Monthly Archives: February 2011

New home sales down 80% from peak, down 18.6% last year, down 11.1% last month

It's always darkest before the dawn. New home sales fall to new lows an astonishing 80% off the peak.

Irvine Home Address … 12 PIENZA Irvine, CA 92606

Resale Home Price …… $1,133,800

We can stay out all day or we can run around all night

Well all night, all night

Well it's time to go home

And I ain't even done with the night

John Mellencamp — Ain't Even Done With The Night

How bad will it get for the real estate industry? We found out last week that the NAr are liars… oh, wait… we already knew that… and our dismal resale home sales figures are even worse than we knew. Plus, with the lower sales prices, real estate commissions are lower on lower volume. The combination makes for hungry realtors, mortgage brokers, appraisers, inspectors, and other related fields.

It's even worse for the new home industries. There are many consultants who make a living providing services to real estate developers and home builders. When homebuilding is off, a major component of our economy sits idle, and its workers are not buying homes. Many are squatting in houses they bought back when they had work in 2006.

I told people last year that I believed the 3rd quarter of 2010 was the bottom of homebuilder activity. I thought the homebuilder stocks were finally ready to rally on a sustained basis. I thought the dawn was finally breaking from homebuilding's long dark night. I was wrong. I know there is a seasonal component to new home sales numbers, December is always a difficult month to open escrow but there is a huge push to close escrows in process. The result is a beefy December and a thin January for homebuilders every year. That being said. These numbers are horrendous.

Sales of new homes fall a shocking 11.2%

chart_home_sales_top.gif

February 24, 2011: 1:02 PM ET

NEW YORK (CNNMoney) — The new year has brought little cheer to new-home builders: Their sales fell a shocking 11.2% between December and January and 18.6% from 12 months earlier.

The total number of new homes sold in January was a seasonally adjusted 284,000, down from 325,000 in December, the government said Thursday.

I reported last week that Irvine Company opens two new developments with 2,600 houses. Since they are the near monopolistic leader of the Orange County oligopoly on residential real estate, they operate differently than the opportunistic builders.

When prices started weakening in early 2007 and the volume dried up, the Irvine Company refused to lower its land sales price, so construction stopped. Very few homes were built in 2007 or 2008, and there were no regular production runs. So while homebuilders in the rest of the country continued to build, albeit fewer and fewer homes, the Irvine Company and its associated builders on the Ranch simply stopped.

So now while the builders are hitting bottom in sales volumes around the country, the Irvine Company has some unmet demand for new homes which it is now gearing up to meet. To continue to function as a price-leader, it must continue to maintain a scarcity of product. When there was little demand, no supply was offered. Now that there is a little demand, the Irvine Company will deliver enough product to meet some of this demand while trying to maintain their price points. Like every other builder, they are hoping lenders can resolve their shadow inventory problem without upsetting the supply shortage that keeps prices above a natural equilibrium.

In total, the market is down 80% from its peak, which was set in July 2005, when the annualized rate of sales hit nearly 1.4 million.

The big problem facing developers is that they face significant competition from foreclosed homes, which sell at bargain-basement prices. In fact, 26% of all homes sold last year were foreclosures.

Resale of distressed inventory caused prices to go down. How fast prices go down depends on the rate at which product is released to the market.

Let me give you a real-life example:

4229 ROBINS RIDGE DR, LAS VEGAS, 89129

11/12/10 Purchase Date

3/11/11 Sale Date

$172,000 Proforma Sale Price

$158,000 Actual Sale Price

-$10,664 Cost of Sales and Incentives

==================================

$147,336 Total Revenue from sale

Acquisition, Carrying, and Renovation Costs

———————————————————–

$127,000 Auction Acquisition Cost

+$12,276 Preparation for sale

==================================

$144,276 Total Acquisition and Renovation Costs

Total Profit $3,060

Profit Margin 2.1%

Comparable Sales

——————————————————————————

2003, 3/2, 2030 SF, $190000, $93.54/SF, SMOKEMONT CT, $188,000

2002, 4/3, 2024 SF, $154400, $76.24/SF, CANYON CLIFF CT, $160,000

2003, 4/3, 2024 SF, $170000, $83.95/SF, COOK BLUFF AV, $170,000

2003, 3/2, 2030 SF, $189500, $93.3/SF, HOLLOWAY HEIGHTS AV, $185,000

Comparable Rentals

——————————————————————————

10452 CANYON CLIFF CT — 3 bed 3 bath 2492 SF — 2002 List: $1,345

10456 CANYON CLIFF CT — 3 bed 3 bath 2024 SF — 2002 List: $1,350

4209 ROBINS RIDGE DR — 3 bed 2 bath 1396 SF — 2002 List: $1,200

4209 ROBINS RIDGE DR — 3 bed 2 bath 1396 SF — 2002 List: $1,200

When I purchased this property, I thought I would get $172,000 based on the comparable sales (two of the four are model matches). My property required extensive renovation, so I didn't get on the market until early January.

On January 11, 2011, one of my competitors buys 10428 DENALI RIDGE Ct Las Vegas, NV 89129 at auction for $125,500. It is also a model match to mine. His business model is different than mine. Rather than fix it up, he did nothing to the property and merely put in on the market for a below-market price to make a quick sale — and steal my buyer.

A few weeks ago, we are approached by a buyer's agent who told us that his clients had visited both properties, and they like ours much better, but since I was at $164,900 and my competitor with a model match a couple of blocks away is asking only $159,900, they offered me $155,000.

Ordinarily, I would have countered back at like $162,500 or something like that, but I took the buyer's agents gambit seriously. His clients really could go buy the other property, and with the savings, they could probably fix it up themselves (not that they would bother). Since my competitor is in a low price and has no renovation costs, he has room to cut price aggressively if he wishes. Plus, if I lose this buyer, how long will I have to wait for the next one?

From the perspective of a flipper in 2011, my Las Vegas inventory is not fine wine. It does not get more valuable as it ages. I countered back at $158,000, and I was happy to make the deal. Not all of them are home runs.

The reason prices are going down in Las Vegas or any market where there is an excess of inventory is due to the behavior of me and my competitors as we each implement different business strategies and react to each other. One thing we all have in common is that we cannot afford to hold our inventory. If buyers are not available at prices set by previous comps, then prices are going down until a buyer is found. The higher price points hold the carcasses of flippers who held out for a better price during the decline.

“Housing is a price-driven market,” said real estate analyst Michael Larson of Weiss Research Investors. “Ordinary home buyers can and will buy houses, but only if the price is right. That makes life tough for new home builders, who have to compete with distressed properties and 'nearly new' foreclosures.”

The release followed Wednesday's more positive industry report showing that sales of previously owned homes had inched up slightly during January. A bulk of those sales came from bank repossessions and other distressed properties.

But there is always a market a for new homes because many people prefer a a house that nobody else has used, according to Jeff Mezger, CEO of KB Homes. Plus, foreclosures are often sold “as is” and are in poor condition.

Foreclosures often are in bad condition because it sometimes doesn't make sense financially to fix them up, particularly in a declining market. Many of my competitors do little or nothing to fix up houses relying totally on speed-to-market to make a profit.

America's ugliest homes

“One of our biggest market segments is single moms, who don't want to have to fix up things,” he said. “They look at used homes first. “They look at foreclosures and don't like what they see.”

That is also one of the reason I prefer to renovate the properties and at least bring them up to the standard of the neighborhood.

Some progress has been made by home builders in reducing their inventories of unsold homes, according to Brad Hunter, chief economist with Metrostudy, a real estate information provider.

In Atlanta, builders reduced the glut by 35% during 2010. In Tampa, inventory fell more than 17%; in Phoenix, it's down more than 10%.

That absorption may be slow by historical standards, but it does indicate a trending in the right direction.

By the end of January, there were an estimated 188,000 new homes still on the market, the lowest inventory level since December 1967. It's a 7.9 month supply at the current rate of sales, down 1.2 months since last January.

The median price of home sold during the month was $230,600, a 13.3% increase compared to a year earlier.

“If you're looking for signs of a robust recovery in housing,” said Larson, “you're just not going to find it anytime soon. Instead, sales, pricing, and construction activity are likely to bounce along the bottom for several quarters.”

One of the things that shocked me in Las Vegas was the resiliency of the homebuilding industry. Homebuilders can adjust to any stable price point where the final sales price of the product is greater than the cost of the inputs. The cost of the sticks and bricks to make a home is less than $60/SF for production builders in many markets, so as long as prices stay somewhat above that, they can build and sell profitably.

I was pulling comps on a property that was a 2007 auction candidate in a neighborhood where the builder restarted construction in 2010. When I pulled model-match comps, I found 7 properties: four of them were priced between $140,000 and $150,000, and three of them were priced between $180,000 and $190,000. When I looked more carefully, I could see the dates of construction are what separated the two groups. The REOs only three or four years older where selling at a 20% discount.

When house prices are in a decline, they take on the characteristics of used cars with a steep drop when it goes on the lot (or is that when it drives off the lot?). The discount for the REO was remarkable, yet homebuilders are building and selling homes. Why is that?

There is always a premium for new. Why do people pay an extra 20% for a car. Surely it isn't for the joy of losing that money as they leave the sales lot. In Las Vegas, new is very affordable. They can buy new houses at or below rental parity. Of course, they can buy REO at a steep discount to rental parity, but for a family wanting a house as an owner-occupant, the extra cost doesn't seem that large when they are still saving on a comparable rental.

Of course, like in other markets, homebuilders in Las Vegas are facing the release of inventory to the MLS and jokers like me competing with other flippers to drive prices down.

How many times will builders face the same dilemma I faced: make me a deal or I will buy a model-match from the flipper down the street? Until shadow inventory is fully processed, homebuilders will not be raising prices or output significantly. Competition from REO won't allow them to.

Take the loan mod money and run

This owner may have received principal reduction from B of A.

  • Today's featured property was purchased on 6/16/2007 for $1,080,000. The owner used a $990,000 first mortgage and a $90,000 down payment.
  • On 3/11/2008 he refinanced with a $920,000 first mortgage and a $74,500 second mortgage.
  • On 12/28/2010 he refinances with a $729,750 first mortgage — no longer jumbo on B of A's books, so it's no longer a risk to B of A.

Did this borrower come up with a quarter million dollars cash to pay down the loan? Perhaps the second hasn't shown up yet, but there is a chance that B of A wrote off the difference in a loan modification. If so, this peak buyer just received a huge windfall from B of A, and he has put the house for sale to cash in his chips.

Update: an astute observer who knows the owners has stated this was indeed a cash-in refinancing. Far less interesting than getting away with loan mod booty, so apparently there is nothing to see here. Move along.

Irvine Home Address … 12 PIENZA Irvine, CA 92606

Resale Home Price … $1,133,800

Home Purchase Price … $1,080,000

Home Purchase Date …. 6/16/2007

Net Gain (Loss) ………. $(14,228)

Percent Change ………. -1.3%

Annual Appreciation … 1.3%

Cost of Ownership

————————————————-

$1,133,800 ………. Asking Price

$226,760 ………. 20% Down Conventional

5.02% …………… Mortgage Interest Rate

$907,040 ………. 30-Year Mortgage

$235,299 ………. Income Requirement

$4,880 ………. Monthly Mortgage Payment

$983 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$189 ………. Homeowners Insurance

$47 ………. Homeowners Association Fees

============================================

$6,099 ………. Monthly Cash Outlays

-$1338 ………. Tax Savings (% of Interest and Property Tax)

-$1086 ………. Equity Hidden in Payment

$443 ………. Lost Income to Down Payment (net of taxes)

$142 ………. Maintenance and Replacement Reserves

============================================

$4,261 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$11,338 ………. Furnishing and Move In @1%

$11,338 ………. Closing Costs @1%

$9,070 ………… Interest Points @1% of Loan

$226,760 ………. Down Payment

============================================

$258,506 ………. Total Cash Costs

$65,300 ………… Emergency Cash Reserves

============================================

$323,806 ………. Total Savings Needed

Property Details for 12 PIENZA Irvine, CA 92606

——————————————————————————

Beds: 5

Baths: 3

Sq. Ft.: 2450

$463/SF

Lot Size: 6,496 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Mediterranean

Year Built: 1997

Community: Westpark

County: Orange

MLS#: S648865

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin: 5 days

——————————————————————————

Private end of cul-de-sac location. Upgraded French doors leading to a large, magnificent residential resort style backyard with pebble tech pool, beach access, waterfall, spa, fire pit, built-in BBQ with refrigerator, elegant palms and more. This home has five bedrooms with ONE BEDROOM AND BATH DOWNSTAIRS. Upgraded Travertine floors, upgraded custom baseboards, crown mouldings and upgraded carpet. Home is open, light and bright with soaring ceilings and elegant high arched windows, custom paint, recessed lighting, built-in alarm system, 3-CAR GARAGE and more. Additional association amenities include parks, pool/spa and tennis. Close to shopping, entertainment and great schools, including Plaza Vista Elementary, UCI and much more.

Banks extend limbo for mortgage squatters to manage MLS inventory

Each quarter the banks release a wave of foreclosure properties, then they cook up a delay while the MLS absorbs them.

Irvine Home Address … 7 ARESE AISLE Irvine, CA 92606

Resale Home Price …… $450,000

Dumbstruck

Color me stupid

Good luck

You're gonna need it

Green Day — Waiting

In early February, an ruling in Nevada against Trustee Corps, the trustee for Bank of America in Nevada, prompted them to postpone and cancel all their foreclosure actions in Nevada this month. Several other trustees did the same. Ostensibly, this delay is necessary to review their paperwork. In reality it is part of a quarterly cycle of release and wait.

The banks need to process these delinquent borrowers and either get their money back. Right now it is tied up in a wasting asset with a liquidation value far less than their original loan amount. This liquidation can't go too fast or prices will crash, and strategic default will create a downward spiral that wipes the market out. Liquidation can't go too slow, or lenders and investors go broke servicing their wasting asset.

The method banks use is to process properties in spurts then wait to see the results. Depending on their internal circumstances, some banks may process more REO and some less. Now that I have been watching this market long enough, I can see the quarterly lull in processing. I wonder what their excuse for delay will be in May?

Investors' foreclosure appetite grows, headaches arise

NEW YORK | Fri Feb 18, 2011 5:25pm EST

NEW YORK (Reuters) – Investors are flocking to home foreclosure sales in California and other states where banks have rescheduled auctions postponed last year to fix loan servicing flaws.

But often their intentions to purchase the distressed properties are still stymied by disagreements over a fair price or as auctions are simply canceled.

In California, bank-set “opening bids” won 14,068 properties from auctions last month, a 51 percent rise over December, ForeclosureRadar.com said in a report this week. Investor purchases rose more than 50 percent to 3,272, but were dwarfed by the 12,279 auctions canceled, it said.

“There's just not a lot of inventory” made available, said Sadie Gurley, a managing partner with New York-based GreenLake Investment Partners, a new entry into the field of investors seeking to profit from the “shadow inventory” building up on bank books.

“It's like a funnel,” she said.

Personally, I like the black hole analogy.

The trend is similar in other high foreclosure states, such as Arizona and Nevada, according to ForeclosureRadar.com.

Distressed property sales have accounted for a significant share of the housing market, rising to 36 percent in December from 32 percent a year earlier, according to the National Association of Realtors. The purchases can be made by investors or banks, which have ramped up “short sales” in which they agree to sell a home below the balance on the mortgage.

The number banks carefully watch is the percentage of distressed sales. Numbers over 30% stymie appreciation. Distressed sales over 40% make prices go down. Lenders have collectively decided that massive shadow inventory is superior to prices in free fall.

Investors — who typically aim to buy, fix and re-sell the houses — are lining up as banks restart foreclosures from moratoriums imposed last year to review faulty processes, such as “robo-signing” of court affidavits or other document issues.

Revelations of shoddy servicing further muddied the foreclosure process, which to investors is key to cleaning up excess inventory and aiding housing's recovery.

Banks have limited sales to others by keeping their opening bids above what the local markets will bear, investors said.

On average, in California, investors are paying 25 percent below market value when winning the auction, versus a 15 percent premium bid of banks that take properties into their “real-estate owned,” or REO, portfolios, said Sean O'Toole, chief executive officer of ForeclosureRadar.com.

In California, the average foreclosure is $150,000 upside down in the mortgage, so if the bank doesn't drop the bid from the amount owed, there's no chance the investor is going to purchase it,” O'Toole said.

It's even worse in Nevada. I saw a property go to auction on February 25 in Las Vegas that was purchased for $3,000,000 in 2006. It was an amazing 7 bedroom 6 bath 4,800 SF mansion. The opening bid was $742,000. How's that for a lender haircut?

Many others are canceled as banks redouble efforts to modify loans, conduct a short sale or if they find problems with documentation, he added.

In January, more than 12,000 were canceled in California alone, up from December but down from a year earlier.

At Bank of America Corp, the largest U.S. mortgage-servicing company, postponements will continue as it works on loan modifications, a spokeswoman said.

O'Toole believes the banks are holding onto properties to avoid write-downs, or sometimes to extend servicing fee revenue.

That's exactly what they are doing. Some of the properties are being held in limbo because servicing agreements provide greater incentive to keep shadow inventory than to process the foreclosure. Also, as i have written about many times, lenders simply are not in a position to write down the loans.

It all adds up to a “measured strategy” by banks compared with dumping the homes on the market, said Bruce Norris, president of The Norris Group, in Riverside, California. For those properties priced attractively to investors, competition is fierce, he said.

Banks will drop opening bids — sometimes just hours ahead of auction — springing investors into action to check out the property. These are crucial moments for investors, since margins as tight as 17 percent are easily eroded by necessary repairs or costly delays if the home is still occupied, which it is most of the time, Norris said.

I am always amazed at how the auction system is set up to obtain the least amount of recovery at sale. The true for-sale inventory is not known until the morning of the auction making prior research nearly impossible. The properties are not prepared or marketed in any way. The information needed to sharpen your pencil and bid a bit higher is difficult to obtain as there is no central database as good as the MLS. In short, the entire process conspires against high bids.

In the past, the inefficiencies of the system were part of the carrot and stick approach lenders would use to get delinquent borrowers to pay. The last thing anyone with equity wants to do is let the house go to auction where they may lose everything. In an appreciating market, the threat of foreclosure motivates borrower compliance. Once borrowers go underwater, this threat turns to work against lenders who now face a low capital recovery at foreclosure.

Former owners are hanging on “more often because of all the news articles about robo-signing and maybe the lender didn't have the right to foreclose,” he said, adding “unscrupulous” lawyers are giving owners a greater sense of entitlement.

Bailouts and False hopes. That's all they are.

Even so, he expects inventory to rise for the next six months as the system plays “catch up” from the slowdown in the second half of 2010, he said.

“Banks are figuring out that having REO is much more expensive,” he said. “That's why they modify first, short-sale second and then reduce bids at a trustee sale. All those options net the bank more than REO.”

Higher loss severities will force lenders to resolve bad loans and liquidate REO. The realization that servicing is more expensive in the long run than immediate liquidation will prompt banks into action. The lenders in the weakest financial condition will try to wait and liquidate last in hopes the market will bail them out. The strongest institutions will sell first lowering the prices for everyone else and eventually bringing an end to the cartel behavior.

Irvine Home Address … 7 ARESE AISLE Irvine, CA 92606

Resale Home Price … $450,000

Home Purchase Price … $643,000

Home Purchase Date …. 2/24/06

Net Gain (Loss) ………. $(220,000)

Percent Change ………. -34.2%

Annual Appreciation … -6.7%

Cost of Ownership

————————————————-

$450,000 ………. Asking Price

$15,750 ………. 3.5% Down FHA Financing

5.02% …………… Mortgage Interest Rate

$434,250 ………. 30-Year Mortgage

$93,389 ………. Income Requirement

$2,336 ………. Monthly Mortgage Payment

$390 ………. Property Tax

$54 ………. Special Taxes and Levies (Mello Roos)

$75 ………. Homeowners Insurance

$290 ………. Homeowners Association Fees

============================================

$3,145 ………. Monthly Cash Outlays

-$386 ………. Tax Savings (% of Interest and Property Tax)

-$520 ………. Equity Hidden in Payment

$31 ………. Lost Income to Down Payment (net of taxes)

$56 ………. Maintenance and Replacement Reserves

============================================

$2,327 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,500 ………. Furnishing and Move In @1%

$4,500 ………. Closing Costs @1%

$4,343 ………… Interest Points @1% of Loan

$15,750 ………. Down Payment

============================================

$29,093 ………. Total Cash Costs

$35,600 ………… Emergency Cash Reserves

============================================

$64,693 ………. Total Savings Needed

Property Details for 7 ARESE AISLE Irvine, CA 92606

——————————————————————————

Beds: 3

Baths: 3

Sq. Ft.: 1614

$279/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Split-Level, Other

Year Built: 1992

Community: Westpark

County: Orange

MLS#: P768717

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin: 11 days

——————————————————————————

Short sale!!! Excellent location & quiet area in gated community. This charming European architecture home with marble fileplace, plantation shutters recessed lighting, custom designer light fixtures, new upgraded custom paint & upgraded carpet, mirrored wardrobes, central vacumm system, vaulted ceilings, water softner. Many windows with lots of natural sun light.

Emboldened by mortgage squatters, traditional RE thieves becoming a problem

With so many people living for nothing in properties they have no equity in, traditional squatters are being emboldened to pilfer bank property.

Irvine Home Address … 9 OLYMPIA Irvine, CA 92604

Resale Home Price …… $474,900

Criminal justice just for you.

There ain't nothing you can do.

Kick down the door, change the lock.

Don't wanna live in a cardboard box.

UK Subs — Squat 96

Last July I wrote about the Montana Man Forgets to Sign Documents Before Stealing Bank-Owned Property. In that story, the would be thief filed a deed giving him title with Yahweh being the seller. Since Yahweh does not show up in the chain of title, this crime was relatively easy to spot.

In January of this year, I reported a couple faces three years in prison for squatting without a mortgage. In that post I made the following observations:

People make many choices in life both good and bad. Some people are traveling the highway to hell, some to heaven, and most have no clue where they are going one day to the next. In the aftermath of the housing bubble, many people find themselves caught up in morally ambiguous situations. People who continue to occupy real estate they have no equity in and do not pay for are not breaking any laws, and they are receiving a significant reward for their behavior. That doesn't make it right.

The couple that is the focus of today's featured article are also occupying real estate they don't own and aren't paying for. Rather than being rewarded, these people are going to jail. Is there really much difference between them and the multitudes of delinquent borrowers?

Foreclosed upscale home in Upland

Couple under arrest

Squatting suspected

Neil Nisperos, Staff Writer

Updated: 02/15/2011 10:18:56 PM PST

UPLAND – A couple living in a five-bedroom home on North Euclid Avenue were arrested Tuesday after investigators suspected an illegal case of squatting on the upscale property.

Richard and Pamela Scott were arrested by Upland police on suspicion of felony forgery, burglary and filing a false document with the county recorder's office.

Richard Scott allegedly had forged a deed trust document for the property, in which he claimed ownership of it, and filed the document with the county, said Vance Welch, a deputy district attorney with the San Bernardino County District's Attorney's real estate fraud unit.

Scott had tried to cloud up the title owner sequence for the property by indicating on the deed that he was renting the home to the Moorish Science Temple of America, and they were in turn granting it back to him, Welch said.

At least this joker was wise enough to get the chain of title correct. The vagrant in Montana was so stupid that he put Yahweh as the grantor.

The clever twist this guy put on it was to put the title in some entity he controlled and he merely signed a lease. It distances him from the crime and when the real foreclosure occurs, he can cloud title and claim his bogus lease is valid. Fortunately, the San Bernardino County District Attorney is smart enough to see through this charade.

“What Mr. Scott did was doctor a false document and he had it notarized and he filed it in the County of San Bernardino,” Welch said. “At that point, your victim is not (only) the person who owns the house. The victim is the county because it impedes the county's record-keeping ability.”

At this point is crime is small, but if he had gotten away with it for a time, he may have tried to sell the house. The transaction might have gone through because the title looks correct. If a new owner is involved and the criminal is long gone with the sales proceeds, then it is a big crime that hurts many people.

Police officers, who arrived with an arrest warrant Tuesday morning, had trouble getting the couple to open the door so they forced it open.

Richard Scott had run to the back of the house, but police were stationed behind it.

The Scotts are expected to be arraigned today in San Bernardino Superior Court, with a pre-preliminary hearing likely to be set later this month.

“I don't know that we've been involved in prosecutions of this nature in the past, however, I think this is an upcoming problem, not just in our community, but all communities with the foreclosures going on,” Upland police Sgt. Greg Signorio said. “There are stories of this happening in other places.

Shortly after the arrest, Carolyn Spencer, a Realtor tasked with being responsible for the home for Wells Fargo, and contractors were busy boarding up the front door and securing windows inside the home.

The couple had lived in the home, located on the southwest corner of 23rd Street and Euclid, for the past month and had completely furnished it, Spencer said. The couple had apparently been living with their children.

A family that squats together stays together?

The home's previous owner had moved out in December after Wells Fargo had foreclosed on the home last fall.

Spencer found out about the couple when she went to check on the property last month and found a moving van at the front of the home.

“This guy was in a moving van and he jumps out of the van and he says `Get off of my property. I'm gonna have you arrested,”' Spencer said. “He was in my face, and I was really shaken.”

What a loser. This guy tries to intimidate the realtor when she goes up to the property. I know a guy in Las Vegas i can send over… just kidding.

The bank was about to initiate repairs to the home before putting it back on the market sometime later this spring, Spencer said.

Welch said Scott has prior felonies for forgery and firearms possession. Welch said he is on probation for prior crimes and would likely stay in custody longer than his wife, who has no prior record.

Welch said he wants potential squatters to know that similar instances won't be tolerated in San Bernardino County. The prosecutor hopes other police departments in the region take a more active role in investigating similar instances in their own communities and thanked the Upland Police Department and Upland Detective Anthony Wilson for taking the case on.

“Any police department that doesn't take an active role in trying to stop this is not doing what they should be doing,” Welch said. “The thing that we have learned is, if you let these guys operate and start looking the other way, it will pop up like a rash.

It is spreading like a rash. Most people squatting in homes they aren't paying for have no contact with the bank. The bank often does not know if the delinquent borrower occupies the property or if a traditional squatter has taken up residence. Given those circumstances, it isn't surprising that squatters are popping up everywhere shadow inventory is leaving many homes vacant and off the market.

Boom, bust, bear rally

Today's featured property has all the features of the housing bubble. One owner bought in 2001 and sold in 2006 for a huge windfall. The next owner went belly up. The third owner is the bear rally buyer trying to sell today.

The owner who paid $302,000 on 9/25/2001 later sold to the peak buyer for $545,000 on 11/22/2006. The first owner had the property just over 5 years and made $243,000 minus fees and expenses. Even renting it for minor negative cashflow, the appreciation alone probably netted this guy $200,000 — which is also why the bust buyer played Ponzi. Unfortunately, the music stopped before he could get his five-year ride.

Don't buy if you might need to move

There is a reason people who might need to move in the next three to five years may want to rethink their purchase. With an unstable market and real estate commissions, there is no guarantee you will get out with your down payment.

The people selling today's featured property paid $485,000 using a $388,000 first mortgage and a $97,000 down payment. Early this year they refinanced with a $378,000 first mortgage. They have paid down their mortgage so far which would ordinarily earn them an A on my HELOC abuse grading system. However, they refinanced with a 5-year ARM at the bottom of the interest rate cycle. When they have to refinance in five years, the cost of money will likely be higher. Plus, this discipline may have been forced on them by a lender and a low appraisal.

Irvine Home Address … 9 OLYMPIA Irvine, CA 92604

Resale Home Price … $474,900

Home Purchase Price … $485,000

Home Purchase Date …. 1/26/09

Net Gain (Loss) ………. $(38,594)

Percent Change ………. -8.0%

Annual Appreciation … -1.0%

Cost of Ownership

————————————————-

$474,900 ………. Asking Price

$16,622 ………. 3.5% Down FHA Financing

5.02% …………… Mortgage Interest Rate

$458,279 ………. 30-Year Mortgage

$98,557 ………. Income Requirement

$2,466 ………. Monthly Mortgage Payment

$412 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$79 ………. Homeowners Insurance

$190 ………. Homeowners Association Fees

============================================

$3,146 ………. Monthly Cash Outlays

-$408 ………. Tax Savings (% of Interest and Property Tax)

-$549 ………. Equity Hidden in Payment

$33 ………. Lost Income to Down Payment (net of taxes)

$59 ………. Maintenance and Replacement Reserves

============================================

$2,282 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,749 ………. Furnishing and Move In @1%

$4,749 ………. Closing Costs @1%

$4,583 ………… Interest Points @1% of Loan

$16,622 ………. Down Payment

============================================

$30,702 ………. Total Cash Costs

$34,900 ………… Emergency Cash Reserves

============================================

$65,602 ………. Total Savings Needed

Property Details for 9 OLYMPIA Irvine, CA 92604

——————————————————————————

Beds: 3 Baths: 3

Sq. Ft.: 1619

$293/SF

Lot Size: –

Property Type: Residential, Condominium, Townhouse

Style: Two Level

View: Trees/Woods

Year Built: 1977

Community: El Camino Real

County: Orange

MLS#: S646753

Source: SoCalMLS

Status: Pending

——————————————————————————

Capturing the best that is Irvine, this wonderful home offers an ideal environment in which to raise a family. Encompassing three bedrooms and two-and-one-half bathrooms in just over 1,600 square feet, one will find elegant hardwood flooring, a spacious kitchen, romantic fireplace in the inviting living room, and energy-efficient dual-pane windows. A formal dining room along with an enclosed private patio, central air conditioning and an attached 2-car garage help complete this lovely home. You're just a short stroll to the pool and playgrounds, with close proximity to the huge Heritage Park that features tennis, softball, basketball, volleyball, a relaxing pond, and the huge library and Community & Arts Center. Enjoy the excitement that the world-famous William Woollett Aquatic Center brings, with its Olympic-size swimming pool and world-class events. Come and enjoy living in one of the safest cities in America – and a school district that is recognized as one of the best in the U. S.

Thank you for reading the Irvine Housing Blog.

Astutely observing the housing market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

National Association of realtors caught lying about home sales

The National Association of realtors, in a deliberate attempt to deceive buyers, exaggerated home sales data during the housing bust.

Irvine Home Address … 5042 GREENCAP Ave Irvine, CA 92604

Resale Home Price …… $534,900

Pray for daylight,

Pray for morning,

Pray for an end to our deception

The Crüxshadows — Deception

Will realtors ever stop lying to us? Apparently, they thought it best to show a market with robust sales even though the reality was low sales. Starting in 2007, just as sales volumes were plummeting because prices were high and qualifying buyers were scarce, the National Association of realtors revised their methodology in a way that overstated sales significantly over the last 4 years. In others words, if you thought sales rates were tolerably low, you were deceived by as much as 20% by the NAr.

This lie was completely self serving. The NAr wanted to dupe buyers into thinking the market was stable to induce transactions that never would have gone through if buyers had known the truth. Many of those buyers in 2007 and 2008 are now underwater, and with the double dip, the 2009 and 2010 buyers may join them.

What those buyers deserved was to be educated to the reality of the housing market. What they got instead was reassuring lies.

Home Sales Data Doubted

Realtor Group May Have Overstated Number of Existing Houses Sold Since 2007

By NICK TIMIRAOS

The housing crash may have been more severe than initial estimates have shown.

The National Association of Realtors, which produces a widely watched monthly estimate of sales of previously owned homes, is examining the possibility that it over-counted U.S. home sales dating back as far as 2007.

The group reported that there were 4.9 million sales of previously owned homes in 2010, down 5.7% from 5.2 million in 2009. But CoreLogic, a real-estate analytics firm based in Santa Ana, Calif., counted just 3.3 million homes sales last year, a drop of 10.8% from 3.7 million in 2009. CoreLogic says NAR could have overstated home sales by as much as 20%.

While revisions wouldn't affect reported home-price numbers, they could show that the housing market faces a bigger overhang in inventory, given the weaker demand.

This is the core of the deception. The actual sales numbers are a jumble of numbers the NAr can spin however they like; however, the months of supply calculation is a widely known market gauge with an accepted interpretation: more than 6 months of inventory is bad and less than 6 months is good. In order to manipulate this statistic, the denominator (home sales) needs to be as large as possible. Anything which overstates home sales directly impacts the months of supply.

In early 2007, months of supply had been above 6 months for about a year. Is anyone surprised they found a way to change their sales numbers to bring the months of supply down? This summer, existing-home sales sunk to lowest level ever recorded. I wonder how bad it really was? And how large did the months of supply get? And how many months of supply do we currently have?

Manipulating sales numbers for the months of supply calculation is very important to those who believe it is always a good time to buy. Steve Thomas of the now defunct Altera Real Estate used escrows rather than closed sales because it had the same effect.

In December, NAR said that it would take 8.1 months to sell some 3.6 million homes listed for sale at the current pace, but the number of months it would take could be even higher if sales are revised down. Any revisions wouldn't have an impact on homeowners, but it could have consequences for the real-estate industry. Downward revisions would show that “this horrific downturn in the housing market has been even more pronounced than what people thought, and people already thought it was pretty bad,” said Thomas Lawler, an independent housing economist.

NAR said the data, which are used by economists, investors and the real-estate industry to gauge the health of the housing market, could be revised downward this summer. Lawrence Yun, chief economist at NAR, wasn't specific about whether and by how much the revisions could reduce reported sales, and he raised the possibility that the CoreLogic estimates have understated the number of home sales. “This is a very important issue, and we are looking at it carefully right now,” Mr. Yun said.

Economists say any overstatement is the result of difficulty tracking data during market corrections. “This is an economic data issue, not a gaming-the-numbers issue,” said Sam Khater, senior economist at CoreLogic. “Any time you get big shifts in the market, the numbers go haywire for a bit.”

Over the past decade, a growing number of housing-research firms have sprouted up, offering new ways to track home sales.

CoreLogic, which was spun off from First American Financial Corp. last year, measures sales by tracking property records through local courthouses. The firm says its data covers approximately 85% of all home sales tracked by NAR.

NAR, which is due to report January home sales on Wednesday, uses a sample of sales data reported by local multiple-listing services to calculate monthly changes in sales.

So CoreLogic actually counts them and the NAr uses some statistical voodoo to estimate them? Hmmm… I wonder whose methodology will prevail?

To produce estimates of annual sales, it uses a model that is benchmarked to the figures reported in the decennial U.S. Census. The model requires making certain assumptions for population growth and other measures in between the census surveys.

Those models could have over-counted sales due to recent consolidation among multiple-listing services, which has resulted in those firms having wider coverage of housing markets. NAR's tally could be distorted if the firms “are sending us more home sales because they have a larger coverage area, but without informing us” that their reach has grown, said Mr. Yun.

Because not every home sale goes through a multiple-listing service, NAR must also make additional assumptions. For example, it must estimate what share of transactions are “for-sale by owner,” and the housing downturn has sharply reduced that segment of the market. Consequently, the NAR could over-estimate sales if it hasn't properly adjusted for a smaller “for-sale by owner” share, said Mr. Yun.

NAR typically produces revisions of home-sales data at the end of every decade based on the latest Census survey data. But because the 2010 Census didn't ask U.S. residents about home sales, NAR must devise a new way to build its home-sales model.

So the NAr's methodology is rooted in a ten-year old piece of data that is no longer being collected? I think they have some significant revising to do.

Here's what I don't get. If every major retailer can operate a national database of their store inventory, why can't the NAr. Why can't the NAr simply query their database and tell us exactly how many homes sold, where they sold, and for how much? They try to make themselves valuable by being the purveyors of vital information, but they operate arcane systems and produce unreliable reports.

Several economists approached NAR late last year with questions about its modeling. NAR economists promised to study the issue during a December conference call that included economists from the Mortgage Bankers Association, Fannie Mae, Freddie Mac, the Federal Reserve, the Federal Housing Finance Agency and CoreLogic.

Economists from the Mortgage Bankers Association said they became skeptical after the MBA's index of mortgage-purchase applications appeared to be a less reliable indicator of home sales. The index had been closely correlated to NAR existing home-sales data until 2007. Even assuming a high share of all-cash sales, purchase-loan application data suggests that home sales have been overstated by 10% to 15%, said Jay Brinkmann, the MBA's chief economist.

“If they are off by this much, this consistently, it would be sending the wrong signal to the market,” said Mr. Brinkmann.

Downward revisions in existing home sales could have an impact on real-estate related businesses, but economists said it isn't clear that they would have a meaningful impact on the broader economy, which typically relies more heavily on new-home construction to drive growth.

Write to Nick Timiraos at nick.timiraos@wsj.com

Really, most rational people already knows the NAr is duplicitous. That's why realtors in used house sales are held in the same regard as slimeballs in used car sales.

Barry Ritholtz at the Big Picture had this to say to the realtors before this latest scandal:

Attention RE Agents: NAR Spin is Counter-Productive !

By Barry Ritholtz – September 1st, 2010, 9:15AM

We have had a god-awful run of Housing data. New and Existing Home Sales, Defaults and Foreclosure data, even the Case Shiller report — all have been utterly horrific.

In light of this, I want to make the following announcement: Attention RE Agents! The National Association of Realtors are doing you a terrible disservice.

Consider the following comments from a RE Agent, published exactly three years ago (September 4, 2007) in the Realty Times:

“The National Association of Realtors and your state association will always have published reports that sound better than what you are personally experiencing in the market. Please understand that they support us. They know that whatever they say will end up in public press. We do not need any more negative press! When you read reports that we have reached the bottom or that the market has actually gone up, take it with a grain of salt. Their job is to permeate the world with good news about real estate.”

In other words, mislead the public with spin. Create false hope. Lie. This agent was defending the National Association of Realtor’s blatant dishonesty — a mistake on its face — just as the damage they did began to have an effect.

What the NAR was offering to buyers, sellers, their agents, indeed, anyone involved with Housing, was the blue pill.

The sort of nonsense the Realtor’s group peddles helps explain why sellers have incorrectly believed a recovery was imminent, even as housing went through a historic collapse. It is why home owners incorrectly still expect their homes to go appreciate by 10% a year.

These false beliefs have real world consequences. They create ridiculous expectations among sellers, who selectively grab onto any positive news they can. They choose the temporary blissful ignorance of illusion — that damned blue pill — versus embracing the painful truth of reality (i.e., the red pill).

This confirmation bias leads sellers into mis-pricing the value of their homes. They have been a season or even a year or more behind the pricing curve the entire way down.

Ask any listing agent how difficult it is to get sellers to become realistic in their asking prices. Real Estate agents would be moving a helluvalot more houses if they were not fighting misinformation that the NAR has put into the marketplace. Many, many agents have confirmed that, even in this crummy environment, a good house properly priced will sell.

Here’s a question for you reality (vs NAR realty) agents. Ever wonder why you seem to be having such a hard time convincing sellers to set reasonable asking prices? Ever ponder why they have such a distorted sense of the true value of their homes? Ever try to get them to set reasonable asking numbers that are competitive with current market prices?

The short answer: NAR spin.

To see how bad this false NAR narrative has become, check out this new show on HGTV: “Real Estate Intervention.” The show’s hosts travel town-to-town in an attempt to convince homeowners to sober up, put the magic mushrooms away, and price their houses realistically. They literally drag these poor bastards to nicer comparable homes to theirs — better locations, bigger square footage, nicer kitchens — all in an effort to TALK SELLERS INTO REALISTIC PRICE POINTS. It staggers the imagination: A television show actually had to be created to counter-act the excess stupidity coming from the Realtor’s trade group.

Gee, where do you think sellers got these crazy ideas? Might the NAR, by encouraging a fantasy, be actually hurting the housing market as a whole?

Even the normally staid NYT has recognized how absurd the NAR spin has become. This past weekend, Joe Nocera began an article with the sentence: “You have to wonder sometimes what they’re smoking over there at the National Association of Realtors.”

When the Gray Lady asks if your economists are high, isn’t that are warning sign that you must make a major change? How on earth is having a reputation of being stoners good for the RE business?

And, buyers have figured out that the NAR news releases are unmitigated fantasy. They have learned that any organization that has to go to such lengths to spin bad news must know that the news is much much worse. The result has been a Real Estate buyers strike.

Here it is, three years after that lame defense of NAR spin, and we can see the damage that spin has wrought. It is readily apparent that the NAR has become counter-productive to the agents they are supposed to be serving.

No, the NAR is not supporting you. They are making your jobs much, much harder. They are spinning the public, and doing you an enormous disservice.

Try RealityTM! Its what is working these days.

Perhaps the NAr will implode or new blood within the organization will see the organizations role differently. What they need is a commitment to accuracy rather than a commitment to spinning. What should they do if it really isn't a good time to buy? Is a listing agent duty bound to lie for a client to convince a buyer the property is a good investment? Is a buyer's agent who pushes their clients into a sale serving or harming them?

The National Association of realtors has a belief pathology. A core belief is eating away like a cancer — buyers can-should-must be manipulated into purchasing a house. This core belief guides many of their programs, advertising campaigns, and general attitude toward both buyers and sellers. Based on their advertising, I would say they think buyers are stupid sheeple.

The not very assuring truth

Buying can still be a good choice even in a declining market. Buyers who are motivated to save on renting are the stabilizing force in any real estate market, and it is the activity of these buyers that ultimately turns the tide. Those who bought in 2008-2010 can still have positive outcomes, particularly if they hold for several years. Those who purchased knowing this reality made a conscious choice to buy even with the financial circumstances.

Not every real estate purchase need be motivated by obtaining appreciation. Some people bought knowing they were overpaying in a declining market because it was the right time for them and their family. They examined the financial implications of their decisions and did it anyway. That made the decision right for them whatever those of us on the outside might think.

Clear decision making made with real data almost always produces a good outcome. Every buyer deserves the opportunity to decide for themselves based on good information. Unfortunately, it isn't what buyers get from realtors.

(BTW, if you haven't seen it, Keith at Housing Panic made a new post after two years. It said to buy real estate.)

A Master HELOC Abuser

I was greatly impressed by the reliability and the amount of the housing ATM withdrawals by this owner. This house is a piece of crap. The guy who bought this in 2001 obviously didn't do much to it, so most of the HELOC booty was likely pissed away.

  • This house was purchased by the former owner on 9/18/2001 for $351,000. The owner used a $275,000 first mortgage a $40,800 second mortgage, and a $35,200 down payment.
  • On 4/10/2002 he refinanced with a $106,500 stand-alone second. This effectively withdrew his down payment and gave him some extra spending money.
  • On 8/27/2003 he refinanced with a $395,250 first mortgage.
  • On 5/13/2004 he refinanced with a $570,000 first mortgage.
  • On 4/27/2005 he refinanced with a $653,000 first mortgage.
  • On 2/28/2006 he refinanced with a $572,000 first mortgage and a $143,000 HELOC.
  • On 4/20/2006 he refinanced with a $636,000 Option ARM with a 1.25% teaser rate, and he obtained a $79,500 HELOC.
  • Total property debt is $715,500.
  • Total mortgage equity withdrawal is $399,700,
  • Total squatting time was about 18 months assuming the NOD was filed in a timely manner.

Foreclosure Record

Recording Date: 10/28/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/14/2009

Document Type: Notice of Default

The bank bought this at auction for $519,000 on 12/29/2010. Hard to say how bad their loss is on that Option ARM, but they will be lucky to recover half after all the fees have been paid off. And Irvine is one of the better recovery areas. Option ARM investors are getting wiped out.

Irvine Home Address … 5042 GREENCAP Ave Irvine, CA 92604

Resale Home Price … $534,900

Home Purchase Price … $519,000

Home Purchase Date …. 12/29/10

Net Gain (Loss) ………. $(16,194)

Percent Change ………. -3.1%

Annual Appreciation … 18.2%

Cost of Ownership

————————————————-

$534,900 ………. Asking Price

$106,980 ………. 20% Down Conventional

5.02% …………… Mortgage Interest Rate

$427,920 ………. 30-Year Mortgage

$111,009 ………. Income Requirement

$2,302 ………. Monthly Mortgage Payment

$464 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$89 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$2,855 ………. Monthly Cash Outlays

-$394 ………. Tax Savings (% of Interest and Property Tax)

-$512 ………. Equity Hidden in Payment

$209 ………. Lost Income to Down Payment (net of taxes)

$67 ………. Maintenance and Replacement Reserves

============================================

$2,225 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,349 ………. Furnishing and Move In @1%

$5,349 ………. Closing Costs @1%

$4,279 ………… Interest Points @1% of Loan

$106,980 ………. Down Payment

============================================

$121,957 ………. Total Cash Costs

$34,000 ………… Emergency Cash Reserves

============================================

$155,957 ………. Total Savings Needed

Property Details for 5042 GREENCAP Ave Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 2

Sq. Ft.: 1856

$288/SF

Lot Size: 5,000 Sq. Ft.

Property Type: Residential, Single Family

Style: One Level, Contemporary

Year Built: 1970

Community: El Camino Real

County: Orange

MLS#: P768698

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin: 11 days

——————————————————————————

NO HOA OR MELLO ROOS. 4 BD/2 BTH HOME, LIVING ROOM, FAMILY ROOM WITH FIREPLACE, CROWN MOLDING, 2 CAR ATTACHED GARAGE WITH LAUNDRY HOOK UPS, SCRAPED CEILINGS. NEEDS SOME TLC.

Foreclosure's economic impact and the Great Recession

The academic paper i am reviewing today attempts — and fails — to accurately define and describe a relationship between foreclosures and the economy.

Irvine Home Address … 12 SANTA RIDA Irvine, CA 92606

Resale Home Price …… $859,000

Brain damage, ever since the day I was born

Drugs is what they used to say I was on

They say I never knew which way I was goin

But everywhere I go they keep playin my song

Eminem — Brain Damage

Academic writing is the only endeavor that you can take common sense, mathematically measure it, statistically analyze it, pompously write about it, and still get it completely wrong. The academic article featured today attempts to take a common sense idea — foreclosures impact house prices and the economy — and try to find some relationships that may have predictive power. They failed. They failed because they didn't properly identify causation.

Correlation is not causation

Have you heard the term post hoc ergo propter hoc? It means that just because something follows an event doesn't mean the first event caused the other. The error the authors make today is rooted in the same problem.

These authors have identified foreclosures as a causal event or circumstance which leads to other economic woes. In fact, foreclosures are another symptom of the same underlying problems — excessive debt, toxic mortgages and borrower insolvency. Foreclosures do not cause indebtedness. But excessive indebtedness is the cause of all our economic problems including foreclosures.

The bubonic plague analogy

Let's say we are doctors examining the circumstances and conditions surrounding bubonic plague, also known as the black death. Doctors noticed bulbous lesions called buboes patients often displayed before becoming very ill and dying. It would be reasonable to postulate that the buboes were the cause of death. They weren't. The nasty black buboes are merely another symptom of the disease.

in the same way, foreclosures aren't the cause of anything. People taking on excessive debts under terms with onerous and sometimes escalating payments is the root cause of all the woes in the housing market. Lenders created more debt than current incomes can support under stable terms. When the system collapsed, many borrowers became financially distressed and stopped making their mortgage payments. Mortgage delinquency is at the core of our economic problems.

Mortgage delinquency can be caused by excessive debt or borrower distress. The excessive debts of the Ponzis would have taken out the housing market even if the collapse didn't spill over into other areas of the economy. However, the implosion of the Ponzis did cause widespread economic pain because the loss of consumer spending and the dramatic decline in the demand for real estate. Therefore, the excessive debt distressed an entire class of borrowers who may or may not have been as irresponsible as the Ponzis.

Mortgage delinquency may or may not cause a foreclosure. A certain amount of mortgage distress is always present in the market. Usually, when people get into financial trouble, they simply sell their house, pocket the equity, and go on with their lives. No foreclosure. However, once prices start to fall, people submerge beneath the surface of their debts, and they can no longer sell into a rising market. With resale not being an option, many more foreclosures occur.

Since mortgage delinquency is the real problem, and since foreclosures are an incidental byproduct that only occurs when market conditions are bad, foreclosures are not the direct cause of anything. Also, not all delinquent borrowers have become foreclosures as lenders are building a huge shadow inventory of delinquent mortgage squatters, and not all foreclosures make their way onto the MLS immediately as lenders often take their REO off the market hoping for better days.

Distressed resales lower prices, and foreclosures often become distressed resales. This relationship is direct. Lenders know this, so they are withholding inventory from the market to prevent prices from going any lower. Further, lower prices prompts more of the marginally distressed loan owners into default creating an indirect impact and a self-reinforcing downward spiral.

Notice that foreclosures, though a big part of the story, are not a direct causal factor for much of anything. Keep the plague analogy in mind as you sift through the academic formalities.

Foreclosures, house prices, and the real economy

Atif Mian, Amir Sufi, Francesco Trebbi

10 February 2011

Several academics, policymakers, and regulators emphasize the role of foreclosures in the Great Recession and subsequent global crisis. This column provides one of the first attempts to show this empirically. Using micro-level data from all US states, it shows that foreclosures had a significant negative effect on house prices, residential investment, durable consumption – and consequently the real economy.

How does a negative shock to the economy get amplified into a severe and long-lasting economic slump? The answer may be found in your house. An extensive body of theoretical research shows that the forced sale of durable goods – in many cases a house – can have two undesirable consequences. First, the price of these goods is driven down. Second, these negative price effects can lead to a significant decline in real economic activity (see for example Shleifer and Vishny 1992, Kiyotaki and Moore 1997, Krishnamurthy 2009, Lorenzoni 2008, and Shleifer and Vishny 2010 for a recent discussion). Indeed, many academics, policymakers, and regulators have emphasized these models in building an understanding of the recession of 2007 to 2009.

To the first point i say, “duh!” forced sale of any good means taking the highest offer no matter how low that offer is. Of course that pushes prices down.

To the second point, if an entire industry is geared toward the production of the asset crashing in price, it stands to reason that a significant economic decline will ensue.

These two points are not where i differ with their findings. It's when we dive into the details of causation that a disagreement arises.

Unprecedented foreclosures

In recent research (Mian et al. 2011), we examine this idea in the context of the recent rise in foreclosures in the US. We ask to what extent this has been responsible for the recent collapse in house prices and the fall in durable consumption and residential investment – important factors in determining major macroeconomic fluctuations (Leamer 2007).

The stylised facts suggest a correlation at the very least. The top left panel of Figure 1 shows that aggregate foreclosure filings in the US increased from 750,000 in 2006 to almost 2.5 million in 2009. While we do not have data on foreclosures before 2006, the mortgage default rate increased above 10% in 2009, which is more than twice as high as any year since 1991. By any standard, the recent US mortgage default and foreclosure crisis is of unprecedented historical magnitude.

This sharp rise in foreclosures has been accompanied by large drops in house prices, residential investment, and durable consumption. As the top right panel of Figure 1 shows, nominal house prices fell 35% from 2005 to 2009. The drop in residential investment from 2005 to 2009 shown in the bottom left was larger than any drop experienced in the post World War II era. The drop in durable consumption is also large, but more comparable to recent recessions.

Figure 1.

These authors don't mention the effect of HELOC abuse — because they probably don't realize how important or widespread it really was. People spending their homes is where the action was at. The lack of mortgage equity withdrawal is also why the economy is in the doldrums.

Empirical strategy

A glance at the aggregate data may lead to the conclusion that foreclosures have an obvious negative causal effect on house prices and therefore real economic activity. But isolating a causal effect of foreclosures on house prices is a significant challenge because house price declines or other negative economic shocks will lead to a rise in foreclosures. Or in other words, how do we know that foreclosures are the cause of declining house prices and economic weakness rather than an effect?

You don't because they aren't.

Our empirical strategy is designed to isolate as accurately as possible the causal effect of foreclosures on house prices and the broader economy.

No, what they are really doing is looking for correlations and hoping they find some causal link. In this instance, they picked the wrong causal factor.

We start with a micro-level data set covering the entire US from 2006 to end 2009 with information on house prices, residential investment, auto sales, mortgage delinquencies, and foreclosures. We have all of these variables at the zip code-year level, with the exception of residential investment and auto sales which are at the county-year level.

I would love to see a study on mortgage delinquency as the casual factor. Of course, with amend-extend-pretend and shadow inventory, the direct relationship which exists probably breaks down in early 2008. However, mortgage delinquency started the chain of events the caused this national catastrophe.

Our strategy to isolate the effect of foreclosures on outcomes relies on variation in foreclosures that is driven by state rules on whether a foreclosure must take place through the courts (a judicial foreclosure). In states that require a judicial foreclosure, a lender must sue a borrower in court before conducting an auction to sell the property. In states without this requirement, lenders have the right to sell the house after providing only a notice of sale to the borrower (a non-judicial foreclosure). Figure 2 maps out those states with different rules. As first highlighted in the economics literature by Pence (2006), the 21 states that require judicial foreclosure impose substantial costs and time on lenders seeking to foreclose on a house.

Figure 2.

Nice map of the judicial versus non-judicial states. It may tells us something about how long it takes a property to go through foreclosure, but it provides little else of value.

Foreclosures and house

Using this instrumental variable approach, we find that foreclosures have a substantial effect on house prices. Our state-level baseline estimate suggests that a one standard deviation increase in foreclosures in 2008 and 2009 leads house price growth to be two-thirds of a standard deviation lower over the same period.

What they have found is a correlation without direct causation.

Our estimate of the effect of foreclosures on house price growth is robust to extensive controls for demographics and income differences across states. All specifications explicitly control for the effect of mortgage delinquencies on house prices. In other words, our estimate captures the incremental price effect of foreclosures above and beyond delinquencies. In addition, the effect is robust to the use of either the Fiserv Case Shiller Weiss or Zillow.com house price indices.

I wish I were smart enough to understand how their study manages to isolate the impact of foreclosures above and beyond the delinquency that caused the foreclosure. I don't think it can be done because the causation does not exist.

We also employ a zip code-level border regression discontinuity specification that is similar to the specification that Pence (2006) uses for credit. This specification allows us to compare zip codes that are very close to each other in geographical distance and observable characteristics. Consistent with the state level correlations, there is a sharp increase in the foreclosure rate as one crosses the border from a judicial requirement state into a state with no judicial requirement. However, there is no similar jump in other observable variables as one crosses the border. Focusing only on zip codes that are very close to the border between two states that differ in judicial foreclosure requirement laws, we find similar two-stage least squares estimates of the effect of foreclosures on house prices. The similarity of the results using the zip code-level design mitigates omitted variable concerns in our other regressions.

That paragraph as loaded with some serious jargon (and bullshit). It would be interesting to see a study of judicial versus non-judicial foreclosure in a market where the substitution effect across boundaries came into play, perhaps Alexandria, Virginia versus some nearby Maryland zip codes.

Our results confirm that foreclosures have a strong negative effect on house prices that goes beyond a simple correlation.

Again, their results are wrong because they have identified the wrong causal factor.

Foreclosures, investment, and consumption

We then turn to residential investment and durable consumption. Employing a similar two stage least squares estimation strategy, we find that a one standard deviation increase in foreclosures per homeowner leads to a two-thirds of a standard deviation decrease in permits for new residential construction. Further, a one standard deviation increase in foreclosures leads to a two-thirds of a standard deviation decline in auto sales. Our estimates are robust to controls for demographics and income.

We use our microeconomic estimates to quantify the aggregate effects of foreclosure on the macroeconomy. Our estimates suggest that foreclosures were responsible for 15% to 30% of the decline in residential investment from 2007 to 2009 and 20% to 40% of the decline in auto sales over the same period.

Think about what they are saying logically. Wouldn't it make more sense that residential investment would decline when prices crashed? How are homebuilders supposed to run their businesses when the sale price of their product was in freefall? Who were they going to sell those homes to? The foreclosures didn't cause the homebuilders to pull back on new construction. A lack of sales did that.

Mortgage delinquencies and distressed sales — many of which were foreclosures — did cause prices to go down which in turn created the circumstances where builders were not incentivized to spend on residential investment. The decisions of homebuilders lowered residential investment. Foreclosures were only part of the mix that occurred in the same time period — correlation without causation.

One advantage of our study relative to the existing literature is comprehensiveness. Our analysis covers the entire US as opposed to one state or one city and we examine foreclosures all the way through the to the end of 2009. We are also the first to use state laws on judicial requirement for foreclosure to identify the effect of foreclosures on house prices – the importance of an instrument for foreclosures has been highlighted throughout the in the literature. Further, to the best of our knowledge, we are the first to examine the effect of foreclosures on real economic activity.

Foreclosures and the Great Recession

It is important to emphasise that we do not take a stand on whether foreclosures help to bring house prices, durable consumption, or residential investment closer to or further from their long-run socially efficient levels.

That is a shame. This is the main reason foreclosures are a good thing. If the market were allowed to follow its natural course, we would have seen a violent drop in prices followed by a sustained recovery. As it stands, we abbreviated the fall and now we will endure a longer and slower drop.

For example, in the absence of foreclosures, house prices may display downward rigidity given loss aversion (Genesove and Mayer 2001). Alternatively, house prices may be kept above their socially efficient level by government support.

I think we have seen plenty of government support.

Further, it is conceivable that the declines we document would occur in the long run even in the absence of foreclosures;

Yes, since mortgage delinquency is the real root cause, the foreclosures are not necessary to make prices go down. In fact, with the amend-extend-pretend policy at the banks, we have not seen near as many foreclosures as we should have given the high level of mortgage delinquency.

it is also conceivable that states where foreclosure is relatively easy will experience a faster housing recovery.

IMO, due to the extensive shadow inventory, the speed of judicial processing is not a big deal. Lenders don't want to process foreclosures quickly. They want to bury their heads in the sand.

But our estimates suggest that foreclosures lead to more abrupt declines in these outcomes than would be observed in the absence of foreclosures, and these declines are likely to be more painful in the midst of a severe recession. This is consistent with the amplification mechanisms emphasized in Kiyotaki and Moore (1997) and Krishnamurthy (2003). We believe that these results demonstrate a direct connection between a financial friction – forced sales induced by foreclosures – and a reduction in residential investment and durable consumption during and after the recession of 2007 to 2009.

Our estimates of the effect of foreclosures on residential investment and auto sales can partially explain both the magnitude and length of the recession of 2007 to 2009. For example, the sharp rise in foreclosures began relatively late in the recession and continues into 2010. If we combine this fact with the finding in Leamer (2007) that residential investment is among the most powerful components leading the US out of recession, it is possible to argue that foreclosures have likely contributed to the length of the recession and sluggishness of the recovery. Similar arguments apply to our findings on auto sales.

Leamer (2007) identifies durables as the part of consumer spending with the strongest negative affect on economic growth during recessions . Under the assumption that our results on auto sales extend to the entire durable goods share of the economy (23.6 % of GDP in 2008), foreclosures can explain the relatively sluggish growth in durables well into 2010. Given that the 2007 to 2009 recession and its aftermath have been closely related to depressed levels of durable consumption and residential investment, our results thus highlight an important role for foreclosures and house prices in understanding weakness in the economy.

Foreclosures one of the symptoms of our national mortgage debt disease. This debt needs to be reduced, and foreclosure is a superior form of principal reduction. Far from being the cause of our ills, foreclosures are essential to the economic recovery.

The fix is in

Whenever I see a property priced under market go pending in a single day, I am suspicious. Did the seller really get the highest and best price? Or did a shady listing agent steer the sale to a favored buyer in exchange for a kickback? I have no idea if anything nefarious happened with this property, but the transaction does look rather strange.

The owner of today's featured property paid $978,000 back on 6/1/2004. The owner used a $782,400 first mortgage, a $100,000 second mortgage, and a $95,600 down payment. On 9/30/2005 he opened a $176,100 HELOC. Since this HELOC matches the loss on the sale after commissions, the negotiations between the second mortgage holder and the borrower are at the forefront of this transaction.

Fast forward nearly seven years, and this house is now selling for a 15% loss. Not to worry, the owner hasn't make a payment in nearly two years, and the bank doesn't seem to be in a hurry to foreclose. Realistically, even if the deal is shady, the bank is probably better off than going through foreclosure and recovering even less.

Foreclosure Record

Recording Date: 03/23/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/24/2009

Document Type: Notice of Default

Irvine Home Address … 12 SANTA RIDA Irvine, CA 92606

Resale Home Price … $859,000

Home Purchase Price … $978,000

Home Purchase Date …. 6/1/04

Net Gain (Loss) ………. $(170,540)

Percent Change ………. -17.4%

Annual Appreciation … -1.9%

Cost of Ownership

————————————————-

$859,000 ………. Asking Price

$171,800 ………. 20% Down Conventional

5.02% …………… Mortgage Interest Rate

$687,200 ………. 30-Year Mortgage

$178,270 ………. Income Requirement

$3,697 ………. Monthly Mortgage Payment

$744 ………. Property Tax

$278 ………. Special Taxes and Levies (Mello Roos)

$143 ………. Homeowners Insurance

$50 ………. Homeowners Association Fees

============================================

$4,913 ………. Monthly Cash Outlays

-$905 ………. Tax Savings (% of Interest and Property Tax)

-$823 ………. Equity Hidden in Payment

$336 ………. Lost Income to Down Payment (net of taxes)

$107 ………. Maintenance and Replacement Reserves

============================================

$3,629 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,590 ………. Furnishing and Move In @1%

$8,590 ………. Closing Costs @1%

$6,872 ………… Interest Points @1% of Loan

$171,800 ………. Down Payment

============================================

$195,852 ………. Total Cash Costs

$55,600 ………… Emergency Cash Reserves

============================================

$251,452 ………. Total Savings Needed

Property Details for 12 SANTA RIDA Irvine, CA 92606

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2535

$339/SF

Lot Size: 5,504 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Other

Year Built: 1997

Community: Westpark

County: Orange

MLS#: S646668

Source: SoCalMLS

Status: Backup Offers Accepted

On Redfin: 12 days

—————————————————————————–

Great Corner Lot location and bright Single Family Residence. First floor bedroom. 3 Car Garage with long drive way. Walking distance to schools and shopping centers. Close to I-405, I-5, John Wayne Airport, Irvine Spectrum and South Coast Plaza.