The summer of 2010 has featured rising REO prices across Sonoma County that reflect an active market with many buyers looking for good value.  The Russian River area including Guerneville continues to be the bargain center for Sonoma County bank owned properties with average three bedroom home listing prices in Guerneville at a solid $150,000. (click on chart to enlarge.)

REO Average Listing Price by City

Guerneville’s average is from five listings for three bedroom properties. Overall, Guerneville has 12 current listings of which almost half are now contingent (offer accepted and due diligence and financing underway). Only one of the active listings has been on the market for more than 36 days. Of the contingent properties, four went into contract in less than 20 days, two of those in less than 10 days. The moral of the story is simple: If you snooze on these properties, you lose. The value of working closely with an agent and having all your financing lined up in advance is clear.

In the rest of Sonoma County we are looking at a very consistent pricing environment. Keep in mind that all the properties on the chart are three bedroom single family homes so the comparison would be across like properties.  What we see is that areas that are traditionally higher value due to location, lot size, and construction quality continue that pattern in the REO market. In particular, Bodega Bay has just one 3-bedroom listing, but it’s an ocean view property with spectacular views.

Sebastopol has seven listings in the 3 bedroom category, so the average price of $514,000 is developed from enough homes to be a real average. The homes reach that price point with an average lot size of 1.5 acres. These aren’t your typical suburban lots. If you’re looking for a 4H property or a wonderful garden opportunity, pay attention to your Sebastopol REO choices.

For the rest of Sonoma County REO pricing, the story is $300,000 and whether you want to pay a little more or a little less. Cloverdale clearly has the best of the pricing outside the Russian River and you might want to check out the active Cloverdale REO listings. There are good values to be had if you don’t mind the extra commute and warmer summer temperatures.

Sonoma County continues to have an active residential real estate market. The mix of Sonoma County foreclosed homes, short sales, and open market sales continues to shift on a month by month basis, but all segments are well represented.

The clearest trend is that the REO sales that dominated the market at the beginning of last year are now just one segment of residential sales.  The open market sales segment (called NONE in the chart to represent “No Special Condition”) passed REO sales in volume in May of 2009 and has grown to be as large as REO sales were a year ago. During that same time frame, Sonoma County foreclosed homes have diminished in volume of sales, but 100 to 150 REO homes are still selling each month  This elevation of open market home sales to the plurality of homes sold is healthy for the real estate market since it indicates that owners can list their homes with the expectation of getting a fair price.

Short sales have continued as a modest portion of the market that hasn’t changed dramatically in scale in the last year.  Since February of 2009 we have been averaging between 50 and 100 short sales per month in Sonoma County.

Sales prices are another aspect of residential sales that I wanted to mention. Since the peak of the housing bubble nearly all buyers are concerned with the state of the market. It’s not just the volume but the prices that concern both veteran home buyers and first time buyers. The chart on the right paints a picture of a very stable residential real estate market in Sonoma County. Across the three market segments of REO, short sales, and open market sales, the prices have been remarkably consistent. There will be a lot more volatility as you drill down into data by neighborhood, but this chart is a good indicator that prices are holding firm.

Sonoma County Average Residential Price - 2009

My last post about 2009 home sales in Sonoma County gave an overview of the dollar volume in Santa Rosa, Rohnert Park, Petaluma, and other cities. For buyers of foreclosed properties in Sonoma County, average home prices are a lot more useful at understanding value in this changing home market.

A couple of facts stand out.  First, Rohnert Park continues to offer some of the best overall values for first time home buyers. The average prices are lower than any other city, and the spread price between open market sales, reo sales, and short sales is modest. Buyer demand has pushed the REO and short sale prices close to open market sales prices.  The same price pressures are at work in Windsor where REO properties and short sales are almost the same average price.

Contrast that with Healdsburg or Sonoma and you can see that not all cities are alike.  Both those cities have substantial estate properties that drive up the average values.  With a few exceptions, those high end properties stayed out of foreclosure during 2009. I anticipate that 2010 will have more high value REO and short sale properties on the market for Healdsburg, Sonoma, and Sebastopol.

I have the underlying data for every MLS listed transaction in 2009. If you would like a detailed analysis of home sales in your neighborhood, please get in touch with me.

The big story about REO listings continues to be their short supply. This is a story I first started writing about in April.  At that time, there were 160 active bank owned properties for sale in Sonoma County. As of today, August 15, there are 97 foreclosed single family homes for sale.  It’s been several weeks since the number of active listings fell under 100, but it has stayed there pretty consistently.

The law of supply and demand still applies to housing.  Few REO homes for sale means greater competition. Most listings are getting multiple offers and a majority of homes are selling above listing price. I prepared this chart of selling price compared to listing price every foreclosed single family home in Sonoma County that sold in July.  Each dot represents one sale. If the dot is above the zero line that runs from left to right in the middle of the chart, the property sold for more than the listing price. If it’s beneath the zero line, it sold at a discount. The dots on the zero line sold for the asking price.

Sonoma County Foreclosed Homes Overbids and Underbids

This chart isn’t a guide to bidding on bank owned property. Variables like neighborhood, quality of home, initial listing price, and even the listing agent are important factors when buyers are preparing a bid. However, knowing that a majority of homes sold for more than the list price is a useful nugget of information as you look through the MLS listings here or on other sites. Some deals really are too good to be true as the dot at the far left of the chart indicates. One “lucky” buyer paid more than $150,000 over the listing price to get his home. Many others paid between $50,000 and $100,000 over asking price.

Sonoma County home buyers have flocked to the REO market this year. The big story is the return of value buyers to the market that started early in the year and strongly continues today. Not every home has buyers beating down the doors to get in their offers, but many do.  It pays to be prequalified and ready to submit offers when you are actively searching.

Sonoma County REO Listings by City

This Sonoma County REO listings graph shows listings by month and by city for the first half of 2009.  I wouldn’t have guessed that Sebastopol had no new REO listings in May before I looked at this graph.  Cloverdale has also had a lot of variety in the number of new listings every month.  The totals also tell a tale of a relatively consistent number of new Sonoma County bank owned homes coming on the market each month. The increasing number of buyers competing for a steady number of homes has created the seller’s market for REO properties we are in today.

I wrote about the short supply of REO properties in Sonoma County at the end of April.  A month later, that shortage continues worse than before. During May 180 REO Sonoma County properties sold. As of the beginning of June only 140 REO properties are in “Active” status compared to 160 in May. This declining inventory position has led to bidding wars for some of the areas in the county. In particular, Rohnert Park at one point last month had only 12 active listings, both REO and regular open market sales. Several transactions I participated in had more than a dozen offers, once with only 48 hours between the property going active on the MLS and bidding closing.

REO Sales in Sonoma County

The seller’s market we are experiencing at the entry level of the market is indicated in the chart. The columns show how many sold in each of the 30 day brackets we use to measure how long a home has been on the market. The line at the top indicates the selling price relative to what was being asked. Everything over the 100 line (right side of the chart to read %) sold for more than asking. You can see that properties that are selling quickly are selling for more than asking price.

There are signs we may be getting additional REO inventory as the banks have resumed their foreclosure cycle after stopping foreclosures earlier this year. Whether the additional inventory will be sufficient to satisfy the current buyer demand remains to be seen.  Prices below replacement cost coupled with low interest rates make for very compelling buying incentives. First time buyer credits, now applicable to down payments on FHA insured loans, add even more incentive for some people in the market. My best advice is to pay close attention to trends, stay in touch with your agent, and be prepared with all your paperwork and lending documentation in case the perfect house hits the market. I am always pleased to meet and take on new clients if  you are searching for an agent to represent you on the buying side.

dave@sonoma.net

Is The Golden Age of REO Bargains Over?
Early January of 2009 was a great time for bargain hunting home buyers. The market was filled with REO properties and the buyers fighting you for great deals were nowhere to be found. Prices were falling and 10-20 new listings were coming on the market every day. Looking at the market today, in late April, all I can say is “What happened to all the listings?”. A buyer from just a few months ago would be shocked at how few listings are actually available.

Sonoma REO Listings Are Almost Gone

This chart shows the awful truth in four bars. Buyers have cleared out the backlog of available REO inventory in Sonoma County. Pending and contingent listings far outnumber active listings, and the pool of active listings represents less than a month’s sales at the rates we have been seeing.

This is a snapshot at the end of April, 2009 and should be taken as just that. A snapshot.  Sonoma County foreclosures might shoot up again. Bank owned properties currently in inventory might be released to the market in large numbers.  What this chart tells me is that in the last four months many people have decided to jump into the market. The more than 800 buyers who were quick got homes already. Another 300 are in the process of buying. The ones who were slow to act are now fighting with all the rest of the late movers to get one of the 160 remaining bank owned homes in Santa Rosa or Windsor.

Emotions Can Run High

There’s one great reason to buy a home that’s a short sale. Fewer bidders to compete with.  That’s the complete list of reasons to be in the short sale market in Sonoma County or anywhere else. Apart from that, a short sale process puts you in touch with emotional hot buttons that can be painful to touch and communication delays that drive even the calmest people crazy.

Let’s back up and start with a definition of short sales. We’re all familiar with the slang use of “short” for not having enough money. Whether it’s your split of a shared lunch, digging into the couches for change to pay the pizza delivery guy, or not having enough in your checking account at the end of the month, you have probably said, “I’m short”. Well, in real estate a short sale is the equivalent of trying to talk the pizza guy into leaving the pizza even though you didn’t pay the full amount.  With pizza, it’s not going to happen. With a house, there’s so much money at stake that the lenders are reluctant to tell the owner to take a hike. The owner might take them up on the offer (cash for keys). So we end up with a situation in which the lenders agree that the house is going to be sold for less than is owed on it; a short sale. How did we get into this mess?

California Median House Price

In the olden days of ancient housing history, like five years ago, nobody ever said, “Don’t buy a house, it’s a bad investment.” The common wisdom was that houses would remain the bedrock investment for everyone’s retirement. After all, since the end of World War II, residential prices in California have seen a steady 8% or 9% appreciation year after year. Sure, there were hiccups and downturns, but the overall trend was upwards.  Well, guess what? We were all wrong. House prices can get too high. What we have lived through since 2003 is a bubble; an unsustainable run up in price. There are only a few ways to get back to a normal price level (as shown on the chart), and that retreat in prices is the dilemma for people that bought or refinanced during the market peak.

• If they have great incomes and a good loan, they can hang on until prices recover to the level they purchased at. There’s going to be a big chunk of the next decade in which their investment will be performing badly, but this is the “save your credit” option that honors the contract to purchase.
• If they have lost income or had a loan that adjusted to a high rate, their choices are more limited. It’s likely that they will not be able to stay in the home.  Unless owners had put a large down payment on the house, chances are strong that it’s worth less than what they owe on it. That’s being “underwater” or “upside down”. At this point, if people can’t continue to make payments, the options are going to be a short sale, the foreclosure process, or simply deeding the house to the bank in lieu of foreclosure.  More on the foreclosure and deed in lieu process in another post. For now, let’s get into the short sale in more detail.

The short sale process is a painful exercise for everyone involved. Without getting too melodramatic, from the owner’s point of view, losing a home is a wrenching, emotional roller coaster. There’s guilt and shame from the usual reasons about money and responsibility. There’s depression from looking at future prospects including retirement and credit scores. There’s panic at trying to balance keeping a roof over their head today in a house they can’t pay for and tomorrow when their credit will suck and their tenant history will be bad. If there is a family to take care of, explaining all of this ranges from hard to impossible. The only blessing in this sea of sorrow is that millions of other people are on this journey. Buying a house in the midst of a bubble was not a moral failing, it’s just a crappy hand that life dealt.

Short Sale Paperwork

The banks are a little more emotionally detatched from this process. It’s not their home. It is their money, however, and they want to keep as much of it as possible. The reality is that a short sale is usually a better deal for a lender in first position than a foreclosure. That leads to the logical question of why we don’t have more short sales. What often makes short sales too complicated to happen is the presence of a second lender, often unrelated to the firm that holds the first mortgage. In all likelihood, the second lender is going to get wiped out completely in a foreclosure, so their only option to recover any of their money is in a short sale. The sad reality of the market today is that the house’s value in a short sale will still wipe out the second mortgage holder. That’s where the short sales can fall apart.

The dance plays out when an owner running out of time and money decides to list their home with a real estate broker. They have often waited until they are in default on their loan(s) and they may be gettng sternly worded letters or phone calls. The pressure is intense to get out from under the burden. Complicating this even more, the property in question isn’t just any property; it’s their home. They may have remodeled the kitchen, built new decks, fixed the roof, or any number of other home improvements that are now essentially devalued completely.  When they meet with the listing agent and hear market realities for THEIR home, it hits home in ways the general foreclosure crisis can’t.

For the real estate agent listing the property, the communication process with the bank is a new experience. Getting answers to your questions in a traditional sale is usually a matter of hours. With a short sale, it might be days.  For potential buyers (and their agents, including me), putting in an offer on a short sale property is an exercise in patience. You can wait days or even weeks to find out if an offer is accepted. The normally fast and efficient agent-to -agent communication process breaks down when the listing agent is as much in the dark as anyone. With two lenders it’s an especially complicated and awkward experience. It’s no wonder that very few short sales are completed. It’s a complex process, loaded with emotional entanglements, and a distortion in the normal real estate transaction model.

By comparison, purchasing a bank owned property is a day at the beach…if you can ignore the circling sharks.

Under $100,000 in Santa Rosa

Santa Rosa has more foreclosed homes for sale than anywhere else in Sonoma County. Bank owned homes are available from $89,000 to nearly $3,000,000, although the high end drops to $985,000 for the next highest priced Fountaingrove REO property. This wide range of prices provides opportunities for first time home buyers, investors, and move-up buyers, but I want to focus here on first time buyers.

I got a call recently from a young couple who wanted to know if they should think about purchasing REO property. They wanted a house, but didn’t know if bank owned homes were a good idea for them. It’s a logical question for newcomers to buying houses.  Here’s how I explained today’s housing market to them.

There are three main classes of sellers in the market today.

1. The smallest category is people selling their homes who still have equity in the property. Many of these are estate sales where the heirs are disposing of a loved ones home. Some are divorces or other forced liquidations where there is value in the property. These sellers have a hard time accepting how much home prices have declined in Sonoma County. In many cases the house is worth as much as 40% less than they thought two years ago. It’s hard for them to be realistic about value.

2. The second category is people who have fallen behind on their house payments. It could be a loss of a job or an unaffordable increase in the interest rate on the home loan. In many of these cases, particularly for homes purchased or refinanced between 2003 and 2007, the home is worth less than the loan amount (that’s what being “underwater” or “upside down” means). These sales are called short sales since the amount of money the home will sell for is “short” of the amount needed to pay off the loan(s). These sales have the emotional entanglements of people who have spent time and money on upgrades and who love their homes. They may have multiple lenders who are often reluctant to negotiate away their principal. The emotions of the sellers and financial consequences for the lenders make these sales very hard to manage.

3. The final category is for homes that either didn’t sell as a “short sale” or the owners were simply unable to continue with the house payments and defaulted on the loan. The bank, through a long process, “forecloses” on the property, the owners have to move out, and the bank takes possession. The banks aren’t in the home-owning business, so they assign the foreclosed house to a real estate agent who puts it on the market at a price designed to get the house sold and off the bank’s books. These homes, priced to sell, represent a chance for first time home buyers to get a well priced home from an eager seller, and they represent a plurality of sales in Santa Rosa today. In Rohnert Park, foreclosed homes represent over 50% of all transactions.

I explained to this young couple that in many ways, the buyers of foreclosed houses are the heroes of our economic recovery. Purchasing a bank owned home provides capital to the bank just as effectively as a loan from the Treasure Department. Moving into a foreclosed home restores vitality to the neighborhood, helping home owners nearby maintain the value of their property. Moving from renter status to home owner status helps young couples start saving for their future. The real estate bubble we are suffering from doesn’t change the underlying nature of a house as a sound basis for financial planning.

They hadn’t thought of themselves as heroes of the economic recovery, but first time homebuyers have an important role to play in our economic recovery. I hope I can help them find their dream property.