Los Angeles: A Buyer’s Paradise

The media’s dire portrait of the real estate market fails to emphasize that for buyers (at least in Los Angeles) the terms are more favorable than in any time during the past 20 years.

There is no denying we are in a downturn (the ‘worst recession since the depression’ seems to be its moniker). However, all the elements that have contributed to So Cal’s boom – the diversified economy (small businesses, big businesses, ports, universities, youthful population, media companies, sunshine!) – will lead to the next boom when we exit this down-cycle.

At the beginning of the decade, while property values rose and lending underwriting guidelines were relaxed, buyers lost their “buying power” as the market shifted dramatically in the favor of sellers.

By the height of the effervescent market in 2005, buyers were forced to make no-contingency offers at prices well in excess of the asking price – and then would compete with rafts of other equally-ebullient buyers – in the hopes of getting a home (fingers crossed that the foundation isn’t cracked.)

Those days are long gone. Buyers who have good credit and documentable income with a 20% downpayment can benefit from the best interest rates in 40 years (hovering around 5% depending on the loan amount). They have a wide selection of excellent properties to choose from. There are abundant deeply discounted bank-owned properties that are floated on the market. Buyers can now have the luxury of ‘shopping around.’

Some might argue that it’s unwise to buy when no one knows where values are going. True, no one can read the tea leaves. However, loan underwriting guidelines change, interest rates fluctuate, governmental regulations can be revised.

Two of the Obama Administration’s proposals – a six-month moratorium on foreclosures, and a ‘locked’ 4.5% interest rate for buyers – will shore up the market and diminish the buyer’s advantage overnight. Homes and investment properties bought today could indeed be the ‘buys’ that are discussed over dinner parties ten years from now.

Jamie Adner
www.adnergroup.com

California Foreclosures Quantified

In California, more homes were foreclosed upon in 2008 (236,000) than in the previous nine years combined. The number of homeowners who were in default on their payments in 2008 also hit a new high – 404,000.

It’s not the “ticking bomb” of subprime mortgages which is at the heart of the most recent foreclosures and defaults – it’s job losses and cutbacks which render even “prime”, qualified buyers with good credit scores incapable of making their monthly payments. Current unemployment in California is more than 9.3%.

More evidence of that trend can be found in the default rate on "prime" loans, those made to borrowers with good credit. The rate of default for “prime” borrowers rose 340% in the three months ended Sept. 30 over the same period in 2007.

The areas In California that have been most impacted by foreclosures are the Inland Empire, the Antelope Valley and the Central Valley, outside of the urban core, where many “nothing down” first-time buyers made purchases on over-inflated homes with overly-lenient lending terms.

By some measures, two-thirds of recent sales transactions in California are on foreclosed homes. This partially explains how the median price of homes in Southern California fell to $278,000 in December, a steep 33% drop from the $415,000 median price in January 2008.

Jamie Adner
http://www.adnergroup.com/

Taming the Foreclosure Tsunami

The Los Angeles Times reported today that a new law intended to help homeowners in distress has caused the number of Notices of Default – the first step to foreclosure -- to drop to its lowest level in a year. In the fourth quarter of 2008, 20% fewer NODs were recorded than during the previous quarter, and 7.7% fewer than during the same period in 2007.

All is not rosy, however. 2008 ended with a steep rise in the number of defaults, suggesting the tsunami of foreclosures has ebbed temporarily, but still poses a major threat going forward. Common wisdom suggests that the real estate market won’t stabilize until the number of foreclosures is brought under control.

The Obama administration intends to tackle the foreclosure problem aggressively. Various proposals have been put forward including: (1) a six-month foreclosure moratorium; (2) a doubling of the mortgage interest deduction; (3) a tax credit for those who buy homes; and, (4) a federally sponsored mortgage refinancing program.

The Obama administration is petitioning congressional leaders to commit $50 billion to $100 billion "to a sweeping effort to address the foreclosure crisis."

What no one has clearly addressed is what the government and banks are going to do with homeowners who are “underwater” -- whose mortgage debt is higher than their home is now worth. Will the bailout that is rescuing the citadels of Wall Street, sputtering auto companies and deadbeat home buyers leave these citizens pursuing the American Dream high and dry?

Jamie Adner

http://www.adnergroup.com/

Catch a Falling Knife

During the past year, the world has been upended by the financial crisis. Call it shock, awe, whatever you like, from every vantage point it's been a gut-wrenching time.

2008 was a year marked by declining property values, increases in "bid-ask" spreads (the chasm between sellers' and buyers' pricing of properties growing ever wider), the flooding of the market with bank-owned properties and short sales, and the dwindling of loan money directed at consumers.

Whether a buyer or a seller; a broker or a developer; in the residential or commercial sectors -- flux and uncertainty prevailed. The 'irrational exuberance' of the bubble era has been replaced by irrational pessimism which seems to know no bottom.

With 'creative destruction' running rampant throughout the economy, turbulence will continue for the foreseeable future.

But one day, this, too, shall pass. An end will come to this economic free fall. We will wake up to rising real estate values, increases in employment, and restaurants and retail spaces that are filled (the ones that survive, that is).

This 'buyer's market' will inevitably be superseded by a 'seller's market', with bidding wars and irrational optimism. From the current wreckage will emerge opportunities. One party's loss will contribute to another party's gain. While wealth is being destroyed, the seeds of tomorrow's equity are being created. The contrarians, who see the hope of tomorrow from the bleakness of today, will be the ones who will be rewarded.

So, think quickly, act decisively, keep yourself attuned to the upside, not the downside. Incredible opportunities present themselves every day (to those who aren't faint-hearted). Catch the falling knife.

Jamie Adner

http://www.adnergroup.com/