You have probably heard the saying, “all real estate is local”.  Believe it or not, this is not simply a National Association of REALTOR® tag line.  I know, you don’t believe me.  But really, real estate is so very local you must understand the market neighborhood by neighborhood and more importantly, street by street.  Neighborhood boundaries don’t exactly follow zip code lines.  School boundaries do not follow neighborhood lines. All of those don’t follow generic San Jose reports.  To understand current conditions and/or even attempt to predict where a particular group of housing prices will go in the future, is extremely hyper local and can not be wrapped up into averages.  Speaking of averages, medians, and the like, the one statistical component that the real estate market predictions rarely include is standard deviation.  In my very humble opinion, this is where the rubber hits the road in regards to how a true real estate professional can help buyers and sellers understand the local market.  You need someone seeing homes come and go, understanding how many are distressed, how many are not, how many are positively effected by optimal commutes, high API school scores, pride of ownership, and local amenities to have a chance at predicting stabilization or appreciation of any home’s value.  A real local full-time professional can help you define the standard deviation related to any home’s value.

So with shadow inventory, I argue the information you are hearing and reading does not take into play neighborhood dynamics or more importantly the standard deviation related to the specific market of the home you might be looking to buy or sell.  Shadow inventory, simply defined, are the homes distressed not yet a part of the active real estate market.  They are the homes where the seller is not yet behind on their mortgage but soon will  be and they are the homes the lenders/investors are holding on to for various reasons and therefore have not become  a part of the active housing market.

How do we predict the impact of shadow inventory on a specific housing market? The ideal would be to identify all distressed homes and request the lenders to publish the homes within their portfolios with a projected release date to the open housing market.  Not easy to find this information.  Imagine the speculation that would come from such a report. However, we can get a general picture from looking at historical data from our very limited statistical resource tools offered by our very expensive local MLS board and see a pattern of predictions based on neighborhoods and zip codes with a sprinkling of lifestyle influences such as schools, jobs, and conveniences offered to predict the future housing depreciation or appreciation.  I am confident this idea will play out no matter what the result of the Greeks role in the European Union or who the president will be in 2013.

Two neighborhoods:

Cambrian Park, known for its high API scoring schools within the Union School District, reasonable commute to the technology hub of Mountain View and Palo Alto, and nestled in between the very desirable communities of Los Gatos and Willow Glen.  Highly desirable, highly likeable, and highly competitive when it comes to home sales.  Here is a chart indicating the year-to-date active and sold listings and the amount of distressed homes in this market both short sales and REO (foreclosures).   On average, 20% short sales and about 5% bank owned properties are actively on the market.  No definitive increasing trends and this is true even when I went back to late 2008.   It appears that REOs move fast in the Cambrian market which keeps the overall active percentage low.

(Blue-Active Pending Short Sales as % of whole, Maroon Sold Short Sales % of whole, Yellow – Active/Pending REOs as a % of whole, and Green – Sold REOs as a % of whole)

Click on the image to enlarge.

Alum Rock, known as the “East Side” of San Jose, not very well performing schools, extremely limited in jobs as well as commute opportunities to the tech hub, inconsistent pride of ownership, and one of the last neighborhood markets to see an increase during the boom years.  Crime rates are higher and shopping, dining, and entertainment are more inconvenient.  This market provided the last opportunities for lower income families to buy a home and unfortunately, many bought with no money down, many with adjustable rates, or negative amortization loan products.  Of course, these home owners where the first home owners to face trouble when the housing values began to fall.   Consistently, 50% on average of distressed homes sales occur in this neighborhood.  The highest rolling average since the bust of foreclosures and short sales.  Longest days on market, lowest average sales price, and many reasons to believe there is more to come.  If you take the simple statistic that only 7 out of 10 short sales close, this large percentage of short sales are very likely to feed the foreclosure pipeline for many months to come.  As market values come down, home owners that did not participate in “exotic” loan products see their home values drop so much that it no longer makes sense to pay on a home worth 50% less than they owe.  The snowball continues.

Click on the image to enlarge.

There is a logical component in predicting how shadow inventory will impact housing prices.  But what percentage of a local San Jose neighborhood market is at risk to shadow inventory?  If you are looking to purchase a home in Cambrian Park, with less that 20% of the homes sales being distressed sales, you can understand why prices are at less risk to go down.  There is actually more opportunity for the average home price to go up because of supply and demand.  As the market prices stabilize or go up even a small percentage, the risk of new distressed homes goes down as well.

For Alum Rock, look for a triple if not quadruple dip between now and 2015.   So many of these home owners bought with riskier loans, are most impacted by job loss, neighborhood housing values will absolutely be further damaged when the banks release any inventory they are holding simply because the distressed market is already such a large percentage of the zip code sales.   However, banks selling bulk REOs to investor could potentially stabilize the neighborhood faster but as a rental neighborhood, may not have a positive effect on appreciation.  Herein lies the standard deviation of housing statistics not discussed on the evening news.  Herein lies the truth to the statement all real estate is local.

What do you think?  Do you think rising interest rates will tip the scales and make all neighborhoods equal?  Do you think expunging shadow inventory in the current weaker zip codes like 95127 will set them up for stronger appreciation later?  Do you think the bottom will never come?  I would love to hear your comments.  Understanding how buyers and sellers see the market helps me understand what tools are best to help them in the buying or selling of their homes.  Oh, and just for the record, I like Alum Rock and believe more local involvement by city government to reduce crime and stronger neighborhood initiatives by long time residents could help turn this area around.  We need to keep this neighborhood an affordable, safe option that provides the best education as any student can obtain in Santa Clara County.

The summit began with a local panelist discussion on San Jose’s housing plan.  Panelist Sam Licardo, San Jose City Councilman and Co-chair of the San Jose General Plan Task Force and Leslye Corsiglia, Director of Housing, City of San Jose started us off with discussion mostly centered around the general plan and housing affordability in San Jose.   The plan mainly focuses on the changing demographic which will include more Baby Boomers and younger groups into our fair city.  This drives “villages”, mass transit, walk-ability, and high density housing.  Mr. Licardo was quick to point out that the intention is not to bull doze neighborhood homes for new development but utilize infill areas for higher density living so “we will be building cities for people and not cars”.   Mr. Licardo pointed out that San Jose needed to continue to pull jobs into San Jose to reduce need to commute up the peninsula.

Leslye Corsiglia voiced her concern about the changes in redevelopment funding and how that will affect affordability.  In the past, redevelopment funds from the Federal and State government, “brought in $40 million dollars in  revenue and  assisted with the development of  21,000 units over the years.  That money is very important.”  Ms. Corsiglia believed development must be all encompassing of wage earners around the San Jose areas as home affordability and rents must be available to blue collar workers as well.  Ms. Corsiglia also highlighted the housing group’s foreclosure assistance through the Foreclosure Help of Santa Clara County organization.

Next up, Ray Mathoda, Preident/CEO/Founder of AssetPlan USA and Gary Schlossberg, Senior Economist, Wells Capital Management.  Statistics from these two were staggering.  From Ms. Mathoda, “2-2.5 years of double dip in housing.  Non-distressed home sales are down 83% from 2005.  Percent of underwater home owners are 11 million or 23%.   60% of home owners in California are effectively under water.  6.2 million liens are delinquent and  2.1 million have not made a payment for 525 days.  6.2 million Americans are unemployed and  4.2 million home owners are more than 90 days late.”  But she ended that stream that with lower home prices and lower interest rates indicate “this is the best time to buy in over 40 years.”   Woo hoo!

Ms. Mathoda’s real message came in the handling of delinquencies.  The reality rings clear.  “If a home owner can not afford their home, there should be methods to help them move on.”  She went on to say the loan modification process was a dismal failure and the sooner these defaulting liens were cleared up, the sooner the housing market would recover.  Ms. Mathoda explained the need for consistency in short sale approval process and recommended the HAFA program to be that process.  She explained how providing incentives through relocation money and removing the threat of deficiency judgement allowed home owners to have a true alternative to foreclosure.  “Financial stability should be the goal. Not simply whether or not someone wants to leave their home.”

Mr. Schossberger focused on the general lending environment and how the private industry was not participating.   With 9 out of 10 loans being supported by government servicing entities (GSE like Fannie Mae and Freddie Mac) a “normal” market can not really exist. He explained how the ripple effect of housing was a critical barrier to the economic recovery. “Housing is only 5-10% when you look at construction.  When you buy a home you also buy big ticket items like appliances. Building materials are driven by remodeling and so on.”

Mr. Schlossberger also pointed out that the speculative purchase of a home as investment has to be balanced with buying a home for shelter.  “Housing is split personality, it is a consumable and it is an investment.  However it is still the single,largest investment for the average household.”  He went on to draw together the need for affordable housing by saying, “Rental market rates are rising and vacancies are down 2%.  Uncertainty of housing market is driving rental market and the overhang of supply (through foreclosures) pushes prices down and  places more people under market.”   His predictions: “Moderate economic growth will also keep job growth slow.  Extra liquidity may bring in investors, speculative but underpinning demand in the housing market.  5-10% decline into 2012.”  Oh my.

If you are reading between the lines, you will see very bold print “Average American will be renting not owning.”   This is not o.k.. I am already seeing average buyers pushing hard to pull together down payments in this “affordable” new market.  I am already seeing requirements from underwriter’s with such intense scrutiny it leads to the “signing over of your first born” image.  I am already seeing Fear Factor come to real life as magazines like TIME and news channels like CNN tell the American public  they should not put so much value on owning a home and choose renting as an option.  I say RUN!  I say COVER YOUR EARS!  Realize the tangible asset called a house is important to your financial future.  Realize that shelter for your family should not be at the benefit of your land lord only!

Then, Chief Economist for the National Association of Realtors, Lawrence Yun, Ph.D  spoke. “We are back to a normal market. The only thing that can hurt this trend is over correction. There is a pent up demand that will help drive recovery of the housing market.”   He explained how the correction had occurred and taken us to pre-boom years of 2002 market prices.  He explained that tight lending practices was preventing recovery in housing market.  He explained that job creation would be part of the continued slow recovery.  He explained that with increasing rents, consumers would see the reason to buy a home.

Although we were all wanting to hear something positive,  these summations were not convincing enough.  There was no explanation or analysis of how “pent up demand” would balance with “shadow inventory”.   There was no explanation on how continued unemployment at 9% over the next 2-5 years would allow for stability in the distressed market.  There was no explanation on how inflation and therefore increasing interest rates would prevent pent up demand from going bye bye.    But, the National Association of Realtors® also gets  my money and therefore I guess they think I want them to show me  the bright side.   Matter of fact, one of Mr. Yun’s best points was in regards to the average real estate professional’s  income.   He stated on average the U.S. real estate agent made $35,000 per year.  But that would be increasing because more and more individuals were leaving the industry and therefore the average would go up.  That was the most positive remark of the meeting.  Seriously.

I actually thought about going home and going back to bed. But my short sale transaction was on the rocks and I needed to make about 20 calls in the next two hours to get it to close.  The short sale seller had been through two years of failed loan modifications, divorce, back surgery,  and now the loss of her home of nearly 15 years.  This economy is in no way pretty.  The results of greed, crazy decisions made in the name of the American Dream are sad.  But I for one am not giving up on the American Dream of continuing to own a home and help others do the same.   I sincerely do not want to see the America where only the very wealthy can afford to own a home.   No doubt we need to change the way we do things.  We can all improve our financial decision making and make smarter decisions.  We can all save more. We can all play a role in educating the public on smart ways to buy a home.  For me, I definitely did not  need to go to a meeting to hear how challenging my future will be for the next 2-5 years.  But then again my average salary may go up after all the others at the meeting get depressed and start looking for a  new job.  I want to believe there is always a bright side somewhere.

• Tax credit for first time buyers.
• States will also be given the authority to issue almost $11 billion tax exempt bonds to refinance subprime loans, provide loans to first-time home buyers and fund the construction of low-income rental housing.
• Permanently raise the limit to $625,000 for mortgages that Fannie Mae and Freddie Mac could purchase.

The bill is now off to the senate and then to Mr. Bush for an expected approval.

There are some details that go along with the plan:

• To qualify you must live in the home and have loans that were issued between January 2005 and June 2007.
• They also must be spending at least 40 percent of their gross monthly income on all household debt.
• A home owner does not have to be in foreclosure but must prove they will not be able to afford the payments.
• If the home owner is to receive a FHA backed loan, home equity lines and credit lines on the home must be paid off.
• Buyers are also on hold for taking out equity lines for 5 years unless it is approved by the FHA.
• Total debt on the home can not exceed 95% of the appraised value.

Of course for this to work, the original lender (s) must agree (volunteer) to rework the loan before the process can begin. An insurance premium of 1.5% of the principal will be required and paid to the FHA.

The reason why this may work is because this may be the only way banks can work these loans or any other loans over the next couple of years. With the investment community not wanting in real estate back securities, the FHA must be the “investor”. Which really means, you and I as tax payers. This also doesn’t address the fact that many of these loans were stated income loans and these homeowners will probably not be able to prove income under the new lending standards to qualify for a re work. However, this will address those who honestly bought homes and then had the market crash around them right when the rate was adjusting. It may not be the answer, but is more than most are getting from their lenders currently. I will be interested to see how it really plays out.  For another more assertive opinion, read this article.