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This week Bruce Norris is joined by Leslie Appleton-Young. Leslie is vice-president and chief economist for the California Association of Realtors, a statewide trade organization with over 150,000 members dedicated to advancement of professionalism in real estate. Leslie directs the activities of the association’s members investment group or information group. She oversees the analysis of the housing market and broker industry trends, member communication, and membership development activities. She also is closely involved in the association’s strategic planning efforts and is a well-known speaker in California.
Bruce wondered how 2012 feels compared to some of the past years we have had to cope with. Leslie said 2012 is easily the best year they have seen in five years, and they are seeing that in their sales and in their price state. They have been above the $500,000 annual pace for six consecutive months, which is a very healthy level of sales. The issue has been prices; and what they saw in April was that the statewide median was $308,050, which is the first time they have been over $300,000 in over two years. There are definitely stresses and strains in the market, but compared to where we have been it is a sign of the times that the biggest challenge for the housing market is lack of inventory. We are not just seeing it in the REO moderate to lower end of the market, but we are seeing it throughout all of the prices in the housing spectrum. That is the good news and sign of the continued healing in the market.
Bruce wondered what Leslie points to as the reason for the median price increases. He wondered if that is an actual increase or a shift in inventory sold. Leslie said it is a little bit of both. What CAR has been doing the last couple of years is analyzing the segments of the market that are really markets unto themselves. They have the REO market, the short sale market, and the equity sale market. Prices in California bottomed way back in the beginning of 2009, so we are about 25% above the floor or the trough. When you look at the Inland Empire, the strong pace of sales they had just coming out of the bottom was really testament to people snapping properties up that were often less than replacement cost. This changed a little bit since people figured it out and you had multiple offer situations. You still have a very low inventory for REO. In their April data, CAR has a two-month supply of REO on the market, so that is the ratio of listings to sales. They have a 4 ½ month supply of equity sales or traditional sales where there is equity in the home.
For the short sale category they have a 6.3 month supply in the market, which take a lot longer to close. You have these three separate markets, and Leslie would argue that in the REO market those prices firmed a while ago and have been showing some upward trend, though not double-digits like we were used to when the lending was sealing the rise in prices. That market went down so low it certainly turned the corner, and the data shows we are starting to see some leveling off in the other parts of the market as well. We are turning the corner, and it is not a 90 degree turn, but it is definitely a turn.
Bruce said he noticed in some of Leslie’s presentations she had a price band page where for the REOs priced for either square foot or the median price, there is a huge spread. One might look at this and think there were big discounts being given on the REO, and Bruce can say this is not really true. Leslie said she typically does not include that unless she spends a lot of time explaining it since it is not corrected for the type of property and geography. The moderate and lower-price communities have tended to have a much greater market share of distressed homes, so that has defined what graphs like this look like.
From the peak of the market to the bottom in early 2009, Bruce wondered what the percentage drop was. Leslie said it was about 59%. We went from May 2007 when the California median home price was $594,530 to February 2009 when it was $245,230. That was a 59% peak to trough inside of two years, which is scary. That was very significant. There was no precedent. We had the ‘90s, which we thought were ugly until we had this. This is a totally different animal.
The residual damage is that you have a lot of people who are upside down. The CoreLogic data is now slightly below 30% of the mortgages in California, which are now underwater. This makes these people really immobile; they are no longer buyers. They may be a short sale candidate, but they are no longer a buyer. They won’t be until they go through some kind of a short sale. This is why it has really been difficult to get a good number for the shadow inventory that everyone talks about. It seems to range from $4 million to $11 million nationally. A lot of it really depends on what the people will do. Some of them have not paid on a mortgage in a while, and others are going to be able to pay until their ARM adjusts. We still have a few people in this category. If their ARM adjusts, the price per month might actually go down since you can’t get interest rates any cheaper.
Bruce said the inventory has really changed since January and is significantly down. He wondered if this is because sales are way up or because the inventory has been diminished. Leslie said it is a little bit of both. We have seen acceleration in sales and also a reduction. If you look at ForeclosureRadar data, for example, we have a slight two-year downward trend in the number of properties that are getting a notice of default, getting into, and coming out of the foreclosure process. There are a lot of reasons for that. As you look at an economy that is improving, we are seeing a few more loan mods coming through. Even though it is not a lot, this still gets people out of the pipeline. In general, you have lenders actively managing their treatment of these properties, pushing them all through, and recognizing all of the losses at once, which is not a viable financial alternative. You are getting things managed and spaced out.
In practical terms, it is really starting to work because if you have inventory this low, you are going to have to have higher comps emerge from this situation. This brings up the issue of appraisals, which is a big problem. Appraisals are always viewed as a problem in a turn in the market. There is always a little bit of a lag; but certainly this time around it is a quandary, both on the appraisal side and more generally on the lending side. Leslie said things seem backwards to her. In retrospect, in 2005 and 2006 things should have been really tight since we were at the top. Now that we are climbing out of the bottom, it is very difficult to qualify. The reality is this is rock bottom. The payment that is emerging, which is reflective in your affordability chart, shows numbers we have never seen before in history. This means that the payment in relation to earnings is at a historical all-time low.
With respect to rates, people are savvy and understand that this is a once-in-a-generation opportunity to buy in these kinds of circumstances with affordable prices and affordable rates. The economy has started to show some life, although we need a lot more. If you look at the macroeconomic data over the last six months, it is getting better. The employment data, although not consistently great, is a lot better than it used to be. It is going to be up and down. The consumer confidence data that came out this morning showed some of a retreat. In general, we are still way up from where we were two or three years ago.
Bruce said it would seem to him that if somebody at the top was in charge of seeing if we are better off having people get their housing costs fixed for 30 years at this ridiculous rate so they could pay more taxes, the answer would be a resounding yes. This would be better as opposed to being a renter with a variable housing cost for the rest of their life. Leslie said she really felt like three years ago as we were just coming off the shock and worst of all this, there seemed to be a general consensus that if we fix housing, help these homeowners, HAMP and TARP, then the rest of the economy will follow. It seems that more recently there is not a consensus that it is about housing anymore. Leslie said this is a little bit of a mistake because as Bruce noted, you have a significant number of households, both in California and nationally that are underwater. People need to take responsibility for their financial decisions. On the other hand, there were certainly bad actors and all kinds of other things going on. It seems like maybe more of an effort made to assist housing will help everybody down the pipe.
Bruce has spoken in front of Fannie and FHA with Sean O’Toole, and one of the programs they discussed was a nothing-down loan program. This would be perfectly timely. He does not know what to do with people who live, for example, in Hesperia who owe twice as much on their home. He does not really think we should reduce all the mortgage debt, but we should say that we need to have a certain percentage of occupant owners, which makes sense to Bruce. There is a generation that can get into homes right now; the down payment is really immaterial. It is the payment that results from the purchase that will make that loan safe. You can move a lot of homes to the occupants if they did not have to have a down payment. One little change to the loan program would be if they don’t make their payment, let it walk to another buyer. This would be a simple FHA assumption like we used to have in the ‘70s. With just one loan program change, you could solve this.
Raphael Bostic, who is with FHA, was sitting right across the table from Bruce when he was talking about his ideas aforementioned, and Raphael said he had no problem with this. He had no problem having the loan walk to another buyer. Bruce asked if he could put this in writing for him, which Raphael found funny. He understood that this would be a valuable thing for the market. A lot of these things are not that complicated, we just need to get support and institute it. The problem is that if HUD made a decision, it doesn’t really sit with them but rather in Congress. The feeling is that a lot of the people do not necessarily understand the things they need to understand. Bruce does a fair amount of looking at charts himself, and there has been a really big change in the criteria both Fannie and FHA are willing to loan to.
In 2007 at the peak of the market, 45% of their loans were made to people with 6/18 FICO scores or less. Now, 3% are 6/18 or less. This is a radical shift. Leslie said when she was back in D.C. for the NAR meetings, there were several people from FHA talking about the situation that they found themselves in. They were under a microscope with respect to Congress in order to justify the program, keep the program stable, and prepare for delinquencies that had been on the rise. This clearly is not an accident, but they are trying to reduce their risk exposure. However, things really need to be looked at more holistically in terms of what is going to be good for the overall economy in the long term. Some of those people are probably going to be great credit risks. As far as a safe pile of loans, they have created the safest pile of loans ever in 2011. The problem was when you are loaning in California in 2008 and 2009 as prices descended 3% a month, the equivalent of the down payment, that is not going to work out too well.
The other thing that keeps getting drilled in over and over again is California does not look like the rest of the country. There is a bulk sale pilot coming out of Fannie Mae. CAR has been opposed to this since they have not had problems selling REOs. If they market them for 120 days and still can’t sell them, then maybe it will be okay. Let our industry have a shot at moving things through quickly, in a less costly manner, and give the Californians who are really anxious to own real estate an opportunity to do so. In other parts of the country, this amount of inventory is not a characteristic of their market. California is always out there on its own, and this is another case of that. It has to be really frustrating to be an REO agent with a 1/10 capacity. Some of the people Bruce new personally who had 600 listings in 2008 have 60 listings today. They could easily absorb any percentage of increase of REOs into their business model and benefit the local economy by creating commission, escrows, and repaired houses. We do not need Wall Street to come in and do that for us. Leslie said they have been very vocal on this issue and seem to at least have made the position crystal clear.
Bruce said he hopes everything makes sense to people since one of their mandates is supposed to be to save the taxpayer money. He does not see how selling in bulk accomplishes this. We should let investors or local owner occupants figure out what they will pay. It has to be more than a bulk sale to do a hedge fund.
Bruce wondered what the mood of the buyer is like in the marketplace. Leslie said she would describe it as a mix of elation and frustration. You have to understand that things cancel out, and it is cheaper to buy than to rent. People’s thinking is that this is amazing; they can get FHA 3% down. However, on the other hand it is one disappointment after another. Leslie has heard horror stories from agents in the association about 5 or 10 offers, even up to 30 offers being made, and it blows your mind. It is a very competitive market out there, so it is very important to set the expectations of what they are getting into. Especially for people doing this for the first time, they read the headlines, think it will be a slam dunk and that they can go into a ritzy neighborhood, pay $.50 on the dollar, get a loan, and everything will be easy. It is not like this at all; although Bruce said the nice part is that is priced at $.50 on the dollar, and you don’t have to get a discount.
Bruce said it drives him nuts sometimes when people search for a home. He will be speaking, and someone will come to him telling him they are looking for their residence. They are very specific about what they want, and then they want a deal. Bruce looks at them and says they have a deal. They have the best price and historically best interest rate, and you are going to miss the opportunity of a lifetime by trying to be cheap. You really need to figure out that they get to have the house of their dreams at a number per month they could never have imagined. A lot of times the inventory they are chasing is really not being chased by investors. Some of them want what was the $1.5 million dollar house that is now the $750,000 house. You don’t mess with this house. There is a little less demand in this type of product. There may not be a lot of listings, even in this price range, but Bruce thinks people sometimes think a discount is a big deal, when in fact getting the right inventory to live in is much more important.
Leslie said she follows a lot of local areas because the aggregate data is always going to be the aggregate data. You want to look into it much more deeply, and there are not a lot of listings. There is not a lot to choose from, so that creates this environment that it is a great time to buy, so why can’t I buy. The short sale process has to be crazy making if you are an owner-occupant where you make an offer and you really don’t know what the answer is for quite some time. Those rules are going to be changing, so you are going to get a response, thumbs up or thumbs down, within 30 days. One of the problems could be if they are literally so overwhelmed by files from customers. There is one person Bruce knows in the B of A short sale department who alone has 1,000 files. The easy answer would be no because there are no other answers that will emerge inside of 30 days. It seems if you really don’t have time to make an intelligent decision because you personally have 1,000 files, then if the answer has to emerge in 30 days the answer would probably be more negative than it needs to be. You would probably have to start it again.
Bruce wondered if the short sale process has been improving and if agents have said it is at least reasonable now. Leslie said it is mixed. She is hearing that things are much better than they were a year ago. Occasionally you hear of people closing in 45 or 60 days, relatively quickly. Leslie said she talked to a manager out in the Conejo Valley who got his report this morning and said it is getting a little more difficult again. It ebbs and flows, but in general there has been such a spotlight on the whole process for the last couple of years that it is getting better and people seem to be slightly more satisfied with what is going on, some lenders more than others. Bruce has said this is true and varies greatly. There tends to be some significant discrepancies between the experience that the homebuyers, sellers, and agents have depending on the lender.
You can go to www.car.org to keep up on all the statistics. Tune in next week as Bruce continues his discussion with Leslie Appleton-Young.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.
