Our Real Estate Blog

August 10, 2010

Our observations of the real estate market in the greater Los Angeles area (includes LA, Orange, Riverside and San Bernardino counties):

MARKET SUPPLY

• market supply in Covina is at 3.4 months - on average a 6 month supply is healthy for any market – our MLS overall has 4.2 month’s worth of supply based on 2009 volumes and 4.5 month’s worth based on 2010 volumes
• most cities have a market supply of less than 4 months
• even many high demand areas are now close to or above 3 months of supply
• some area are over 5 months of supply (like Los Angeles at 5.8)
• the number of homes on the market has, slowly but steadily, been increasing
• in the last few months we started to notice an increasing number of regular sales – more research has shown us that these are homes that were bought by investors at the foreclosure sale, fixed and then put back on the market
• a large percent of the homes on the market are either short sales or bank owned (combined at approximately 60%)
• the number of homes in escrow have increased over the last few months and are still quite high in some areas – we anticipate this to level off as the tax credits have expired or will soon run out of money

HOME PRICES

• home prices are still low and the average per square foot prices appear to have stabilized– in most areas prices have held steady for the last few (around 5) months and they are at 2003 levels - average per square foot prices are moving within a 5% or less range
• average per square foot price of homes compared to last year averages is up close to 5%
• homes are selling on average at 98% of asking price
• it looks like the low for average per square feet was in February 2009 for homes and July 2009 for condos – this could still be tested since the banks are still sitting on a lot of foreclosed homes (at least that is what we are hearing from a lot of reliable sources)
• the length of time a home is on the market before going into escrow has also been increasing

SALES VOLUMES

• getting a loan for a condo purchase seems to be harder due to the fact that many complexes do not qualify for a loan even if the buyer does
• some homes are still receiving multiple offers (however the final sales prices are no more than 5% above the last asking price in most areas)
• the volume of homes sold this year appears to be on track to be close and within +/-10% of last year’s volumes
• buyer activity seems to have slowed since the end of the tax credits
• there is what we believe to be a sizable group of buyers who are waiting to see which direction the market will go

INTEREST RATES AND LOANS

• interest rates spike and sink based on various economic data that is released - rates are still well below historical averages - depending on various criteria, a loan under 4.75% or less is still possible - if you can afford it, you can even buy this rate lower
• when comparing interest rates also compare the fees that it will cost you to get that rate because that is really what you are shopping for (the cost of a particular interest rate)
• FHA loans are what most people are getting to qualify
• a pre qualification is not enough to win most deals, you need to actually have your documentation submitted and verified and have a loan approval to make your offer strong
• FHA, Fannie Mae and Freddie Mac are changing their fees as well as when people who had foreclosures or short sales will be able to apply for anew loan

MAKING AN OFFER

• for most bank owned properties you still may need to cross qualify with their lender
• if you can afford a 10% or higher down payment and get a conventional loan you will have a better chance of getting your offer accepted - although conventional loans are getting tougher to get
• patience is vital in this market with some homes receiving multiple offers – supply is increasing and demand is flattening
• short sales are the largest part of the market and banks have improved their processing of these – they are still taking a long time, compared to other types of transactions, to get approved but more of them are getting approved
• the new government sponsored program that is still being implemented will help to streamline the process and make short sales quicker
• many offers are from buyers that are buying with cash
• we are continuing to see a lot more investors buying properties (in many areas buying a home with 15% down will results in positive cash flow)
• there is a lot of competition among investors and that hurts owner occupying buyers
• appraisals are still a wild card and in most cases they are being scrutinized a lot more and sometimes more than one appraisal is requested
• with the expiration of the tax credits it seems that some buyers have left the market (or are in escrow) and offers are easier to get accepted

TAX CREDITS

• The California tax credits are running out and about a week ago had only half the money left that was allocated to the new home program – and the resale home allocation is run out even though they are taking applications in case some the previous submissions do not qualify
• the loss of the tax credits drove some buyers out of the market and thus reduced competition and has made it easier to have offers accepted

LOAN MODIFICATION

• there are new programs and a bigger push to keep people in homes – if you are in trouble you have a fair chance of getting help – but you have to take the time and effort to contact your lender and provide them with what they require - timely
• banks are working more with homeowners to modify loans and keep defaults down – few trial modifications end in permanent modifications - unfortunately about 80% of these modified loans end up in default within 6 months and will go back through the foreclosure process

OUR OPINION

• we anticipate prices to stay low
• we anticipate interest rates to stay in the below 5% area for some time
• we also believe that demand and competition will continue to ease and decrease
• FHA loans will continue to be the largest share of the market and the qualification for one will start to get harder and cost more
• in our opinion there will be more bank owned properties coming on the market in the near future and for the next few years, however we think the volume will be less than it has been
• the high volume of REO properties (the shadow inventory) that the media has been talking about has yet to materialize - we started to see a small trickle in the last few months and are hoping the banks will release more soon
• we believe that average per square foot prices will move flat with slight up and down movements and will finish the year less than 5% above last year’s prices
• if demand continues to be weak and the number of homes on the market continues to increase than we believe that prices will once again start to drop

Bottom line:

1. Federal Tax credit is gone and the State Tax credit that started in May 2010 is for for the most part gone for re-sales more than half gone for new homes

3. Inventories are slowly but steadily increasing but still low, especially in high demand areas

4. Prices are seem to have stabilized

5. Interest rates are still close to historic lows