Live Lake Forest

Disclosure -  I am not an economist, not a psychic, and not a fortuneteller.   My crystal ball is foggy (or cracked!), and any predictions I make are based on my own experience, insight, feelings, observations, wants, hopes and superstitions.  I will tell you what I think will happen to the real estate market in Orange County and Southern California, but if you rely on any of my predictions, and they turn out to be wrong, I will refund all that you paid me to share my valuable secrets ($0.00!)

The volume of sales will increase above the 2007 levels.

• This is based on my observation that it can’t get much lower without coming to a complete stop!  In 2007, total sales for Orange County will be only around 20,000 (19,900 as of 12/30/07) compared to 27,700 in 2006 and 40,000 in 2005.  I think we will see somewhere between 25,000 and 30,000 closings through the MLS in 2008.   There is a base rate of transactions that needs to happen regardless of market conditions.  Some people get job transfers, some people lose or quit their jobs, we all get older, some people retire and leave the area, or get too old to go upstairs anymore, new families are formed or expanded, some families split up, some people die. These sales will be completed one way or another because they have to.
• There are a lot of “wanna be” home owners who have been sitting on the fence waiting to buy.  They have been told by their parents, friends, co-workers, neighbors, Uncle Herman, and their hair dresser that now is not the time to buy, and if they wait they can time the market to hit the very bottom.  BUT they are getting impatient! The battle cry of this group is going to be “Close enough is good enough!”  As prices continue to decrease, their temptation will overcome them and they will jump in.
• Distressed sales will continue.  There will be more foreclosures due to the toxic loans that are coming up for adjustment in the next year.  Some lenders will do everything they can to work it out, but many will still be foreclosed.  The presence of vacant and neglected homes will not be good for any neighborhood, so my hope is that the lenders will price them accordingly to find a new owner who will take good care of them.  (Based on my own experience selling foreclosed homes, they rarely list them realisticly to start, but will listen to reasonable offers after they have been on the market over 30 days.)

Prices will decrease – both listing price and sale price.  This will be because more sellers will finally give up and realize that they are not going to get the same windfall price that their neighbor got in 2005, and if they want to sell and move on they have to face reality.  This will be a good thing because it will cause buyers (see above) to buy these homes!  These realistic sellers will benefit by making up for it on their new purchase, which will be at a similar lower price.

The mortgage market will settle down and find it’s equilibrium, and we will all learn what to expect and how to play by the new rules (possibly based on verified earnings and proof of the ability to repay a loan that still leaves money each month to buy food, gas and utilities!) We will learn what needs to be done to get a buyer properly qualified for a mortgage, and it won’t be done by lying about income, teaser interest rates, or any other shady “do-it-quick” then “do-it-over” type financing.

A lot of real estate agents will leave the business.   The National Association of Realtors is predicting about 15%, but I think it will be higher.  When homes are selling quickly, prices are rising, and everyone qualifies for a loan, selling homes looks like an easy way to make a living.  When the market turns and it requires actual work, knowledge, experience, intelligence, patience and caring about the client’s best interests, there are many who won’t want to stick around, or just don’t have the reserves to make it between closings.  It’s lots easier and safer to be on someone else’s payroll and collect a check each month than to actually learn how the market works, how to react to change, how to solve the problems that you can, and let go of the ones you can’t.

The real estate industry will continue to become more “transparent”with more information being shared openly and honestly with consumers, and much of the hype disappearing.  More agents will be blogging; some will provide good insight and information, and others will post a few ads about themselves and then give up when they are ignored.  The main feature that separates a blog from a standard website, is that it is meant for 2 – way communication.  If you want to get more details about a real estate subject, question my reasons for saying something, suggest an improvement, challenge a theory or anything else, you can ask it right here in the comments.   Someone else may have the same question or thought, so it will be answered publicly for anyone who stops by to see it.

What do you think about my predictions:  optimistic, pessimistic, or about right?  Your comments or opinions are welcome and appreciated!

Is your home priced too high for the current market?  Many times, sellers insist on testing the market to make sure they are not leaving money on the table.  Some times, the listing agent is selected based on recommending the highest list price.  Other times, sellers simply have an inflated opinion of the value of their home.  Whatever the reason is, or was, usually ends up backfiring in the end. 

This is an illustration of the pricing of an actual home that was first put on the market in October 2006, but due to being out-of-synch with the market, didn’t close until 13 months later . 

Sellers need to learn to be more careful than ever about pricing, because in the current market, the carrying costs of mortgage, taxes, insurance, property taxes and homeowner association dues can put a substantial dent in the final net proceeds.  This particular listing had a very low tax basis, and a low interest rate on a small mortgage, but taking over a year to sell this property ultimately cost the seller an extra $10,000 in lost proceeds! 

My guess (it was not my listing) is that if it had been originally listed at $549,900, it would have had multiple offers almost immediately and closed in 45 to 60 days at a higher price!   

An additional consequence of losing your house to either foreclosure or a short sale, is the potential tax liability.  (As if you aren’t hurt enough!)  The IRS has added a section to their website that helps explain it.  You need to consult a tax professional to be sure, but this site gives you some information to start with. 

** Update 12/20/2007 :  HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for homeowners who lose their homes during 2007, 2008, and 2009.  Read Kelly Kilpatrick’s article for a good explanation of what it does. 

On the days that I’m not out showing or previewing homes, I check the MLS “Hot Sheet” list several times a day to see what just came on the market, what has recently been reduced, and what has changed status to indicate that it is under contract.

I’m often amazed at the number of price changes that some homes go through prior to selling.  There was a house on the market recently that changed price every day for 7 weeks!  Not big changes – the house was “variable range priced” and started at $779,500 to $814,900.  The price changes made daily would reduce the lower range number one day, then reduce the high number next day – but only by $100!  Changing the price gets the house back on the hot sheet, so it can be an effective way to draw attention to a listing, but this is not the way to do it!

Small price reductions always reminds me of what my grandpa used to say (he was also a real estate broker.)  “You must treat price adjustments like surgery…..If you don’t need it, don’t do it, but if you do really need to amputate someone’s leg, do the whole thing at once and don’t cut off one toe at a time!”

The Lake Forest market, as well as surrounding cities in the South Orange County area, seem to be picking up the pace a little now. The inventory has shrunk some, as many sellers have taken their homes off the market for the holidays, and the prices are now noticeably lower than last summer.

I have heard from several of my agent friends that they also are feeling that the market is picking up from the doldrums, as buyers seem to be cautiously reappearing.

The pricing now starts at $169,900 for a single story, one-bedroom condo that is a short sale, and 3 other short sale or bank-owned condos are on the market priced under $200,000. The 2-bedroom condos start at $203,900 with 9 others priced under $250,000.

There are currently 9 single family homes priced under $500,000 available today. With 205 single family homes on the market, there are many choices for buyers, and “room for negotiations” on price. About 25% of the homes for sale are “distressed” with 10 available that are bank-owned REO properties and 44 that are short sales.

With the current interest rates available in the low 6% range, and competitively priced homes becoming available, I am predicting the activity level to pick up significantly after the first of the year.  I don’t believe the prices will drop enough to attract investors, but for owner occupants, the outlook is definitely improving.