SO HAVE WE BOTTOMED OUT … YET?

If you listen to various media outlets the housing market nation wide has reached bottom and the market maybe stabilizing in certain areas. Market pundits and realtor organizations comparing existing homes sales in June year over year and from May figures suggest that we may be through the worst of the market downturn. Realtors report from the trenches that prices in the lower end of the market are selling quickly with multiple offers. So what does all this mean? Have we experienced the bottom? Is this information reliable?

Both National Association of Realtors (“NAR”) and California Association of Realtors (“CAR”) report a 3.6 percent annual increase in June comparing to May’s revised figures. Total units sold in June were 4.89 million compared to May’s revised pace of 4.72 million units. Lawrence Yun, NAR chief economist, stated “we expect a gradual uptrend in sales to continue due to tax credit incentives and historically high affordability conditions.” In California, CAR reported on July 27^th that home sales increased 20.1 percent in June compared with the sales period a year ago. Furthermore, CAR President James Liptak stated that “June marked the 10^th consecutive month of positive sales gains, and the fourth month of rising median home prices.” The other piece of news that has created this “false” sense of recovery is that in California it was reported that the number of properties going to Trustee Sale (the second step in the foreclosure process) decreased by 28.9% in June.

Many people interpret these numbers to mean that the market has reached bottom and is starting to move in the other direction. However, if you “peel back the onion” slightly you might see a different story evolving that may impact your assessment. There are several significant trends worth considering as a part of your market assessment. Realize that any discussion on national and state trends may not be reflective of individual “sub-markets” (aka “micro-markets”) within your particular local market, such as the Bixby Knolls area of Long Beach (90807 zip code). So you need to understand the broad national and state trends, but ultimately evaluate your particular sub-market or micro-market to accurately assess how these trends affect you directly.

The first factor to consider is how unemployment figures into the economy and home values. Recent economists are predicting that unemployment will continue to grow and create a “drag” on the economy through 2011. Some have predicted a continuation of double-digit unemployment. In Southern California, specifically Long Beach, the unemployment is hovering around twelve percent (12%). As unemployment rises fewer people will be able to afford paying their mortgage or purchase new homes. If this number continues to increase you will notice property defaults on the rise, which will over time impact local inventory and property values.

The second factor to track closely is the current foreclosures on the market and the number of properties going into default (notice of defaults actually filed with the County). According to ForeclosureRadar, a company that tracks California foreclosure data, the number of Notices of Default (“NOD” – the first step in the foreclosure process) filed in California increased 11.8% in June to 45,691. This number is the second highest monthly total on record, and is a 10% year-over-year increase from June 2008. Additionally California had over 135,000 foreclosures in process as of June 2009 (NODs filed through Trustee Sale). Furthermore, there are bank owned properties that have been taken back in auction (Trustee’s Sale) not currently on the market. It is common knowledge that the Federal government has encouraged all banks to “honor” a moratorium on REO properties as well as foreclosures – moratorium has kept REO properties off the market and banks have “suspended” any foreclosure efforts since the fourth quarter 2008.

How many REO (“real estate owned”) properties are currently held in inventory by the banks and service companies (i.e., Fannie Mae and Freddie Mac) is unknown; however, it is believed the number is significant. This “invisible hand” has controlled the inventory of homes on the market (if you restrict inventory [supply] and you have a steady number of buyers [demand], then the law of supply and demand will move prices up) and affected prices as a result. As these foreclosures come onto the market it will cause a “bloat” of inventory that will cause a further reduction in the median price for housing in high foreclosure areas.

There has been significant commentary in the press media lately regarding loan modification. Although loan modifications are a preferred option with the Feds (because they are committed to reducing the affect these foreclosures will have on the economy), the industry estimates that anywhere from 25%-60% of these loan modifications have or will re-default, and re-enter the foreclosure process in the future. See the Wall Street Journal article in May of 2009 entitled “Mortgage Modifying Fails to Halt Defaults.” If this trend continues than upwards of 60% of the 300,000 loans currently being modified will re-enter the foreclosure process down the road.

The statistics not being emphasized by the Feds or industry associations (CAR or NAR) will dramatically affect both the inventory levels as well as market valuation in the future. The Feds are committing significant capital and resources into the economy, specifically housing which has softened the down turn; however, there could be further erosion in the market in the months to come due to these other factors. The difficulty is that the Feds are in effect “manipulating” the market in order to reduce the drag housing has on the over-all economy. So the real answer is that the market has improved, but it has a ways to go before foreclosures stop flooding the market and placing downward pressure on prices. The key is to watch current trends with an eye to what is coming along in the pipeline.

If you wish additional information and statistic data on your particular micro-market visit: www.coastalcommunityhomes.com. Otherwise if I can be of service to you, please send me an email at jim@peys.net.