Saturday, April 28, 2012

My Response to Christopher Matthews in Time Business

The following link is what I'm responding to. A post in LinkedIn seemed to think this article was optimistic. After reading it, I didn't find it so, but I notice a lot of agents on LinkedIn are talking the market up, maybe because they believe it to be true, but, I suspect, mostly to make a commission. So this is the link:

Here are two of my responses that I posted on LinkedIn:
 In coastal areas this may be true. California's San Diego, Orange County, and San Jose only have about 30 days of inventory. This may well have to do with the employment bases in those areas, though. 
SD County and OC are pro-business conservative strong holds in the CA political landscape. San Jose has made the most of high-tech government subsidies, and is left-leaning. But the three areas have steady jobs and ocean accessibility. 
Outlying areas are still seeing drops in the housing market. We're also seeing a double-dip (or are soon likely to) in the foreclosure rates--or should I say a double-spike? There is going to be another round of foreclosures as investors and homeowners who can't find work after 2 years finally let their houses go back to the banks. 
Why? If you've been watching, CA tax revenue dropped 16%. The job providers in CA are still leaving and Gov. Brown is still trying to get Californians to vote themselves a tax increase this year. So, expect more people to give up on CA. This will probably help some other state, though. 
You can also add in factors such as "self-deportation" of illegal immigrants and also of some of our legal immigrants who've decided to go home. Keeping in mind that many adults are living with extended family, and the country's population growth is driven primarily by immigration, you don't have heavy demand for housing, except for already crowded markets.

 When the market got overheated in 2005, I decided to go work as a building inspector in 2006 until 2008. I couldn't justify selling homes I felt were overpriced, but thought I'd see a 30% correction. Little did I know that in the Inland Empire it would be 50-70% or I would have gotten out of the rental market entirely. 
After being an inspector for the first half of 2008 I watched panicked contractors unloading their inventory, and Frontier Homes declare bankruptcy. I am currently VP of the local chapter of the International Code Council, and 90% of the contractors I knew have left not only the area, but California. I listened to Mexican-Americans and guys that I suspected were here illegally talk about leaving CA to go back to family farms in Mexico. (FWIW I speak pretty good Spanish, and was the only Spanish speaking inspector at the city for over a year). 
There are bright spots in the economy, but this has more to do with government favoritism of certain industries. Low income housing (or affordable housing) requires local governments to provide a certain amount of housing. This helps developers at the cost of small-time investors. Also FHA rules allowing only 4 loans has hurt small investors. I know several that would like to invest but can't, unless they spend money incorporating and jumping through other hoops. 
Many of these investors, maxed their credit cards to keep things afloat or took hard-money loans because they couldn't get any other financing. Their hopes of the economy recovering has been dashed, and they are realizing that it's time to short sale, deed-in-lieu, or BK this year. Next year you will see more bargain homes outside of the coastal areas. 
Additional areas for profit include rentals, if you are just getting into them. The FHA 4 loan rule benefits corporations and the IRS (is that a surprise to anyone?) There is a lot of rental buying in the High Desert, mostly with section 8 renters. But, I can't deny there is money to be made in this arena. I think it's a big crap shoot myself, but know people that swear by Section 8. File this under making money through affordable housing and government subsidies, in my book, however. 
There was a recent article about new home owners finding themselves underwater shortly after purchase on Reuters on April 26, 2012 (date preserved for future searches: If the agents for these new owners did the right thing for them, they may have bought for construction cost or less. In which case their is still an upside. If we get inflation, the houses may be worth more and the low mortgage rates are beneficial, as long as their is employment to pay the mortgage. 
I'm not saying don't buy. But, inasmuch as we disclose to our clients, we have a fiduciary responsibility to let them know what we can. I try to work with investors that understand the risks 
One other area to look at that comes to mind is having your buyer buy solar during the purchase process. It adds to value of the home, and costs around the same on a monthly basis as the electricity it generates. This helps keep housing from going underwater and is justifiable with FHA energy efficiency mortgages. This also prepares your client for CEC building code changes coming in 2016 and 2020. 
My company PFAES consulting can help with this process.

Please email me at or reply to this blog if you have any questions. 

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