2013 Real Estate Market in SoCal

The Real Estate Market is shifting once again.  At the start of 2013, we are moving into some strange new territory.   Like me, many other industry pros are a little unsure of where they are going with the 2013 Real Estate Market.  When I say pros, I mean agents, brokers and investors.  A salesperson from one of the major real estate websites called me, asking me to “fill in a great spot” that just opened up in my section of Orange County.  That call led to a very interesting conversation.  Because of that conversation, I decided to share my observations and insights as a buyer, investor and Realtor©.

It turned out that one of my major competitors and two smaller ones were pulling their ad campaigns from his company’s website.  During the conversation, he made a funny comment.  He said, “It is just like all the agents have decided to roll over and die.  They are all giving up.”  That got me thinking.

He was right in more ways than he realized.  He was also missing the real issue.  It isn’t the agents that have died, it is the market.   Yes many agents are leaving the business, but that isn’t the big issue with todays Real Estate Market and the market moving into 2013.  He also missed the mark in a big way.

Inventory is Down.

In the areas I focus on are called my “farm”.  In this area, the current listings are nearly zero.  Three years ago there would have been 20-30 signs at any given time.  Up to four on each block.  Last weekend, there were just four signs in the entire area.  Three of these are simply over priced which will require a very willing cash buyer.  Three of these homes also have been on the market over a year, one of them over two years.  The home that has been on the market the longest is held open just about every weekend now.

That house is an odd case.  It really is a great home and it is in a great location.  The problem is that it is a “middle house”.  There are significantly nicer homes and a few “fixers”.  The cash investors are buying the “fixers” and the cash buyers who are buying themselves a home are going for broke.  That is exactly what I did nearly two years ago.  My guess is they agree with me on inflation and the direction of the price of Real Estate in the next few years.  I think Real Estate is a better hedge against long term inflation than gold, and therefore ready to explode in value even if mortgages are harder to find than snipes at a boy scout jamboree.

Mortgage Money is Tight.

Speaking of mortgages, in a high dollar market like Orange County California, there is another issue.  Lenders aren’t lending the way they used to.  My loan guys tell me they have money to lend, and yet, people just aren’t getting loans like they used too.  The ratio’s that we as agents learned to use for the past five or ten years are no longer valid.  Higher credit scores are required just as much as lower payment ratio’s.

Being self employed, my income is avaeraged.  When I bought my home, I had a 52% ratio. That means the day I bought the house, 52% of my take home pay was going to be used for the monthly payment.  While that sounds crazy, it really wasn’t, if I was right.

The bet I made was that the market prices had bottomed, interest rates were near bottom and I was buying my home below market due to the sellers stress.  So far it looks like I was right,  lucky or both.   I bought into this market with a fixed rate loan, and knew that my wife would be going back to work bringing the 52% closer to a more comfortable 40%.  I didn’t expect the changes in taxes and increases in other costs.

Today, that kind of loan isn’t going to happen.  A payment to income ratio with 40% of take home pay for the house payment would be considered quite high now.   A couple of the loan officers I talked to at the big banks are saying they would like to see 30-35% ranges.

If I were house shopping today that means that I wouldn’t be able to buy anything close to what I live in now.

The root of the problem is with the Real Estate Market, not the agents.

When you take out “liar loans” and cut the maximum payments, you can see why the average buyer isn’t buying.  More importantly, you can also see why sellers aren’t selling.  Nobody can move up.  The few people who I am lucky enough to talk with about listing their home are usually moving inland to lower priced property or out of state because of our new taxes.

House prices are creeping upwards here in Orange County, and I believe this is due to simple inflation, not a recovering market.  Days on Market is usually a great indicator to tell the status of the market.  That number is dropping, which in “normal” markets would indicate a move to recovery.  In this case, it is merely a symptom of the shrinking Real Estate Market.  There are still cash buyers, so sellers have a good chance at selling.

New taxes aren’t helping either.  For long term home owners, selling means moving to an even higher tax basis.  Renters who voted for the tax increases will see increasing rents to follow.  Inflation will also drive up the price of homes and rent.  Raises in taxes, will only delay the recovery and cost the very cities and schools it was meant to help.  Every time a home sells, taxes are collected.  When homes sit, money sits too.

What Does It Mean.

For buyers, it means you need to be prepared.  You need at least one if not two loans pre-approved before you even start shopping.  Why?  Because when your agent does find you that house, you’ll need to move quickly before the seller changes their mind or gets an offer from someone better prepared to buy.  Sellers that do sell aren’t playing games and have cash offers lining up.  As an agent, I ask anyone that I work with to get at least one pre-approval before we go house shopping.  I do this because many people still want and expect to get a house they can no longer qualify for.  Setting realistic expectations based on the current mortgage market is important to avoid wasting time.

For sellers, it means that you also need to be prepared.  You should clean up the house to get the most you can for it, and be ready to move when a good offer comes in.  You also need to be ready to find out the buyers really can’t buy, and get your home back on the market.  Even two pre-approvals may not get a loan these days.

Sellers also have the advantage of being able to select from many hungry agents who are getting back to work.   Some agents are still figuring out the new rules and others are out door knocking for listings.  Either way, sellers need to be careful.  An agent trying to sell a home under last years rules won’t get you the best price or deal for you as a seller.

There are still a few lazy “experts” that live in an area and have a listing or two.  If you do a little homework before listing your home, they are easy to spot.  All you have to do is read their listings and look at the details.  Don’t select an agent because they are your friend or neighbor, select an agent who will work for you.

When other agents are looking at the wrong information on the MLS, your house is going to have a hard time selling.  Recently I previewed a property after receiving several calls about it.  From the MLS data, the home was a deal, and I had a cash buyer who would be very interested.  While doing my research, I found the listing agent listed the monthly land lease of $4,000 as the annual lease.  Even after I pointed out that he had understated the annual lease by $44,000 he left the listing as is.  $44,000 per year is an entirely different category of buyer in this market.

For agents, the 2013 Real Estate Market means you have to go to work.  Not work like 2006 where you could plug a sign in the ground, and write a contract.  Work like really knowing your buyer before ever start shopping for them.  Anyone can surf the internet and find houses.  Our job as agents is to represent the buyers and find them a home, investment and help them fulfill dreams.  Todays challenge isn’t selling a home, it is fighting for the listing.

Working with buyers is a whole new dynamic of research.  Knowing your area  or “farm” is key, and knowing when to let go of a buyer is also a skill many have forgotten.  We all hate to let a qualified buyer go, but if they move their search out of your area, you might be doing a disservice trying to keep up with their shopping.  When buyers are willing to go anywhere, you can’t help them.  Even thirty year veterans like my mentor can’t know every area in Orange County.

While all of this is bad news for the local Real Estate Boards, which will continue to lose membership, it is good news for agents willing to work.  Full commissions will be justified as you become the expert helping buyers and sellers navigate the overload of information and correct the misinformation from the internet and the press.

Like all things, the 2013 Real Estate Market will come and go, and next year will be different.  For now, all of us need to hold on, it is going to be a rough ride.

Scott Bourquin is a real estate agent with Keller Williams Newport Estates.  For more information visit www.socalcoastrealtor.com

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