For those waiting for someone to say the worst is over, let me be the first to say it: “The worst is over!”. Bold statement? Perhaps. Inaccurate? Not so much.
For those of you who know me or follow TheRealEstateConverstation.com, you know I have been a glass half full guy for a long time. It’s not that I am perpetually optimistic, it’s just that I believe the housing market is bouncing along the bottom and this week’s data and editorial commentary by a well known real estate maven, is further evidence of that. Still don’t believe me? Consider the following…
The first public acknowledgment that the housing market might possibly be on the mend came Tuesday, from none other than Miss Gloomy herself, CNBC’s Diana Olick, when she reported that low housing inventories and an improving job picture might be a signal that the end was near. I have been saying for months that the inventory numbers were not consistent with a buyer’s market and in fact, if the media ever made a proclamation as I have just made, buyers would start scrambling to lock in historically low interest rates and take advantage of 4 years of record declines in prices. To play off the oil company mantra, we’d be hearing “Buy, baby, buy”!
On my website, http://www.1000OaksRealEstate.com, I have a widget, or website tool, provided by Irvine based RealtyTrac, that allows visitors to search foreclosures nationwide. And when I look at any given area, the number of “flags” indicating homes in some stage of repossession or distress is pretty frightening. Yet the data out of the Mortgage Bankers Association yesterday showed that while the number of homes delinquent rose slightly over the previous quarter, the year over year numbers were down. The MBA interpreted this not as a “significant change” but rather as a “leveling off”.
“But the National Association of Realtors reported that home sales were down in April based on the Pending sales or homes under contract, following a nice rise in march… what gives”? says you… To understand both sets of data which suggests more of the same for housing, let’s go back to what Diana said on May 17: “REO (bank owned) and short-sale inventory is high and will likely get higher in the coming months as banks process more foreclosures and push through short sales more efficiently. But organic, non-distressed sellers are holding off, and that is actually creating a phenomenon we haven’t seen since the housing boom…. Could this inventory issue be the catalyst to home price stability? I’m not talking about the big bad foreclosure markets, but the rest of the country, where demand is rising and the number of listings are falling. I hate to go back to that boring old theory of supply and demand, but might it actually prevail?” Supply and demand…hmmm, now that’s a concept.
Another interpretation worth noting is that part of the delinquencies are tied to strategic negotiations between borrower and lender, either due to the borrower’s attempt to seek a loan modification or a short sale. Why? Because troubled homeowners can’t get the bank to talk with them if they are current on their payments. Quite simply, there are just too many households already behind for the personnel strapped banks to negotiate with those borrowers still current on their payments – the banks have to start with those folks closest to having their home repossessed, it’s just logical. This fact, which is seldom acknowledged in the media, explains some of the homes that are called the “shadow inventory”. They are in default, yet not bank owned.
Dave Walter, a top local Realtor and friend of mine told me yesterday that 50% of his listing calls are short sales. To him, this is an indication of a troubled market, not one on the mend. On this we don’t agree. There is no question that short sales are not going to go away anytime soon and by their very nature put pressure on prices, since short sales typically sell for less than market value. Yet when I look at the pending homes sales in my market in Southern California and specifically the Conejo Valley, it is clear that a large percentage of the homes in escrow are short sales (in some price ranges as much as 50%). This is because A) buyers want to buy distressed property for their perceived better value and B) unlike regular sales which clear from pending to closed in 30-45 days, short sales take months to complete. What’s significant here to me is that this warps the distressed or pre-foreclosure numbers because while these homes are in default, they are also under contract and will likely never end up in a bank’s inventory.
So why are sales down? Much has been made recently on those declining sales numbers. However I believe those numbers are declining not due to lack of demand, but lack of quality inventory. To Diana’s point, equity sellers don’t like the prices they can get. Further they may not have enough equity to make the move up. In fact if there is any short coming to this market, it has to be the dearth of move up buyers. You have to have enough equity to buy the next price up and many don’t given the stringent underwriting guidelines the banks are using to lend today. Moreover, even those with sufficient equity, look at the inventory landscape and don’t see a suitable replacement property to go after. They can’t buy a short sale or REO, because they have a home they have to sell, and banks won’t accept contingencies on sale, and they don’t want to sell until they find a home to replace their current one. So they wait. This in turn keeps a lid on inventory. Multiple offers are commonplace and well priced homes in good neighborhoods and locations are selling quickly. To my thinking, even though confidence in real estate remains shaky, lack of inventory is the real explanation for declining sales numbers, not declining demand.
Does this mean prices are poised to rise? Probably not soon, but it does mean that most of our markets are stabilizing, the economy is improving and that is welcome news indeed
Daniel Zane is the owner of London property inventories one of the UK’s leading suppliers of property inventories.