August 13, 2010
By, Carlos Aguilar, Team Aguilar – AXIA Real Estate San Diego
Please click on this LINK to view the 2010 YTD Real Estate Sales Statistics for San Diego County data used for this market recap.
This summary of REO trends for San Diego County is based on review of SDAR MLS Statistics for 2010 through July 31, 2010 as wells as “UCSD Leading Indicators” report provided by School of Business Administration. It is also largely based on our personal experience of the REO activity in 2010 and discussions with other REO agents in San Diego County.
Commenting on generalized real estate trends for San Diego County is difficult to do unless one takes into consideration the numerous micro markets that we have in San Diego, each of which reacts differently within the general San Diego market. For purposes of this report these comments are intended to emphasis those micro markets where larger numbers of REO property are found, which also happen to be the markets which are considered most affordable for the San Diego market. The key factors affecting these micro markets are;
1. Medium price in any of the numerous micro markets versus the crime rate for the individual micro market. The majority of REO’s in San Diego County are found in entry level markets where buyers have traditionally found affordable housing prices. San Diego continues to have a shortage of housing at prices that buyers can qualify for when using the medium family income that is typical for buyers in said micro market. This medium price is also influenced by the real or perceived crime / gang activity of each micro market. Many affordable homes will sit beyond the average days on market because buyers consider the crime rate in these affordable areas to be higher than what they are willing to accept. These homes will typically sit until price reductions make the purchase price attractive enough to offset the risk to the buyer.
2. Increased underwriting scrutiny of new loan originations (especially for entry level buyers using Fannie, Freddie, FHA/VA loans) coupled with the threat of mortgage buy-backs of loans that were not underwritten to new stricter guidelines have caused delays in closings. Underwriters / Funding departments are scrutinizing files and conditioning and or verifying everything in file to insure that they have eliminated the risk of a file not being acceptable when it is sold to secondary market. This renewed scrutiny is largely responsible for numerous delays in closings of existing escrows in last 60 days. Now more than ever it is important to look at pre-quals / pre-approvals with care and push for full pre-approvals by direct lenders that are willing to provide a copy of the DU printout with conditions. The REO Listing Agent must review those conditions to determine if the conditions are normal and customary closing conditions. Current MLS statistics show that days to close have increased by 28% in previous 60 days. Thus despite historically low rates, fewer buyers are taking advantage and/or are able to qualify for loans. A quick telephone survey of escrow officers confirmed that in recent 60 days a higher than normal cancellation rate is being experienced at most escrow offices.
3. Fannie Mae HomePath, when first introduced, was believed to be the answer to financing much of the Fannie inventory by eliminating the need of an appraisal and in the case of condos we could get by the strict owner occupancy rules and HOA delinquency rates that made FHA / VA loans so difficult for most condo complexes. The reality is that we find reluctance on the part of many HomePath lenders to close loans with HomePath and continue to see many buyers who started a loan with HomePath but end up closing with an FHA loan. Lenders claim that the reason for the change is that the HomePath loan is more expensive to the borrower especially when the borrower is buying with the minimum 3% down payment and has a credit score below 680. In these cases the closing cost for HomePath increases by 2-3% and the rate can be 100 to 150 basis points higher than an FHA loan. An additional factor that may influence a lender is that the FHA loan continues to be a more profitable loan for lender to close. We believe that we will continue to see lenders offering HomePath as a hook to attract buyers but will see many of these buyers switched to an FHA loan. While the goal continues to be the closing of assets regardless of the loan, the reality is that when using an FHA loan we are often renegotiating the sales price because of low appraisals, negotiating lender required repairs and experiencing delays in closing escrows because buyers have to start over 2-3 weeks into escrow and order appraisal, redo contracts and negotiate repairs.
4. Federal and State Tax credits were responsible for an increase in sales beginning in January, 2010 and peaking in May with the highest number of closings (3,364) for a single month since 2004. During the first 5 months of 2010 it was common to see Multiple Offers and buyers offering above listing price which resulted in a year to date increase in medium price of 13.3% in micro market where we found medium priced homes. The tax credits were successful in bringing buyers to market however since the end of tax credits we are seeing an opposite market reaction. Since June we have seen Available Listings and Days on Market increase month to month. The Medium Sales Price declined -3.1% in July from prior month. In last 60 days we have been tracking decreased buyer traffic to active listings, seeing 42% fewer offers, and an increase in days on market; these indicators show that we are moving back to a market that will be largely driven by buyers making low offers.
5. Investors will be a factor in REO market once again as the current trend continues through the end of 2010. Owner occupant buyers have been the majority of market with emphasis of Fannie Mae’s First Look program which has led to higher sales prices. As we see inventory levels increase investors will again become a factor causing prices to decline.
6. Home Sales in July declined 21.7% compared to last year but more alarming is that Pending sales have declined 58.6% from prior year and available inventory has risen 23.3% over prior year. As stated above, the Medium Sales Price declined -3.1% in July from prior month. In the last 60 days we have been tracking decreased buyer traffic to active listings, are seeing 32% fewer offers, and an increase in days on market; these indicators show that we are moving back to a market that will be largely driven by buyers making low offers.
These statistics indicate a trend in the San Diego market that will be felt through the end of the year. We should expect to see a softening of demand in all micro markets with inventory increasing and prices dropping as we see a transition to a buyers’ market.