Our Real Estate Blog

December 24, 2010

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

IN THE NEWS

• Mortgage rates have gone from close to 4% to about 5% in the last 30 days
• We posted articles on our blog so check them out for more details at http://www.teamszucs.com/RealEstateBlog

MARKET SUPPLY

• market supply in Covina is at 4.1 months - on average a 6 month supply is healthy for any market – our MLS overall has 4.8 month’s worth of supply based on 2009 volumes and 4.8 month’s worth based on 2010 volumes
• most cities have a market supply that is now at or very close to 4 months
• even many high demand areas are now above 3 months of supply
• some areas are over 6 months of supply
• the number of homes on the market has been steadily increasing
• in the last few months we started to notice an increasing number of regular sales
• a large percent of the homes on the market are either short sales or bank owned (combined at approximately 55%)
• many buyers and agents that were previously not very interested in short sales due to the long wait time for the approvals are starting to look at them since they are the majority of the market

HOME PRICES

• homes that closed in November have an average price per square foot close to 5% below the previous month’s - we think this is due to the higher volume of homes available and the lower demand
• 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 8) months and they are at 2003 levels - average per square foot prices are moving back and forth within a 5% or less range
• average per square foot price of homes compared to last year averages is up close to 2.5%
• 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) and now that market supply is increasing
• November average per square foot prices were very close to the lows in February 2009
• 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
• the better quality and shape 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 lower in most areas than last year’s volumes
• surprisingly buyer activity increased in the last few months and we believe this was mainly due to the very low interest rates – with the increase in rates we believe that we will once again see slow down in activity
• overall 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

• in the last thirty days we saw an increase of interest rates from the low 4% range to the low 5% range -
• FannieMae has a good program called Home Path – you should ask your lender about this program – it is limited to certain FannieMae foreclosed properties – interest rates are a bit higher
• 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 a new loan
• When going through the loan approval process the underwriters are questioning anything that may be an issues so be prepared to answer questions and if possible clean up as much of yoru credit report as possible before applying for a loan

MAKING AN OFFER

• for most bank owned properties you still may need to cross qualify with their lender and for sure have to prove funds as well be qualified and prove qualification
• 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
• homes in good shape and high demand areas are selling quickly – often in under two weeks
• many sellers and agents are not very interested in short sales due to the long wait time for the approvals – so if you have a bit of time and patience this may be a good opportunity

LOAN MODIFICATION

• while we are hopeful that loan modification programs will allow folks to keep their homes – the reality is that most modifications do not help much and most do not go through to the final phase of modification for various reasons
• we recommend trying a modification before anything else – just have patience and be prepared to provide a lot of documentation to the lenders
• 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 also anticipate that demand for entry level homes at low prices will continue to be strong
• as supply continues to increase we believe prices will go down – we just don’t know how much – although if November sold prices are an indication we may be heading lower than the low last February
• prices in some areas, like the high desert, do not have much more room to go down so they will likely maintain their current average per square foot price (between $ 55 and $ 90 per square foot – depending on the area) – this is lower than the cost to build the same size home today
• we anticipate interest rates to stay close to the 5% range for a while longer
• and as we saw in the last 30 days we believe that there will be constant movement in the rates
• we also believe that demand and competition will continue to ease and decrease until home prices go lower or until home prices can prove that they will stay at current levels or even start to increase
• 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
• 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

Bottom line:

1. INTEREST RATES MAY HAVE GONE UP A BIT BUT THEY ARE STILL VERY LOW

2. Inventories are slowly but steadily increasing

3. Prices seem to have stabilized AND ARE STARTING TO SHOW SIGNS OF GOING LOWER

NEW SHORT SALE LAW – below is an article from an attorney regarding a new law that will go into effect 1/1/2011

NEW SHORT SALE LAW - HELP OR HINDRANCE ?

By Jim Klinkert

Governor Schwarzenegger recently signed into law SB 931, which prevents lenders from seeking deficiency judgments following short sales in certain situations. The new law, set forth in Code of Civil Procedure section 580e, states “no judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.”

Great news? Possibly, but there are some significant limitations and the overall effect on the short sale market may be negative rather than positive. First, the limitations: (1) the new law is effective January 1, 2011 and will not operate retroactively (i.e., short sale ransactions concluded before the end of this year will not be subject to the protections of the new law); (2) the new law applies only to first trust deed loans, not junior liens; (3) only loans secured by residential property with not more than four units are subject to the new law; and (4) even as to covered transactions, a lender may still pursue claims based on fraud or waste to the property.

Potentially more important than these limitations is the possible effect on the short sale market. One possible effect is an increase in the number of short sale transactions because a major risk to the seller has been eliminated. However, the exact opposite effect could occur. The number of short sale transactions could actually decrease because many lenders who no longer have the right to seek a post-sale deficiency judgment may simply refuse to consent to the short sale. We are currently advising our clients that if they wait until next year to attempt a short sale the risk of continuing loan liability may be eliminated, but at the same time their lender may be unwilling to consider a short sale because of the new law.

[CVAR legal counsel Jim Klinkert is an attorney with 25 years of experience in real estate law and a member of Ritchie, Klinkert & McCallion in Ontario, California. Jim can be contacted by phone at 909-390-9999 or by email: jklinkert@rkmattorneys.com]