Warning:

Do not pay up-front fees!

Loan Modification and Short Sale Companies are not authorized to charge up-front fees without an advanced fee agreement approved by the BRE.

 

SDHS does not

charge up-front fees.

 

Loan Modification fee is charged after modification is completed to the client’s approval.

Short Sale fee is paid for by the lender or buyer.

Market Update

Market Update Summary

  • There will be overall price declines due to unsold inventory through 2012
  • Some regions and property types will see declines through 2013
  • Prices will not level out until inventory and unemployment are stable
  • Default rate and interest rates will have a large impact on price and timing
  • Prices will be level for some time, then rise after housing confidence returns
  • Consumer-driven economy will improve after inflation-adjusted price increases begin
  • Less stringent loan programs will slowly be offered, prices will go up
  • 2005/2006 price highs will be matched in 2017-2018 (inflation adjusted)
  • Top of the market will occur around 2019-2021

 

History

Around the middle of 2005 we started to feel a change in the real estate market.  We began an intensive research project to determine exactly what was happening in the market and how best to counsel our clients.  In 2005 we began warning clients and in 2006 we published our California Real Estate Market Forecast 2006 to 2010 report that correctly predicted the coming market decline.

 

History shows the market decline was worse than expected, but, on the positive side the rapid and deep decline has set the stage for incredible investment opportunities as outlined at www.sandiegohousingsolutions.com/investors in our 2009 to 2010 Real Estate Investor Guide.

 

When we made our market decline predictions in 2005/2006 they were not widely accepted, even though they were backed up with logical explanation, current and historical data and real life examples.  Many of our investors & residential clients did adjust their choices based on our predictions, and they are now very happy as a result of that, as they are now well positioned to ride it out and / or benefit form the opportunities. 

 

History has shown that many organizations whose responsibility was / is to correctly predict the housing and financial market outcomes, have mostly failed at that task.  Organizations such as the National Association of Realtors - NAR, California Association of Realtors – CAR, and major financial firms like Lehman Brothers and Goldman Sachs provided information and gave recommendations that were financially devastating to their clients.   

 

California Association of Realtors Chief Economist remarks in 2005

Source: August 2006 Norris Group Newsletter

In a September 2005 prediction for our state, Leslie Appleton Young, the Chief Economist for CAR, made light of any chance of a real estate bubble. She predicted a 10% increase in median price, sales volume of 630,000 homes, and builders would build 200,000 homes (50,000 less than was needed according to Appleton).

 

If you research CAR predictions, you will see in 2006 they acknowledged there was a market slow down, but predicted market would recover in 2007.  In 2007 they said they see a turn around in 2008.  In 2008 they said no one could have predicted that the banks could have caused this decline with their lending practices, but the market should flatten out in 2009 and prices will begin appreciating again in the middle of 2010.

 

Just like in their 2005 predictions, the facts do not correlate with their forecasting, and homeowners and investors that base their choices from their current predictions will likely be repeating the misinformation and pain cycle. 

 

The housing market cannot stabilize until these events occur:

  1. Defaults and Foreclosure numbers stabilize (naturally, without moratoriums)
  2. Number of new distressed sellers = the number of qualified buyers
  3. Unemployment numbers to stabilize

   SoCal Graph 0309    California Unemployment 2004 to 2009

 

Current Conditions

Most inventory (over 60%) in the market is distressed sales (REO or short sale) and they are competing against renovated investment properties and owner occupied sellers.  The defaults and foreclosure numbers are simple to track but the numbers can be skewed because of foreclosure moratoriums or large class action lawsuits against lenders requiring them to stop foreclosure process (such as California vs. Countrywide that stopped most all Countrywide foreclosures from late 2008 to middle of 2009). 

 

1974 to present Notice of Default to Trustee Sale Ratios and % which sell

See current foreclosure statistics at www.foreclosureforum.com/stats.html

 

  

Click on selected graphs to see expanded view

 

Default Rate, Interest Rates and Loan Backing

Default rate and interest rates will have a large impact on price and recovery timing because higher default rates eventually cause higher unsold inventory and as interest rates go up that reduces the buying power and number of qualified home buyers to purchase the unsold inventory.

 

IMFresets.jpg    feature photo

 

The Good:  A close look at the United States 2007 To 2015 Mortgage Reset Chart shows we have passed the majority of the sub-prime resets which crippled the banking system, insurance agencies and the economy. 

 

The Bad: Unfortunately we are yet to experience the majority of resets of Prime, Alt-A, Option Arm loans as seen by the more detailed 2009 to 2014 Mortgage Reset Chart from Credit Suisse.

 

The Ugly: Interest rates will have a dramatic affect on the housing market because as interest rates rise, affordability drops and both the number of buyers and the buying power of those buyers chasing the available inventory decreases.  Thus rising interest rates increase the amount of unsold inventory and place additional pressure on those with adjustable mortgages that are just hanging on.   

           

 

Compare the 1971 to 2008 affordability index to the 1970 to 2009 Conventional Mortgage Rate chart to see how the high interest rates of the 1980’s dramatically reduced the affordability rate.  It is difficult to pin down a mortgage rate forecast but US borrowing / printing of money, general consensus and conventional wisdom indicate interest rates will rise over the near term.  Forecast.org indicates mortgage rates beginning to rise in the third quarter of 2009 and mortgage-x in their “Projected Future Prime Rate Values: 2009 – 2039” show prime rates increasing from June 2009 3.25% as follows:

 

Projected Prime Interest Rate between 2009 to 2020 (Date vs. Prime Rate)

Forecast From: http://mortgage-x.com/general/indexes/prime_rate_forecast.asp

Dec 2009

4.00

Dec 2013

8.50

Dec 2017

8.25

Dec 2010

5.75

Dec 2014

8.75

Dec 2018

8.75

Dec 2011

6.50

Dec 2015

8.00

Dec 2019

8.5 - 9.5

Dec 2012

7.50

Dec 2016

8.00

Dec 2020

9.0 - 10.0

 

PRIME RATE vs. NACMR

Date

Prime

NACMR

#∆

Jun 1997

8.50

7.67

.83

Jun 2002

4.75

6.62

- 1.87

Jun 2007

8.25

6.58

1.67

 

#∆ = the % difference between PRIME RATE and NACMR (National Average Contract Mortgage Rate)

The difference (∆) between Prime Rate and NACMR is less than 2% since 1990

 

Mortgage rates are connected to the 10 year T-Bill Index and based on supply and demand for mortgages and thus, not directly connected to the prime rate, but, difference is historically pretty close.  Since 1990 Prime Rate has been +/- 2 % of the National Average Contract Mortgage Rate (NACMR) as exemplified by; June 1997 Prime Rate was 8.50 % vs. 7.67 % NACMR (which is derived from the FHA’s (MIRS) Monthly Interest Rate Survey) compared to Jun 2007 when Prime was 8.25 % and NACMR was 6.58 %.

 

If mortgage interest rates rise with Prime Rate as predicted to by 2011 to 6.5 %, then another 2% by 2013 to 8.5 % and the National Average Contract Mortgage Rate (NACMR) follows it’s historic +/- 2 % difference we will be looking at an average mortgage interest rate between 6.5 and 10.5%.  Either way this is not a good scenario… rising interest rates with high unemployment and high inventory.

 

  

 

So, San Diego, the question is… How low will we go on price?

 

A lot of “How Low Do We Go?” now has to do with the following factors:

 

  • How will the economy react to the massive printing and borrowing of money we are engaged in? 
  • How large a role will the GSE’s have in backing of home loans?
  • How much will interest rates go up? (notice not asking if they will)
  • Will the ‘Walk Away affect’ exponentially increase as prices decline?
  • Will the government institute more foreclosure moratoriums to delay the inevitable inventory?

 

Normally, the answer to ‘How Low Do We Go’ is a simple supply and demand evaluation (# of sales and days to sell vs. inventory) but since there is so much governmental intervention by inventory regulation measures and money supply policies the answer is more complicated.

 

1997, 2006 & 2009 San Diego Home Price ‘snap shots’

Source: California Investor Group

Type

1997

2006

2009

Extreme Luxury

rare

7 Million +

5 Million +

Super Luxury

1-3 Million

2-5 Million

2-4 Million

Luxury

400 – 900

900 – 2M

700 – 2M

A

180 – 400

400 – 800

300 – 600

B

100 – 250

300 – 500

200 – 400

C

70 – 200

300 – 500

130 – 300

D

50 – 125

250 – 400

100 – 300

 

News related to FHA mortgage backing:

“Due to recent upheaval in the mortgage market, the FHA's share of home loans has ballooned to about 30 percent. Because of that growth and the spike in foreclosures, the FHA's cash reserves - which, by law, must be at least 2 percent of the value of its outstanding mortgages - dipped from more than 6 percent to 3 percent as of last fall.” Source: Mortgage News

 

     

 

Delinquencies: Will the ‘Walk Away Effect’ exponentially increase as prices decline?

As previously referenced there are a tremendous number of mortgage resets due through 2012 and each time that time approaches or reset happens that causes a borrower / homeowner to evaluate their financial circumstances.  If there is not financially viable fix (loan modification or refinance) then the other options open are forced upon the borrower (DIL, walk away, short sale).  The government have set up ‘incentives’ or ‘punishments’ for DIL and walk away (foreclosure) by imposing a 4 or 5 year penalty for acquiring a new Fannie Mae backed loan.  In the second quarter of 2009 the Obama administration proposed guidelines for short sales to make them a more mainstream and viable option if an owner cannot afford to stay in the home.  If the owner cannot or does not want to complete a DIL – deed in lieu of foreclosure (see Foreclosure section for discussion on this), then it is calculated that a short sale will save the lender over $50,000 per foreclosed home or as much as 30 to 60 percent of the outstanding loan balance (source Mortgage Banker’s Association Congressional Brief).

 

In 2005 we wrote:

“Because planning for the future is like creating tomorrow today it is important that you read this entire document to see the system I have developed”. This system will address: what to do now, what to do soon, and what to do later down the road to assure you are informed and ready for the future’.

 

This system was referring to the 2005 – 2010 Market Forecast and California Investor System we shared with our clients to warn them of the coming market decline and how to best position themselves to benefit from it.  

 

    

 

Recovery

Eventually there will be a point when the economy recovers, the mortgages reset rate will decline, the default rate will slow and home prices will stabilize.  Just like few saw the turn of the top of the market in 2005 few will see the bottom too. 

 

Housing prices will begin appreciation when:

  1. Home Inventory and Unemployment Stabilize
  2. Home affordability is present
  3. Jobs and displaced workers begin return to California

 

The length and strength of the housing recovery will depend, along with the usual factors (jobs, supply, demand) a variety of unknowns factors including governmental policies on lending, pooling of securities, property tax deduction changes, appraisal policies and flipping penalties to name a few.  

 

The bottom line is the market will eventually turn around and unless the human psyche suddenly changes or government polices are set up to avoid the traditional swings we will see a continuation of the market phases as referenced by Wall Street analyst, Charlie Dow.

 

The famous Wall Street analyst, Charlie Dow, showed that markets move in cycles, and that these cycles have specific "Market Phases" and "Psychological Phases":


 Down Market (Bear Market): 
 First- Disbelief, Later- Despair, and Finally- Resignation

 

 Up Market (Bull Market):
 First - Disbelief, Later - Rising Expectations, and Finally - Mindless Euphoria

 

Just like we experienced the highest price boom California has ever seen in 2006, we will see the largest price ‘bust’ it has ever seen.  Based on historical data, predictive assessment indexes and market psychology (but tempered by future governmental policies) if we begin recovery around 2011-2013 we will see another housing boom will take us to the next top around 2019 to 2021.

 

2006 to 2019 San Diego County Neighborhood vs. Single Family Home Price

Source: California Investor Group

Type

2006

2009

2011

2019

Extreme Luxury

7 Million +

5 Million +

3 Million +

TBA

Super Luxury

2-5 Million

2-4 Million

1-3 Million

TBA

Luxury

900 – 2M

700 – 2M

500 – 1.5M

1M – 3M

A

400 – 800

300 – 600

200 – 500

600 – 1M

B

300 – 500

200 – 400

150 – 300

500 – 800

C

300 – 500

130 – 300

125 – 250

400 – 600

D

250 – 400

100 – 300

100 – 200

350 – 500

Notes:

Condo prices will follow same price pattern but are the first to fall and last to rise in prices.

2009 is the bottom of the low end of D neighborhood properties

2010 will be the bottom of low end of C neighborhood properties

2011 will be the bottom or close to the bottom of lower end of A and B neighborhoods

2019 TBA – High end luxury prices will depend on political attitude to business and tax environment.

There will be a continued decline in values of the ‘upper end’ of A, B and luxury home prices until 2016.

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