There is a lot of blame going on right now as to who, what, where and why we are experiencing the challenges we face today in the California real estate market and other markets throughout the country. Who's to blame? It's the Appraiser's fault, no wait, it is real estate agents, or possibly mortgage brokers, it's the economy stupid? Is it?
First of all GET A GRIP! It is not one group, or another, but a series of events which is part of the normal real estate cycle.

The most prevalent excuse or reason I hear out there is the sub prime market and adjustable mortgages are the primary reason the market is struggling today. These evil loan products alone have caused all these challenges. This segment is certainly a major contributor but I believe it is just one piece of the puzzle in the ?Big Picture?

Let's jump into the Delorean and go back to the future to the sales decline we experienced in the 1980's and again in the 1990's both were a direct result of a weakened economy as well as all of the same factors we will be addressing within this blog. The economy piece is missing from today's market, sure the real estate challenges we face today will impact the market in general. However the factors which have lead us to where we are today are not all a direct result of outside or inside economic forces.

Fast forward to today, one of the largest 'true portfolio lenders? World Saving was recently bought by Wachovia Interestingly enough the majority of loans World Savings originated were adjustable loans with payment options, they have been doing these types of loans for decades, yet they are not imploding as a result of the market. Sure they are not unscathed but they are not in trouble as others in the mortgage industry. My understanding is they are not seeing a significant delinquency rate above and beyond the delinquency rates of their competitors as a result of these types of loans. There are other such institutions firmly in place that will be still remain in place once the market turns.

I believe the major contributors to today's market are the following, the affordability rates. Most homes today are beyond the reach of your typical buyer, pay raises and the like could not keep pace with the cost of housing. Here are the facts in 2003 the percentage of households in Los Angeles that could afford the median priced home was 46% . In 2004, the percentage dropped to 35% , In 2005 it dropped to 25% and in 2006 even lower to 20%. This factor alone is a major force in today's market conditions. Demand fueled this over the last few years and many small investors bought homes with no intention to live there but to reap the profits of Appreciation. The builders and lenders tried to limit this type of investment because of the known risks, but looked the other way in some cases or people found ways around these 'safeguards?.

Many homes in the last few years were purchased at 100% Financing and credit standards were loosened or lowered by most lenders due to the veracious demand by wall street for mortgage backed securities. They couldn't get enough of this product. Many people were qualified for a mortgage based on the start rate (1% or more) as opposed to the fully indexed rate which could range from (5% to 7%). But the general thought was the magic wand of appreciation will offset this risk. HELLO if you got a loan at 100% financing in the last 2 years you in most cases you likely owe more than what it is worth today. So underwriting and credit is now more restrictive and harder to get. The 100% loan is all but gone! So now everyone is back pedaling and pointing the finger at each other.

There are higher delinquencies as a result due to people not having anything invested in the home in the form of a down payment as well as those that got short term sub prime adjustable loans based on volatile indexes and the typical job loss scenarios.

Although the median price home is higher in California up 3.2 percent at $594,260 from a year ago in July all indicators are dictating a price reduction scenario. Again I can't emphasize this enough is all part of the real estate cycle.

Here are some statistics the sales activity has decreased 24% from the same period last year in California. The average days on market increased from 45 days to 52 days from last year. In 1982, 22% of the homes were unsold with an average marketing time of 79 days. It dramatically dropped over the course of six years to 6% in 1989 with the average home selling in 48 days. We all know this was the height of the market then. From this point the percentages increased again to a high point of 13% in 1991 with an average market time of 72 days. Every year from that date to 2003 the unsold inventory percentage dropped all the way to a record 2%!! Now from 2003 to 2005 this percentage has increased to 2.9% with an average days on market of 31 days. From 2005 to 2006 it doubled to 6% and 51 days on market.

So as supply continues to increase and demand begins to decrease. The pressure to drop home prices will continue.

Homeowners who need to sell do so NOW and listen to your Real Estate Agent. Properly price your home and don't test the market with an overpriced listing. Make sure the advisor you choose has been in the business at least 5-10 years. If you don't need to sell right now ride this out. However there are good opportunities you may want to look at to move up so take them NOW. If you're a buyer don't try to time the market. Don't wait to buy. I have a few friends and clients who have been waiting till prices drop SEVEN YEARS in some cases in the meantime they have not benefited from the tax advantages and past appreciation. Now they are telling me they are going to wait till prices hit bottom. Buy, then wait for the long term. The market will eventually turn and you will be at the right place at the right time. Especially in California where the need for housing is in demand.more so than not.

Everyone has a unique situation so the views I am sharing may not necessarily fit in with your game plan. This is my general consensus and I believe this is just a temporary setback in the California real estate cycle. Better times will come again. People need to buy and sell despite the market conditions, it is our job to assure they achieve their goals in buying or selling their real estate.

I also feel that the problems that exist today, existed a few years ago only the magic wand of appreciation wiped the slate clean for most.. So in summary, you cannot blame one segment, one entity, one field, one product, or another. It is a combination of all of the above which has lead us to the challenges we face today. It is now up to us as to how we face those challenges ahead for ourselves and most importantly our clients.

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