Happy 1 Year Anniversary Doctor Housing Bubble! Introducing the new Website www.doctorhousingbubble.com

Hard to believe that we have been posting for one year. With over 150 posts, many multiple pages long, I realized that we have outgrown the Blogger site. In fact, we have written over 300 pages worth of housing analysis regarding foreclosures, housing psychology, and the intricacies of the current housing market. We have a wonderful and insightful community and I wanted to setup a site where communication will be much better and provide a place for a community to grow. I believe that we are only entering the first stages of a multi-year housing bear market. And since our friend Ben Bernanke is slamming the dollar, I decided to celebrate our 1 year anniversary by rolling out a new site by spending my now depreciated dollars because in a year, I may need to use a wheel barrel to purchase this same website. This weekend I was working away setting up the new website at www.doctorhousingbubble.com and making sure everything was up and working. Over at the new site, www.doctorhousingbubble.com we have the following new items:

· I’ve added a search feature to make it easier to search through our 150+ articles.

· I’ve added a forum which should be great for conversations that require more than a simple comment section.

· The posts are now easier to browse through via the archives section.

· I will be doing a weekly short-sale update.

Come take a look at the new site and let me know what you think. We will keep up this Blogger site for the meantime but will be adding new posts to the new site. But if you could please update your bookmarks to www.doctorhousingbubble.com, that would be great. If you are subscribed via Feedburner you do not need to do anything since we will update that information for you. What started out as a hobby has morphed into a fun and diverse community with over 160,000+ unique visitors a month. Thanks for making this a wonderful community and I look forward to posting new articles. I look forward to seeing all of you at the new site!

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Press Zero for Reset: Are we out of the Subprime Mess?

Before the subprime issues, there were many articles and research papers highlighting the impending challenge the mortgage market would face once rates started their inevitable reset descent. Two camps emerged; one believed that the subprime market would be contained while the other camp saw it as the tip of something much larger. There is no point in rehashing which side won this debate since it is already clear. The next step is to focus on a market analysis and assess the current situation. Recently, we haven’t seen much analysis in this area because it is a foregone conclusion that many subprime loans are resetting and this is causing a profound market impact beyond the subprime sector. But what does the future potentially hold? There is a great article that was published in the O.C. Register talking to a BofA analyst, Robert Lacoursiere discussing the future of the mortgage correction. The chart provided on the site provides a disturbing picture:

*Soucre: O.C. Register

From past articles and projections, we already knew that September through December of 2007 would see the largest number of subprime resets. We've seen a couple of reports putting monthly rate resets in the range of $50 billion to over $100 billion. This is important because it will be a litmus test on the resiliency of the housing market. It is clear that many lenders and financial institutions are buckling even with the current environment. A few other things will place additional strain on the market including third quarter results that unfortunately, will reflect a slow and underwhelming summer housing market. This coupled with growing inventory, stalling appreciation, and the massive wave of resets will make it very difficult for housing prices not to depreciate.

Option One – Refinance

According to DataQuick, during the first half of the year over 43.4 percent of loans in Southern California were jumbo loans. Jumbo loans are home mortgages that go above $417,000. The typical monthly payment buyers committed to was $2,421. Sellers facing reset issues have the option of refinancing into a fixed rate mortgage. Thanks to a low interest rate environment, rates are still hovering at all time lows. Unfortunately, many home owners are unable to refinance even into reasonable conventional loans because they stretched into their current home. If we take a look at notice of defaults (NODs) in Southern California, we are seeing an exponential jump:

The illuminating thing of this data is that many of these NODs are turning into foreclosures. This is a phenomenon absent in the previous decade of the housing boom. Sellers facing trouble were bailed out by a rising market and rapid appreciation. There was no need to refinance aside from taking out money or lowering a higher previous rate. Those sellers that desperately wanted to stay in their home, used creative methods such as tapping into a home equity line of credit and bought extra time for paying off their current mortgage. The burden has now shifted since the mortgage markets are tightening their belts and appreciation is stagnant. In fact, this is the first year of serious market issues in Southern California in over 10 years. The refinance option may not be a viable choice for many home owners that have a subprime loan and are facing a reset in the next few months. That is why many housing bears cautioned that these loans had a biased toward continued appreciation and no insurance in case the housing market started losing any steam.

Option Two – Sell

Last month sales volume fell over 50 percent in Los Angeles on a year-over-year basis. The last option of hope for many home owners in trouble was selling. In fact, many sellers were able to unload their homes before their rate reset and profited nicely. This went on for multiple years. In a bubble, rational behavior and fundamentals seem to take a backseat. Even staunch opponents of housing started singing a different tune. It is almost a historical prerequisite that once a bubble forms and is in full stride, rhetoric regarding a “new era” creep into the mainstream lexicon. Selling is becoming a challenge in the current market because of market depreciation, increased inventory, and buyer psychology. Another characteristic of any bubble is irrational logic guiding fundamental economic decisions. There was really no reason for housing prices to run up the way they did with no income support, population growth numbers that didn’t instigate amazing jumps, and renovations that didn’t reflect hundreds of thousands of dollars in price premiums. In addition, buyers are no longer fighting for the one home on the block. Any person living in Southern California need only get in their car for a weekend drive and cruise the local streets. Without fail you will find one or two homes for sale within your field of vision. The growing number of foreclosures doesn't help:

Sellers are also competing with short-sales and foreclosures. The worst time to negotiate is when you are hostage to spiraling debt. Many of these sellers have no choice but to sell. Life goes on and things such as divorce, employment disruptions, or crushing debt payments are enough reason to move out. At a recent presentation by Countrywide, they announced that the number one reason for people facing foreclosure was “curtailment of income” at 58.3 percent of all causes. The second leading cause? Medical or illness coming in at 13.2 percent. This paints a contrasting view to the current reports that employment and income is strong and healthy. We need to start examining leading indicators such as building permits, insurance claims, and the money supply because this will tell us where we are heading. Looking at lagging indicators such as the unemployment rate only tell us where we have been. They are both important but clearly we are at a tipping point of market data not reflecting market reality.

Option Three – Foreclosure

It goes without saying that most people do not want to lose their home through foreclosure. It is a financially and emotionally stressful life event. 100 percent of people do not want to lose money. Yet looking at the exploding number of foreclosures, it is becoming more apparent that the country debt load is becoming too much to handle. Keep in mind that we have never witnessed a time in history of such extraordinary national real estate appreciation. We had previous regional housing bubbles such as the Florida housing boom during the 1920s. In addition, our unemployment rate is relatively low and inflation according to government statistics is still under control. We examined this in a previous article and highlighted that in modern day society, avoiding debt is nearly impossible for most working class Americans. The cost of education, healthcare, housing, food, and energy have all gone up dramatically in the last decade. Let us take a look at the national mortgage debt load for the entire country:

As you can see from the above chart mortgage debt has tripled from 1992. It went from approximately $4 trillion to about $12 trillion in the current market. You can also see the inflexion point at roughly 1999. It is hard to imagine that such a booming economy with relatively low unemployment is facing the debt struggles that we are facing. One of the main reasons is that employment in the housing sector has boomed in the last decade. It goes without saying that a slower housing market will equal unemployment for those in the housing industry.

Solutions

Policy makers are providing their solutions to this mortgage crises. Initially what started as a subprime problem is now spilling over into multiple sectors. This has the potential of pushing the economy into recession and more and more economist are chiming in with future odds. What are some of the current solutions on the plate?

*Tax forgiveness for those in foreclosure

*Lowering the Fed Funds Rate trying to make credit products more attractive

*Increasing loan caps through government sponsored entities (GSEs)

*Funding for credit counseling

These solutions may help but they only put a bandaid on the overall broken housing market. In a politically charged environment with so much at stake next year, both sides of the political spectrum are treading water carefully. No one wants to be seen as the party that didn’t help suffering home owners. Bernanke is a student of the Great Depression and realizes that history doesn’t bode well for a Fed and government that doesn’t act swiftly. Even though they publicly echo fears of inflation, policy moves and data point toward a more permeating fear of deflation. I truly believe Americans do not want to see their fellow citizens fail and suffer. In fact, I believe most Americans have a strong work ethic and hold that people that sacrifice and work diligently should be rewarded. What frustrates most Americans is a game where the uber-wealthy are given corporate welfare when times are tough but poorer Americans by these same groups are seen as not being able to pull themselves up from their own bootstraps. The solution to this, even though people do not want to hear this, is a market correction. This means that local income levels and the new tighter credit standards will dictate future housing prices. In some areas this means 10 percent drops while in others this can reach 50 percent or higher. Will this happen? The data is already pointing toward this. Even if property drops 30 percent over 5 years, combined with inflation adjustments this is close to a 50 percent drop. Some areas in Los Angeles are already seeing 20 percent adjustments year-over-year.

By looking at the reset charts, we realize that the housing correction still has a long way to go. What will happen in the next year through policy and market sentiment will set the tone for the next decade of housing in America.

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Operation Destroy the Dollar: H.R. 1852 Objective Number One – Bailout the Lenders.

You can tell it is an election year when political operatives try to pander to every single group with no long-term thought process of the implications of instant gratification. Maybe that is why the United States on a personal level, has a negative savings rate. How can the government encourage people to save and be prudent when they do the complete opposite? Let us take a look at the winners with this newfound ease in lending:

Home Loans: Winner because they become cheaper

Auto Loans: Winner because payments will be lower

Credit Cards: Winner since your APR just dropped from 18 percent to 16 percent
Lenders: Winner since they are given a lifeline to do more loans

Savings Account: Losers since your interest rate is lower than inflation

Dollar: Loser as you can clearly see by the drop below the 80 support level

Pretty basic right? But if you think about the deeper ramifications of the decision it shines the light on an eerie part of our economy. The only way we can keep this game going is by making savings unattractive to the masses and encourage spending at all cost. Many investors realize the game is up and are diversifying out into foreign currencies, stock, and everything else that will benefit from a falling dollar. Many are doing short-term call options and figure they can make a profit on these pseudo bull runs. This does not help the massive majority of Americans. How is this good for our country in the long run? Today we will take a look at an absurd piece of legislation that passed the house, H.R. 1852. I will translate the key points for you into blunt language and what it means to you and our country. Take a look at this press release issued a few days ago from the House Committee on Financial Services:

· Lower Down Payments. Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment.

Translation? We are going to institutionalize subprime lending! Forget about the tried and tested 10 and 20 percent down payments of yesteryear. We are overhauling the system to remove down payments. After all, we have a hard enough time saving anything month-over-month so how can we expect people to save a few thousand dollars? So instead of requiring this archaic “saving” that is so passé, we are going to allow people, assuming they can make the monthly payment, to purchase homes even if the prices go beyond financially prudent ratios. Down payments exist for a reason. They show that a prospective buyer has the ability to tighten their belt and manage their finances for a few years to purchase a home; normally this is achieved by foregoing spending on other discretionary items. But you can have your cake and eat it too in the mortgage world! Debt is saving in this apparently brave new world.

· Housing Counseling. Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments.

Do we really need housing counseling? I can imagine one of these sessions:

Counselor: “Can you tell me about your current situation?”
Supbrime Borrower: “Ok. Someone from one of those now bankrupt lenders gave me this great 1.25% teaser loan and told me it wouldn’t reset for a long time. I didn’t read the note because hey, I trusted him since he was in a nicely ironed suit. When he said long time I thought he meant 10 years, not 2 years. Now my payment went from $1,250 a month to $2,200. What can I do? I barely was able to afford it even with the crazy teaser rate?”

Counselor: “Damn. Looks like you need to increase your income by adding an all America 2^nd or 3^rd job. Another option is to go into foreclosure since the market price on your home is now less then the mortgage balance. Oh hold on a second…I’m getting a fax from our blessed government. [pause to get fax] Hey! Good news. We can refinance you into another loan with another teaser rate since the government is now subsidizing these loans.”

Subprime: “Great! Because I was looking at this other home that I would like to flip…”

The folks that need “counseling” are the lenders and the policy makers for thinking this is a good long-term strategy.

· Subprime borrowers. Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.
Reverse Mortgages. Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans.

Higher risk but qualified borrowers? Bwahaha! You couldn’t write more Orwellian language. Could it be that they are high risk because maybe they can’t afford the home? This is like saying that a person is perfectly suitable for working at the drug enforcement agency so long as his cocaine and heroine addiction doesn’t rear its ugly head while raiding a drug house. As we are seeing, it is unethical to give someone that doesn’t have their financial house in a row $100s of thousands of dollars in the form of a mortgage only to have them lose their house later on. That is why we have [had] lending standards. When lenders had to hold the notes they actually vetted the loans with higher scrutiny because a foreclosure would hurt their books. Now we have this moral hazard where we are encouraging irresponsible lending. This doesn’t help the homeowner. This is horrible classical conditioning on a mass scale. What we are telling people is credit doesn’t matter, saving is irrelevant, and bad financial moves will have a bailout from the government. Does this make sense?

Then the reverse mortgage portion is just classic. You can see the light bulb over these congressmen go off. “Next year is so important. Older voters are an important constituency group.” Since Social Security is peanuts and the cost of living adjustments are based on ministry of truth data, they only see marginal increases. The majority don’t have adequate savings but what do they have? Over inflated home equity! How about we slap on another virtual ATM and drain all their savings so instead of the equity going on to their children or grandchildren, it will go to the good old government. Amazing planning here. Let us keep reading.

· Multifamily Loans. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities.

You really need to put on your doublespeak reading glasses for this one. So they want to raise FHA multifamily loan limits to encourage affordable housing? They are basically forcing prices to go up. If the market played itself out, construction companies that are able to acquire cheaper resources and labor would be forced to pass on the savings to consumers via more affordable housing. But this legislation assumes that current housing bubble prices are justified and are trying to institutionalize them under the guise of good public policy. What we need is less legislation and more open market competition. Think about it. If you have two companies and materials are being driven down because of competition and efficiencies, then the company that can provide lower priced goods to the market will win. That means lower priced homes and more sales. Did you notice how Hovnanian had no problem attracting buyers when it slashed prices by $100,000? But here, we have this big government mentality and you’ve seen the ridiculous budgets where toilets cost $2,000 and pens go for $30 each. Do you really think these companies compete when they know they have a locked in price? Why do you think communism failed so miserably? And the language is scary. What do they mean “fully fund construction costs” in bubble areas? They call them more expensive areas instead of overpriced bubble metro areas fueled by rancid loans but I think the PR folks removed that language. This is a blank check. Make sure you contact your representatives in both houses and contact the White House to veto this. Maybe Bush will dust off the pen and use it for once.

· Affordable Housing Fund. Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead of returning such funds to the General Treasury.

You don’t need the affordable housing fund if you relax zoning rules, stop bailing out lenders, and make these folks accountable for their actions. They are trying to seal high prices into the system as a paradigm shift. These folks want you to believe that higher prices are just a thing of the modern day as opposed to being fueled by exotic funky lending and mass greed.

· Higher Loan Limits. Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The amendment also also retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”

This is the one that is getting everyone worked up. How is raising loan caps going to help the family on main street USA by pushing limits over $500,000? I thought the median price was somewhere around $225,000 for most Americans? Oh! I forgot. Lenders make their most profits from overpriced bubble metro areas therefore we should ask our brothers and sisters in Wyoming, Montana, Arkansas, and every other non-bubble state to contribute to their mass greed. Make no mistake. This bill is 95 percent for the housing industry. It will not help you or your family if you are facing foreclosure. They will use the 1 or 2 examples to get media heart bleeding and lenders going into crying moments (did you see that Youtube video of the guy pleading for Brittany?); it’ll be something to that effect but everything is garbled up in this translation. Pandering at its finest. How is someone in a high priced area with a $400,000 or $500,000 mortgage with a family income of $50,000 going to get help if the main problem is a pricing and income issues? Unless they want to give everyone a 50 percent mandatory raise, I’m not sure how this helps anyone except lenders on the large part by washing their hands clean ala Pontius Pilate of unethical and corrupt mortgage products?

Doublespeak: Helping Minorities Pad our Bottom-line

Someone once told me that getting married is easy, staying married is the hard part. During a presentation, one of the nation’s mortgage lending leader reiterated their goal of helping minorities to own homes. The government always throws this PC statement out. The last few years these lenders have done the most damage to minorities. Guess who are the folks who are losing their homes because of subprime lending in the largest numbers? These greedy lenders didn’t care about folks’ long-term well being, they only cared about putting people into homes and getting their nice commission cuts. So what if 1, 2, or 3 years down the road the family drowns in their own debt service? Setting people up for failure is not the American way.

The fact that many are subprime meant they couldn’t afford homes to begin with. Simple way to avoid this mess from the start. If people want to buy homes why is it so bad to ask that they save a minimal down payment? You know why? Because this slows the real estate complex down. During this time people aren’t buying, selling, refinancing, busting out home equity lines of credit and all things where the housing Ponzi Scheme gets their money from. To use this “we are helping minorities” line is arrogant and absurd. Why don’t they address the real reason that of massive inequities in pay for minority groups? Oh! We can’t talk about income because that is taboo. Yet they are okay with putting people into ticking time bombs. A good senator and representative, for example, in voting for a war should always ask themselves if they would send their own child to a conflict. In the case of lending, a good lender should be required to ask, “would I loan this person money if it came out of my own bank account?” Guess what your answer would be?

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The Sacred Commission: 3 Reasons Why Commissions Will Come Down.

During the housing boom, agents and mortgage brokers have done extremely well. In fact, word spread so quickly that we have seen large increases in the number of people making career shifts into the housing industry. From 1989 to 2001, the membership numbers for National Association of Realtors was around 800,000. However, from 2002 to 2007 we see a dramatic and steady increase to approximately 1.4 million active members. Why the sudden increase when for over a decade, membership numbers stayed relatively stable? Welcome to the world of basic economics. The fact that money was to be made in the industry and low barriers for entry, many folks decided to roll the dice and take a chance with real estate. Simple supply and demand. In addition, with a booming market and lending standards so low that you can smell the floor, selling homes and lending money seemed to be a no brainer. Prices kept going up in double-digit sprints and many in the industry saw this as a locked in yearly wage increase. After all, if your income derives on the underlying asset price and the price keeps going up, it is by default that you will make more money since you are paid a percentage of what a home would sell for. This was all fueled by easy credit in every aspect of life. For 7 years it seemed that housing would go up ad infinitum.

The housing market is now entering the first stages of a multi-year bear market. 2007 has seen the loss of 155+ lending institutions. Over 100,000 individuals have lost their lending related jobs. Many entering neophytes are victims of poor timing. They read and listened to the housing bull books and seminars 7 years too late. Many seasoned agents and brokers realize that housing ebbs and flows. These housing veterans have sufficient contacts to weather the storm and will try to hold the fort down during these down times. From my experience in the industry and simply looking at the wage earnings for agents, it is apparent that he Pareto Principle holds true for this industry. Vilfredo Pareto, an Italian civil engineer, observed that 80 percent of the wealth in Italy was owned by 20 percent of the population. How does this apply to agents? In the case of superstar selling agents, it is the case that 80 percent of the sales happen via 20 percent of the top producing sellers. They have deep contact lists and other attributes that make them successful. When you look at the median earnings of real estate agents in the U.S., you’d be surprised by what you find. A good agent is someone that can sell a home when no one else is able to do so. See, the last few years even amateurs were able to sell homes and oversights were masked by a booming housing market. Sort of like venture capitalist throwing money at any prospective company with a dot com in its name during the raging tech boom.

Capitalism is a great thing if you let it run its course without government intervention. For example, now that the housing market is slowing down many companies are falling flat on their faces for running poor businesses. The 155+ lenders that have imploded this year are victims of inefficient business models and the market is taking care of them. After all, these companies were raking in money during the boom times. Good businesses are built with diversification to weather multiple storms. Take a look at Proctor and Gamble and General Electric. During the good times, they ventured into other businesses that allowed them to have a buffer should one industry sector falter. Many of the lenders that are now defunct saw returns too appetizing in the housing industry. Instead of going into more conservative ventures with their revenues or build war chests, they decideded to reinvest into a business model that was unsupportable.

The internet is now a ubiquitous part of life in the U.S. Everyone uses Google to search for answers. If you don’t know the answer to a complex question, you can go to Google and find not only one response but probably a few thousand. Information is power. Even in the 90s, buying a home was a challenge because you didn’t have access to all the important pieces of information. If you wanted previous sales data, you would need to go to the clerks office or pay a title company to dig up the information. Most people never bothered to look at previous tax records. And finding comparable sales? The only viable source was the MLS which was under lock and key by the housing industry. Now with the advent of Zillow, ZipRealty, Redfin, HelpUSell, and other do it yourself services information on homes is no longer hard to find. The LA Times had a great article this Sunday about selling your home with different services. Do you want to know the previous sales price? This will be easy to find. What about comparable sales? Not only can you get this information but you will have it nicely displayed via a satellite hybrid image that you can sort out. And the best thing is most of these services are free or cost a small price. And in a market where 6 percent can mean the difference between you breaking even or going into a short-sale, many folks are opting to use discount services or doing it themselves.

So why will commissions drop? Here are three further reasons for the inevitable drop in commissions:

Misnomer: Only the Seller Pays the Fee

You always here this argument thrown out. Buyers shouldn’t hesitate in using an agent because it is the seller that pays the fee. The way the process is currently setup, the seller pays the typical 5 to 6 percent commission fee and should a buyer’s agent bring a worthy customer, will get a cut of the percent. This can be anywhere from 2.5 to 3 percent. So why is this a misconception? Like a stock that pays a dividend, the market already factors this into the price. You aren’t really getting the service for free because the underlying price is inflated to reflect this market standard. But as standards shift, say commissions go to a lower rate or flat fees, the price of the home will reflect the difference. We are already seeing this here in California where market pressure and multiple options are giving consumers different choices. And sellers that went 0, 3, or 5 percent down realize that 6 percent may be their entire equity, are willing to find creative ways to sell a home. Keep in mind in a hot market where the median price for Los Angeles County is $550,000, 6 percent is $33,000. As a seller, you may think twice about paying this especially in a tighter market.

This priced in model happens in many financial instruments. If you look at options that are nearing a dividend pay date, the market has already priced this into the premium. So you really aren’t getting a good deal even though this is a sort of slight of hand financial gain. And many professionals will argue that you can’t get the service that they can provide at a lower cost. This may be true depending on the person you hire. But look at the professional Hovnanian Enterprises cutting prices in their Deal of a Century campaign to unload homes. In some cases, these professionals are lowering prices by $100,000. Now that will get your attention. And these homes are new units so you don’t really need to worry about wear and tear and in many cases, these builders are now offering financing to move inventory. You can see why a downward market will put pressures on commissions.

Access to Information: MLS, Competition, Down Market

Have you used Zillow? Know about Craigslist? Ever browsed homes on ZipRealty? Then you are benefiting from the competition brought on by the industry. Many of these companies realize that you can make money from other venues such as advertising and taking a lower fee and making it up on volume. They realize that a small piece of $550,000 is enough money to invest millions of dollars into new business models. In addition, the competition is now fierce since sales are dropping and credit is tight, so now your option may be limited to a few qualified buyers that are absolutely determined to buy right now. A good agent is now earning his money trying to sell a home. No longer are multiple offers coming in like the good days. The market is now different. Many new industry folks are unable to deal with a down housing market and are going into this as a trial by fire. This is their first experience with a down market. And the last 7 years were a complete anomaly so anyone thinking we will be back to that is hoping for a deal of a century that will not come again for another century.

It is easy to find information on comparable home sales. You can easily access previous sale prices. These companies at the vanguard are finding that many buyers and sellers are willing to get their hands dirty if that means they will save $20,000 to $80,000. I always get a kick out when the rebuttal is, “well I wouldn’t expect to pilot a plane just because it is cheaper.” Flying a plane is not like selling a house. Doing heart surgery is not the same as showing an open house. There is a clear difference. Will it require work if you decide to do it? Of course. Just like owning a rental property. You will have issues come up but that is why you are rewarded financially. Otherwise, everyone would be doing it. Even savvy attorneys, title companies, and discount brokers are capitalizing on this market. If you are too lazy to review sales on Zillow or ZipRealty, drive around and see a few comparable homes, and read one of the thousands of real estate books out there then yes, maybe you should fork over your money to an expert.

Cost of Housing: People Will get Dirty for Tens of Thousands

When you are selling a $100,000 home in a slow market with few buyers, agents do earn every penny for their hard work if they bring a qualified buyer and the deal closes. Many agents across the US are not in prime areas and the percentage is not that much in nominal terms. But in the last few years, if you managed to get a listing in SoCal all you needed to do was list it in the MLS (if that) for $600,000 in a decent area and you would get multiple offers. In fact, sellers even put into their listings “sold as is” expecting buyers to put up or shut up. And guess what? Homes sold without inspections many times. Lenders couldn’t careless since banana republic mortgages were being bought by investors. So the sellers were in absolute control. It was the best sellers market in decades. It’ll be interesting to see how those in the housing industry that haven’t seen a downturn will react to this market shift (remember the jump of 600,000 NAR members since the boom?). Many of course are calling for a bailout and corporate welfare but this has little chance of making any impact in California or other high priced areas where prices are disconnected from the reality umbilical cord.

Many sellers that bought in 2004, 2005, 2006, and even 2007 that are looking to sell are quickly realizing that 6 percent is a big deal especially if they are swimming underwater. Any smart agent realizes that in slow markets quality buyers must be courted with lower prices and this may include rebates. No amount of marketing or savvy advertising will make a lender fund a buyer; you may have a willing buyer but if they don’t get financed, the deal is going nowhere. The market is changing and to be honest, those in housing will have to revert to old school ways of doing things. Adding repairs and sprucing up houses to catch a now dwindling amount of buyers. Throwing in discounts if possible. More aggressive marketing directed to bringing in qualified buyers (take note on Hovnanian advertising approach). And no, we are not even remotely close to a bottom. We had a 7 year housing bull market and only in late 2006, did we shift into a slower housing bear market. Heck, Los Angeles County returned back to its historical median record price of $550,000 last month so we haven’t seen a correction here. Expect this to last 3 to 4 years. Moreover, these new services are built to cater to price conscious buyers and sellers; in down markets with tighter credit, nothing is more precious than price.

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When the Housing Clock Stops Ticking: Why the Median Price is Going up While Sales are Going down.

If you haven’t noticed, Los Angeles returned to its previous median record price of $550,000 last month. Before you scratch your head in dismay, let us take a look at what is really happening. As you know, higher priced homes are still moving while lower priced homes are stagnant thus skewing the numbers. If a home doesn’t sell, it doesn’t show up in the data. Similar to taking an immensely hard mathematics course where half the class drops out, but those that remain push grades higher. When calculating the final overall class performance the statistics show the best of the best and those that stuck the course out, but what of the students that dropped out? Well as you can see from the Real Homes of Genius examples, prices are coming down. So what do we make of this seemingly contradictory information?

The Sales Cycle

This chart shows sales for Los Angeles County over the past 7 years. As I point out in the above chart, each January and February we hit a trough because of the slower selling brought on by fall and winter. This has been the case for each consecutive year since 2000 and is actually part of the normal housing cycle. But what do we have here appearing in summer of 2007? It appears that we have hit a trough 5 months early. In fact, summer sales numbers are looking more like seasonal sales numbers of winter. This chart is also telling because it shows a consistent pattern over time. Those that don’t believe in housing cycles are spinning in their chair wondering what happened this summer. Normally a strong spring and summer selling season allows for the lower numbers in the fall and winter. This will not happen this year. Unless of course we see a radical jump in sales in the next few months. This data is also a good indicator of where we are heading. Keep in mind the data reported is from sales that close after escrow. This data can lag 1 to 2 months. So what we are currently seeing in the actual finalized recorded sales is probably from July to early August. Well of course the mortgage blow out just occurred and credit standards are much tighter since then. So guess what this will do for sales at the slowest time of the year? Either way, this is a much necessary correction and that is why any housing pundits thinking we are going to have some bounce back in the next few months is simply hallucinating and not following the trend.

I’ve been getting some e-mails about timing the market. There are many ways to valuate housing prices. As we previously discussed with 3 housing valuation methods, every city in Southern California is overpriced. If you haven’t noticed the media is now using the terms “housing slump” and “credit crunch” as if they’ve been talking about it for years. Too bad even as late as January and February of this year, they were still carrying the housing banner. Using rhetoric such as “booming” and “amazing” when talking about housing. I’ve seen a