Continued from Stockton Real Estate Recap, Pt 1  

In his November 2009 Update, Dr. Yun shares the following:  Rising home values will prevent home prices from overcorrecting even further. Home prices have, indeed, been overcorrecting and have led to sizable destruction in middle-class housing-related wealth. By contrast, stock market and financial wealth have experienced spectacular gains in the past nine months. Despite those gains, however, consumer confidence still continues to tread near historic lows.

But stirring a pot of voodoo finances has produced a brew that is showing some strong medicinal benefit.  Per Dr Yun: Earlier this month, the U.S. Congress overwhelmingly passed and the President signed into law new measures to maintain the momentum for a housing market recovery. The home buyer tax credit, originally scheduled to expire at the end of November will now be available through the middle of next year and more potential buyers will be able to take advantage of it. The income limit was also increased and many move-up buyers - not just first-timer purchasers - also will qualify. Furthermore, loan limits will not shrink as was planned for next year; in high-cost areas, the loan limit will remain at near $730,000 in 2010, thereby permitting more consumers to tap into the historically low mortgage rates.

In the Stockton market we have seen the benefit of this ‘brew’ first hand.  As the accompanying graphs are showing, the overall inventory has diminished greatly since the Tax Credit hit the scene.  In recent years a graph showing a decline of inventory would have been due to Sellers “giving up” and deciding to ride out the storm; not sell for a loss.  Who knew the tsunami that would be known as 2006!  But this decline of assets is real, representing Sold inventory leaving the market at near historic levels. 

Another interesting side note has been the rise of Short Sales, which continue to clog the market.  The effect is a market that is clearly made up of 3 parts.  1- Sellers with equity; 2- REO (foreclosures); 3- Short Sale assets.  As the graphs show, the moratoriums have delayed the REO assets from hitting the marketplace.  More on that subject later.  Short Sales are on the rise and slated to increase even more for the next 3-5 years per Alex Charfin, president of Certified Distressed Properties Experts (CDPE  Due to their increase as a market presence, they are impacting Days on Market (DOM) averages and more important there appears to be a growing sum of evidence showing they are selling

-10% less than REO or Retail.  The reasons are many, but 2 quick observations are: First, the primary buyer has been 1st timers who qualified for the $8k Tax Credit.  These buyers did not want to take the chance and lose these funds by going to escrow with a home that may never close.  2ndly, as the DOM are long, the end result unknown, in a market that is still declining on average of 1.4% P/M (Metrolist) the buyers want to ensure they are not overpaying for the home once it finally closes. 

The end result has been buyers have turned their attention first to the Retail and REO seller.  We experienced a window of opportunity where pricing was able to be ‘pushed’.  Multiple offers were the norm throughout 3rd quarter and into 4th quarter leading to final values in excess of original list pricing.  Internally, we saw Sellers with borderline equity rush to the market to escape their losses, and eliminate the threat of foreclosure or the stress of short sale. While the extension of the tax credit has acted like a pressure relief valve, it is clearly going to play a part in 2010 as the Phantom Inventory makes itself visible.

As is evident, a safe conclusion of the above ‘facts’ is that we are in the MIDDLE of this market.  We have seen hints of what can happen if the market has sufficient Salable Inventory coupled with Tax Credits and historic low interest rates.  The data clearly show the Buyers are “there” if the market is.  However, we also see the effect of not having a clear Short Sale program equal in clarity to the REO system.  If someone can finally persuade the lenders to create some rules the housing market and real estate agents can interpret and depend on, we will see the END of this market.

Ever the ‘eternal optimist’ I believe we are seeing this.  Several lenders I serve are aggressively pushing the ‘Pre-Approved’ Short Sale.  Various reports show that the Lender will lose 70% of value through foreclosure while the losses are 15% in Short Sale.  Sounds like a simple decision then, right?  Not so.

The financial market is not the simple structure of years past, but more closely associated with “it’s not your father’s Oldsmobile” thinking.  With STORING loans being rare, selling the loan off the norm, selling fractured interest common and commonsense rationale being absent altogether, the task of persuasion becomes formidable.  Yet, any movement towards standardization will have a multilayered effect: cleansing the market, stabilizing pricing, and even driving prices to the point that borderline Short Sale candidates will not need to go down that path but instead sell and re-buy without a stigma attached to their credit.

And after all, it will be Housing that leads the way…