Update: How bad is the August slump?

Blogger's note: This post is updated with two additional links below, one to an LATimes story that ran on August 13 adressing this issue, and a new post on Manhattan Beach Confidential reporting that new escrows have slowed to a "trickle."

Every indication is that August was a very slow month for the real estate industry -- and we don't mean that in the "it's summer and things are slow" sense. We mean that in the "the mortgage industry is in crisis, loans aren't getting approved and deals are not closing" sense.

Remember, August was when two major lenders -- Countrywide and Thornburg -- had trouble getting their hands on money to lend; it was when rates on jumbo mortgages spiked, the market for mortgage-backed secruties froze, and the chairman of the Senate Banking Committee, Chris Dodd, said "You can't get a mortgage in America today."

So our question is, can anyone take a stab at quantifying how bad the August sales numbers will be? Two four pieces of guidance:

(New) The LA Times addressed this issue back on August 13th, reporting "August could wind up as one of the worst months on record for the region's home sales."

(New) Manhattan Beach Confidential reports that new escrows in August have slowed to a "trickle."

Commenter Cal writes, "Anecdotal evidence from realtors who post pending sales data and my own tracking of my local market pendings, I've seen approx a 16-18% drop in pendings in a short period of time from these sources."

But broker/columnist Lou Barnes cautions that we won't know for a while: "August home-sales are closing on contracts written June-July, and a substantial decline in activity won’t appear until September sales are reported in October."

Your thoughts? Guesses? Predictions? Email story tips to lalandblog@yahoo.com.

Comments

[Cal]

Well here is one guys opinion from CNN.com:

http://www.cnn.com/video/#/video/business/2007/08/23/intv.us.property.market.viles.cnn

;-)

One piece of good news for the secondary market, Indymac has said he finally sold some AAA non-conforming loans in the secondary market:

http://theimbreport.com/?p=71

"While the trade prices on these sales are still outside historical ranges, they do reflect an improvement over several “fire sale” trades made by others in recent weeks. We are encouraged by these sales as they represent the first small sign that the ice is beginning to melt, and some modest liquidity is beginning to return to the private-label mortgage market."

But no mention of exact price.

[CD]

Peter , you made us proud, what a great telecast on London CNN, impeccable suit ,tie and glasses. Your counterpart was not as lucky, a Liberty print tie and heavy jacket in August, I guess his wife did not check him out when he left for work....

[Randy Adams]

Peter:

Just a comment on your explanation for the Central California bubble in the CNN piece. It was more than just the "liar loans" that created the bubble. Indeed, I'll bet that "liar loans" were only a response to the bubble. The real initiating cause for the Central Valley bubble was the bubbles happening in both Southern California and the Bay Area. Some of my family live in Fresno and I go up to visit periodically. Over and over for the past five years I've been hearing about new neighbors who have bought there after cashing out their homes in Southern California or the Bay Area. These are usually people who are retiring and have decided that they want to take advantage of the explosion in value to their residences and yet stay in California.

You are absolutely right about the underlying economic fundamentals not supporting the price run-up that occurred in the Central Valley cities which suffer much higher unemployment (and also higher crime rates) than the more populous coastal centers as well as having much less temperate climate. But while the new prices were impossible for many of the local workforce (hence their resort to the "liar loan"), they seemed cheap to the out-of-towners happy to pay them.

[JDZ]

I came across an interesting article by Barry Ritholtz discussing possible ramifications of violations of the Truth in Lending Act. Any thoughts on how it will play out in LA?

http://bigpicture.typepad.com/comments/2007/08/coming-soon-tru.html

[jemarqu]

Peter, I would just like to say that I absolutely enjoy your blog. I happened to just find this blog on accident but it keeps me coming back to the LA Times web site again and again.

But broker/columnist Lou Barnes cautions that we won't know for a while: "August home-sales are closing on contracts written June-July, and a substantial decline in activity won’t appear until September sales are reported in October."

I would have to side towards Lou Barnes on this one. I don't think August data will be near as grim as the fall reports. I think this holiday season is going to be really rough on retailers.

[Jonah]

Hey Peter,

I agree with Lou Barnes, I don't think August will be as low as September or certainly October. The month I'm looking forward to is January some 60 days after the first big wave of ARMs reset.

[Dave P]

August is going to be bad, September is going to be much, much worse. While he's right that August closes represent deals written in June/July, he doens't account for the fact that a very high percentage of the deals written the past two months CAN'T close because the loans that the buyers were approved for don't exist anymore. 100% financed? Sorry. Stated income? No can do. Bad credit score? Wish you got here 2 months ago.

The deals that are supposed to be closing right now are stuck in escrow while both parties scramble for financing. Last year the buyers would have been kicked out of escrow after a couple of weeks without securing a backup loan. Today the sellers realize that there aren't quality backup offers ringing through on the fax machine so they'll hold on and pray for a miracle.

You heard it hear first: The big trend for the next couple of months is the Back On Market listing. Every trend needs a cool anagram. I'm thinking BOMb. "More overpriced real estate BOMbs hit the Manhattan Tree Section this week..." Has a nice ring, no? What would the 2nd B in BOMb be? A little help, people.

[SidelinedBuyer]

Great question, Peter, and one I'm sure most of us are dying to know. Unfortunately there have not been a flurry of posts from knowledgeable brokers and realtors who would have at least anecdotal evidence about the numbers of loans and sales that are closing on the one hand or falling out of escrow or failing to get pre-approved on the other. Thanks to Cal, whose comments I almost always find informative and honest, for posting his perspective.

I wonder though, whether this news item (the seriousness and depth of the "August slump") wouldn't be a more appropriate subject for an actual article and not just a blog post? Since the brokers and agents aren't volunteering all the info, shouldn't the L.A. Times put a reporter on the story to call people up and investigate? This would certainly be of more interest and more widely read than another puff piece on some b-list celebrity selling a house. I understand that they can't compile the exact numbers, as Lou Barnes points out we won't really have those until October, but certainly they can get some interesting anecdotal evidence.

This is not to put down this blog in any way. I love it and read it compulsively. This topic just seems like the $64,000 question and I would love to see it get the full article treatment.

[John]

This particular bubble bursting has some unusual traits.

So far we have no villains, no heroes, only tragedies.

Who has gained, and who has lost?

Yes, the article needs to be written. I suspect a series of them.

[RadioManTodd]

Looks like I won't be closing.... adding to the bad August (was supposed to close on our first home on Friday the 31st.) Fortunately, (if you can say that) our inability to close is tied to a last minute discovery that theres a pending $12 Million lawsuit filed against the HOA and not because we're not worthy of getting a loan (well... the lender won't loan knowing we could be on the hook for our share of $12 Million... so I guess technically we can't get a loan). So I guess we just gotta head back out there and keep looking.

At least, with the way the trend is looking, we'll probably start finding better values.

[MyLessThanPrimeBeef]

How about, Back On Market, Baby!!!

[Pete Viles]

My Less Than Prime: Back on the Market, Baby!

I like it -- especially if you say it like Dick Vitale.

Kind lame but I'll throw out: Back on the Market Boomerang.

And if it's in LA, it's a Richie Valens Special because it's a LA Bamba.

[Bill]

Question above: "What would the 2nd B in BOMb be? A little help, people."

BACK
ON
MARKET
BABY!!

[Pete Viles]

SidelinedBuyer wrote, "I wonder though, whether this news item (the seriousness and depth of the "August slump") wouldn't be a more appropriate subject for an actual article and not just a blog post?"

Thanks for the comment, and the suggestion, which I passed on to the business section folks on the newspaper side. They point out they took an early stab at this story on August 13th -- I've added that link to the original post, but here it is:

http://www.latimes.com/la-fi-escrow13aug13,0,2019672.story

Thanks again for the comment.
Pete

[Dr. JwB]

from the article:

"One client who had been approved for a mortgage that covered 90% of the value of the home she wanted to buy withdrew her offer Friday because "she is scared to death to buy right now." It didn't matter to her that since getting loan approval this month, the lender stopped funding such high loan-to-value mortgages."

"She blew the opportunity," Ohlbaum said, "because she is worried about the market and making a bad decision."

That cracks me up. Yeah, thanks Ohlbaum. Heaven forbid anyone would be a little cautious in making the biggest purchase of their life in an uncertain market.

[Cal]

SidelinedBuyer:"Unfortunately there have not been a flurry of posts from knowledgeable brokers and realtors who would have at least anecdotal evidence about the numbers of loans and sales that are closing on the one hand or falling out of escrow or failing to get pre-approved on the other."

Over 500k+ realtors in California, I looked for one for a YEAR that had basic stats on their local market area. Finding one that recorded basic things like closings, pendings, etc is a bit harder than finding a thylacine. Finding one that actually performed analysis or anything greater than recording closing,pendings, is impossible. Simply doesnt exist. About 20% will be able to find the local MLS stat report sent out monthly, about 2% will record their own stats (which is a pared down version of the MLS report, more localized) and 0% will do anything more than that.

p.s. Thank you for the kind words.

[manraygun]

BOMB = Back On Market Bonanza!

[mg]

Bull--it
Outrageous
Mortgages
Belatedley
Expedited
Downward

[are they crazy]

Dow down 280.28 today. MSM FINALLY full of bad news for housing & credit. My question is what effect the coming election year will have on how the economy will be handled? Hard to imagine the administration letting the economy tank in an election year. Not asking what should happen - what will happen?

[Rich]

That was a good prediction made above about the "back on the market" trend, I can see that happening.

Once trend I see happening in my local Northeast (New England) market is a sort of a "buyer's strike"--buyers have temporarily exited the market, standing back waiting to see the bargains start to appear. It's a great game, cheap and easy to play, and if the attitude of sellers during the bubble has got you pissed off, it can be very satisfying reading the ads for houses you think are ridiculously priced and trying to imagine the angry backstabbing, finger-pointing arguments going on between greedy couples, developers, and their agents. Good reality therapy for all involved...

[Tex]

How about asking the LA Times business section for a piece on LA families who resisted the herd mentality, decided to rent instead, and are saving responsibly, waiting for housing prices to return to reasonable levels? All we hear about in the media are sob stories about people who are facing foreclosure because they bought a house they couldn't afford.

[are they crazy]

I agree with tex - great article idea - we suffer from being treated like cultural and societal dolts by most or black helicopter crazies. It would be a good thing to show what people living within their means actually look like. Because most of the masses are living in the brain numbing pink cotton candy rainbow world of TV and MSM they could barely even view what living within your means would look like - to them, it looks like poverty to not live as an attention whore who gets what they want when they want it.

[saver]

Awesome ideas guys - a nice, honest article about normal people who have chosen to be financially responsible and save their money instead of blowing it on overpriced real estate with funny loans.

Unfortunately, although the situation is rare it is not very interesting.

[jemarqu]

Tex wrote: "How about asking the LA Times business section for a piece on LA families who resisted the herd mentality, decided to rent instead, and are saving responsibly, waiting for housing prices to return to reasonable levels? All we hear about in the media are sob stories about people who are facing foreclosure because they bought a house they couldn't afford."

I think you have a great idea Tex. You are constantly hearing about the struggles of those living beyond their means but how about the struggles of spending less then you make.

My wife and I live in a very modest (borderline dumpy) 2br apartment. Even though my retirement and savings accounts keep growing, I am jealous of my friends and family out purchasing new homes.

I am a child of a former Aerospace engineer. I saw what the recession of the 90s did to my family. My parents purchased at close to the peak in the late 80s. Their home dropped close to 30% and then later went into foreclosure after my dad lost his job.The Realtor was filling their heads with things like "you better buy now before the prices are so high you can't get in" and "the prices will never go down only up".

There is no way in this world that I am going to make the same mistake my parents made. So I am going to continue to save and wait patiently. I figure with a modest six figure household income, a strong FICO and a savings account full of money there is no reason we can't purchase a nice home at a reasonable price on day.

[SavingInTheSouthBay]

I agree with Tex. I'd love to see a story like that. My husband and I decided in January of 2006 that we need to save money...it does not save itself! Our rent is $1000 (low for the South Bay) and we wanted to see if we could really afford a $3000 mortgage. So for over a year and a half now, we put $2000 away every month right off the top of our paychecks. We live frugally and wait, while studying the market. Our goal: 100K savings in 4 years. We are almost halfway there.

We have no debt, make good money and want to spend within our means. On top of it all, we just found out we are pregnant! All of our friends when they have kids buy a house right away if they don't have one. We decided that the stress of being new parents and a new mortgage isn't for us. We are not instant gratification people, but we'd love a house just like anyone else!

It's annoying to read these sob stories of people who only make 90K total and buy a 700K house while being 30K in debt with two car payments. They were greedy and stupid. Patience, saving, and smarts are key.

Doesn't anyone do it the hard way anymore?

[D110]

I'm such a sideliner. My wife and I sold our house in Silver Lake and closed in August 2005. We then rented in Brentwood, $7000 a month for a house with a $21,000 annual tax assesment.

We missed the appreciation of 2005/2006, one of the biggest jumps ever in the market, but we're reasonably confident that prices will stay even or fall in Brentwood over the next 18 months and we'll become homeowners again.

We love the house we're in, huge lot and an asthetic, comfortable hillside yard and pool.

One of the questions that's always there is, 'Will mortgage rates be so high that any discount in price will be offset by the higher carrying costs?'

Anyway, it's such a pleasure being a renter. Anything goes wrong, and you just pick up the phone. Kind of like living in a hotel. :)

[MyLessThanPrimeBeef]

D110, the purchase price is like a fixed rate mortgage - it will never change.

Yes, when the prices come down, mostly likely, the rates will be higher than even today. But rates fluctuate.

So, if you put 20% down, get the house at a great price (much lower than today's), why not finance it with an adjustable loan? And if you don't feel comfortable doing that, get a fixed then, but you can always refinance a few years later.

Remember, the first law of real estate is Location, Location, Location.

So is the second law of real estate.

But very few know that the last law of real esate is this: Low purchase price @ high interest rate >>>> High purchase price @ low interest rate.

[MyLessThanPrimeBeef]

tex, love your article idea.

Here is one of my own, called Wacko, to be made by the next Michael Moore, which explores the crazy, sad and hopeless housing situation faced by the average renting American familes today.

Hopefully, the fiction/documentary doesn't have any conspiracy theory about the government needing an artificially inflated housing market to finance their wars.

[Ace]

'We then rented in Brentwood, $7000 a month for a house with a $21,000 annual tax assesment.'

$7000 a month?!?!?!?! As in $84,000 a year? Ouch! Are you on HBO's Entourage?

[Kaye Thomas]

I can't speak for all markets but pending sales ( after August, 2007) are down for all cities in the South Bay. Lou Barnes is right you won't see the numbers for August until September or October when the escrows close. However we are still seeing some places with multiple offers and others that are selling fairly quickly.

CAL.. ..I do show listings, pendings and solds on a monthly basis for all beach cities and do twice a month snapshots of Manhattan Beach and will be doing them for North Redondo as well in the coming weeks.. http://beachcityrealestateinfo.blogspot.com .. I also have stats that go back over a year and periodically show other information ... However I do use our MLS data and not all recorded sales so probably not as thorough as you would like..

[D110]

Well no, we just built our own business over the years, so now can afford Brentwood. Our rental, based on just the tax assessment, would probably cost about $15K to $18K a month to own with a mortgage. I can't get that much tax shelter out of ownership to make it worth owning, simply on a cash flow basis. If appreciation is gone, what motivation is left?

Question 2: Will Brentwood and other West Side enclave neighborhoods give it up to the meltdown? There are those that say cash-rich in-migrants and high-paid professionals will hold prices steady or up.

Thoughts?