We all want affordable housing. There are numerous government programs designed to provide low-cost rental and ownership properties to people in all walks of life. Lenders, builders, realtors and buyers all benefit from affordable housing because affordability means an increase in transaction volumes and more money into the pockets of those dependant on the real estate market. The difficult problem with affordable housing is how to provide it without making it unaffordable. Finance is not the answer.
Most of those who worked in the mortgage business really believed the "financial innovation" meme. I have contended that the entire idea is a fallacy. At its core, the belief among financiers is that affordability products reach more customers and permit home ownership for a larger number of people. The statistics during the Great Housing Bubble seem to warrant this enthusiasm.
Home Ownership Rates from 1984-2005
Unfortunately, increasing the home ownership rate also dramatically
increased prices and created an unsustainable bubble in both. Why is
that? As with all macroeconomic concepts, it emerges from the
microeconomic circumstances of individual borrowers and buyers. If you
look back to the lending practices which endured the crash of the last
housing bubble in the late 80s, you see that the financing arena was
dominated by 30-year conventionally amortizing loans with 20%
downpayments and conservative debt-to-income ratios. This is the only
loan program that has relatively low default rates even if prices
decline. So what happens when a new "affordability" product is introduced into this stable system?
Detailed stats on the Irvine housing market are something we are always
interested in. The Inventory number in the sidebar comes from
ZipRealty. A chart of those numbers shows some interesting trends. We also have some great resources provided by ipoplaya and IrvineRealtor.
A new resource we just learned about are the Neighborhood Analytics that Redfin launched. Irvine charts available after the jump...
Do you remember the days when a relatively low-priced property would bring out the knife catchers and get bids over the ask? Those days appear to be behind us. The price on today's featured property was dropped $100,000 at the beginning of the month, and it is still there. It is discounted 30% off its 2005 purchase price which likely represents almost 35% off the peak valuation. With another $70,000 to $90,000 off, this property would be at rental parity. Prices are still free fallling, but at least a potential bottoming figure is in sight. To be honest, I did not think we would be seeing prices like this in 2008.
What were the guys over at IndyMac smokin'? I recently spoke with two developers who have looked at the IndyMac portfolio of large loans. They both said it was nearly impossible to value because it was such an eclectic mix of properties with appraisals of dubious quality. There is a great post at Appraisers Forum on the nonsense over at IndyMac. In residential home lending, IndyMac had positioned itself as the leader in Alt-A loans.
Tanta at Calculated Risk has a great discussion in her post Reflections on Alt-A. Her basic premise is that Alt-A was never a good business plan. Alt-A loans were generally stated-income and low-doc loans given to people with high FICO scores. The theory was that people who could be responsible with normal debts could do just as well with enormous debts. It isn't working out too well, particularly for IndyMac.
One of the intriguing ideas from her post is that Subprime will return, albeit in a different form. There has been much discussion about how people who have gone through foreclosure will get back into the housing market. Subprime was originally intended to take people with poor FICO scores that had good income and savings and give them bridge financing until they could repair their FICO scores and refinance into conventional loans. This business model will probably return in a few years as there will be many people in this category. However, Alt-A is likely dead, and it will not be resurrected. Stated-Income, High CLTV, and low or no-doc loans will probably not resurface no matter how good a persons FICO score is simply because people will default on these loans not matter how responsible their past history.
So where does that leave Irvine's housing market? Without Alt-A, people will not be able to get the loans necessary to support today's still-inflated prices. Buyers will actually need to qualify for loans based on their real income, and they don't make that much money. And since many previously Alt-A borrowers have defaulted and are now Subprime, and since Subprime is currently defunct, the buyer pool in Irvine has gotten much, much smaller.
Today's featured property is a simple story of speculative greed, Alt-A financing and the aftermath of years of irresponsible lending. The buyer used 100% financing and defaulted when prices didn't go up. IndyMac foreclosed on its first mortgage and wiped out the second. They are now trying to sell the house to recover the value of their first mortgage, and they are over market. The only mystery remaining is how much of their first mortgage they stand to lose.
