Are the high-end homes in Irvine plated with marble? The asking prices would make you think so. Today's featured property was purchased by a knife catcher at auction. No improvements have been done to the property -- no marble -- and now they want $260,000 for their efforts. Oh wait, they made no effort. They just want $260,000 just because. This is the kind of behavior that makes house prices unaffordable, and it is exactly the kind of behavior this market is going to crush out of existence.
The people who bought properties as flips in 2007 had to put their own money into the transaction. All of these people made a small fortune by starting out with a larger one.
One of the myths of the real estate bulls is the rich-foreigners-will-save-us fallacy. This myth has a hint of racism to it: foreigners must be culturally superior to have the money to come to the rescue of us poor Americans. Whenever I see this argument raised, I always link to a post done by Rich Toscano at Piggington.com called The Dumb Money. As stated in the article, "Far from being a positive fundamental, a sudden excess of foreign
participation in an asset market is indicative of ill-informed
speculative money at work. When the foreigners really start piling on,
it's always a good sign that the end of the bubble is nigh." As you might have surmised, today's featured property was a flip attempt by someone with a non-Westernized name (as was yesterday's.) The stupidity of this particular flip is breathtaking to me. It was purchased as REO for well over what the lender paid, and now it is being offered for much less. The entire loss is going to be the flipper's money.
If the property looks familiar, it is because we have featured it before: Brookside Comp Killer.
Check out Howlin' Wolf's description of the blues (it's at the beginning.)
It cannot be denied (rationally) that we are currently in a declining market. In a declining market, banks look at appraisals and comps differently than they do in a rising market. When prices are rising the lender will look at the highest comparable sales to determine total value upon which they will base their loan. When prices are declining like they are now, the lender will look at the lowest comparable sales or asking prices to establish the value upon which they will base their loan. This is a major headache for sellers. Remember the post I did on the big drop in Turtle Rock recently How to Lose $500,000 in a Year? Once that seller put that house on the market asking $800,000, he ruined the comps for every similar home within a mile of his location. Let's say you are the neighbor at 6022 Sierra Siena Road who is asking $950,000 for a similar property. If you find a buyer willing to pay $950,000 and put 20% down, the lender is going to look at the neighboring house asking $800,000 and say, "I can only loan your buyer 80% of $800,000." For the buyer of the Seirra Siena Road property to make a sale, the buyer will need to put down $310,000 -- almost 30% because of the low asking price on Silver Cres.
Also, in a declining market lenders will raise loan-to-value requirements. The lenders I have spoken to have told me that right now, there is no market outside of the conforming loans of the GSEs (Freddie Mac, Fannie Mae) or the FHA. The FHA will allow loans with 3% down, but the income requirements are so tight, that it is very difficult to qualify. The GSEs allow higher DTIs, but they are also requiring higher downpayments. Even now, very few loans are being approved without 20% down. Another interesting thing I was told is that nearly all of the buyers over the last several months were renting at the time of their purchase. It is a classic case of those renters who felt "priced out forever" jumping at the chance to own -- more kool aid. There is almost no move-up market right now, probably due to the deep price drops at the low end of the market. People getting out of entry-level housing do not have any equity, and those who still have equity, are not able to sell their homes.
Today's property is a classic flip. The owners bought it in March, and they are asking $119,000 more than they paid for it. In the bubble rally, they might have pulled it off because the bank would have ignored their low purchase price and financed anyone with 100% financing at almost any price they wanted to ask. However,in today's market, they set their own comp, and the lender is not going to ignore it. For them to get their WTF asking price, someone is going to have to put down a large amount of cash. In short, it is not going to happen.
Asking Price: $659,000
Income Requirement: $164,750
Downpayment Needed: $227,000 based on their purchase price as a comp
You don't need a realtor to sell a house. A title company can take care of most paperwork, and an attorney can draft the rest for a minimal fee. Realtors are supposed to be experts at sales and marketing, but if you possess these skills, there is no need to pay someone 6% to draft a poorly written property description and sit in your house on the weekends. You can do it yourself and save a great deal of money. There are advantages of to selling on your own. You don't have to base your asking price on comparable properties. You can make up a number and put the property for sale for whatever price you want. There is no neutral market observer to tell you your price might be too high. Who needs to pay attention to comps? Also, you don't have to worry about the time and money your realtor is going to spend marketing your home because you will pay all those expenses yourself.
Today's featured property has been featured on IHB before. The previous owner was unable to sell it using a realtor, and it went back to the bank in foreclosure. The current owners bought it from the bank. Surely, they will find the buyer who appreciates the unique qualities of this home and obtain their asking price. It is just a matter of good sales and marketing and a healthy dose of optimism (real estate optimism tastes best when mixed with kool aid.)
In the era of 100% financing, speculation was widespread. Why not, speculators had nothing to lose other than their credit score, and if prices had gone up, they would have reaped a huge windfall. We have documented case after case of this behavior right here on this blog. Are we flagellating the equine after it has already perished? Perhaps, but until this behavior is seen for what it was, lenders will not learn their lessons, and they will do it all over again. Realistically, the only thing that could save housing prices would be a return of 100% financing and the elimination of lending standards like we saw during the bubble. There is only one problem with that: people cannot afford the payments -- They have proven that much. The continued use of 100% financing through 2007 was the only thing delaying the crash. Now that the FED is lowering interest rates, they are hoping this will translate into lower borrowing costs and help knife-catchers finance the huge sums necessary to afford today's pricing and slow the decent of prices. There is only one problem with that: as the FED lowers interest rates it increases inflation expectations, and mortgage interest rates go up. Hmmm... It is really quite a quandary.
The low interest rates we are experiencing now may prompt a few sales in 2008, but the FED will not be able to keep interest rates low for long or inflation will get out of control (anyone remember the 1970s?) If the FED starts raising interest rates later this year to curb inflation, mortgage interest rates will again rise -- not because of inflation expectations but because base rates will have increased. Mortgage interest rates hit the floor in 2004. The Federal Funds rate was 1%, inflation was low, and risk premiums were artificially low because investors in mortgage backed securities did not recognize the risks. 5.8% is as low as interest rates on a 30-year fixed-rate mortgage can get. Higher inflation and more rational risk premiums will prevent interest rates from getting that low again. It seems very unlikely mortgage interest rates can get any lower than 5.8%. We will not see 4% mortgage rates to prop up prices.
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Have you noticed when the real estate market bulls are proven wrong, there is always some unforeseen outside factor to blame? David Lereah had the nerve to claim nobody saw the subprime crisis coming despite the fact warnings about subprime lending were widely known and reported. Remember that you read this here: Mortgage interest rates are going to rise. You will probably not see mortgage interest rates on 30 year fixed rate mortgage below 6% again in your lifetime. Sometime in late 2008 or early 2009, the federal reserve will start raising interest rates, and mortgage rates will rise with them. This will be blamed for the big drop in prices and it will be held up as the reason for the faulty forecasts of bullish realtors. If it wasn't for the FED, trees really would grow to the sky, right?
One of the primary functions of the FED is to provide a stable financial system. Once the Federal Reserve begins to see economic growth and liquidity in the debt markets, interest rates may rise as quickly as they fell in order to stop hyperinflation from occurring. The FED does not want to see its member banks receive worthless currency in return for the loans it made; although I suppose this is better than receiving even less currency in a default.
Mortgage Interest Rates 1972-2006
When a country knowingly devalues its currency, it causes a severe recession as the prices of imported goods and raw materials increases dramatically. Perhaps a severe recession and price inflation is preferable to an economic depression like the one of the 1930s in America, but it is certainly not desirable. There will be some benefits to a devalued currency. A less valuable currency is a boon to exporters. The United States has run a chronic trade deficit for many years, and much of the recent deficit has come from inexpensive goods imported from China. The trade imbalance may correct itself with currency devaluation. Of course, this rebalancing of trade will come at the cost of more expensive imported foreign goods and a commensurate decline in spending power from US consumers. Also, prior to currency devaluation, wages in the United States were so high that jobs were being outsourced to foreign countries where people can be paid much less. Wages could not rise significantly from where they were without devaluing the dollar to prevent wage arbitrage from moving jobs overseas. The devalued currency provided some room for wage increases, and these wage increases could theoretically provide additional support for housing prices. If the FED does chose hyperinflation, there needs to be wage inflation to go along with it or the economy will experience a very deep recession due to the steep drop in consumer spending (It may anyway.) If wages rise, houses become affordable again. I wouldn't mind paying today's prices if my salary doubles.
Put today's problems in perspective: the Federal Reserve is being forced to chose between stagflation and depression, house prices are crashing, and homeowners are being foreclosed on in record numbers. This situation is the result of declining home prices; the declining home prices are a direct result of the unsustainable price levels created during the bubble rally; the unsustainable price levels were created by widespread use of 100% financing and the elimination of lending standards, so this is important stuff worthy of daily exposure on blogs like this one. In today's 24 hour news cycle, it is easy to focus on the sensational and forget about the root causes of our problems. The roots are here in properties like this one and in borrowers like this one who used 100% financing to speculate in the real estate market at the expense of our banking system.
6 bedrooms total - 4 bedrooms upstairs, 2 bedrooms, 2 dens downstairs, with 2.75 baths. Wood flooring downstairs. Remodeled kitchen with double ovens, flat top cooking surface, large pantry & newer cabinets. Leaded glass front doors, plantation shutters, newer central A/C, newer tile roof, 8 ceiling fans and recently painted in & out. Large backyard. Close to park and community pool.
$241 / SF is real progress.
The price will have to be reduced for the cost or repainting. The pink and green colors are truly ugly.
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This property was purchased less than one year ago, and if the short sale is approved, and if the seller gets their asking price, the lender (NBGI Inc.) stands to lose $207,400 after a 6% commission. There have been some comments on my equity burn calculation where I take 10% of the purchase price and divide it by 12 to get a monthly equity loss on the property. How much was this lender's equity burn? $17,283 per month. If this flipper had any of his money in the deal, that would have been his loss, but since it was the lender...
Anyone looking to buy in today's market really should pay attention to the equity burn number. In today's market, borrowers have to put money down. It is their money evaporating into the ethers. The phenomenon is real, and it will continue for the foreseeable future.
It is a good time to be a renter.
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Tonights the night well make history, honey, you and i
And Ill take any risk to tie back the hands of time
And stay with you here tonight
I know you feel these are the worst of times
I do believe its true
When people lock their doors and hide inside
Rumor has it its the end of paradise
But I know, if the world just passed us by
Baby I know, you wouldnt have to cry
The best of times are when Im alone with you
Some rain some shine, well make this a world for two
Our memories of yesterday will last a lifetime
Well take the best, forget the rest
And someday well find these are the best of times
These are the best of times
