Focus On REOs

REO. Three little letters, so much of our market. For those who've heard the term, but don't know what it means, it stands for Real Estate Owned. It's a banking industry term - homes for which financial institutions find themselves holding title, most often as a result of foreclosure. The catch is, they aren't in the house business. They're in the money business, and houses are just collateral on loans to them. So when they find themselves in a cycle like this, where they have a lot of collateral on the books, they get serious about turning it back into money. Great for buyers, as it drives down prices. Not so great for everyone else, especially folks who need to sell or refinance their home.

The national numbers are grim. You don't need me to go into them - just turn on CNBC for an hour, and you'll probably hear all you want about the national picture. Our local market has been hit by this as well, pretty hard, but not to the extent of many other markets. That said, REO activity is still the biggest driving force in our market, and will probably continue to be so through the rest of this year. As I noted in my 2008 review a couple of weeks ago, REOs accounted for 43% of residential listings that came on the market in the Lompoc Valley last year, and they accounted for 59% of the sales.

What does the average REO sale look like? Well first of all, don't blink, or you'll miss it. The median days on market for sold REO listings last year was 24, compared to 70 for non-REO listings. On average, they sold for closer to their list price - 1.7% below list, compared to 5.4% for non-REOs. Both of these speak to price. Most of the time, these properties weren't just priced to sell, they were priced to sell right now.

REO sales hit every price segment in our market, from the tiny 1 bedroom condo in Cypress Woods to the executive homes in Mesa Oaks. They did skew toward the lower end of that scale, however, and the median sale price for REOs was $217,500, compared to $319,000 for non-REO sales. I'm going to have a moment of candor with you here - I didn't realize that spread was that large until just now, when I pulled the numbers. That's just a staggering number. I have a few ideas about how that happened, but I'll need to chew on them for another post some time.

REO purchases can offer up some of the best opportunities out there - although we've also seen some outstanding deals on regular deals too. It depends on how motivated and flexible the seller can be. Here are a few things to be aware of if you are thinking about taking advantage of a great REO deal:

1) You know that C.A.R. contract that you wrote the offer on? It's pretty much out the window. Most banks come back with their own terms in an addendum, or in some cases, a whole different contract. The price and financing terms that you negotiated are often the only things that are the same. Read that contract carefully.

2) You're going to need some patience. Banks move at the speed of corporations, and they can be slow to respond to offers (although some are getting better about that), and once you're in a deal, they get slower to respond. And you're almost certain to have the escrow office down in the L.A. basin somewhere. This may not sound so bad for the uninitiated, but trust me on this - there's no benefit to a buyer to someone taking on escrows in bulk. Some of them have been just horrible. And we're losing quality local escrow and title reps here because of it. Don't even get me started...

3) You're buying a house or condo without the benefit of any disclosures about the condition. The bank never lived there, and they are exempt from making disclosures about the property condition. It's doubly important in these properties to get a good physical inspection, and if the bank doesn't provide a pest report, buy one yourself.

4) Count on it being "as is". Some banks will take on some repairs, some won't. Even in some cases where they tell you up front that they won't, we've seen a few go through with repairs to keep the deal together. But don't count on it.

All that said, don't let any of it deter you from going after one of these deals. The whole foreclosure problem is awful, absolutely horrid. I hate going into a foreclosed house and seeing the bedroom that was obviously painted for a young child. It's gut wrenching. But there is an upside - more people can now afford to buy a home without selling their soul than could for several years. And that's a huge positive to take out of this mess.

Monday Morning Numbers 1/19/09

Happy Monday! It's good to be home from Monterey - it's a nice town, and I like going up there, but being there on business isn't quite as much fun as being there to hang out and drink wine...

The numbers this week:

Active Listings: 117
Contingent Listings: 18
Pending Listings: 56 (29.32% of the inventory)
Price changes for the past week: 7 (5.19%)
Sold listings for the previous two weeks: 9

Our inventory level continues to drop. We have approximately 4.9 months of inventory on the market today.

We've been working with a couple of buyers in recent weeks, and quite frankly, we've been having some difficulty in finding good properties in some cases. The ones we do find are most often getting multiple offers. If you're reading this, and you've been thinking about buying a home, I have a word of advice for you: Do it now.

OK, that's three words. I have a hard time being concise sometimes. But seriously, if you're waiting around right now to see if prices get better, or if interest rates get to the point where lenders are paying you to take their money, you stand a real good chance of missing out. This isn't Dennis the Salesman talking - if you know me, you know that I'm not the slick sales type. I'm not saying that you should just jump on the first thing that comes along, but the selection is getting lean in a lot of segments, and it's time to at least get your financials in order, and get to a local lender for a pre-approval. That way, you can start looking. It might take you a few weeks to find just the right property, and you'll want to be ready to move when that happens.

Monday Morning Numbers 1/19/09

There are going to be times when these Monday morning posts look an awfully lot like the one from last week. The changes tend to be pretty subtle. If you want some more detail on what some of these numbers are about, take a look at the 1/5/09 post.

Active Listings: 124
Contingent Listings: 21
Pending Listings: 50 (25.64% of the inventory)
Price changes for the past week: 13 (8.97%)
Sold listings for the previous two weeks: 9

Pretty similar numbers compared to last week. The overall trend in inventory level is still down, and activity remains pretty stable. Price changes were up a bit this week, but that's mostly due to a new construction builder putting in a few price changes on the units they have in the MLS. We have about 5.2 months of inventory on the market as of this morning.

I may or may not be able to post a Wednesday piece this week. I'm heading up to Monterey for a California Association of Realtors statewide directors meeting this week, and this being my first one of these, I have no idea how much down time I'll have.

2009 Prognostication - The Slightly Cracked Crystal Ball

Last week I promised to come up with a preview of what I see ahead of us for 2009 in the Lompoc Valley real estate market. I'll be straight with you here - this is a lot like trying to project what the weather is going to be like a few weeks from now. You might have a few good ideas about what a seasonal norm would be, but there are bigger forces of nature that we can't control that might change unexpectedly.

I don't know what lies ahead of us this year. I can only look at the information I have now and try to make an educated guess about the future. Like I said last week, if someone tells you that they can say for certain that they know what is ahead of us, forget the grain of salt, take it with the whole darned salt mine.

I think that in 2009, our market hinges primarily on three things: the employment picture, mortgage rates and availability, and foreclosure listings. These are the big supply and demand factors at work. So far, demand still appears to be pretty good - we're still seeing multiple offers on well priced properties and we still have a high number of pending sales. Mortgage rates are incredible right now, and despite what you might have read, qualified buyers are still getting loans.

The employment picture looks a little healthier here for potential home buyers than the national picture would indicate. We've lost some retail outlets in town in the past few months, and while that's not good, it shouldn't be a big factor in the residential real estate market. I'm an optimist about the local employment picture. I think we should see stable employment for the jobs that pay well enough to make mortgage payments, and demand should remain fairly steady this year. I doubt that we'll see a big change in the lending picture for several months. Rates should remain low, although maybe not as low as they are now. And while the days where all you needed to qualify for a mortgage was the ability to fog a mirror are long gone - as they should be - lenders still have to make loans to stay in business.

The supply side of the picture is a little murkier. As I've been saying in previous posts, our inventory is lower than it's been in over three years, and a big part of that is that we've seen fewer listings coming on the market. I've heard some national pundits talking about a big influx in foreclosure listings hitting the market later this year. I don't think that will happen locally. We've been seeing a slowdown in default filings in the past few months, mostly due to a new state law that passed last year forcing lenders to make more of an effort to communicate with borrowers who are behind on payments. Did this just delay some foreclosures, or will it cause a decrease in them? That remains to be seen. The anecdotal evidence I have from talking to REO listing agents is mixed - some have a good number of things in the pipeline, and some have nothing coming on.

I think that we're likely to see active listings edge back up in a few months, but I doubt that we'll get back to a level where we have more than 6 months of inventory unless demand falls off drastically. If we stay close to status quo in supply and demand, we should probably see some price stabilization in the second or third quarter of this year. Quite frankly, I'm a little mystified as to why that hasn't already happened.

Bottom line - I expect that this will continue to be a market that offers incredible opportunities for buyers for the foreseeable future. But when anybody asks me "When are we going to see the bottom of the market?", my stock answer is "I'll tell you six months after it happens". Seriously - if I could see the future, I'd be too busy placing bets at the MGM Grand sports book to be doing this...

Monday Morning Numbers 1/12/09

Here we go again... If this is the first time you're seeing these numbers, go back and look at the 1/5/09 posting for some background. Here's what the Lompoc Valley real estate market looks like this week:

Active Listings: 129
Contingent Listings: 17
Pending Listings: 51 (25.89% of the inventory)
Price changes for the past week: 7 (4.79%)
Sold listings for the previous two weeks: 8

Not a lot of change this week. I had kind of expected that we might see a bit of an increase in the inventory. We typically see some of the listings that expire at the end of the year come back on the market in the first week or so of the new year, but we didn't have a lot of those this year, and only one or two of those came back so far.

18.5% of our total active inventory this morning is bank owned, and 47.9% are short sales. At the current rate, we have about 4.9 months of inventory. Taking out contingent sales, we're down to 4.3 months. The generally accepted benchmark in the industry for a buyer's market is over 6 months of inventory. While we have fallen below that level, this market is still ripe with opportunities for qualified buyers. You may have to compete in a multiple offer scenario - especially on REO's, but there there are some great values to be had.

Come back later this week for my best guess at what 2009 has in store for us.

2008 Year In Review

If you believe everything you hear in the media, 2008 was a horrible year in the real estate world. Lenders are folding up their tents, values are falling to almost zero, inventory levels are off the charts. You'd think that wolves are roaming the barren landscape, devouring the carcasses of the few people brave and crazy enough to even think about buying or selling a home. To borrow and paraphrase a line from the late, great Richard Pryor (one of the few that I can actually use in mixed company), "Who are you gonna believe, them or your lying eyes?". So put down the newspaper, turn off the cable news, and let's see what's really been happening in the Lompoc Valley real estate market over the past year.

2008 was a huge opportunity year in our market, and buyers came out in big numbers to take advantage of it. We had a total of 390 residential units sold in the Lompoc Valley, up a whopping 53% from 2007. This increase was driven by approximately a 25% decrease in home values over the course of the year. The exact numbers may change a small amount as the last few 2008 sales get updated in our MLS, and later this month I'll post a chart showing price trends over the past few years.

The number of residential listings that came on the market dropped off last year by about 11%, and the vast majority of the listings that came on were either REO's (43.3%) or short sales (24.5%). Those that were neither, your traditional "mom & pop" sellers, had to compete with these listings, or languish on the market. REO's in particular tended to be aggressively priced for a quick sale, thus the big decrease in values last year. And they got just that. The median days on market for all sold listings last year was 39, down about 28% from 2007.

So what's been selling? No big surprise - REO listings made up 59% of the listings sold last year. I can't easily track the 2007 numbers because we didn't have a field for that in our MLS until early 2008, but looking back at some manual tracking that I did on this in late 2007, it looks like REO's were about 30-40% of the sales late in the year, and probably less than that in the first part of the year. Short sales accounted for 7.4% of the sold units. We started seeing a trend last year of improved success in short sales, but they still are presenting a huge challenge, and they require a sharp and tenacious listing agent and a very patient buyer to get closed.

We saw a huge change in how people were paying for home purchases in 2008. For a few years, FHA and VA loans were a very marginal, almost unheard of part of the market. But last year, that all changed. A combination of lower prices and tighter lending practices on conventional loans started moving the loan market to these government loans. These factors combined to increase the median escrow periods to 42 days, up 31% from 2007.

So where does this leave us? What's next? Let me tell you this much - anybody who tells you that they know where this market is going is either lying or deluded. Come back next week, and I'll make my best stab at prognostication for 2009, and we can all look back on it and laugh this time next year. Or maybe I'll look like a genius. We'll see...

Monday Morning Numbers 1/5/09

OK, here we go! Our first numbers of the new year (and for this blog). First, a little background on this to put these numbers in perspective.

We've been seeing a decline in residential listings over the past month. We had a very stable inventory level of around 190-200 total active listings for most of 2008, but in December we saw this number drop down to 160, and this morning, we're at 148 total. The 2008 inventory was lower than it had been for the past couple of years - we had a point in the summer of 2006 where we approached 300 active listings.

I'm doing something a little different than I had done in the past with the inventory numbers (for those of you who had seen these on a listing or quarterly report). In the past, I've lumped the contingent listings in with the active listings, because those are still technically active listings. It didn't matter a lot, because there weren't usually more than 10 or so of those listings at any given time. But last summer, our MLS added a couple of new contingency fields to deal with short sale and REO situations and we started seeing a lot more use of these fields, so I'm breaking them out to give a more accurate picture.

Yes, that's right, I'm a geek. Who else would you want to get your stats from?

Like it says up at the top, all of these numbers are taken from the Lompoc Valley Association of Realtors MLS. These numbers are always for single family attached and detached homes (houses and condos) for the Lompoc Valley (ZIP Code 93436). I don't include mobile homes, land, commercial, etc. in these reports.

Enough qualification (and no, I won't be qualifying everything so much every Monday morning). Let's get on with the numbers:

Active Listings: 131
Contingent Listings: 17
Pending Listings: 54 (26.73% of the inventory)
Price changes for the past week: 9 (6.08%)
Sold listings for the previous two weeks: 8

That two week sold number is probably the least accurate number I have, because there is too often a fair bit of lag time with some agents in updating the MLS with sales. Don't get me started...

At the current inventory level, we have approximately 4.9 months of inventory. I arrive at this number by averaging out the previous three months of sales, and dividing it by the total active listings (active plus contingent). At this point last year, we had about 12.6 months of inventory. The market has changed a lot over the past year. Later this week, I'll get a bit more in depth with that.

If you've gotten this far, congratulations. And thank you. Come back later this week, and I'll tell you more about what happened last year.