Out and About - Woodbury

Since this is an off-duty weekend for me (the ex has my little guy) I was able to feed my open house/model home habit for a little while this afternoon. I ran some errands from my (rental) home in Westpark through Woodbridge on my way to Woodbury. I noticed a paucity of Open House signs as compared to recent weekends. It's Saturday, and Sundays appear to be more popular for Open Houses in Irvine, so that might be one cause. Perhaps Realtors have some Open House fatigue, too. What with the summer just past, weekend after weekend sitting in the same Brady Bunch houses, they're probably a little depressed! (I sure would be!).

So I turned into Woodbury from the new Sand Canyon entrance. The city recently finished rehabbing Sand Canyon in that area and it's great - nice and new and wide. I drove by the La Casella sales office, noticed it was open, did a U-turn and pulled into the parking lot. There were 4 other cars there. Assuming one was the sales person's, this place was practically hopping compared to my recent observations of Woodbury's sales offices!

The lone sales guy at La Casella was rather strange. For starters, he didn't look like your average (i.e. professional dress, borderline haughty demeanor) home sales guy. He had lots of facial hair and kind of babbled at me when I asked for an information sheet. He told me the townhomes started at $730k and went to $900k and the way he explained it, made me think I wasn't going to be getting an information sheet! He ended up giving me one, mutttering something about some people quickly leaving without even looking at the models after being told the prices. So he was actually trying to make sure I was not one of those door darters before giving me a propaganda brochure and price sheet! Hmmm, is this a cost-savings thing I wonder?

Anyway, I went into the $730k plan first (actually listed as $735 on the sheet). It's a Lennar "Everything Included" home. Single story, very nice. The casita thing, though, is a hate it or love it gamble on Lennar's part, in my opinion. It's the third bedroom/bath, completely detached from the house, across the cute little courtyard which has an outdoor fireplace standard in it. The garage is also detached, in that you have to go through your private courtyard in order to get into the casita or the main house.

The casita thing would be fantastic for me if it had a kitchenette, so I could rent it out. Otherwise, it strikes me as kinda weird. And for that much money, I want my garage to be ATTACHED!

I went through the two larger models pretty quickly. Standard stuff - very nice, but not worth $835k and $890k!

As I departed through the sales office the salesguy called out to me "That was fast!" Uh, yeah.

The information sheet lists Irvine High, not Northwood, as this development's high school. Hmmm, I had thought that all of Woodbury would feed into Northwood. I'll need to be careful if I ever do buy into Woodbury - Northwood is the only high school in Irvine that I'd want my boy to attend.

I stopped off at just more one more place in Woodbury since I needed to do a Target run. 81 Mission, a Treo Plan 2. The Realtor's flyer had "$819,000" crossed out and $799,000 handwritten underneath. This was actually the first home I have been to in Woodbury that I really do NOT like. It feels a LOT older than it really is. Maybe that's because the owners apparently chose not one single upgrade - plain carpeting, linoleum, and a barren side yard made this feel more like a plain-vanilla apartment than a Woodbury house. I wouldn't buy this house even if the price dropped a full 50%.

It's kind of strange - even as the Commons and the shopping center get closer to completion, I find myself less and less enamored of Woodbury. This time last year I was practically obsessed with the place. I didn't buy for two reasons: my son's current daycare is in Westpark and I want to keep him there for a while (and I choose to live very close to it) and of course, I saw the bubble popping clear as day. Could it be because Portola Springs is even newer and is more topographically interesting? (Woodbury is flat, flat, flat, whereas Portola Springs is in the hills and has some nice views). Or could it be because my desire for a lake view has increased? (hello, Lake Mission Viejo!).

Preventing the Next Housing Bubble - Part 2

Regulatory Solutions

The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed discussion of the text follows:

Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:

1. 1.       All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
2. 2.       The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
3. 3.       The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
4. 4.       The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.

Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower’s right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.

Preventing the Next Housing Bubble - Part 1

Preventing the Next Housing Bubble

The pain of the deflation of a housing bubble cannot be avoided by trying to keep the bubble inflated, or by trying to deflate it slowly. The only way to avoid these problems is to prevent the bubble from inflating in the first place through some form of intervention in the mortgage market. Intervention can take the form of a market-based intervention demanded by investors and ratings agencies, and it can also come about through direct government regulation.

Necessary Intervention

The regulated free-market system in place at the turn of the millennium allowed the creation of the Great Housing Bubble. Some combination of market-based and regulatory reforms is necessary to prevent the same circumstances that created the bubble from creating another one; it is imperative to prevent the next bubble in order to avoid the problems from the bubble’s deflation. [iii] The kind of intervention proposed here is not a bailout plan. A substantive bailout plan to rescue homeowners would be fraught with problems and unintended consequences. In September of 2008, the banking system neared collapse due to the problems of the fallout, and a banking system bailout became necessary. This outcome argues more forcefully for an intervention to prevent future bubbles from occurring in the housing market.

Buying and Selling During a Decline

Buying and Selling During a Decline

During the bubble price rally, sellers and realtors, the agents of sellers, had everything going their way. It was easy to price and sell a house. A realtor would look at recent comparable sales, and set an asking price 5% to 10% higher and wait for multiple bids on the property–some of which would come in over asking. The quality of the property did not matter, and the techniques used to market and sell the property did not matter either. As far as buyers and sellers were concerned house prices always went up, so the sellers were thought to be giving away free money; obviously, the product was in high demand. As the financial mania ran its course, buyers became scarcer; all the ones who could buy did buy. The buyer pool was seriously depleted leaving prices at artificially high levels. When the abundance of sellers became greater than the number of available buyers qualifying for financing, prices began to fall.

Residential real estate markets generally move very slowly and trend in a single direction for long periods of time. Once these markets reach an inflection point, the direction of price movement changes, and the balance of negotiating power shifts from an advantage to one side to an advantage for the other. However, most market participants do not recognize this change for some time. Sellers continue to price and attempt to sell using tactics that worked during the rally, and they find they are unable to sell their properties. It often takes two years or more before sellers accept the reality of the new market and adjust their attitudes and behaviors to the new dynamics of a buyer’s market.

Future House Prices - Part 3

Price Decline Influences

There are a number of factors that will influence the timing and the depth of the price decline. There are a number of psychological factors and technical factors in play. [1] These include:

• Smaller Debt-to-Income Ratios
• Increasing Interest Rates and Tightening Credit
• Higher Unemployment
• Foreclosures
• Decrease in Ownership Rates
• Government Intervention

Smaller debt-to-income ratios impact the market because buyers tend to put a smaller percentage of income toward housing payments during price declines. Increasing interest rates decrease the amount borrowers can finance and use to bid on real estate, and tightening credit decreases the size of the borrower pool and thereby lowers demand. A deteriorating economy and higher rates of unemployment means there are fewer buyers with the income to purchase homes, and more homeowners are put in financial distress. High rates of financial distress caused by unemployment or the resetting of adjustable rate mortgages in a higher interest rate environment leads to more foreclosures. Large numbers of foreclosures adds to market inventories and works to push prices lower. The ultimate unknown factor is the meddling of the US Government in the financial markets. A bailout program for homeowners or lenders could radically alter the course of price movement.

Future House Prices - Part 2

Price-to-Income Ratio

Since incomes and rents are closely related, evidence for the Great Housing Bubble that appears in the price-to-rent ratio also appears in the price-to-income ratio. National price-to-income ratios are quite stable. There has been a slight upward drift with the decline of interest rates since the early 1980s peak, but from the period from 1987 to 2001, this ratio remained in a tight range from 3.9 to 4.2. The increase from 4.1 to 4.5 witnessed from 2001 to 2003 can be explained by the lowering of interest rates; however, the increase from 4.5 to 5.2 from 2003 to 2006 can only be explained by exotic financing and irrational exuberance.

Future House Prices - Part 1

Future House Prices

For all our wisdom and collective experience, none of us knows what the markets will do next. Like an ocean current or a raging river, a financial market charts its own course. It is fickle and feckless and flows without regard to our hopes and dreams. The ebbs and flows of financial markets are meaningful to us, but in reality they are just movements in price; nothing more. Price rallies make homeowners blissful and renters bitter, while price declines make homeowners gloomy and renters gleeful. These feelings and emotions are independent of movements in price. The market just moves, that is all it does. It is benign, yet dangerous; it is indifferent, yet demonstrative; the market is a paradox which we must simply accept.

During the rally of the Great Housing Bubble, buyers did not concern themselves with the day they were going to become sellers. Why would they? There was an endless demand for properties, and buyers were paying whatever was asked. If they wanted a price above current market values to pay off a loan, all they had to do was wait. Once the bubble burst and home prices started to decline, the conditions people were accustomed to during the rally dramatically changed. Anyone considering buying a home in the aftermath of a crash should think about the buyer who is going to buy their home from them at some point in the future, and more specifically, what debt-to-income ratio and loan terms this future buyer will utilize. This is important, because the amount of money this take-out buyer will pay for the home is completely dependent upon these variables. At most, a house is only worth what a buyer can pay for it. In a declining market with few qualified buyers, many of those qualified buyers will only make offers if the deal is exceptional or simply wait for further price declines.

In a market environment where prices are detached from fundamental valuations, bubble buyers face a daunting challenge just to break even on their purchase when the time comes to sell it. A future buyer must have favorable borrowing terms allowing for a high degree of leverage or they may not be able to borrow the prodigious sums borrowers during the bubble rally were able to obtain. If a future buyer is not able to borrow as much with their income as bubble buyers, then wages must increase over time to permit future borrowers to borrow the same sum and allow a bubble buyer to avoid a loss. Unfortunately, it will take many years for wages to catch up to bubble prices. Even when this occurs, and a seller can recover their purchase price, inflation will have diminished the value of those dollars. If the prices are adjusted for inflation, many bubble buyers will never see an inflation adjusted breakeven price.