Southland Homes Sales Perk up: Market Now Being Carried by Distressed Sales.

This weekend I was listening to a real estate radio show that plays on FM radio here in Los Angeles while trying to escape the blistering heat. Now that we know that Fannie and Freddie are going to be a little more lax with their requirements and some people think this is much to do about nothing, these hosts had a diverging opinion. They were absolutely adamant that this was the booster shot needed to resurrect the declining Southern California market. In fact, they were licking their chops to squeeze people in starting this June. Mind you these are the lenders and the agents here. These are the folks that will put people into these loans. I also remember these same folks a few years ago pushing Option ARM mortgages and interest only loans yet now have some sort of collective amnesia. I’m surprised by some of the people that think Southern California will avoid fraud because of the proprietary risk based underwriting software from these agencies. Clearly these people do not understand the extent of what is going on or are Pollyanna in their views. Keep in mind Countrywide also had proprietary underwriting software as well. If the argument is about keeping a lid on fraud this simply makes it a little easier to open the jar. Fannie and Freddie are already stretching the limits of their capitalization and this will only add further stress. There was absolutely zero reason for raising the caps into the stratosphere since as I will discuss, the ultimate method of increasing sales is lowering the price! If the lifting of caps was to aid the higher priced markets, there is now no need. The Southern California median home price is $385,000; which means that the old method of conforming loans was enough to cover the entire region. The lifting of caps is simply a stealth way of shifting inflated bubble mortgages from private lenders to the public. By the way, these hyperinflated mortgages have the highest risk of default since they are now in a negative equity position by definition of the current median price. The bail out is already occurring. The incentive for fraud is through the roof. Many now defunct brokers and lenders are shifting into becoming REO and foreclosure specialists. The fox has now eaten the hen and is the leader of the Hen Eaters Anonymous group. Back to the radio show, they state that they welcome all calls but whenever a caller starts to go negative, “yeah, I bought an investment property in Las Vegas and financed it as a primary home but now I’m losing about $1,200 a month in cash flow and…” the host chimes in, “okay, what’s your point? I recommend you find a person at a casino at a discount to cover your cost and don’t lose that home okay? Thanks!” It is also important to note the fraud that occurred behind the scenes. Fake pay stubs, straw buyers, inflated appraisals, and other absurd shady tactics became mainstream. What is to stop a team of folks from over inflating a price of a home, using a high FICO’d borrower to cover the note, and then financing another property? You know what has been the best fraud prevention? Flat out stopping the secondary mortgage market. If you have all the right paperwork you can still get a stellar mortgage in today’s market yet the only problem is there isn’t many who do qualify at least in the legit way of doing business. The government sponsored entities now think after a few months that they have a handle over risk assessment as noted in a LA Times article : “The FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a “risk-based” system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid-1990s. The agency’s move, which will cover new applications including “jumbo” loans up to $729,750 in high-cost markets through December, will bring the FHA in line with the private sector’s main approach. Brian D. Montgomery, the FHA’s top official, outlined the impending change in a speech here May 8 at the annual conference of the National Assn. of Real Estate Editors. Under the old approach, he noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented a low risk of default on loans and an inappropriate subsidy of applicants who were likely to default. A study of an entire year’s applications turned up the additional fact that the FHA’s lower-income borrowers typically had higher FICO scores than those with larger incomes. “Is it counterintuitive? Yes,” Montgomery said.” Bwahaha! Yes, the private sector has been doing a fantastic job pricing in risk. And this amazing find is nothing more than pre-cliff diving euphoria. What about all those Alt-A high income Option ARM borrowers that will now lose their high paying finance or housing related jobs? Will they still be prime after a few years? This again fails to recognize the absolute reliant nature of our economy on FIRE (finance, insurance, and real estate). Let us move on to some rosier news. Southern California actually saw an uptick in sales. Can this be the much anticipated bottom? Southern California - News Flash! Homes Sell When Prices are Lowered! You would think that people were stunned to realize that lower prices actually increased sales. It wasn’t the Hope Now Alliance, FHA Secure, or any other of those absurd crutches but a simple economic approach. Lower prices will bring people back into the market. The question is, was this the actual bottom or a temporary plateau before we head lower? Let us look at the data first: All homes Apr-07 Apr-08 % Change Apr-07 Apr-08 % Change Los Angeles 7,225 5,016 -30.6% $540,000 $435,000 -19.40% Orange 2,682 2,166 -19.2% $629,000 $500,000 -20.50% Riverside 2,987 3,186 6.7% $409,000 $295,000 -27.90% San Bernardino 2,049 1,667 -18.6% $370,000 $265,000 -28.40% San Diego 3,436 2,809 -18.2% $490,000 $400,000 -18.40% Ventura 890 771 -13.4% $572,000 $445,000 -22.20% SoCal 19,269 15,615 -19.0% $505,000 $385,000 -23.80% *Source: DataQuick The first place I want to draw your attention to is that the increase in sales from last month occurred predominantly in areas that saw the largest nominal drops in prices: All homes Mar-07 Mar-08 %Change Mar-07 Mar-08 %Change Los Angeles 8,353 4,263 -49.0% $540,000 $440,000 -18.50% Orange 3,130 1,663 -46.9% $629,000 $506,000 -19.60% Riverside 3,680 2,691 -26.9% $420,000 $306,250 -27.10% San Bernardino 2,476 1,534 -38.0% $369,000 $265,000 -28.20% San Diego 3,218 2,108 -34.5% $490,000 $395,000 -19.40% Ventura 999 549 -45.0% $566,750 $430,000 -24.10% SoCal 21,856 12,808 -41.4% $505,000 $385,000 -23.80%   jump in sales % Increase over last month (county specific) Los Angeles 753 17.6 Orange 503 30.2 Riverside 495 18.3 San Bernardino 133 8.6 San Diego 701 33.2 Ventura 222 40.4 Now you need to remember that there is always a bump during this time of the year simply due to seasonal causes. But from looking at the above percent increases, you can see that there were strong jumps in Orange, San Diego, and Ventura Counties. Interestingly enough, these counties have also seen some of the largest nominal drops in their median home price. Los Angeles County is off by $105,000 from one year ago and Orange County is off by $129,000. Those are big price declines. Yet we also have to remember that sales hit all time record lows for Southern California so an increase without perspective doesn’t really help. Let us look at Los Angeles County since it is the largest and spans over 88 cities. Here is the sales history versus median home price charted for you to take a look at: What you’ll notice is consistently a seasonal dip in sales during the winter. This uptick is nothing out of the ordinary. In fact, it is a typical spring pattern. The real litmus test will be once we are fully into August and September; if we do not have a few strong months from now until September, the market will literally implode from fall into winter. The current housing bottom meme going around is probably spreading because of a lack in definition to what constitutes a bottom. It can be that we are nearing a lull in sales and inventory but that does not necessitate a bottom in price which I’m sure is what most of us are interested in. What use is it screaming we have an inventory bottom when prices may fall 10, 15, or even 20 percent more? Sales are usually a leading indicator in terms of predicting future prices. Let us do a bit of quick sales math: Current SoCal Inventory: 146,337 April 2008 sales: 15,615 Months of Inventory: 9.3 months Still not a healthy market. Normally a healthy market is around 6 months of inventory. Do you really see monthly sales jumping up to 24,389 anytime soon? Not likely given that we have an onslaught of REOs that will soon make their way onto the market: More notice of defaults are actually going into foreclosure which will add to the inventory but also depress prices since these usually go for lower than market rates. The market did improve from last month in terms of sales but I wouldn’t be quick to call this a bottom. Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information Share This Related Posts: ■ Zillowed, Disappearing Inventory, and Free Housing: 3 Major Psychological Reasons Why Housing is Still Declining and Living Rent and Mortgage Free. ■ The Short Sale Report: Volume 1 – The True Barometer of the Housing Market ■ Sexy Bottom: The Naked Truth of the 10 Percent Southern California Housing Drop. ■ Don’t Catch a Falling Guillotine: Housing Free Falling in Southern California. 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