Market Activity

In a month normally characterized by rising sales, May 2013 California real estate sales were nearly unchanged, falling 0.1 percent for the month and 11.1 percent over the past 12 months.  A sharp change in mix of distressed versus non-distressed sales, beginning in January of 2013, appears to be driving the overall decline. While non-distressed sales increased dramatically as a percent of total sales over the past year, the gain has not been strong enough to offset the decline in distressed sales.

In May, distressed properties accounted for 31.1 percent of total sales, down 21.1 percent from 52.2 percent of sales a year ago.  Meanwhile, non-distressed sales were 68.9 percent of total sales, up 21.1 percentage points from 47.8 percent a year ago. 

 

 

  

While statewide declines in distressed sales relative to non-distressed sales over the past year have been large, trends at the county level vary considerably.  In May 2013, Solano County had the largest percentage of distressed-property sales at 46.2, down from 78.2 percent a year ago.   Meanwhile, San Francisco County had the smallest percentage of distressed-property sales at 9.7 percent, down from 20.1 percent a year ago.  Table 1 lists the top 5 counties with the highest percentage of distressed-property sales and the top 5 counties with the lowest percentage of distressed-property sales. 

 

Table 1 – Top 5 California Counties with the Largest and Smallest

Percentage of Distressed Property Sales

 

 

Median Prices

Median sale prices appear to have been significantly impacted by the change in mix between distressed and non-distressed property sales. We have found in previous research that banks foreclose more quickly on lower-end properties, and therefore lower-end properties make up a greater share of distressed properties.

Prior to 2007, distressed property sales represented less than ten percent of the market and exerted little impact on median prices.  Beginning in January 2007, however, distressed property sales began to rise. 

By August 2008 distressed property sales exceeded 50 percent of total California property sales, exerting considerable downward pressure on median prices. It is important to understand that during these periods median price reflects both real changes in price, and a shift in the mix of properties being sold – from higher end homes to lower end homes. 

Beginning in September 2012, distressed property sales fell below 50 percent of total sales. By May 2013 distressed property were only 31.1 percent of total sales reflecting another shift of properties being sold – this time from lower end homes to higher end homes.

The behavior of median prices in California over the past year provides a perfect example of how a shift in mix impacts median prices. In May of 2012, California distressed property sales were 56.2 percent of total sales and the median price was $300,000. By May 2013, distressed property sales had fallen to 31.1 percent of total sales and the median price jumped 29.7 percent to $389,000. 

The dramatic increase in California median prices over the past year begs the question of whether or not the price increase is real or an artifact of the change in mix of properties being sold.  In order to shed light on this question we divided all properties into two sub-categories – distressed and non-distressed properties – and computed median prices for each of the two sub-categories.  The results are summarized in Table 2.  

 

Table 2 – California Median Price Summary 

 

The results show that the year-over-year increase in median prices for all properties is nearly double the year-over-year median price increase of either distressed and non-distressed properties alone. 

The impact of mix on median home prices is even more pronounced at the county level.  Median price increases for all, distressed and non-distressed property sales are tabulated for ten of the largest California counties in Table 3. 

 

Table 3 – Select County Median Price Summary  

 

 

Property sales in Contra Costa County provide an excellent example of the distortion mix has on median prices.  The median price increase between May 2012 and May 2013 computed using all Contra Costa property sales was 39.7 percent.  When property sales are divided into distressed and non-distressed property sales and median prices compared, an entirely different picture emerges. In May of 2012, Contra Costa County distressed property sales amounted to 53.2 percent of total county sales. By May of 2013, distressed property sales had fallen to 30.4 percent.  Over that time period, the median price of distressed property sales rose 32.0 percent year-over-year from $235,000 to $310,000.  Meanwhile, the median price of non-distressed sales fell 0.9 percent year-over-year from $530,000 to $525,000. This does not necessarily indicate that non-distressed prices fell in Contra Costa, as even within the non-distressed category mix likely changed, with more non-distressed sales under $500,000.

The divergent median price increases computed from the different property categories suggests that median prices are significantly impacted by mix and may be imparting a distorted view of actual price movements.  

Cash Sales

 

In May 2013, cash sales were 27.1 percent of total sales, down 2.2 percent from April’s total of 29.3 percent. Cash sales as a percent of total sales peaked at 33.8 percent in February 2013. While cash-sale volumes have been relatively unchanged in recent months, the recent decline in cash sales as a percent of total sales reflects the rapid rise in non-distressed sales and the fall in distressed sales.

Despite the recent drop-off in cash sales, total cash sales have increased dramatically as a percent of total sales from 2008 to today. From 2001 through 2007, cash sales ranged from a low of 27,381 to a high of 51,387 and represented only 6.2 percent to 8.4 percent of total market sales. In 2008, as the housing market collapsed and prices plummeted, real estate investing became more attractive and cash buyers jumped into the market. By the end of 2008, cash sales had risen to 57,019, or 15.9 percent of total sales.  By 2012, cash sales had swelled to 116,549, or 29.2 percent of total sales. Cash sales as a percent of total sales now appear to be heading lower. 

 

 

 

Foreclosures

California Notices of Default (NODs) fell 10.2 percent in May, their first decline since January. Trends in NODs have been oscillating around the 10,000 notice level after a temporary decline due to the implementation of the California Homeowner Bill of Rights, which went into effect January 1. 

Foreclosure Notices — Notices of Default plus Notices of Trustee Sale — were down 9.1 percent for the month and down 53.7 percent for the year.

  

 

 

California foreclosure sales fell 23.1 percent in May and are down 63.6 percent for the year, reaching their lowest level since January 2007.  The dramatic drop in May foreclosure sales resulted from an Office of the Comptroller of the Currency (OCC) guidance letter  that specified minimum standards for handling borrower files subject to foreclosure.  Several of the largest banks either slowed or stopped their foreclosure sales in May while they digested the requirements of the new guidelines.  At of the end of May, JPMorgan appeared to have resumed foreclosure sales.  Meanwhile, foreclosure sales from Citi and Wells Fargo Bank were down 50 percent and 75 percent since the letter, respectively, from their March and April levels. We expect foreclosure sales to pick up in June as banks incorporate the new standards.

For a more complete discussion of May foreclosures, please see the PropertyRadar blog post, California Notices of Default Fall 10.2 Percent in May.

 

Madeline’s Take – Director of Economic Research, PropertyRadar

 

The dramatic 29.7 percent year-over-year increase in California median home prices belies the fact that May sales, a month normally characterized by rising sales, declined 11.1 percent year-over-year..  Taking a longer-term view, year-to-date market sales were down 6.4 percent from 2012 and have actually been nearly unchanged and relatively flat since 2009.  In this bifurcated market, non-distressed sales are up smartly for the year but distressed sales are falling faster than the rise in non-distressed sales.

Driving the divergence in trends is the weird alchemy of artificially low interest rates driving up demand, thwarted by millions of underwater homeowners and government policies that are starving the housing market of inventory for sale. 

Given the fact that an estimated 370,000 California homeowners are delinquent, more than 72,000 properties are in foreclosure, and nearly 47,000 properties are bank-owned, there “should” be plenty of inventory.  Instead, market activity is at its lowest level in four years for the following reasons:

• Nearly 2 million California homeowners remain underwater — 1.1 million of them by more than 25 percent. That means 20 percent or more of all California homeowners cannot materially participate in this housing market (outside of a short sale).
• Short sales are likely declining due to government policies.  The $25 billion National Mortgage Settlement has largely been fulfilled, taking the pressure off the five largest banks to conduct shorts sales. Also, the political football in the California Legislature over the fate of SB30, the California version of the extension of the federal mortgage debt relief act , is likely depressing short-sale activity.
• Rising prices and low inventory create a seller’s market, so homeowners who do not have to sell are waiting on the sidelines to take advantage of rising prices.

Given these factors, the rapid price increases are likely to fizzle out sooner rather than later.

Sean’s Take – Founder/CEO, PropertyRadar

 

I’ve long believed that the popular use of median sales prices as an indicator of home price direction is misplaced. Median sales price is an interesting measure of what sold in a particular month, and how that compares to prior periods, but it is a nearly meaningless indicator of home values overall. While it is extremely clear to me that actual home prices have been heading up throughout most of the state, no one should be looking at median sales price as an indicator of how much their homes value has changed.

Fast Facts

Calif. median home price: April 2013: 

• California: $402,760
• Calif. highest median home price by region/county April 2013: Marin, $952,870
• Calif. lowest median home price by region/county March 2013: Siskiyou County, $$118,0000

Calif. Pending Home Sales Index: April 2013: Decreased 3.7 percent from a revised 126.5 in March to 121.7 in April
  
Calif. Traditional Housing Affordability Index: First Quarter 2013: 44 percent (Source: C.A.R.)

Mortgage rates: Week ending 6/6/2013 (Source: Freddie Mac)

• 30-yr. fixed: 3.98% fees/points: 0.7%
• 15-yr. fixed: 3.10% fees/points: 0.7%
• 1-yr. adjustable: 2.58% Fees/points: 0.4%

Realtor.com releases Real Estate Health Report

Large regional markets across the country are leading the way to a national recovery, according to Realtor.com’s Real Estate Health Report for the month of May 2013. As seller confidence matches consumer demand, more homes are going on the market for a shorter amount of time. Conditions for market recovery have been bolstered by strong regional markets experiencing key growth and California markets, in particular. continue to lead the list of the country's top performing housing markets in median list price increases. Filling out the list are Phoenix, Ariz.; Detroit, Mich.; Reno, Nev.; Jacksonville, Fla. and Orlando, Fla. 

The data reveals that in May, the total number of single-family homes, condos, townhomes and co-ops for sale in the U.S. increased by 5.82 percent month-over-month. On an annual basis, May 2013 inventory decreased by 10.11 percent. In addition, the median list price ($199,000 for May 2013) rose by 2.10 percent over the month and by 4.79 percent year-over-year.  
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Housing Inventory Improves

Housing inventory might be down in June, but in comparison to the start of 2013, there has been an improvement in year-over-year inventory levels. In fact, the inventory of for-sale homes has improved 5.3 percentage points year-to-date because a 17.5 percent shortfall was seen in January compared with a 12.2 percent drop in June. The spring selling season has eased some of the inventory shortages. The report shows that the improved annual inventory level is evident in 70 metros. While inventory is expected to remain below year-ago levels for the foreseeable future, Zillow’s chief economist posits that “a corner has been turned.”
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CA Home Price Records Largest Year-to-Year Gain Since 1980

Median home prices across the state continued to show signs of recovery thanks to robust sales growth and a continued housing supply shortage, C.A.R. reported this week.

 

In fact, the surge in median home price in May led to the largest year-over-year price gain in at least the last 33 years. Based on information collected by C.A.R., the statewide median price of an existing, single-family detached home was $417,350 in May, which is an increase of 3.6 percent from April’s median price of $402,760. There have been 15 straight months of annual price increases on top of eleven consecutive months of double-digit annual gains. 

In comparison to April, sales in May were up 1.9 percent, with 431,370 existing, single-family detached California homes being sold. The state’s Unsold Inventory Index is noticeably down from last year, which speaks to the diminished supply of available homes for sale. While a six- to seven-month supply is considered normal, the rate was 2.6 months in May.
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Housing Pushes Economy’s Recovery

Fannie Mae’s Economic & Strategic Research Group has announced that the strengthening of the housing market is pushing the economy forward but the country’s growth has yet to reach its full potential. While we are currently experiencing a prolonged period of steady economic growth, it is expected that growth will remain below 2.0 percent for the first half of the year, with gradual strengthening in the second half of 2013 and into 2014.The ongoing recovery in housing has contributed greatly to an economy moving in a positive direction, thanks to home prices, home sales, and homebuilding activity showing signs of long-term improvement. In fact, growth is expected to surpass 2.5 percent in 2014 due to improved conditions in the housing market.
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How to Spot a Real Estate Investment Scam

These days, the newspapers, online financial forums and other news outlets are full of stories about Ponzi schemes, fake investment deals and other sorts of scams. While many of the schemes involved high-tech companies or convoluted financial vehicles, the real estate world was not immune and many investors lost sizable amounts of money to real estate investment scams. 

Real estate has one fundamental advantage when it comes to investment deals – an actual property must exist. Here are four ways to use this fact to your advantage when examining any real estate deal that will help you avoid the untrustworthy sources:

Examine the Details of the Property

Ideally, a visit to the actual site of the property will deliver a vast amount of information. In the event that this is not possible, photographs, architectural plans, appraisals and, most importantly, county plat information will ensure that the property exists in the state described by the borrower. In addition, a proper title search will guarantee that the property is unencumbered by other liens and is actually being sold by the rightful owner. 

Understand the Risk/Reward Ratio

Successful – and relatively, stress-free – investing is a balancing act between the desire to make outsized returns while maintaining a tolerable level of risk. When a potential borrower or “real estate developer” promises a high return at low risk, a clanging alarm should always sound in your head. It is not that these deals do not exist. In truly outstanding deals, oftentimes the people involved keep it to themselves.

Visit Other Knowledgeable Investors

Find a forum like a private money lender where many knowledgeable and experienced investors congregate. Not only can you pick their brains for investment advice, you can watch their actions when it comes to certain types of deals. The deals presented on this platform are highly scrutinized as are the individual borrowers and lenders. It is highly unlikely that a real estate investment scam would pass unnoticed for very long in this venue.

Do Not Dismiss the Paperwork

Handshake deals are essentially a thing of the past. Formalizing any real estate deal with the proper appraisals, escrows and legal documents is one of the surest ways to avoid being taken by a scam artist. In many cases, the paperwork, itself, is too expensive for the thief to fund and the deal will die a quick death if you insist that they pay for it.

How To Flip a House in Today's Real Estate Market

Figuring out how to flip a house today is a much easier process than in the past. After all, buyers are back in many markets and prices are either stable or, in many places, increasing. However, with prices going up and debt still hard to source, the market is not without challenges. Here is a process that can help you figure out not only how to flip a house but also choose which one to flip.

1. Identify markets that are attractive to first time homebuyers but are occupied by older homeowners. These neighborhoods frequently have low prices and properties that are fundamentally sound but in need of cosmetic upgrades.
2. Calculate the cost to buy an existing home in need of upgrades. Add in the cost of making the upgrades and of sourcing private mortgage financing. Since banks are still not active in most investment property markets, private money may be your only choice. Given that private lenders will sometimes lend on an as-improved value and can also execute very quickly, they are frequently also the best deal out there even if you can find bank financing.
3. Project what your net proceeds after flipping the property to a homebuyer. To be safe, subtract 5 to 10 percent from your expected net proceeds, just in case something goes wrong.
4. Subtract all of your costs from your adjusted projected net proceeds to see if the project can be profitable.
5. Move forward with the transaction if you can meet your profit expectations. When you calculate your profit, don't look at the total purchase price and the total sales price. Look at the cash that you will put into the deal and the cash that you will take out after a successful flip.

Given the new found stability in the market, doubling or tripling your down payment is probably unlikely today. However, returns in the neighborhood of 30 to 60 percent are possible. A healthy return like this can help you build your equity account so that you can return to the market with a different problem -- figuring out how to flip a house in two or three different neighborhoods at once.

Happy 4th of July!

Criteria for Investing in Single Family Homes

Many fledgling real estate investors choose to start off small by investing in a single-family home instead of a multi-family or apartment property. In these deals, the investment is smaller, the potential problems seem more manageable and the downside is significantly lessened.

Still, for these deals, the criteria for finding a suitable property are much the same as for larger deals. Here are some things that any real estate investor should examine when investing in a single-family home:

Investigate the Neighborhood

Location is as pertinent to the value of a single-family home as to any other real estate property. While no neighborhoods are intrinsically a bad investment, one should know whether they are trending up or down in value and adjust your offering as warranted. In addition, an examination of the neighborhood will tell you the best places to invest your remodel dollars if that is your intention.

Examine the Property

If you’re a new real estate investor, don’t leave this task to an inspector. As Yogi Berra once said, “You can see a lot by just looking around.” It’s your investment dollars and no one will protect them as well as you.  A personal visit is the best option but, for out-of-town properties, insist that pictures be taken of the most salient features of the house such as the foundation, the roof and appliances.

Understand the “Comps”

The selling prices of comparable houses, known as ‘comps’ in the trade, are one of the best indicators of the value of a single-family property. Of course, every property has its peculiarities, such as amenities, the owners need to sell, and general level of maintenance, however, comps are a great place to start when determining a value.

Find the Best Financial Resources

There are innumerable financial resources available to homebuyers looking for a house to live in. For investors, the situation is not quite as simple as most traditional lenders are not particularly interested in investor loans as they are not backed by government guarantees. Instead, real estate investors should turn to private money lenders. These companies bring investors and borrowers together for any type of real estate deal including single-family homes. These deals offer competitive rates, the same guarantees and complete documentation plus they are a convenient way for both lenders and borrowers to meet their investment objectives. In short, private money lenders are an excellent resource for those investing in single-family homes.