Market Time Report: Multiple Offers in the Lower Ranges?

March 6, 2008

Yes, it is true. Our reports from the streets substantiate the latest development: the lower ranges, especially distressed properties, are receiving multiple offers. It is difficult to gauge the current real estate market by reading the papers or listening to newscasts. The absolute best way to assess what’s going on in is to poll the Realtors® out in the field, writing offers, guiding buyers from home to home, and representing sellers in the marketing and selling of their homes. The reports are in: the lower ranges, below $500,000, are seeing plenty of activity, with multiple offers and buyers losing out on their first choices. The lower ranges were hit the hardest through the subprime shakeup and they slowed first. Logically, it seems appropriate that this range, the entry level, would be the first to heat up. The below $500,000 range accounts for 45% of the current active inventory and 50% of the most recent demand. One year ago, it accounted for 26% of the active inventory and 28% of demand. First time buyers are stepping into the fray with their first real opportunity to purchase in years. Bank owned foreclosures are in vogue and are seeing the most activity. Foreclosures only account for 7% of the total active inventory, but 23% of demand. There currently is only a 2.37 month supply of foreclosures, an extremely valid explanation for all of the multiple offers. When the expected market time is below the 5 month mark, it is a seller’s market. Everybody is looking for a deal, but it seems that the banks are in the driver’s seat. With the new FHA and conventional loan limits coming, the upper ranges will witness a similar boost in demand shortly.

Demand, the number of homes placed into escrow within the prior month, increased modestly by 73 homes in the past two weeks from 1,820 to 1,893 escrows. Demand is at levels not seen since June of last year. And, according to our Realtors® out in the field, what is NOT reflected in the data is that when a buyer and a seller come to an agreement on a short sale, where the seller’s combined loans against the property exceed the purchase price, most homes are not changed in the Multiple Listing Service (MLS) to reflect the agreement. Instead, they remain on the market as active listings until formal lender approval of the short sale. You see, the buyer and seller may agree on a price, but the seller is really bargaining on behalf of the bank since the bank has to take less than what is owed. They are “subject to lender approval” according to the terms of the contract. So, the standard practice of care out in the field is to keep these homes on the market until lender approval occurs. Also, we are not talking a couple of days for the lenders to respond either. On average, they are taking anywhere from 21 to 90 days to respond. Needless to say, demand is currently understated. This should wash out over the next month as more and more lender approvals hit the market. There are over 4,000 short sales currently on the market, 26% of the current active inventory. Short sales only account for 17% of demand (remember, it is currently understated). Accordingly, the expected market time for short sales is 12.28 months.

The current active inventory climbed by only 20 homes in the past month two weeks to 15,412 homes. With the active inventory virtually unchanged, coupled with a slight increase in demand, the expected market time dropped from 8.46 to 8.14 months today. That’s a stark difference from the 15.60 month inventory at the beginning of the year. It is still a “buyer’s market,” just not as deep. Last year at this time there were 12,558 homes on the market, demand was at 2,338 escrows and dropping with the start of the subprime crunch, and the market time was at 5.26 months and climbing. Two years ago, there were 9,562 homes on the market and rapidly climbing, demand was at 2,779 escrows and the market time was at 3.44 months.

What’s the difference between the condominium market and the detached home market? The detached home market continues to fare better than the condominium market with a 7.88 month inventory, the first time below eight months since May of 2007. For condominiums, there is an 8.67 month inventory. 31% of the detached home inventory and 37% of the condominium inventory is either a foreclosure or short sale. 67% of all detached homes below $500,000 are either a foreclosure or short sale. For condominiums, 54% below $250,000 are distressed.

What do the new conforming loan and FHA loan limits mean to the Orange County real estate market? The new loan limits are going to have a significant effect on the market. These new limits won’t address the troubles everywhere, since they are formulated based on an area’s median sales price. So, they will have little effect in most of the country, but they will have a profound influence on California and, specifically, Orange County. Orange County’s limits have been established at the maximum amount of $729,000. On a 10% down loan, that will allow buyers to stretch up to $800,000. That will provide incredible liquidity to our market. With 10% down, the prior $417,000 limit allowed buyers to only look up to $459,000. That represents a difference of $343,000! The loans will be available as of April 1, just a few weeks away. Expect demand to increase substantially as many buyers take advantage of this temporary program. Demand should elevate and then remain at higher levels throughout 2008. The increased loan limits will expire on December 31st of this year. The increase was designed to assist markets like Orange County to get through the current financial crisis, buying precious time for the financial markets to right themselves. That should give the markets plenty of time to restore investors faith in buying pools of non-conventional loans once again. The FHA loan limits will allow buyers with credit blemishes and low down payments to obtain financing. This restores the gap in products with the drying up of the subprime market. FHA financing is a much better alternative to subprime and was common just a decade ago. The problem had been that the FHA loan limit was just too low to provide any help to the Orange County market. The limit had been $367,000 and was virtually non-existent in Orange County. Do not worry, FHA financing is NOT the same as subprime financing. It provides financing to borrowers with some credit issues and lower down payments, but it requires documentation of income and does not allow “payment shock” where a buyer jumps from a low rental payment to a high mortgage payment. FHA has all of the safety gaps and education in place so that buyers do not get in over their heads like they did with subprime financing. So, expect demand to increase substantially due primarily to the increase of both the conventional loan and FHA loan limits.

Buyers, what to do? There was a great article in Time Magazine last month by Dan Kadlec, --titled “Ignore the Headlines!” The article identified something I have been talking about since the beginning of the year, “finance costs will rise as the economy recovers, so trying to time real estate might not pay off.” The article then proceeds to give an example of a rise in rates of just 1%. If home prices were to drop by 10% over the course of a year, but rates rise by 1%, the end result will be a wash and renters would have waited a year and saved nothing. If rates increased by 2%, the monthly mortgage payment would be significantly higher. Rates will inevitably increase to stave off inflation. In 2000, conventional rates were 8% and in 1990 they were at 10%. So, do NOT wait for the bottom of the market. Instead, enter the market when the conditions are most ideal: low rates, tons of choices and plenty of motivated sellers. Go find the best home for your family. Also, be aware that for banks in charge of foreclosures, they have the upper hand and it is a seller’s market for them. In looking at short sales, many already have an offer submitted to the lender for their approval. Also, the higher the price range, the less motivated sellers are due to financial circumstances. 73% of distressed properties are below $500,000 and 94% are below $750,000. This is worth repeating in every single one of my reports - take considerable comfort in the fact that Southern California real estate has always been a historically wonderful long term investment.

Sellers, what to do? I am always leery that sellers will ignore current conditions and place their homes on the market in anticipation of a great Spring market. Thus far, homeowners have kept their homes off the market, but the Spring market has just begun. There are positive signs in the marketplace for the rest of 2008; however, the market remains a “buyer’s market” unless you are a bank. So, do not place your home on the market unless you absolutely must sell OR you are willing to take a hit in value in order to move up in the market to a more expensive home. For the “move up” seller, 10% of a $500,000 home is less than 10% of a $750,000 home. The net result for the move up seller is a positive savings. If you have to sell in this current market, be prepared to do what it takes to be successful. It is all about location, price, condition and time. Price is extremely crucial to procure a sale; the better the price, the better the odds for success. Condition is important too. Since short sales and foreclosures for the most part are in poor condition, homes in better condition can equate to an increase in price and offer a refreshing alternative for buyers. Be ready to pack your patience; depending upon the area, it can take months to sell. Given last month’s demand, there are still 13,519 sellers who will not be successful in selling their homes over the course of the next month. Competition is intense. Those willing to remove their emotions to make decisions will ultimately achieve their goals in selling. Remember, a lot of the market is relying on banks to make decisions and they are void of emotions.
If you are considering buying or selling a home in South Orange County, call on the experts! Dianna and Brian McGarvin 949-370-2652 or visit our website at http://www.pierbowl.com/