Wednesday, April 16, 2008

Foreclosure glut further depresses housing prices

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By Peter Y. Hong

With homes in or facing foreclosure accounting for more than one-third of sales, activity in Southern California inches up in March while the median price falls.

The traditional spring home-buying season is off to its worst start in 20 years, data released Tuesday show, with sales so weak that foreclosures now account for more than one-third of all market activity.

Nearly 38% of Southern California homes sold in March had been foreclosed at some point in the prior year, up from 8% in March 2007, DataQuick Information Systems said.

In Riverside County, more than half of all sales were foreclosures.

That's helping to drive prices even lower, DataQuick said, because foreclosures typically sell at a 15% discount to surrounding properties.

The median price for a Southern California home fell below $400,000, to $385,000. Homes are now typically selling for what they fetched in April 2004, with the median price 20% below the market peak of $505,000 last year.

If there is a silver lining to that cloud, it may be the astonishing rate at which prices are plunging, said UCLA economist Edward E. Leamer. That might get the market to hit bottom sooner, he reasons, so a recovery can begin.

"Lower prices are part of the adjustment that has to be made," he said.

Home sales typically pick up in spring, when the weather gets warmer and parents of school-age children look to buy so that any move can be made over the summer.

This year was no exception: March sales in Los Angeles, Orange, Ventura, San Bernardino, Riverside and San Diego counties were up 18.8% from February.

But that increase, while welcomed by the real estate industry, pales in comparison to previous seasons. For the last 20 years, March home sales have on average been 38% higher than February sales, DataQuick said.

"We continue to believe a lot of people who could be buying or selling right now are opting to sit tight until they sense we've hit bottom," DataQuick President Marshall Prentice said. "Often what we're left with, especially in inland areas, are sales driven by foreclosure or the threat of it."

Homeowners who aren't facing foreclosure, meanwhile, often cling to outdated notions of what their properties are worth, real estate agents say.

David Emerson, a Lakewood real estate broker, said he was still able to quickly sell houses when owners priced them realistically.

A broker for 25 years, Emerson said much of his work now involved telling sellers what they might not want to hear.

"You go from being like a doctor who delivers babies," in a booming real estate market, he said, "to being an oncologist, just giving people bad news all day long."

Emerson also believes the worst is yet to come. "There are just too many foreclosures coming down the pike," Emerson said.

Natalie Neith, a Beverly Hills real estate agent, has also seen a modest pickup in open-house traffic and sales recently, but like Emerson she sees more foreclosures coming.

Neith credited a recent sale of a house in the West Adams area of Los Angeles to the seller's pricing it below others in the area. The four-bedroom Craftsman house could have been listed for $850,000 a few years ago, Neith said, but the owner priced it at $725,000 and sold it in a month for close to full price.

"When I talk to sellers now, I say you need to reduce your price. You have the prospect of thousands of foreclosures coming. That's going to be your competition," Neith said.

Nationwide, foreclosure-related filings -- including notices of loans in default -- were up 57% in March, according to RealtyTrac, an Irvine firm that sells default data. These filings include notices of loans in default, in which borrowers may be able to avoid foreclosure if they strike deals with their lenders.

California foreclosure filings were up 106% in March from a year ago, RealtyTrac reported Tuesday.

Christopher Thornberg, principal of Beacon Economics, said that so far the housing downturn had defied historical norms by occurring while the overall economy remained healthy. That's about to change, Thornberg said.

"On top of everything else, we're tipping into recession," he said. With unemployment rising and income growth slowing, "we've got the typical drivers [of a real estate slump] again."

Builders of new homes say a spring turnaround does not look likely.

"With the traditional home-buying season now well underway, we have not seen the sales activity we normally would," National Assn. of Homebuilders President Sandy Dunn said in a statement Tuesday.

A monthly NAHB survey found builders rate the condition of the housing market as poor for April.

The builders group uses an index on a 100-point scale to measure their members' sentiment. A score of 50 or above indicates that builders see home sales conditions as positive. The April index number was 20; it had last been higher than 50 in early 2006.

A Chapman University study also released Tuesday forecast further double-digit declines in Southern California home prices. The study by the university's Anderson Center for Economic Research contends that even with the steep price declines so far, area home prices remain higher than income levels justify.

A typical Los Angeles County family would have to spend 48.6% of its annual income on mortgage payments and property taxes to afford a median-priced home, the Chapman study concluded. Historically, the mean expenditure for a home in L.A. County has been 35.7% of income.

For affordability to return to that historic mean, home prices in Los Angeles County would have to fall more than 20% further, said Anderson Center director Esmael Adibi. The affordability gap is a bit less severe in Orange County, where incomes are higher, and the Inland Empire, where home prices have fallen more severely, Adibi said. "In the Inland Empire, we're seeing it get closer to the bottom," Adibi said.

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