Deodar of Destruction

Asking Price: $380,000

IrvineRenterPurchase Price: $515,000

Purchase Date: 10/12/2006

Address: 23 Deodar, Irvine, CA 92604

Beds: 2

Baths: 2

Sq. Ft.: 1,000

Lot Sq. Ft.: 2,800

Year Built: 1976

Knife Catcher Award

Stories: 1

Type: Condominium

County: Orange

Neighborhood: El Camino Real

$/Sq. Ft.: $380

MLS#: S485757

Status: Active on market

On Redfin: 40 days

From Redfin, “Single story home in a corner lot overlooking a huge greenbelt. Beautifully remodeled throughout. This is an as is short sale.”

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This short sale price will probably not be approved by the lender as it is too far outside of their loss limitation guidelines. It is probably priced this low to entice bids in order to give the bank an idea of where the market will be after they take the property back in foreclosure. The bank will lose money, but they will follow their guidelines for loss mitigation which will not permit a 30% haircut after a little over 7 months.

In my opinion the real story here is probably in the sale history:

Sales History

Date Price

10/12/2006 $515,000

10/27/2005 $465,000

08/01/2000 $218,000

It appears to me the buyer on 10/12/2006 was a straw buyer bailing out the 10/27/2005 buyer. The $515,000 sales price, after a 6% commission, would net this seller $20,000 — enough for a payment to a straw buyer and/or the person who arranged the sale. This is pure speculation on my part, and the previous seller may simply have gotten lucky, but when you see a short sale after 7 months, it is probably a first-payment default fraud. This may be a flip gone flop, or it may be fraud, either way this never should have transacted at a price over $500,000, and its next transaction (after the bank buys it at a foreclosure auction) will likely be less than the 2005 price.

The sellers who will really be displeased by this whole mess are the neighbors. The above sale won’t feed their fantasy price, but then again, they probably will ignore its significance as an aberration, drink some kool aid, and deepen their denial.

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13 DEODAR

Irvine, CA 92604

Price: $565,000

Beds: 3

Baths: 2

Sq. Ft.: 1,178

Lot Sq. Ft.: 3,035

Year Built: 1976

Stories: 1

Type: Condominium

County: Orange

Neighborhood: El Camino Real

$/Sq. Ft.: $480

MLS#: P579755

Status: Active on market

On Redfin: 7 days

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19 DEODAR

Irvine, CA 92604

Price: $585,000

Beds: 3

Baths: 1.5

Sq. Ft.: 1,517

Lot Sq. Ft.: 2,112

Year Built: 1976

Stories: 2

Type: Condominium

County: Orange

Neighborhood: Orangetree

$/Sq. Ft.: $386

MLS#: P572471

Status: Active on market

On Redfin: 49 days

34 thoughts on “Deodar of Destruction

  1. Bob

    You mean the same neighbors who were soooo willing before to use a sale next door to justify their “gains!” You can’t do one and not the other if you want to claim that you are a rational, unbaised investor but as you have so elegantly pointed out before, the sellers are anything but wise, rational investors.

    I just saw a post over in the comments at Inventory blog referring to an auction in Florida. In december of 06, buyers paid 300k for condos. They were just auctioned off for 145k. Yes, more than a 50% decline in price. They interviewed the current homeowners who said “that’s not fair” well was if fair when people who decided not to take out suicide loans, save, invest in businesses that created jobs could not afford to buy b/c of recless speculation? I would say both situations are fair — that’s how markets work.
    —–

  2. Rob

    It is interesting that the close of Escrow was 2 weeks shy
    of L.T. capital gain deadline.

    May This be tax fraud also?

    May seller not report income (wages) making S.T. gain tax free
    vs 15% L.T.?

  3. Trooper

    Not positive, but as far as I know anything held as a primary residence for less than 24 months is subject to capital gains. Um, anyone ?

  4. IrvineRenter

    Me too, I haven’t seen her post in a while. I like having some housing bulls at the site because it makes for a more lively and balanced conversation. I hope she comes back.

  5. IrvineRenter

    Most assets held less than a year are actually subject to personal income taxation which is generally higher than the capital gains tax rate.

  6. Irvine_Native

    Over half a mill and you get to live 50 yards from the trailer park and 20 Yards from the train tracks.

    For that kind of money, you could do much better in Irvine right now.

  7. SoCalwatcher

    This bank is going to have a major Deodar RANT when they realize how buried they are in this property.

  8. Boomer

    The gain on an owner occupied primary residence owned less than a year is subject to ordinary income tax rates. Owned more than a year, it’s subject to long-term capital gains treatment. Owned more than two years and the first $250k in gain is tax-free ($500k for married couples filing jointly) (assuming the owner occupied the residence for the duration of the two-year period).

    Ever if you move out after two years, you still have 3 years in which to sell it and exclude the first $250k (or $500k) in gains from taxes.

  9. Aerogell

    Board,

    I heard at CNBC that RealtyTrac will release their latest numbers on foreclosures tomorrow but the CNBC reporter got the exclusive and take this for California:


    Apr-to-May increase: 30%

    May ’06 – May ’07 increase: 350%

  10. graphrix

    A good place to start is by reading the posts by tanta over at http://calculatedrisk.blogspot.com/2007/02/tanta-on.html this is just a few of her posts and you can find more on the main page of the blog.

    She does a great job of explaining the scary world of the secondary mortgage market and the other various facets like private mortgage insurance. They are long and very detailed and I do recommend at least skimming through the comments.

    As for “first loss exposure” I believe it just means that when there is a default the company who provided the insurance will be the one who takes the loss first. If the loss is greater than the insurance provided then the lender will have “second loss exposure”. I am not all that familar on how mortgage insurance works but I believe that is what it means by “first loss exposure”.

  11. buster

    Well, you’re kind of right (by the way, I’m a CPA). A principal residence is a capital asset, so any capital asset that has been held for less than one year will have any gain taxed at Short Term Capital Gains (STCG) rate. Right now, the STCG rate is the same as ordinary tax rates, but if there are capital losses carrying over, they can be used to offset the STCG. If there are unused capital loss carryovers (say from stock losses), they can be used dollar-for-dollar to offset the STCG, or Long Term Capital Gains, for that matter.

  12. squareround

    Mid-Year

    Real Estate Outlook – 2007

    “Still in Neutral”

    Gary Watts’ forecast for 2007 marks the 34th year of bringing to the real estate industry his outlook for the resale housing market. Since Gary speaks only to the real estate industry, his information is presented in a format that real estate agents can use to inform their clients. His forecasting analysis includes both the current marketplace and where housing demand and pricing will likely to be heading. In the 1970’s he forecasted trends, in the 1980’s he began forecasting the direction of home prices which included his now famous 1989 talk The Party is Over. In the mid 1990’s, he gave the signal to the real estate industry that the bad times were over and in this new millennium, Gary began forecasting home price appreciation rates. His forecast versus the actual appreciation numbers are listed below. Although we are enduring the “hang-over” from the 2003 & 2004 “wild party years” (which includes the present problems in the sub-prime market and increasing foreclosures), Gary still does not see any economic signs, that will cause any major price changes for most of the Southern California housing market – other than remaining in a “neutral position”.

    For the record, here are his numbers compared to actual numbers since 2000:

    2000 2001 2002 2003 2004 2005 2006 Totals: 2007

    Forecast: 12.5% 12.0% 10.0% 15.0% 25.0% 15.0% 15.0% 102.5% 7%

    Actual: 13.0% 10.1% 16.8% 19.1% 24.8% 16.5% 3.4% * 104.1% 4.6%

    (1st Q. ’07)

    Another Bad Year for the Pundits!

    Their Forecast for 2006:

    One would think that with all the economic data readily available, forecasters would be able to do a better job of forecasting than they do. Each month we know the numbers for employment, gross domestic product growth, interest rates, housing supply and sales, consumer spending, inflation, wholesale costs, crude oil prices, population growth and the status of world economies – just to name a few! These all have an impact on housing and yet, with all this information, they still miss the direction and strength of the U.S. housing market . . . and they have been missing their mark for decades!

    “The goal of owning a home seems to be getting beyond the reach of more and more Americans. The

    typical new house today costs about $28,000.” – Business Week, 1969

    “The median price of a home today is approaching $50,000 . . . housing experts predict price rises in

    the future won’t be that great.” – National Business, 1977

    “The golden-age of risk free run-ups in home prices is gone.” – Money Magazine, 1985

    “A home is where the bad investment is.” – San Francisco Examiner, 1996.

    Today’s Headlines!

    ? The Housing Bubble Will Burst!

    Their first forecast for a bubble was in 2002 and it still has not happened. So much for the Great

    American Housing Collapse . . . and you won’t see it in 2007 either! Appreciation rate for the

    1st quarter in southern California was 4.6%!

    ? The Correction Phase for Housing Will Be Devastating!

    Although there was some speculative over-building in certain areas of the U.S., most of the U.S. housing

    market weathered this change without blood running in the streets, as some bubble-bears had forecasted.

    ? Real Estate Prices Will Plummet!

    Nationally, home prices ended the year by appreciating between a low of 1.9% to a high of 5.9%, depending upon

    which indicator was used. Last year, buyers acquired 1.06 million new and 6.48 million resale homes.

    These numbers may have exceed any other time in the history of the U.S., except from mid-2003 to mid-2005.

    ? Foreclosures Reach Record Highs!

    What record? Foreclosures are near a record low. Last year, only 1.09% of mortgages went to foreclosure.

    That means 98.91% percent of the buyers are making their payments! Today, foreclosures are grabbing the

    headlines but the truth is that most foreclosures are due to fraud and unethical lending. That is followed by

    medical reasons and then loss of a job. Most of the loans going into foreclosure are from February of 2005

    to May of 2006. Today, over 97% of all homeowners are still making their house payments! In California,

    the media loves to report record Notices of Default but the fact is that they are not even close to our record

    high set in 1996. If you add in the fact that we have built almost 2 million more homes in this State since than,

    the percentage is ridiculously low!

    ? Affordability Index at Record Low – This has been their mantra for decades!

    Homeownership is at a record high of 69%, with the baby boomers’ ownership at 80%! This affordability

    index is archaic and does not account for a world that changed dramatically in 1979!

    Source: National Home Builders Association and the National Association of Realtors

    Why The World Changed in 1979!

    Baby Boomers’ Impact

    Never before in the history of the world has a generation accumulated so much wealth as the baby boomers. The Internal Revenue Service will tell you that from 1945 to 1979, incomes increased at the same rate for all tax brackets. By 1979, the early baby boomers had been in the workplace for over 10 years. They were the most educated generation to enter the work force, and they had the skills for our changing world. Today, the IRS tells us that, from 1979 to 2004, the median income in the U.S. rose 18% but . . .

    ? The top 20% of incomes grew by 59%, while the bottom 20% of incomes grew by a measly 7%!

    ? The top 1% of incomes grew by 200% – earning more than the entire bottom 50% of wage earners!

    ? Today, the top 10% of wage earners receives 45% of all household income.

    ? The top 85% of the nation’s wealth resides with the richest 15% of Americans; the bottom 50% of

    Americans holds only 2.5% of the nation’s wealth.

    Over the next decade, there will be a 25% increase in the population over 50 years of age. They have more money than any preceding generation, due to having dual incomes, equity growth, and record inheritances (60% goes to the top 40%)! This age group is spending $2 trillion dollars annually! Last year, 2.1 million boomers turned 60, with 25% planning on not retiring. They found a way to mix leisure with work and are not ready to fully retire – they have money and income and they are still investing in real estate.

    They are part of a major buying wave, as 75% plan on moving to either the west or the south for warmth. Already, 80% own their own home with 25% of those owning additional property. This helps to explain why, in 2005, 27.7% of all sales were for investment purchases and 12.2% of all sales were for 2nd homes!

    Those Who Own and Those Who Don’t

    1. We are the youngest of the home-building nations. History does repeat itself! Every country has gone through a cycle whereby it breaks into two parts: those who own a home and those who don’t.

    2. When this happens, rental rates begin to soar. We are in the beginning cycle of this event, as evidenced by the fact that the national rental rate increased 5.3% in the last 12 months. Since 2001, the rise in rental rates has easily outpaced inflation.

    3. Obviously this becomes a great benefit to those who own homes and rental properties – especially when the U.S. occupancy rate is now at 96.2%!

    4. The United States is unique among developing countries – we are still growing! Last year our population surpassed the 300 million mark as we added another 2.9 million people. This makes us the 3rd most populous nation in the world, behind China and India. Since 2000, we have added 20 million individuals and by 2030, there will be 80 million more people living in America!

    Source: 2004/2005 Census, U.S. Bureau of Labor Statistics

    Just How Rich Are We . . .

    There are now 2.9 million millionaires in North America, holding $10.2 trillion in assets. There are 317 billionaires in the U.S. holding $1.1 trillion in assets. California is home to 90 billionaires!

    The Federal Reserve reports:

    · Consumers have $5 trillion dollars in liquid cash sitting in banks and savings and loans!

    · In 2006, households’ net worth rose 7.4% and now exceeds $55.6 trillion dollars!

    · Homeowners real estate equity is $10.9 trillion dollars – representing a 59% equity position!

    · The value of individual stocks and mutual funds held by individuals grew to $10.4 trillion dollars!

    · Other assets held by individuals include:

    $ 3.2 trillion in bonds and credit instruments

    $ 1.1 trillion in insurance reserves

    $ 6.7 trillion of equity in non-corporate businesses

    $11.1 trillion in pension funds

    $ 2.5 trillion in 401K’s – plus $10 billion in loose change in homes and cars!

    What Are They Doing With This Wealth?

    They or their parents are also in the process of transferring their wealth to their children and grandchildren. These newest home buyers make up the largest group of the 3 buying waves. They are presently 23 to 33 years

    of age, and will add 1.2 million new households per year for the next decade! They are purchasing at a median age of 26, yet those purchasing under 25 years of age now represent 14% of the first time home buyers market.

    And let us not forget the wave of buyers that represent the normal buying market. This group is projected to grow at a rate of 1.17 million per year for the next 7 years. They include 1st time home buyers (median age 29) and those purchasing upscale homes (median age 45).

    Impact of Immigration

    Add to this the immigrants purchasing real estate and you can see that the U.S. home buying market will remain strong. From 1980 to 2000, over 6.2 million minority households joined the ranks of middle-income earners, and they are purchasing housing.

    ? Immigrant children who arrived with their parents in the ‘80s and ‘90s, are now buying homes.

    ? These 2nd generation Americans, if history repeats itself, will out-earn their parents.

    ? As 1st time buyers, they represent 35% of the 1st time resale market.

    Immigration of new buyers is largely due to a U.S. policy of family reunification. Today, there are 34 million immigrants, making up 12% of our total U.S. population and representing 28.4% of all households.

    ? Presently, Latinos are the fastest growing segment of the U.S. housing market.

    ? Asians will become the fastest growing segment of the U.S housing market over the next decade,

    largely concentrated on the West Coast.

    Source: 2004/2005 Census, Federal Reserve, Internal Revenue Service, National Association of Realtors

    Why We Will Continue To “Hold Our Own” In 2007!

    The National Economy

    If we take a look back at this decade, we have seen a lot of really bad things happen to both individuals and businesses. Our nation has seen the crash in the Dot.Com business world, an attack on our own soil, 2 geo-political wars with serious consequences, major stock scandals, record corporate bankruptcies, the doubling of the price of oil, and as if all this were not enough . . . 17 consecutive rate increases by the Fed!

    So let us look at what is happening now in our economy . . .

    Since 2003, the U.S. has created over 4 million new businesses and over 7 million new salaried jobs. Add the existing 16 million self-employed, the 25 million part-time workers and the 25.8 million small businesses (where 75% are sole proprietorships) and you can see we are generating a whole lot of tax revenue.

    Over the past 12 months, we have employed almost 2 million new workers. Our unemployment rate of 4.5% is at a 5-year record low, and since 3% of the population won’t work even if you give them a job, we are near full employment.

    These increased tax revenues have helped to reduce the originally projected deficit of $325 billion down to around $240 billion. Our tax revenues are up 14.1% over last year, and the federal debt was reduced by 20.8%. The government’s first quarter fiscal year saw a 32% reduction in the deficit compared to the last year’s 1st quarter – a 5 year low! The Treasury has announced the elimination of the 3-Year Note due to lower deficits!

    Corporate profits have doubled in the past 5 years, and this year their after-tax profits averaged 15.3% – the highest in 4 decades. This makes 19 straight quarters of double digit earnings! Corporations posted earnings in excess of $1 Ttrillion in the 1st quarter, and they set a single one day record of $85.5 billion in quarterly taxes paid last Sept. 15th ! Corporate cash is still at a historical high of $2 trillion.

    Since 1980, the Gross Domestic Product has risen 70% and is now at $13.3 trillion, helping to shrink our federal deficit. Today, debt is only 1.8% of the GDP, compared with 6.0% in ’83 and 4.7% in ’92.

    Source: Federal Reserve, IRS, U.S. Bureau of Labor

    So What May Happen The Rest of this Year?

    The sub-prime news is now old news and other than a few companies folding, most weathered the storm of making “risky” loans and the interest income

    from them has more than off-set the losses! That is why you see private investment groups now acquiring some of these companies while others sell off

    some of their loans for millions.

    Foreclosures will stay in the news for a couple more months but then most will have run their course and it too will disappear from the news. They rarely

    tell you that of all the notices of default filed, 68% of them either cure the problem by: (1) selling their home (2) refinancing (3) making up the back payments.

    Today, foreclosures still represent only 1.5% to 2% of all outstanding loans!

    First Quarter:

    The economy will continue to show positive growth while the Fed continues to stay in the pause mode. Home prices have held steady for the entire region

    but there are some minor problems in the areas where a lot of “over-building” has occurred. It will take about a year to regain balance, so some minor price

    declines may occur.

    Second Quarter:

    The Federal Reserve should have begun to reduce the Fed rate but with the economy still doing well and employment numbers still up, it may be later

    in the year before they cut interest rates – if at all. This will continue to put a damper on the housing market but will not cause any new problems and

    prices should hold. Housing inventories should begin their seasonal rise but less than last year with the southland averaging around a 6 to 8 month

    supply of homes. One should remember that as much as half of the inventory numbers are sellers testing the market and are not serious sellers.

    Third Quarter:

    Here is where we should begin to see some improvement. The not so serious sellers will begin to leave the market by late September and inventory

    numbers should begin to decline. If the economy has truly slowed down, the Fed may make their first interest rate cut and that will spur the homebuyers

    back into the market. Prices will hold steady.

    Fourth Quarter:

    If interest rates are cut and buyers do come back into the market, this will be a very busy quarter. Housing prices should begin to rise

    and with the media reporting new activity, buyers that have been sitting on the fence will enter the market. As the year comes to a close,

    we will have weathered the storm of sub-prime lending, foreclosures and start feeling pretty good as we head into the election year!

    What to Watch:

    1. If the Fed sees things it does not like and raises interest rates.

    2. If increases in our housing inventory push the supply past 8 months.

    3. Un-motivated sellers still entering the market in large numbers.

    Housing Appreciation Trends – California and Orange County

    California Existing Single Family Home Annual Average Sales Price

    1968 to 2005

    Year
    Average Sales Price
    Dollar Increase
    Percent Change

    1968
    $ 23,210.00

    1969
    $ 24,230.00
    $ 1,020.00
    4.21%

    1970
    $ 24,640.00
    $ 410.00
    1.66%

    1971
    $ 26,880.00
    $ 2,240.00
    8.33%

    1972
    $ 28,810.00
    $ 1,930.00
    6.70%

    1973
    $ 31,460.00
    $ 2,650.00
    8.42%

    1974
    $ 34,610.00
    $ 3,150.00
    9.10%

    1975
    $ 41,600.00
    $ 6,990.00
    16.80%

    1976
    $ 48,630.00
    $ 7,030.00
    14.46%

    1977
    $ 62,290.00
    $ 13,660.00
    21.93%

    1978
    $ 70,890.00
    $ 8,600.00
    12.13%

    1979
    $ 84,150.00
    $ 13,260.00
    15.76%
    10.86%

    1980
    $ 99,550.00
    $ 15,400.00
    15.47%

    1981
    $ 107,710.00
    $ 8,160.00
    7.58%

    1982
    $ 111,800.00
    $ 4,090.00
    3.66%

    1983
    $ 114,370.00
    $ 2,570.00
    2.25%

    1984
    $ 114,260.00
    $ (110.00)
    -0.10%

    1985
    $ 119,860.00
    $ 5,600.00
    4.67%

    1986
    $ 133,640.00
    $ 13,780.00
    10.31%

    1987
    $ 142,060.00
    $ 8,420.00
    5.93%

    1988
    $ 168,200.00
    $ 26,140.00
    15.54%

    1989
    $ 196,120.00
    $ 27,920.00
    14.24%
    7.95%

    1990
    $ 193,770.00
    $ (2,350.00)
    -1.21%

    1991
    $ 200,660.00
    $ 6,890.00
    3.43%

    1992
    $ 197,030.00
    $ (3,630.00)
    -1.84%

    1993
    $ 188,240.00
    $ (8,790.00)
    -4.67%

    1994
    $ 185,101.00
    $ (3,139.00)
    -1.70%

    1995
    $ 178,160.00
    $ (6,941.00)
    -3.90%

    1996
    $ 177,270.00
    $ (890.00)
    -0.50%

    1997
    $ 186,490.00
    $ 9,220.00
    4.94%

    1998
    $ 200,100.00
    $ 13,610.00
    6.80%

    1999
    $ 217,510.00
    $ 17,410.00
    8.00%
    0.94%

    2000
    $ 241,350.00
    $ 23,840.00
    9.88%

    2001
    $ 252,350.00
    $ 11,000.00
    4.36%

    2002
    $ 316,130.00
    $ 63,780.00
    20.18%

    2003
    $ 371,520.00
    $ 55,390.00
    14.91%

    2004
    $ 450,990.00
    $ 79,470.00
    17.62%

    2005
    $ 548,200.00
    $ 97,210.00
    17.73%
    14.11%

    37 Year Average Appreciation
    7.92%

    Source: California Association of Realtors

    Orange County Historical Single Family Home Prices

    Year
    Average Sales Price
    Dollar Increase
    Percent Change

    1970
    $ 27,000

    1971
    $ 27,700
    $ 700
    2.59%

    1972
    $ 28,400
    $ 700
    2.53%

    1973
    $ 31,500
    $ 3,100
    10.92%

    1974
    $ 38,400
    $ 6,900
    21.90%

    1975
    $ 44,300
    $ 5,900
    15.36%

    1976
    $ 55,000
    $ 10,700
    24.15%

    1977
    $ 70,100
    $ 15,100
    27.45%

    1978
    $ 81,100
    $ 11,000
    15.69%

    1979
    $ 93,400
    $ 12,300
    15.17%

    1980
    $ 107,100
    $ 13,700
    14.67%

    15.04%

    1981
    $ 118,100
    $ 11,000
    10.27%

    1982
    $ 120,200
    $ 2,100
    1.78%

    1983
    $ 132,700
    $ 12,500
    10.40%

    1984
    $ 133,900
    $ 1,200
    0.90%

    1985
    $ 138,200
    $ 4,300
    3.21%

    1986
    $ 146,200
    $ 8,000
    5.79%

    1987
    $ 165,700
    $ 19,500
    13.34%

    1988
    $ 210,600
    $ 44,900
    27.10%

    1989
    $ 248,200
    $ 37,600
    17.85%

    1990
    $ 257,300
    $ 9,100
    3.67%

    9.43%

    1991
    $ 246,900
    $ (10,400)
    -4.04%

    1992
    $ 238,700
    $ (8,200)
    -3.32%

    1993
    $ 221,500
    $ (17,200)
    -7.21%

    1994
    $ 215,800
    $ (5,700)
    -2.57%

    1995
    $ 213,300
    $ (2,500)
    -1.16%

    1996
    $ 211,100
    $ (2,200)
    -1.03%

    1997
    $ 217,300
    $ 6,200
    2.94%

    1998
    $ 251,200
    $ 33,900
    15.60%

    1999
    $ 273,500
    $ 22,300
    8.88%

    0.90%

    2000
    $ 300,400
    $ 26,900
    9.84%
    }

    2001
    $ 334,800
    $ 34,400
    11.45%

    2002
    $ 391,600
    $ 56,800
    16.97%
    14.75%

    2003
    $ 458,600
    $ 67,000
    17.11%
    6yr Avg.

    2004
    $ 535,000
    $ 76,400
    16.66%

    2005
    $ 623,275
    $ 88,275
    16.50%

    35 Year Average
    9.75%

  13. squareround

    Gary Watts’ forecast for 2007 marks the 34th year of bringing to the real estate industry his outlook for the resale housing market. Since Gary speaks only to the real estate industry, his information is presented in a format that real estate agents can use to inform their clients. His forecasting analysis includes both the current marketplace and where housing demand and pricing will likely to be heading. In the 1970’s he forecasted trends, in the 1980’s he began forecasting the direction of home prices which included his now famous 1989 talk The Party is Over. In the mid 1990’s, he gave the signal to the real estate industry that the bad times were over and in this new millennium, Gary began forecasting home price appreciation rates. His forecast versus the actual appreciation numbers are listed below. Although we are enduring the “hang-over” from the 2003 & 2004 “wild party years” (which includes the present problems in the sub-prime market and increasing foreclosures), Gary still does not see any economic signs, that will cause any major price changes for most of the Southern California housing market – other than remaining in a “neutral position”.

    ? The Housing Bubble Will Burst!

    Their first forecast for a bubble was in 2002 and it still has not happened. So much for the Great

    American Housing Collapse . . . and you won’t see it in 2007 either! Appreciation rate for the

    1st quarter in southern California was 4.6%!

    ? The Correction Phase for Housing Will Be Devastating!

    Although there was some speculative over-building in certain areas of the U.S., most of the U.S. housing

    market weathered this change without blood running in the streets, as some bubble-bears had forecasted.

    ? Real Estate Prices Will Plummet!

    Nationally, home prices ended the year by appreciating between a low of 1.9% to a high of 5.9%, depending upon

    which indicator was used. Last year, buyers acquired 1.06 million new and 6.48 million resale homes.

    These numbers may have exceed any other time in the history of the U.S., except from mid-2003 to mid-2005.

    ? Foreclosures Reach Record Highs!

    What record? Foreclosures are near a record low. Last year, only 1.09% of mortgages went to foreclosure.

    That means 98.91% percent of the buyers are making their payments! Today, foreclosures are grabbing the

    headlines but the truth is that most foreclosures are due to fraud and unethical lending. That is followed by

    medical reasons and then loss of a job. Most of the loans going into foreclosure are from February of 2005

    to May of 2006. Today, over 97% of all homeowners are still making their house payments! In California,

    the media loves to report record Notices of Default but the fact is that they are not even close to our record

    high set in 1996. If you add in the fact that we have built almost 2 million more homes in this State since than,

    the percentage is ridiculously low!

    ? Affordability Index at Record Low – This has been their mantra for decades!

    Homeownership is at a record high of 69%, with the baby boomers’ ownership at 80%! This affordability

    index is archaic and does not account for a world that changed dramatically in 1979!

    First Quarter:

    The economy will continue to show positive growth while the Fed continues to stay in the pause mode. Home prices have held steady for the entire region

    but there are some minor problems in the areas where a lot of “over-building” has occurred. It will take about a year to regain balance, so some minor price

    declines may occur.

    Second Quarter:

    The Federal Reserve should have begun to reduce the Fed rate but with the economy still doing well and employment numbers still up, it may be later

    in the year before they cut interest rates – if at all. This will continue to put a damper on the housing market but will not cause any new problems and

    prices should hold. Housing inventories should begin their seasonal rise but less than last year with the southland averaging around a 6 to 8 month

    supply of homes. One should remember that as much as half of the inventory numbers are sellers testing the market and are not serious sellers.

    Third Quarter:

    Here is where we should begin to see some improvement. The not so serious sellers will begin to leave the market by late September and inventory

    numbers should begin to decline. If the economy has truly slowed down, the Fed may make their first interest rate cut and that will spur the homebuyers

    back into the market. Prices will hold steady.

    Fourth Quarter:

    If interest rates are cut and buyers do come back into the market, this will be a very busy quarter. Housing prices should begin to rise

    and with the media reporting new activity, buyers that have been sitting on the fence will enter the market. As the year comes to a close,

    we will have weathered the storm of sub-prime lending, foreclosures and start feeling pretty good as we head into the election year!

    What to Watch:

    1. If the Fed sees things it does not like and raises interest rates.

    2. If increases in our housing inventory push the supply past 8 months.

    3. Un-motivated sellers still entering the market in large numbers.

  14. awgee

    The 10 yr note closed at 5.29% today, but not to worry, Gary Watts says everything will be just fine. Oh, and by the way, is there anybody in here who believes that home prices is So Cal appreciated by 4.6% in th 1st quarter of 07 and 1.9% in the 2nd quarter?

  15. IrvineRenter

    I wonder how Gary would explain posts like this one showing 20% to 30% haircuts?

  16. Mexifornia Mortgage Broker

    Squareround

    Talk about delicion. Even if the Feds bring rates down, how are the new buyers going to be able to qualify for the available homes when you do not have 100% financing lenders out there? Are not taking into consideration that this was the cause that raised prices within the last two years? Pin point me a specific area in Southern Ca and we can go through the list of properties that were sold within the last two years. You will see that 80% or more of those properties were financed with no money down.

  17. Mexifornia Mortgage Broker

    Furthermore, even the lenders who are still in business doing 100% financing are now asking for credit scores of at least 640 and full documentation to prove income. Full documentation? What is that? I need to look up that term in my English-Spanish dictionary, I never heard it before.

  18. Trooper

    Well, I did glean something useful from this rather LONG post… that the r.e. market in the early 90’s continued to lose for 5 years running. Makes me think we’ve got a long road ahead of us for price declines. Excellent.

  19. lendingmaestro

    mark my words: The FED will NOT cut rates. If anything they will raise rates to be more in line with the global economy. Rates in other parts of the world, especially Europe, are rising. More and more money is flowing into foreign markets instead of the US. A decrease in rates could result in a horrid economic situation known as stagflation.

  20. lowrydr310

    It ain’t gonna happen my friends. I know many people who have over 700 FICO and very good incomes that can only qualify for $300K full-doc.

    Wait until a 10% downpayment is required and buyers need reasonable DTI ratio. Banks won’t want to take the risk without these qualifications.

    I think many people are going to have a hard time meeting the coming loan standards. We’ve been on a spending spree for the past decade, racking up record debt and emptying any savings that ever existed.

  21. nirvinerealtor

    Trooper,

    I am here! I just have been too busy working. Yes, there are people who buy because they are now able to find the perfect house.

  22. nirvinerealtor

    Lending – The market changes so quickly. Only yesterday that money was pouring into US!

    Who can say which way the market goes!!!!

  23. k.o.

    After reading squareround’s comment I now also believe the following:

    (1) I need to get into a house I cannot afford now otherwise I will never be able to buy anything in my entire life.
    (2) I shouldn’t worry about the house I cannot currently afford because in a few years it will be worth eleventy billion dollars.
    (3) I can fly and shoot lasers out of my eyes.

  24. awgee

    I don’t know if it is true, but I have read that a tidal wave does the most destruction on the way back out to sea when it sucks everything in it’s path back out to sea, and does it at a higher velocity than when it flows on to the land. Many in here seem to be able to say which way the market is going and seem to be having alot of success at it. There is an old saying; “It is easier to ride a horse in the direction it is going.”

  25. nirvinerealtor

    awgee,

    “Many in here seem to be able to say which way the market is going and seem to be having alot of success at it”

    …I always admire people with a firm projection of the future as I am not at that level. That is the reason why I find this blog very interesting.

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