A Few Pundits Quick At The Trigger But ...

Over the past month, government officials and other industry pundits (C.A.R. and National Association of Realtors) have been trying to spin a positive story from the steady stream of statistics on the housing market. As arm-chair economists it becomes difficult sometimes to sort out the truth from the chafe. I understand that a significant part of our market economy is built upon "public perception" which oftentimes has little factual basis or support. Furthermore, these agencies and groups emphasize a positive strand amongst a steady stream of "bad" news in an attempt to buoy the market. But consumers "in the market" need to avoid the temptation of stopping at the raw data (statistics), and connect the "dots" which consist of the factual plot points when evaluating your buying or selling decisions.

Reported today in the Los Angeles Times Business section is that "home sales fell again in May." The story reported that sales were down 3.6% from the same month last year. However, last week C.A.R. and other pundits reported that May sales figures were up for the month 9.2% as compared to April's sales figures. So what is the real story behind the numbers - increase or decrease? Well not so fast ...

The real story is not in the sales statistics cited above, but the relationship and affect a series of other numbers provided at the end of the article have on the housing market. Inventory levels (number of homes on the market) fell 3.5% in May, and that given the current sales volume it will take 9.6 months to sell this inventory. The historic average inventory level for supply is approximately six months. Higher inventory levels result in lower median home prices; while lower inventory levels usually cause an increase in median home prices.

Other information that affects inventory levels which in turn drives both median prices and sales figures are the developments in the foreclosure markets. Last month Data Quick reported that there were over 100,000 homes in foreclosure in Southern California. In the Times article the Federal Housing Finance Agency reported mortgage delinquencies on the rise - the number of borrowers at least 60 days behind on payments rose to 1.1 million from 926,000 in the 4th quarter of last year. This represents a 3.62% increase on late pays nationwide. This will result in another wave of foreclosures and short sales going to market over the short term - four to twelve months. This pent up supply of homes will be in addition to the homes in foreclosure subject to the "moratorium" in place. The current moratorium prevents banks and REO service companies from marketing existing foreclosure properties. How will the Feds manipulate the market and slow down the tidal wave of foreclosures which may dramatically affect the inventory levels and price points at the lower end of the market? This is a significant plot point as it relates to the lower end of the market - which recently has made up 60% of the total home sales in Southern California.

The best long term medicine may be tough to swallow in the short term ... the Feds need to let the market place resolve the mess. This means that the moratorium should be lifted allowing REO servicing companies to get the existing foreclosures sold. Turning over the existing foreclosure backlog will create pricing pressure in the short term; however, it will ultimately benefit the real estate service industry, construction, retailers supporting home improvement, manufacturers, lenders, and the financial markets (and for that matter all supporting service industries and markets). In addition, new buyers will benefit from a lower affordability index and entry into homeownership. The other tangible benefit will be that by the Feds loosing the reins on the moratorium they will prevent a future whiplash that potentially will create more damage than any short term pain.

Specifically, as the economy continues to soften in 2009 (look at the unemployment figures), more and more homeowners will get behind in payments which may continue to increase the number of short sales and foreclosures on the market (thus affecting inventory levels, etc.). A steady stream over the short term may be easier for the market to handle verses creating, through a series of moratoriums, "pent up" inventory that may get unleashed on the market all at once. Another ripple effect to the moratorium is that REO service companies have allegedly been told that the moratorium will be lifted in Sept - the problem with this plan is that by the time tenants are evicted from the property, the holiday season will be upon us and that is typically when the market activity drops significantly (less buyers in the market); thus causing vacant foreclosure homes sitting idly on the market further creating price erosion. As with many manipulated market plans or government regulations, the solutions oftentimes create situations worse than the problems intended to solve. This may be the case with the proposed plans and actions currently being hatched in the real estate industry these days.

Let me know your take on these developments. Otherwise, if you are looking to buy or sell real estate in Southern California look us up at: www.coastalcommunityhomes.com.