High-end headaches
Steve Goddard, president of the California Association of Realtors, surveys the local housing market. Photo
While many industry insiders hail a recovery of the housing market in Southern California and across the nation, questions linger about whether the high-end homes covering the beach cities can take part in the rebound.
On the up side, median home prices are rising in the beach cities, a major indicator of a strengthening market, while interest rates for new loans are low, encouraging people to buy.
On the down side, the area’s affluence might work against it. As the sale of pricey homes lag behind the overall real estate recovery, large loans for new homes remain hard to get, and owners of high-end homes face steep payment increases for their “jumbo” loans, which could force many of them into foreclosure.
‘Good trend’
Steve Goddard, a Manhattan Beach-based Realtor and president of the 173,000-member California Association of Realtors, said the overall housing market has stabilized and is trending upward.
He said this is also true in the beach cities, an area filled with high-end homes. He said prices of the more expensive houses have stabilized, with the end of 2009 and the beginning of 2010 trending in the upward direction.
Indeed, home-sale statistics for the beach cities show a rise in median prices at the end of 2009 and the beginning of 2010. The sale prices climbed from $788,000 in October to $806,000 in November, $857,000 in December, and $999,000 in January, according to statistics compiled by the association.
“It’s showing a good trend now,” said Goddard, who is a seller and broker manager for Re/Max Beach Cities Realty. “The whole real estate market is trending upward, and that’s a good thing. It makes buyers comfortable. Now is a good time to buy.”
He predicted that interest rates would rise, and added, “The best time to buy is when the interest rates are as low as they can be.”
Chris Manning, a finance professor who specializes in real estate investment and entrepreneurship at Loyola Marymount University, said beach cities homeowners weren’t hit as hard by the housing downturn as many others. Before the housing bubble broke, he said, large numbers of people bought lower-end homes by getting loans that, based on their incomes, they were unlikely to repay.
“The market is very segmented. Along the coast, Manhattan Beach, Hermosa Beach, they did not suffer as badly because there are not as many people who have gotten creative mortgages, and their income is not as strained, so they have been able to pay their mortgages,” Manning said.
“The beach areas are pretty solid. Home prices were not hit so hard out here, and prices are even going up,” he said.
Buying obstacles
But while people trying to buy or hold onto less expensive homes get help from the federal government, and from lenders, substantial government support has not been available for the people who want to buy, or hold onto the more expensive homes.
Goddard noted that buyers of high-end homes continue to find it tougher to get loans. The federal agencies Freddie Mac and Fannie Mae guarantee loans up to about $750,000, but do not go higher.
To buy a home for more than $1 million, “you have to put down 30, 40 or 50 percent,” he said.
Goddard and other association members are scheduled to fly to Washington, D.C., April 25 to ask representatives of large lending institutions to make jumbo loans easier to get.
“I’ll be heading back on the 28th, and hopefully we will have gotten somewhere,” he said.
“We don’t mind that for a $1 million loan they are asking for 20 percent down, but it’s pretty difficult when they ask for 50 percent down,” Goddard said.
“All Realtors want the banks to make good loans, to not be at risk. But lately they’ve been a little stingy,” he said.
Over the first quarter of this year, homes listed for $1.5 million or less far outperformed more expensive homes, said Gerard Bisignano, who sells high-end homes for Peninsula Sotheby’s.
“People had a hard time getting loans for over $1.5 million. They used to have to come up with 10 percent [down], now it’s 25 percent at least,” he said. “For a $2 million home, to come up with $450,000 down – I don’t know many people who have $450,000 to play around with.”
Manning also noted the difficulty of securing loans for high-end homes.
“Those high priced homes almost have to go for cash,” he said. “If there is a loan it comes with a high rate [of interest] because the government does not want to back those loans.”
Asked why the government won’t help with large home-buying loans as it will with small ones, Manning said there is more pressure to help those in lower cost homes.
“I think it is more political. How are you going to pass through Congress a bill that’s going to save a rich guy’s house? A family of four losing a job, and losing their home, that’s different than an equity investor or a movie star who’s overspent. Plus the numbers are so much smaller, it’s not as newsworthy,” he said.
Seaside foreclosures?
While the government looks the other way, high-end homeowners might be following their less well-off counterparts into foreclosure, Manning said. He pointed to a study by the RealtyTrac service especially for The Wall Street Journal which predicted a steep rise in foreclosures this year for houses with loans of $5 million or more.
The newspaper noted the same advantages that Manning attributed to well-to-do homeowners, including their bigger incomes.
But the newspaper reported that in February, 352 homes with $5 million-plus loans were scheduled for foreclosure auction nationwide, marking the largest month for such notices since the financial crisis began. RealtyTrac found that there were only 1,312 such notices all last year.
Government officials have not previously looked at helping the owners of more expensive homes, because of their attention to the vastly larger number of people with homes that cost less, Manning said.
“They had bigger fish to fry,” he said.
The seeds of the jumbo loan problem were planted in 2003 through 2007, when banks were making 30-year negative amortization loans, often accepting low down-payments along with ongoing payments that were small enough that, on paper, they would not actually pay off the loans.
There was, of course, a catch – the payment sizes would be adjusted upward in three to five years, so that the homeowner would begin to pay down the principle of the loan. Many of those loans were jumbo loans.
It was supposed to work out well. Lenders believed that homeowners’ incomes would continue to rise, allowing them to afford the “resets” in their payment amounts, and they thought home values would continue to rise, allowing owners to sell their homes if they couldn’t afford the higher payments.
But incomes and home values dropped, while unemployment rose.
Now, great numbers of those steep resets are scheduled to hit homeowners this year and next year, perhaps greatly disrupting the jumbo-loan housing market, which occupies much of the beach cities.
Bisignano said some jumbo loan holders will see their payment sizes increase by 30 percent.
“They are going to start defaulting,” he said.
Bisignano said the beach cities have been “for the most part insulated” from floods of homes entering the market because of owners who can’t make the mortgage, but that might change.
Goddard said people with jumbo loan resets coming up can renegotiate, adding that current interest rates stand at an agreeable 5 percent.
“Prudent people are renegotiating these loans now,” he said. “…The banks are being pretty reasonable about it, even if you don’t have as much equity as you would like to have to refinance. They don’t want to take those homes back.”
Bisignano wondered whether banks can handle a nationwide flood of potential refinancers holding jumbo loans.
“They can’t renegotiate hundreds of thousands of loans because logistically they’re not set up to handle that,” he said. “Hopefully they are moving in that direction.”
Bisignano said he sees help from the government as unlikely.
“The government’s bailout of the banks was not very popular with the electorate,” he said. “I don’t know if they would have the money for this, and I don’t know if they would have the political will.”
He said these days he gets “the most action” from potential buyers for a very high-end, $13.5 million Strand house, rather than for any of his other listings, including $2 million ones.
“The people who can buy that home have cash, and they have a relationship with their business banker, and they can call and get a $6 million loan,” he said. “It’s the normal Joe who has problems getting a jumbo loan.”
Buying up
Goddard said some beach cities residents can use the equity in existing homes to help them buy larger ones.
In the beach cities, he said, some people bought their homes decades ago, when prices were low, and have found it possible to buy bigger homes using the equity they have built up as home prices increased.
“There are people who bought homes and then used them as a vehicle to buy bigger homes as their equity increased,” Goddard said. “There are schoolteachers who bought homes for $20,000, 25 years ago, and found themselves in a million dollar home.”
Those people, he said, can pull a down payment out of their first homes.
However, he said, many of those teachers or firefighters who were fortunate enough to buy early would rather remain in their homes than try to buy up.
“Some people can afford more house, but they’re also very concerned about the economics of life,” Goddard said.
Market concerns
Hermosan Leo Nordine, one of the Los Angeles area’s foremost sellers of foreclosed homes, offered little comfort for the high-end beach cities market. He said foreclosures have slowed here, but so have sales, while houses stand for longer periods on the market without finding buyers.
Nordine pointed to a home in Hermosa that he has sold before, yet this time found itself lingering on the market without finding a buyer.
“I’ve got a dingbat house on Monterey [Boulevard] that was $950,000 last time. I used to sell these houses in the sand section for $900,000 all the time. This one’s at – let’s see — $589,000 and I still can’t get rid of it,” he said.
“It’s a single-family, no-parking half-lot, but it’s four blocks from the beach, and I can’t sell it. It’s been shown about 2,700 times,” he hyperbolized. “Bank of America owns it and it’s just sitting there.”
Nordine said the market for lower-end homes has improved, and if he’s not selling as much in the beach cities, he is moving homes in less expensive areas such as Compton and South Los Angeles.
At the high end, he said, “It’s hard to get financing. Jumbo loans are just about an impossibility. The spigot is really tight…At the high end it’s mostly cash. You can’t get a loan.”
“I’m selling a lot more at the low end,” Nordine said. “But the high end, $500,000 and over,” is “pretty much anything in the beach cities.”
Turning to the overall housing picture, Goddard said, “The market has stabilized.”
He pointed to 10 straight months of increase in the state’s median home-sale prices.
“In Southern California, for sure, what’s happening is every home that goes on the market properly priced is getting five to 10 offers on it. What we’re seeing is that the marketplace believes – be it investors or first-time homebuyers – that now is the time to buy.”
But Nordine said the overall housing market rests in a state of artificial grace, suspended from a second freefall by lenders who don’t want to foreclose, and government officials who also don’t want them to.
He said the somewhat cheery home price statistics are illusory, and he foresees a second wave of foreclosures once artificial protections are lifted. Such a wave could glut the market with homes for sale, driving supply higher than demand and sending prices down again.
“I think the economy is still really soft, and the market is soft,” he said.
“Now it’s holding steady,” he said. “The banks are trying hard not to foreclose.”
He said lenders don’t want to take back homes from their delinquent owners if the homes will be difficult to resell, especially at the high end of the market. Nordine said the lenders are offering loan modifications for their homebuyers, hoping they can stay put.
“They’ll even make a loan modification after a foreclosure notice,” he said. “They’ll unravel that, and give it to them.”
In addition, Nordine said, lenders often are simply declining to begin the paperwork that leads to foreclosure. This is confirmed by delinquent homeowners who call him for advice.
“I’ve had people tell me they haven’t made a payment in over a year, and they haven’t gotten a notice [of default],” he said.
The moves to forestall foreclosures keep many homes off the market. In addition, Nordine said, owners of more expensive homes who aren’t facing foreclosure don’t want to sell “unless they really have to” because the prices for high-end homes “are so bad.”
Predicting a second wave of foreclosures, Nordine cautioned that a foreclosure delayed is not, in the long run, a foreclosure prevented.
“Half of those loan modifications are going to get foreclosed,” he said. “It’s going to take years to go through the inventory [of foreclosed houses].”
Foreclosure track
RealtyTrac reported a 2 percent drop in foreclosures nationwide in February. Like Nordine, RealtyTrac CEO James J. Saccacio attributed the trend to the protective actions of government and lenders.
“This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity, albeit at a historically high level that will likely continue for an extended period,” Saccacio wrote in a March 11 report.
In February, California’s foreclosure rate was the fourth highest in the nation, with one in every 195 housing units receiving a foreclosure-related filing.
Statistics compiled by RealtyTrac showed that in Redondo foreclosure filings were received for a total of 354 homes, which works out to one out of every 468 homes.
In Hermosa foreclosure filings were received for a total of 89 homes, or one out of every 508, and in Manhattan, foreclosure filings were received for a total of 92 homes, or one out of every 1,292.
In Redondo the average foreclosure sale price was $419,500. Average sale prices for the other beach cities were not available.
‘Limbo-land’
Nordine said foreclosures from the housing crisis started to slow down around the November 2008 federal elections, when the economy was nose-diving and politicians “put a lot of pressure on big banks” to forestall foreclosures, and offered their own incentives for loan modifications.
“The whole thing, it’s not even capitalism any more. It’s not a free market, it’s not even close,” Nordine said.
But, he said, if politicians and monetary officials had not intervened, the economy’s plunge would not have been stalled.
“There would have been Armageddon,” he said. “There would have been a worse collapse, but the recovery would have been shorter.”
The health of the overall housing market can be difficult to gauge because of the artificial decrease in foreclosures, Nordine said.
“It’s hard to get a good gauge, because they’re not letting it ride,” he said.
“They keep coming up with new tax credits and incentives, and cheap money to get people to buy, but the economy still sucks, so the prices are going to be flat for a long time,” Nordine said.
“As long as we keep manipulating the market and keep the foreclosures really from flowing through like they should, we’re just going to be kind of in limbo-land for years,” he said.
Market confidence
Goddard said he does not foresee a second wave of foreclosures, which could cause a dreaded “second dip” in overall housing prices.
“There will be some more foreclosures coming on the market,” he said. “I’m not sure I would call it a wave.”
Manning agreed.
“It’s not to say that we will not have a slow recovery, and there won’t be weakness in the recovery, but I don’t see a big second dip in home prices,” he said.
As government incentive programs expire, politicians and lenders continue to discuss launching further programs, and Manning believes that will continue.
“The government is investing billions to ensure there’s not a second dip. They’ve given incredibly generous funding to Fannie Mae and Freddie Mac, and then there is [homeowners assistance through] the FHA. There’s a lot of political pressure to prevent a second dip,” Manning said.
“The government has already done 90 percent of the effort to make sure prices do not drop,” Manning said. “If they do, it’s not going to be by much, and it’s not going to be consistent.”
And, he said, the economy is improving.
“The economy is picking up. We are officially out of the recession. That lagging factor in unemployment keeps income low, but we should start whittling down unemployment this year,” he said.
“Retail sales were up 9 percent in March. The economy is looking pretty darn good,” Manning said.
“With the bottom of the housing market more stabilized, with more months of prices not going down, and even going up, people are taking the opportunity of a lifetime to buy low,” he said.
Manning said the Federal Reserve Board also can assist the housing market by moving interest rates up or down and by tightening or loosening the money supply.
“It’s very politically unpopular to take an economy off easy money. Usually the Fed is slow to do so, until inflation becomes a problem. Right now inflation is no problem,” he said.
“There’s not going to be a double dip, a big drop in housing prices,” Manning said. “They have too much invested in not letting that happen.” ER