conventional loans fell 27 percent. Home sales with VA or FHA loans fell 16 percent. Homes purchased with cash fell 24 percent.

But as bad as all that sounds, things could turn around. Clearly buyers are waiting for prices to come down, but since December, mortgage interest rates have softened a full percentage point to near record lows. Consumers can save approximately $100 a month in payments, and qualify for homes that might have been out of reach a month ago. The government is feverishly working on solutions that will raise the conventional loan limit from $417,000 to $625,000, allowing more people to finance without resorting to jumbo loans. In addition, new home standing inventory has caused existing home sales to soften. If more inventory is absorbed in new homes, that improves the outlook for existing homes. Look for a much better spring. Home sale trends are identified over several months.

Borrowers stuck with existing loans

The National Association of Realtors reports that both sales and prices were down in 2007, but there's another measure, which has also fallen -- and this one is good news.
Interest rates are down. Freddie Mac reports that toward the end of January rates for 30-year fixed-rate financing reached 5.48 percent with .4 points. This interest level is not only ridiculously good when seen in the context of the last five decades; it may also be the key to containing the foreclosure mess.

Figures from RealtyTrac.com show that foreclosures in November were 68 percent higher than a year earlier. No less important, foreclosure numbers are expected to rise because millions of additional toxic loans remain outstanding.

In such circumstances it certainly makes sense for borrowers with exploding ARMs to refinance into stable, fixed-rate mortgages. But many such borrowers have loans where mortgage balances have grown while home values have fallen. Such borrowers can only refinance if they bring cash to the table, cash they don't have. We also have borrowers who paid soaring mortgage costs but skipped other debts. Now with damaged credit, they no longer qualify for the best mortgage rates.

What can be done? Lenders had no trouble changing traditional underwriting standards when it meant big profits, now they're using ignored standards to lock borrowers into high-cost loans. Surely borrowers with significantly-lower monthly payments are a better risk than borrowers who are slowly drifting into bankruptcy. And certainly lenders are best served avoiding the big costs represented by foreclosures. But what if lenders are not responsive to new marketplace realities? Then one very-real possibility is that an inflamed political process will impact the financing arena in a way that will comfort no lender.

A little unreported good news

If you stand back and only look at the negative economic and housing news this week, you might feel a bit numb -- and a little discouraged. But if you focus on the bigger economic picture, you might be surprised at some of the good news that's lurking out there -- especially the forward-looking factors.

On the negative side, you probably know the numbers: New homes sales down 4.7 percent in the latest month. Median home resale prices down 1.8 percent for the full year of 2007 -- the first times prices have dropped on a national basis since 1968. Foreclosure filings up 75 percent for the year, leaving dozens of major markets clogged with bank-owned real estate for sale at depressed markets.

What about the positives? Some of them are probably in the category of "news you never heard about because it never got reported." For example: The most comprehensive national index measuring home price movements, covering almost 7,500 Zip codes and 662 counties in all 50 states and the District of Columbia -- the First American-Corelogic Index -- found prices flat or positive in 31 of the 50 states.

The national numbers are being dragged down primarily by sizable declines in a couple of big states: California and Florida, along with Arizona, Nevada and -- here's a little surprise -- Rhode Island. Among the 60 percent of states with positive performance are the current top performers of the pack: Texas, Utah, New Mexico, the Carolinas and Montana.
Then there are what we call the forward-looking factors: Mortgage interest rates continue to hover just above 40-year lows and the Federal Reserve keeps pushing down short term rates -- twice this month alone.

The economic stimulus package coming from Washington by mid February should be another plus: It promises to raise loan limits for Fannie Mae, Freddie Mac, and FHA well above $600,000 -- maybe even higher than $700,000.
According to estimates from the National Association of Realtors, pushing the limits to just $625,000 could stimulate 350,000 more home sales this year alone -- and lead to $44 billion in new economic activity -- all with no expenditure of taxpayers' money. How about THAT for a cost-efficient stimulus plan for real estate?

Market turn-around

Legend has it that if the Groundhog emerges from its borrow tomorrow (Groundhog Day, February 2nd) and fails to see his shadow, winter will soon end. But if he sees his shadow he will return to his burrow and winter will last another six weeks. Foreseeing the end of our chilly real estate market should be so easy as predicting the winter forecast in Punxsutawney, Pennsylvania. Despite all the negative publicity from the national press, most people are beginning to ask “when” and not “if” the real estate market will turn around. That’s actually a good first sign but there are other indicators of when the real estate market will find its floor.

This is my fourth market correction in 35 years of practice. They all have similarities but a specific predetermined termination date isn’t one of them. Nobody blows a whistle and yells “End of Slump… Time to buy”. Free markets are as unpredictable as the weather can be in the foothills and I have seen narcissus bud in a February’s frost, snowflakes during an Easter weekend and cherry blossoms in early March.

Attempting to buy a home at exactly the bottom of the market isn’t always possible. Life’s major decisions are made despite economic cycles. Families grow, incomes improve or decline, we move for environmental, health and economic reasons. Forrest Gump puts things into perspective in the 1994 Tom Hanks movie, when he said “Life is like a box of chocolates…you never know what you’re gonna get ”. Although we all understand the concept of buying low and selling high, most homebuyers cannot put their life on hold while waiting for the official end of the real estate slump.

There are a number of prospective homebuyers waiting for some significant event or official pronouncement before they commit to buying a home. Obsessed market-timers usually wait too long to buy and miss out on current opportunities under their noses. Making money in real estate is not all about when you buy or sell but often how long the investment was held. We have yet to see any signs that the real estate market is seeking equilibrium but here are a few traditional and non-traditional turnaround indicators that I will be looking for this year.

When the number of homes for sale starts declining, it’s a good sign that the market has ended its trip south. When housing inventory is leaving the market faster than it is being replaced, it indicates that the best listings have already been sold. It also may indicate that discressionary sellers have decided not to panic and move but to remain in their homes. The record number of listings that we have witnessed in the county throughout 2006 and 2007 is partly responsible for driving down selling prices. When inventory declines, prices will rise.
The average time it takes to sell a home is another gauge of the strength of the market. Currently, our multiple listing service has no accurate information on the actual time it takes to sell a listing. If one agent has a listing for six months and it fails to sell and then another agent lists the same property and it sells in 60 days, the time it took to sell that property is reported as 60 days. It should have been eight months. That inaccuracy of reporting market time will be corrected. When it does, we will be able to obtain an accurate average time that it takes to sell an average home. The fewer days required, the better the market.

One of the first signs of declining interest in a new home development appears when builders begin to offer incentives to their buyers. Many builders begin by crediting buyers for closing costs if they use the builder’s in-house lender for a mortgage. Then landscaping and builder interior upgrades become popular. Soon, builder incentives become a creative free-for-all with offerings ranging from new SUVs to swimming pools. When elaborate builder incentives begin to disappear, the market has turned.

Tracking the county’s average monthly selling price might appear to be a good idea in judging the market but averages can be deceiving. Just as individual stocks will decline while the composite indexes are rising, so will individual house values rise and fall despite statistical averages. Higher end home sales have held up the county’s average selling price. A better indication of market turn-around would be the relationship between the listed price of a home and its sold price. When homes begin to sell closer to their listed price, the market is on the mend.

In addition to traditional market trackers, here are some other indicators that the market has bottomed out. When your neighbor, who got into the real estate or mortgage business within the past four years, tells you that they are getting out of the business, the market will start improving. When you no longer get phone calls or e-mail from lenders soliciting your refinance or home equity loan, it’s a good sign.

When an entire month passes without the evening news featuring some poor soul loosing their home to foreclosure, you know things are improving. When home prices are not the favorite topic of water-cooler chatter, it’s getting better. When you hear first time buyers talking about saving for a downpayment or paying off their credit card debt in order to buy a home, the end of the correction is at hand.
A more stable real estate market is likely to occur within the next 18 months. The exact time is uncertain but its occurrence is as certain as spring in the foothills.