The big story of the weekend seems to be the "conservatorship" of Freddie Mac and Fannie Mae. The American taxpayer will now be liable to pay for all the losses on the toxic mortgages these two poorly-run entities insured.
This is the bottom line: Freddie Mac and Fannie Mae and insured billions of dollars in toxic mortgages. The losses on these mortgages will end up exceeding the amount of money these companies have. If these companies were to go out of business, the entire secondary mortgage market would collapse, and our real estate markets will be in turmoil as transaction volume would plummet from its already anemic levels. The government believes it has to take over these companies in order to have a secondary mortgage market. A government takeover means the taxpayers of the United States just became liable for all the losses on the bad loans insured by these two companies. When you pay your taxes, you are now paying for a portion of all the bad mortgages given to speculators, flippers, fraudsters and the like.
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It started off so well They said we made a perfect pair I clothed myself in your glory and your love How I loved you, How I cried... The years of care and loyalty Were nothing but a sham it seems The years belie we lived a lie I love you 'til I die Save me, save me, save me I can't face this life alone Save me, save me, save me... I'm naked and I'm far from home
The slate will soon be clean I'll erase the memories To start again with somebody new Was it all wasted, All that love? I hang my head and I advertise A soul for sale or rent I have no heart I'm cold inside I have no real intent Save me, save me, save me I can't face this life alone Save me, save me, ooooohhhhh... I'm naked and I'm far from home
Each night I cry I still believe the lie I'll love you, 'till I die
Save me, save me, oh, save me Don't let me face my life alone Save me, save me, ooh... I'm naked and I'm far from home
Today's featured song was sent by a local musician who is an avid reader of the blog. I bet you can guess his name...
The crash at the end of a speculative bubble can be brutal. So far, the price decline in Irvine has been measured and orderly compared to the drops in less desirable markets. I was recently looking at properties in the Palm Springs market, and I found some of the new neighborhoods that were the carnage is simply breathtaking. Check out some of these listings at around 50% off their new home sales price of 2 years ago:
I could list more, but I think you get the point. The Palm Springs market may have some chance of recovery as baby boomers may want to go here when they begin to retire soon. If you want to see carnage in a market that is not likely to recover any time soon, take a look at Hemet/San Jacinto:
The interesting thing about all of these properties is that they are selling for less than replacement cost. With asking prices around $85/SF, that is the cost of construction of the box itself. Even if the lots were free, a builder could not build and sell a house on it and make any money. There will be no new construction in these markets until prices rise above replacement costs, and then it will only occur on already finished lots selling at an extreme discount. There will be no new development or construction of finished lots until prices rise back above $130/SF. That is about 50% above current values. As you can see, replacement cost does not put a floor below prices. Ultimately, the lack of new construction will create a shortage, and prices will rise due to supply constraints (assuming the financing is available). However, since we overbuilt in many of these fringe markets, it will take some time to absorb all the existing inventory.
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stacked behind the door are the photographs of yours. in the basket
down the hall there's a soccer shirt that i borrowed.
the end isn't the
end. the end isn't the end of this.
picking out the darkened hair from
each and every happy moment. i've come to terms that have been laid
bare, quiet sleeping angels in my bed.
the end isn't the
end. the end isn't the end of this.
so don't you disappoint yourself
again, you'll be back home.. you disappoint yourself
again, you'll be back home.. you disappoint yourself
again, you'll be back home.. before too long..
these discussions with
myself, the kinds of things that don't tend to help. pacing back and
forth with my guitar, looking way up high on a shelf.
This week in the comments, we joked about new lending programs for the next real estate bubble. MalibuRenter, the gentlemen who helped with the content editing of my upcoming book, makes a living patenting financial products (among other things). The following is an idea for a new patent (tongue in cheek).
Lending during the Great Housing Bubble was too messy. There were too many loan programs. Since real estate always goes up, and since people want immediate access to this appreciation to spend it like income, a new loan product which readily provides this money is in order. The Option ARM was a major innovation. By allowing for negative amortization, people were able to add to their loan balance and effectively "cash out" their equity. The problem with this loan program is that it didn't go far enough -- people still had to make payments, and they had to get HELOCs to extract the remainder.
The new loan program I am proposing is called the "Pay You" loan, or PU for short. The PU loan has no payment of any kind. The total amount of interest each month is added to the loan balance. Further, appreciation in excess of this monthly interest is sent to the borrower each month. Rather than pay for an updated appraisal each month to determine value, an automated reappraisal system which looks at the current pricing of comps can accurately determine the current market value. Since homes now pay cash to owners each month, home ownership would be very desirable, and home prices should rise steadily far in excess of the monthly interest cost. With automated appraisals, little additional servicing costs would be required. Also, lenders would find the monthly service fees an attractive feature, so they would readily peddle the PU loan to any borrower who wanted it, and since borrowers are actually being paid to own their home, everyone would want to enroll in the program.
These loan programs would be very attractive to investors because the interest income would be booked as profits, and since the balance is growing each month, the interest income gets compounded. The main problems investors in mortgage loans have is that borrowers often pay back these loans early, and the balanced decline over time. Therefore, they do not receive the rate of return reflective of the stated interest rate. With the PU loan, investors actually get a greater return due to the compounding effect. The early payback is not a problem because even if a borrower sells a home, they will quickly buy a new one to get back on the home appreciation gravy train. The PU loans may even allow for assumability and portability so the loan doesn't need to be closed out when a buyer wants to move up or sells. It is a panacea.
Now we just need home prices to always go up...
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I call you,when I need you my hearts on fire You come to me, come to me, wild and wild
You come to me, give me everything I need Give me a lifetime of promises and a world of dreams Speak the language of love like you know what it means And it cant be wrong, take my heart and make it strong, baby
Chorus: Youre simply the best, better than all the rest, better than anyone, anyone Ive ever met! Im stuck on your heart, I hang on every word you say Tear us apart, baby I would rather be dead
In your heart I see the start of every night and every day In your eyes, I get lost, I gte washed away Just as long as Im here in your arms I could be in no better place...
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...
Sometimes you see a property where the asking price simply cannot be explained as anything other than greed. This weekend's featured property falls in this category. It has been on the market for 580 days! Do you think they might have been able to lower the price and move it by now? These owners have been very conservative with their mortgage, they have paid it down, and there are no HELOCs. Their asking price gyrations have nothing to do with mortgage conditions or anything other than their desire to double their money in 5-6 years. Their inability to grasp the reality of the market has left them changing their asking price frequently and woefully missing the market. I hope they and their realtor are having a good time because they certainly haven't done much to sell their house.
Listing Price History
Date
Price
Feb 03, 2007
$939,900
Feb 12, 2007
$924,900
Mar 06, 2007
$919,900
May 02, 2007
$914,900
May 04, 2007
$912,000
Jul 21, 2007
$899,900
Jul 25, 2007
$912,000
Aug 18, 2007
$899,000
Jan 27, 2008
$849,900
Mar 03, 2008
$824,900
Mar 08, 2008
$799,900
Apr 30, 2008
$849,900
Jun 30, 2008
$824,900
Source: SoCalMLS
Their listing price activity reminds me of the Curly Shuffle -- two steps forward and one step back.
Beautiful Fieldstone Barrington home located on a cul-de-sac. Nice size
yard w/patio cover/dramatic slate hardscape in back & front
yard/ceiling fans/built-in cabinets in garage/french doors/beautiful
tile floors/full splash in kitchen. Do not miss seeing this home!
It started off so well
Unsold in 90+ days
