Orange County Housing Report
January 7, 2010

This is the best start to a New Year for the Orange County housing market in years. Low interest rates, tax credits, increased home affordability, increased conventional loan limit, U.S. Treasury purchases of paper, and Federal Housing Administration loans have all had a positive influence on the housing market. By the numbers, the Orange County housing market has not enjoyed this strong a start since prior to the recent downturn. Demand, the number of new pending sales over the prior month, has decreased by 10%, or 250 homes, in the past two weeks to 2,265. Usually, there is a much larger decrease in demand after New Years, but before the typical start of the home selling and buying season which begins Superbowl weekend. More telling is that current demand is the highest initial posting since January of 2004.

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Last year demand was at 2,008 pending sales and two years ago it was at 998 (not a typo). The active listing inventory dropped by 88 homes in the past two weeks to 7,293. This too is just normal cyclical behavior for the beginning of a year. What is different is that the inventory is at its lowest New Year starting point in five years. In 2009, the active listing inventory started the year at 11,287 homes available for sale. Two years ago there were 14,944 available for sale. With a smaller inventory and higher demand, the expected market time is currently at a healthy 3.22 months. This is much better than the 5.62 of inventory months we started with in 2009 or 14.97 months of inventory we started with in 2008. If it weren't for the distressed segment of the inventory we must still work our way through, the market would be poised to appreciate. Distressed properties for sale are keeping a lid on appreciation and a lack jumbo financing and tight lender requirements have sapped the life out of demand in the upper price ranges.

Everyone is talking about distressed properties in one way or another. The constant drone about the "shadow inventory" is deafening. However, the "wave of foreclosed homes" has not materialized. If you think that lenders are suddenly going to unleash a massive number of foreclosed homes onto the market, you are fooling yourself. A wave of foreclosed homes is not going to materialize.

But, there is a wave of a different sort that has manifested itself over the course of the past two years, a wave of short sales. Short sales are going to dominate the distressed market in 2010.

The federal government has been meeting with the big banks ever since defaults started to skyrocket. First we heard about foreclosure moratoriums. Then we heard about loan modifications. Both were heavily encouraged by the federal government. Moratoriums only stall the inevitable. Loan modifications have not been that successful, although, I have heard anecdotal evidence that there are a lot more successful loan modifications than what is currently being reported. Now, the federal government is setting its sights on short sales. If homeowners do not qualify for loan modifications, then the government wants the big banks to turn to short sales and streamline the process. Foreclosures will become the option of last resort.

From my perspective, the short sale is a much better alternative for banks than foreclosing. Short sale listings are often in great condition because the current homeowner still takes pride in the home. Short sale listings are often marketed while still fully furnished and are clean and ready to go. Foreclosures, on the other hand, are often dilapidated with broken windows, holes in the walls, missing appliances and fixtures, green pools, dead landscaping and are in overall poor condition. The reason is that many homeowners that lose their home to foreclosure are despondent and no longer care about their home as they are forced to vacate. If there are occupants, the bank has to endure the long process of eviction. Delays are inevitable, making the foreclosure route lengthy and expensive. Short sales sidestep many of the problems inherent with foreclosures because there is a greater sense of working with the homeowner. It is a much more civilized approach.

The only real issue when working with short sales is that many lenders have processes that are disorganized and not capable of properly handling the large numbers of them currently in the system. Short sales require lender approval as they are asking for the bank to accept less than what is owed on a home. With the decrease in values over the past several years, many homeowners owe more than their homes are worth. If a homeowner cannot afford their payment, due to a job loss etc., they may elect to work with the bank to sell their home as a short sale to try to minimize credit damage.

Currently, only a very few lenders are able to make a decision quickly. On November 30, 2009, the Treasury outlined the short sale process for Fannie Mae and Freddie Mac loans. FHA loans followed suit with new guidelines in the middle of December. Many banks are preparing, or have already prepared, a streamlined short sale process, based on these guidelines. 2010 will be the year of the short sale and we will undoubtedly witness many more successful short sales than foreclosures. Currently there are 2,555 distressed homes on the active market, an increase of 46 in the past month and 166 in the past 10 weeks. This represents 35% of the current active inventory. Of the 2,555 active distressed homes for sale, only 375 are foreclosed leaving 2,180 that are short sales.

There are over 7,000 short sales that are either active listings on the market, pending sales, or are currently on "Hold" in Orange County to be addressed by the new short sale processes. Closing these short sales will go a long way toward cleaning up the local inventory. We should remember though, that the foundation of our market is not made up of distressed sales. Last month, 17% of the closed sales were foreclosed homes, 25% were short sales and 58% were equity sellers. The equity sellers are back, and growing in numbers creating the underpinnings of a stable housing market.

Source: Steven Thomas, President, Altera Real Estate