April continued the trend I wrote about earlier this year with multiple offers, overbids, and profound lack of inventory. From my perspective as the publisher of a daily email of new Sonoma County REO listings, I saw many days in April with no new listings. I can’t remember another month with so many days without fresh inventory. It may be good for the overall housing market to be winding down the emphasis on distressed property, but it is making it harder to find bargains.

REO, short sale, and non-distressed sale discounts

Nobody wants to buy at the top of the market. On the other hand, trying to practice market timing in real estate has proven to be almost impossible. Prices nationally are drifting slightly lower, but some markets have already started to strengthen and prices may be rising.
If you aren’t keeping track of what’s going on in your key neighborhoods and price ranges, you are missing one of the biggest real estate stories of 2012, the return of multiple offers and bidding wars.

Sonoma County REO Hotsheet Trends

Let’s set the stage with a simple chart of REO activity in the last 30 days (REO stands for Real Estate Owned by lenders). Reading across the bottom of the chart shows the status of homes and the height of each column shows how many homes are in that status category. For almost all readers, this chart looks perfectly normal…until you realize that in typical times, the active column should be substantially higher. What we are seeing here is a torrid pace of sales that is drawing down the inventory much faster than it is being replenished.  The Active and Sold columns are self explanatory, and you can see that they are almost matched. What is not as obvious is that all the other columns could be added to the Sold column since they represent property that is under contract to be sold.  Some of the contingent sales will fall out of escrow due to bad inspections, financing that can’t be arranged, personal reasons including loss of job or divorce. Still, a large portion of the contingent sales (and all the pending sales) are going to be added to the Sold column. This simple chart shows that buyers are overwhelming the REO market.

Sonoma REO Pricing Discounts

The next chart shows the impact of a surplus of buyers in the market. Each column represents a day of sales and the height of the column shows the relationship of the price paid to the listing price, with the listing price equal to 1.0.

When there are only a few buyers in the market, discounts are common, and it would be normal to see numbers between .85 and .95. As more buyers begin to compete for the smaller inventory of properties, it is much more common to see people paying list price for properties. What this chart shows is that in recent weeks, it is more common than not for buyers to be paying above list price, a practice known as overbidding. What isn’t evident on this chart, or even available as actual data, is that many of these sales had multiple offers from competing bidders. When you’re in the market shopping for homes, the call from the listing agent for you to prepare your “highest and best offer” is a sign that you may have waited too long  to get into the market.

REO Sales Stats by Sonoma County Cities

The final chart shows that Sonoma County is not universally in a bidding war. Some areas are much more frenzied than others. The bottom of the chart shows selected areas of Sonoma County as defined by the MLS. The set of colums for each city match the sales categories we just looked at for Sonoma County as a whole. The sold column in a dark brown is starkly taller than the active listing column in blue for both northwest and northeast Santa Rosa. Even though those two area show a significant number of new active listings in the last 30 days, the volume of sales, pending sales, and contingent sales is far larger. The southeast quadrant of Santa Rosa may be the only area in the county where inventory actually increased during this 30 day period.

As an agent, I am encouraging all my buyers to start paying serious attention to these market trends. Prices are still very affordable. Interest rates are still at near-record low rates.  Just don’t expect to be scoring the record bargains that were avaialable when the competition among buyers didn’t exist.

• Here’s a few insights I want to share:
• The old days of low-ball initial offers are mainly over.
• You can still find bargains.
• Many fixers aren’t drawing the skilled wannabe homeowners who can convert them to charming homes.
• Investors with cash are competing with renters needing loans.
• Entry level homes are often selling for more than list price. If you see a bargain price, it may not be the realistic selling price.

You can’t buy the houses you don’t hear about. If you’re serious about the REO market you need to stay on top of new listings to make sure you can submit offers in timely fashion. Our Sonoma REO Hotsheet weekday mailings are designed to keep you in the know. We include every Sonoma County single family home, condo, and farm that is entered into the MLS as an REO. Within 24 hours that information is yours. All you need to do is sign up on the simple form on the left side of the page. All we want is a valid email address and your name. We promise not to share either with anybody.

Sonoma County Average Residential Sales Price

Rohnert Park and Cotati share a distinction in the Sonoma County housing market. They feature the highest ratio of REO transactions to open markets and short sales of any other region in the county. They also feature prices that appear to be highly impacted by the prevalence of REO transactions. This chart shows various cities and their sales values for REO, short sale, and open market transactions.

Rohnert Park Sales Volume by Sales Condition

I thought the Rohnert Park sales prices looked lower than they should, so I ran another chart that divided the Rohnert Park sales into the separate condominium and single family home categories. This chart shows the sales volume of each residential type as well as whether it’s an REO, a short sale, or an open market sale.  These numbers make it clear that the volume of Rohnert Park condo sales is a big contributor to the apparently low average price relative to the rest of Sonoma County. In addition the fact that REO sales accounted for a plurality of single family home sales in March and April has to put a damper on efforts by homeowners to market their “not-underwater” homes.

Rohnert Park Average Sales Price by House Type and Sales Condition

To see if the impact of the REO volume made a difference in price, I ran a companion chart to the one above showing average pricing with the same breakdown by month, residence type, and sales condition. This chart shows an average price for single family homes that floats around the $300,000 level for all sales conditions.  Unlike most of the other cities in Sonoma County, there is very little difference in price in Rohnert Park depending on whether it’s an open market sale, a bank owned property, or a short sale. We see big differences between condos and homes, of course, but market pricing in both categories is being driven by the lowest common denominator, the REO property.

Sonoma REO Sales and Inventory

2011 has started out to be a hot sales year for REO properties. The chart (click on it for a bigger version) shows strong sales and a modest inventory in the first two months of this year. The famed shadow inventory is undoubtedly real,  but the banks have collectively controlled the release of new REO properties to maintain a small inventory and high demand.

What jumps out as a key number from the chart is that the light blue “sold” column is bigger than the active column in the darker blue.  If you add the contingent and pending columns to the sold column you can get a better sense for just how slim the inventory of REO single family homes in Sonoma County is.  There are 493 homes represented in this chart, but of that number, only 170 are available to purchase.  On the flip side, that means 323 homes are either sold or are in escrow. Using a common real estate measure of market strength, the market absorption rate in Sonoma County for bank owned homes appears to be approximately 160 homes per month.  170 active listings is barely a one month supply. Even leaving out all the contingent and pending properties,  over 187 Sonoma County foreclosures have sold since January 1. Our current inventory doesn’t even cover two months’ supply at that rate.

However you want to play with the numbers, if you want to be an active participant in the Sonoma County REO market, you have to be prepared to act quickly when the property you want comes on the market.

1. Make sure your pre-qualification process is completed and your mortgage lender is ready to work with you when you submit an offer.  Get all your income and expense paperwork gathered together to make the loan process more organized.

2. Make sure you are receiving daily updates about new REO properties in the cities and price ranges you are interested in. (email me with your city and price range and I’ll be happy to set up an automated search)

3. Don’t ignore news reports about the housing situation, but keep in mind that local conditions often trump national trends.  Sonoma County is not the same as Stockton or Las Vegas.

Sonoma County REO Average Sales Price

Sonoma REO prices have dropped almost 10% in the last months of 2010.  July and August were solid months with average Sonoma REO prices right around $300,000. The last three months have been closer to $270,000 , a cliff drop of almost 10%. I think the timing of this relates very closely to the timing of the announcements about foreclosure fraud and the robo-signing problems that caused temporary halts to REO sales in all 50 states.

Sonoma REO Sales Volume

What’s interesting from a buyer’s point of view is that the price drops haven’t been accompanied by any reduction in the market volume for bank owned homes in Sonoma County. Instead, in direct contradiction to the traditional annual slow down of residential sales, the  REO market has actually picked up volume since the end of summer.  Both September and November are higher than July and August. That’s not a result I would have expected.

Between the price drop and the steady volume, we have two contradictory measures of what the market is doing. Normally a price drop would be accompanied by a reduction in demand (or be a result of it). What we are seeing instead is both growing demand and falling prices.  I will post more about the overall market after we have had a chance to look at all of 2010. I think we’ll have some interesting relationships among REO, short sale, and open market sale properties in Sonoma County.

Sonoma County Courthouse Steps Auction

I’ve written about Sonoma County real estate auctions before.  To the average person, it seems like the court house step auctions might be a good way to buy property at a discount. There are a host of pitfalls, however, and the reality is that auctions are suited to investment syndicates and savvy investors more than wanna-be homeowners. Still, the lure of getting a house for tens of thousands of dollars beneath retail pricing is strong. I continue to visit the aucti0ns to see if anything has tilted the playing field in favor of regular bidders.

I regret to say that things are just as tough, or tougher, than ever. The biggest barrier to participating in the auctions is the raw amount of time that is required to be a player. It would be great if there was a date and time certain where you could attend an auction where you knew the property would be sold. Unfortunately, the foreclosure industry works on cancellations, bankruptcy proceedings, and the dreaded “mutual agreement” postponements in which the homeowner is granted a reprieve for a month or two, but which keeps would be bidders confused as to when the home is on the market.

Banks keep most auctioned homes

Worse even than the delays, however, is the eagerness of banks to keep these toxic assets on their books. This chart shows that barely 20% of auctioned homes are sold to the host of eager bidders that are waiting to buy them. It’s not clear if even the banks know why they take so many of these homes back, but every time the auctioneer says “sold to the beneficiary”, it’s another house that gets stuffed into the bank’s inventory of homes they’ll get around to selling some day. We are averaging about one home sold to a third party bidder per day. Considering that at least half a dozen groups are there every day for just that purpose, there are a lot of frustrated bidders.

To be a successful bidder you must know the house you want, know what the liens and loans are, know the physical condition, know whether there are tenants or not, and know the date of the auction. Even with all that, you only have a 20% chance of the home being auctioned for a market price…and you’ll have some antsy investors fighting you for it since they’re as frustrated as you are by the too-few chances they get to buy houses to hold or to flip.

If you want to look hard, there is a silver lining. For REO buyers in Sonoma County, there is an advantage to the banks keeping so many of these properties out of the hands of investors. It means there will be more fixer REO properties available for banks to sell in the future. If the investors buy them, they will do the repairs and updates themselves and the home prices when they put the home back on the market are going to reflect repair costs and profits for the investors.

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.