California Housing Forecast

A "normal" sale is often noted by realtors in the MLS as "this is not a short sale" or "this is not bank owned", to distinguish it from the 8500 distressed listings on the MLS today. 

We have 19,928 listings, and 8500 are distressed.  The distress component is growing each month.

However, not all distress listings are equal.  Short sales still have a very low chance of getting accepted by the servicer/bank.  Just as the borrower has trouble getting a loan modification or workout, so he has trouble getting his short sale accepted.  We have read in the media about the very low loan modification rate.

Let's look at San Diego's rate of short sale acceptance.  We have 5700 short sales, and 20% are pending, but only 7% close escrow.  This big gap is because lenders do not like to accept short sales.  Since April, less than 400 short sales closed.  I looked at 15 of these, and found one thing in common for the accepted short sales:  no second lien holder of a different company.  So either there was no 2nd, or the 2nd was with the same lender.

REOs are flying off the shelves like hotcakes.  Banks price low, and buyers love it!  We have 2800 REOs listed, 65% are pending, and 28% are sold since April.

So don't be discouraged to make an offer on a short sale, but be prepared to wait 2-4 months for an answer from the lender, and be prepared for the answer to be a "no", especially if two lienholders are involved.

REOs have a 4x better chance of selling.  The REO sales rate would be higher, if more of them would be sales-worthy.  Many REOs are so run down, it takes a very special buyer to show an interest.

One-fourth of CA homes are owned free and clear.  So not everyone is deep in debt.

This release from Realtor.org shows that foreclosures are made of mostly of subprime loans (which make up a small part of the mortgage market).

Subprime loans are cause of foreclosures 

  Click on image to enlarge

On NPR, I heard a man earning $40K/year, laughing that the mortgage company lent him $540K.  He joked that not even a criminal would lend him that much, even though they could break his kneecap if he did not repay.

So that is why subprime loans are going bad in such huge numbers:  they were made at debt-to-income ratios too high to repay, and also made to people with no cushion to weather any little economic hiccup. 

We are getting deeper into debt, as a country.  How will the housing and bank bailouts impact our budget?

US Debt by Sector 

We really are a low-wage town, and our house prices are still too high.  The median price needs to fall 40%.   First, some facts.

Income disparity in San Diego County is growing. 

Click on image below to enlarge
San Diego Income Distribution 

About 20% of families at the bottom earn only 4% of our County's income, while the 20% of families at the top earn 25%.

Only 9% of county residents earn over $75,000 per year. 

The poverty level is over 11%, ranging from 6% in Carlsbad to 15% in Vista.  That means over 330,000 people in San Diego County live below the federal poverty level.

Adjusted for inflation, average income fell almost 4% last year.

This income disparity explains why the housing market is being kept afloat by the middle and higher tier of San Diego income earners.  

3/4 of our wage earners make less than $ 45,000 per year.  The median household income is close to $ 60,000, but it is skewed by the higher wage earners.  [Added 5/14/08: One sentence refers to wage earners, the other to household income.]

Now, this is where my forecast is basic economics, but will shock many people.  A household can get a mortgage for 3.5x its income.   San Diego County median household income is $60,000, and 3.5x that would be $ 210,000.  Now, let's assume that the buyer puts down 10% ( 210/,.9),  then the median house price needs to come down from its current $ 395,000  to $ 233,000, a 40% drop.

To my amazement, the market has really heated up this spring, and it seems we are in a temporary plateau.  Realtors all over San Diego (and homebuilders) are seeing very high buyer activity, due to lower prices (20% down in some very nice areas like Del Sur), low interest rates, low unemployment.  One builder told me last week they are not dropping prices at all for the rest of their phases, due to the high demand.

This increased buyer activity is the reason I have been out in the field so much, and not keeping up with what I love to do:  blogging about real estate and the economy.

We are putting together a new website, in talks with the REO department of a major bank, planning more seminars, started a new listing campaign, and spending a lot of time with buyers (both owner occupants and investors).  We are not the only ones busy - every realtor I speak with, is really busy. 

I just spoke with a friend in Poway, who gave me a dozen stories about multiple offers, someone making an offer without seeing the inside of the home, and full price offers.  In Carmel Valley, a few homes we followed close at list price and above list price. 

Here is my straight talk on this:  we are in a temporary plateau, brought on by the spring bounce, which is really another way of saying "emotional behavior by humans".  There is no reason sales should rise in the spring.  People need shelter at all times of the year.

Yet, sales and prices paid rise in the spring.  Our charts show average price rises in the spring.  This increase in sales and prices paid starts in February, when the days get longer and wamer.  Humans think of marriage, growing food, and shelter in the spring-summer months.

If I were looking for a bargain, I would wait until I have fewer buyers competing with me.  I'd buy oceanfront in the winter, Palm Springs in the summer.

The imbalances in the market persist, so this is not over.  Housing downturns last 7 years, and this is only the 3rd year.  The consumer is spent, so the lower spending will cause more job losses.

Texas Instruments in San Diego is closing...I was told this is 200 programmers.  Nokia already had their layoffs a year ago.  Wall Street is letting go thousands of people.  The recession will put a damper on house buying, and further foreclosures will cause tighter lending standards.

If you are buying for the long term and can handle a temporary price drop, (there will be another BUBBLE!), then start looking to buy.

If you are still priced out and want to wait, please do not think you have missed the bottom.  Be patient.