August 2013 Archives

This saying comes to us courtesy of our military. They use it in the context of ten million peasants armed with stone age weapons will swarm one man, no matter how well armed or how well supported. In my work, I use it in entirely different contexts, and it is an amazingly versatile phrase for real estate. One use: when price has fallen enough, buyers will swarm no matter how tough the times. Requiring a low quantity of dollars will cause the buyers to come out in droves in the expectation of a deal. Quantity (low price) has a quality (buyer appeal) all its own.

A lot is getting made of the state of the economy, how many people are losing their jobs, companies closing, etcetera. The (real) unemployment rate is over ten percent nationally. What they aren't emphasizing is the margins between that and the best unemployment rate ever: something just over four percent. This means that ninety percent of the people are working in horrible times, as opposed to ninety-six percent in the best times ever. Difference: about six percent, or one person in sixteen. Bad if you're that one person in sixteen, but not too much difference if otherwise. Maybe a few more people than normal are also less secure in their jobs than at other times, but there's always quite a bit of that. The bottom line is that eighty to eighty-five percent of the people out there are secure in occupations that aren't going to vanish, working for companies that aren't in any danger. Unless that company decides it's worthwhile moving overseas to avoid excessive US regulation and costs of staying in business, their jobs are going to securely stay right where they are. These folks are actually sitting pretty right now, because their money is worth a lot more than it was not very long ago, and especially in real estate, much more than it will be worth two or three years from now (unless the so-called "progressives" manage to finally kill the economy for good and turn us into Mexico or Somalia). The difference in the economy is on the margins, and these people are not on the margins.

They're figuring it out, too. The areas where I work here in San Diego, the absolute inventory isn't down that much in the last few months, but what there is is selling much more quickly, and that's just at a first glance. In time terms, we're down from about eighteen weeks inventory to about ten weeks inventory here in East County, but there's a distortion in that due to the fact that most short sales stay in the "active" list all the way to the actual sale, as opposed to moving over into "pending". This in the period of the year that is usually the absolute worst for getting property sold. I don't have a crystal ball, but my projection for what happens this spring when people start thinking about moving once the kids are out of school is a little bit scary.

People can really afford a lot more than could when unsustainable loans were the order of the day. When I'm in escrow for just over $400,000 on a property that last sold for over eight hundred thousand, you know things have changed. Another property I'm in escrow on is about three and a quarter on a property that would have been worth $650,000 at market peak, and probably would have sold for seven hundred or a bit higher. These properties are closer to being the rule than the exception. Yeah, the market comps I'm getting are about ten percent higher (which means I got them one hell of a good deal), but even a $360,000 property is a lot more affordable to the median wage earner than a $650,000 one, and a lot more people can afford $400,000 than can afford $819,000. Since incomes have an approximately normal distribution, a lot more than twice as many people can afford a property that's half as expensive.

A while ago now, I did a study on what people can afford in San Diego. Those numbers were based upon 2006 wages, those being the most recent I could find a distribution for, and then-current rates. Well the rates now are a lot lower. When I did that study, I assumed an FHA type loan at 6.5%, by which I really meant a tad over 7, as the FHA charges 55 basis points per annum for financing insurance. The rates at this update are a lot lower for exactly the same loan. That person smack dab in the middle of the largest group of wage earners, who could afford the loan, taxes and insurance on a $302,000 property all by themselves at $2343 per month, is only spending $2016 per month on exactly the same thirty year fixed rate loan, taxes and insurance on exactly the same property at exactly the same price - a difference of over $325 per month. This means it's a lot easier for them to afford exactly the same property. You shouldn't make decisions on real estate based upon payment (at least not beyond a blanket rejection if you can't make the payment), but people do it. Quantity of dollars out of the monthly budget has a quality all its own, as every crook who's ever preached "Low Monthly Payments!" knows very well.

That same $2343 per month under exactly the same circumstances now stretches to a $342,000 property. The loan by itself would allow a further stretch, but those pesky property taxes keep going up by purchase price. This enables people to set their sights on more desirable areas of town, or bigger, better, more attractive properties within the same area. Instead of a 1000 square foot 3 bedroom 1.5 bath property, people can now afford a 1500 square foot 4 bedroom 2 bath property next door for exactly the same payment. Maybe it isn't quantity having a quality all it's own, but higher attractiveness and more value becoming obtainable for the same price (as these folks think about it) will also cause more folks to sign on the dotted line.

Lower rates are also allowing more people to save their property. They couldn't afford the adjusted payment at eight and half percent, but they still have equity, and their debt to income ratio supports five and a quarter percent, where it didn't support seven percent, let alone the higher adjusted rate. If they have equity, they are refinancing. If not, they are getting loan modifications - the lenders are willing to give them at lower rates when the rates are lower, and they're certainly preferable to the lender losing the money and being forced to sell the property in what has been an uncertain market. The lenders have also (finally!) figured out that if they stop flooding the market with inventory they don't have to, prices might stay a little bit higher, and recover more quickly, so they get a better price and lose less money on the properties they do have to put on the market.

The backlog of people who want to sell is dropping. The number of people who have held their property off the market was only large, not limitless. We're burning through the people who didn't or don't have any choice but to sell - the short sales with adjusted loans and lender owned properties, and back when I first wrote this, I didn't see another wave of foreclosures here in San Diego (that might happen now, thanks to the way the government is persecuting american companies and making the environment unfriendly for investment. We can't all work for the government, and even if we could it wouldn't be a good thing). People are assuming foreclosure takes three years after loan adjustment and thinking that some loans were fixed by up to five years after initial purchase before adjustment, but there just weren't many of those in San Diego - the dangerous loans were all two to three years before the payment adjusted - the exceptions are insignificant, statistically. Furthermore, people are deciding to get out now and get the pain dealt with, even though there are a lot of reasons why they shouldn't. It's been several years now since the last of the Make Believe Loans (January 2007), and even longer since the bottom started falling out of the San Diego market (October 2005). My point is this: of those who are going to lose the property because their loans adjusted, the vast majority of those adjustments have already hit, and people are deciding - wrongly - that the smart thing to do is stop paying their mortgage now.

Of those in other situations, where they have a choice, some people have decided to stay in their current property, while others have decided to wait until prices recover and still others are waiting for conditions to be right for a move up. These last can afford a slightly more expensive property, but some of them need a little bit more equity for the down payment on the new property. They will be in a position to get it soon, and when they are, the market is going to heat up still further.

The only thing causing prices to go down - the only thing that can cause prices to go down - is excess inventory (Conversely, the only thing that can cause prices to rise is excess demand). That excess inventory is starting to clear, at least here in San Diego. I don't know how far the rest of the country is behind us, or any given area, but it will happen, sooner than most folks probably think.

Caveat Emptor

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This page is an archive of entries from August 2013 listed from newest to oldest.

November 2012 is the previous archive.

September 2013 is the next archive.

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