Happy New Year — ABBA
On January 1, 2008, I wrote a post titled Predictions for 2008. You can go back and review it to see how well I did.
As a recap, I would like to share with you a couple of charts from 2008 for Irvine and OC:
Click for larger image
Most of the macroeconomic conditions I made in 2008 are still operative, and several of the predictions I made which came true will likely repeat in 2009. These are:
- 2008 will see the worst single-year decline in the median house price ever recorded
- One or more of our major financial institutions and one or more of our major homebuilders will fail
- A severe local recession
- I predict we will see many more angry homedebtor’s troll the blog
I do not believe 2009 will see median house prices decline as much as 2008, but I do believe they will drop significantly, particularly in high-end neighborhoods. The low-end neighborhoods are closer to the bottom than to the top, so 30%+ declines in these neighborhoods are not likely. The high end neighborhoods will experience big drops. Most did not drop 30% last year, so they have more room to drop. The unemployment rate is high, and the economy is in recession which will put pressures on home prices. The dreaded ARM problem is not going away, and these loans will start blowing up this year and on through 2011.
However, there is one bright spot for the housing market that will blunt the declines in 2009: ultra-low mortgage interest rates. We will see properties at rental parity in 2009. The low interest rates are going to reduce the cost of borrowing to the point that many properties will reach rental parity this year. This does not mean we will be at the bottom. These interest rates are artificially low due to the “quantitative easing” by the Federal Reserve. This policy may persist for some time, but it is not likely that sub 5% interest rates will be around for buyers 7-10 years from now when 2009 buyers go to sell their property. That creates the issue with Your Buyer’s Loan Terms.
With the low interest rates, and with the foreclosures resulting from this year’s loan resets being a year away, we are in a good position to see our first bear market rally. This summer, we might see two or three months of sustained appreciation. This will bring out all the bottom callers. Everyone will be cheering the Federal Reserve, and many will believe the worst is over for the housing market. This will cause some major emotional gyrations for desperate homedebtors. Those who had moved from denial to fear will likely move back to denial for a time.
Remember, the loans that reset this year will take a year or more to become foreclosures. The real problems caused by all the resets will not be apparent this summer. We will likely see a large number of short sale listings, but as we all know, these rarely consummate a transaction. It is only the presence of these short sales listings that will remind us of the impending disaster when the ARM reset problem becomes a tsunami of foreclosures. When these foreclosures start hitting the market in larger numbers, and the market rally is reversed, all of those who call the bottom this summer will act surprised. Ignorance is bliss.
Not to get too far ahead of ourselves, but 2009s bear rally will be wiped out by the first wave of foreclosures. I foresee 2010s bear rally being knocked back by continuing foreclosures and the much-anticipated rise in interest rates when the FED stops quantitative easing as the recession abates. The rally in 2011 will be tepid, but at least it will be for real. For 2012-2015, appreciation will be less than 5% each year as the overhang of foreclosures and a sputtering California economy keep prices in check until Californian’s lose their minds again and inflate another housing bubble.
In my opinion, these artificially low interest rates will simply guarantee that house prices overshoot fundamentals to the downside because the fundamentals in this instance are illusory. The low interest rates will prompt some people to buy, and this increased buying activity will stop prices from falling as much as they would have without the subsidized interest rates. However, very few people currently qualify for these loans. Loan terms are getting tighter all the time, and the buyer pool is very restricted. People talk about the conservative lending terms as if they are too tight. This is nonsense. We are still not at pre-bubble loan terms (20% down, 28% DTI, high FICO, etc.) and until we get there, loan terms will continue to tighten. The diminished buyer pool when combined with increased foreclosures creates an imbalance between supply and demand which will push prices lower.
Many people erroneously believe that low interest rates are going to save the housing market because the loan resets are not going to lead to foreclosures. As I outlined in the ARM problem, the payments are going to increase even if the interest rate remains the same due to the amortization recast. If you want a more detailed explanation from Mr. Mortgage, I suggest you read Pay Option ARMs – The Implosion Is Still Coming Despite Low Rates and Low Mortgage Rates to Spur New Wave of Defaults. The idea that low interest rates are going to save the housing market is another in our ongoing series of denial fixes being fed to a weary populace. It is all bull$hit.
Last year I predicted that we would see banks and homebuilders go under. We did see several banks including WAMU bite the dust. This trend will continue. All of our banks are basically insolvent. Only creative accounting practices and huge amounts of borrowing from the Federal Reserve is keeping them afloat. Even the huge infusion of money through the TARP program is not going to save them. There will be many more failures and consolidations in 2009.
One surprise from 2008 was the lack of bankruptcies and consolidations in the homebuilding industry. Ordinarily, during a recession, the weak companies go out of business or are absorbed by stronger ones. In my opinion, the reason we have not seen this yet in the homebuilding industry is because there are no strong ones, and there is no reason to consolidate or expand while housing starts and sales continue to decline. I think 2009 will be different. In the second half of 2009, the homebuilders will start to rebound. If past history is any guide, the recession will bottom when housing starts bottoms. This is when the industry will begin to consolidate.
I believe we will see massive consolidation in the homebuilding industry. During the 80s and 90s the homebuilding industry was dominated by small, private builders. Many of the small fry were wiped out during the recession of the 90s. During the 00s, we witnessed the rise of the national homebuilders as the dominant market force. I believe we will see consolidation into an industry dominated by a few big names with a few small privates picking up the scraps in various markets.
Last year I predicted a severe local recession. I did not have the courage to predict a severe national recession. Perhaps I should have…
I do not have a prediction about angry homedebtors. As the market shifts from denial into fear, there is a widespread acceptance of the reality of a housing bubble. Most trolling comes from people trying to maintain their denial (if you want to study this phenomenon, I suggest you read this forum thread). With acceptance comes less anger and trolling. However, I have recently launched an article marketing campaign that likely will catch the attention of realtors across the country. We may see a few of them stop by to explain to us why we don’t know what we are talking about. That should be amusing.
Today’s featured property was brought to my attention from a reader. It is a typical Irvine property struggling with a typical Irvine debt load. I predict we will see this house for sale as REO in a year.
Income Requirement: $179,750
Downpayment Needed: $143,800
Monthly Equity Burn: $5,991
Purchase Price: $475,000
Purchase Date: 10/15/2003
Address: 4152 Homestead, Irvine, CA 92604
|Property Type:||Single Family Residence|
|Area:||El Camino Real|
|On Redfin:||113 days|
Unsold in 90+ days
upgraded kitchen, bathrooms, flooring throughout, and great master
bedroom w/upgraded bath. 5-year-old tile roof new furnace, newer water
heater, newer kitchen appliances, newer French doors, all new windows,
great size yard and side yard, (back yard that feels like a park).
Walking distance to a great part, all shopping and restaurants off
Culver. Close to schools. Living room w/vaulted ceilings and fireplace.
Family room w/built-in wine cooler, formal dining room, breakfast bar.
Great Cull-De-Sac location. Inside laundry with plenty of storage for a
big family. Just a great house to live in with lots of windows that
bright up the house. Walking distance to a great park. Great schools
have made this neighborhood very popular.
bright up the house?
At least this description tells us where some of the HELOC money went.
- Today’s featured property was purchased on 10/15/2003 for $475,000. The owners used a $380,000 first mortgage and a $95,000 downpayment.
- On 11/5/2004 they refinanced with a $530,000 Option ARM.
- On 5/3/2006 they opened a HELOC for $150,000.
- Total property debt $680,000 plus negative amortization.
- Total mortgage equity withdrawal is $300,000 including their downpayment.
This house is typical of the entire Irvine housing market. The owners doubled their debt (which is about average from what I see with houses for sale), they are overextended, and they are listing their house for a wishing price that will bail them out of their financial dilemma. It looks as if they have solicited a relative to sell their house for them, probably for a discounted commission. Based on their asking price (which the market is telling them is too high), they are priced to cover their loan obligations. They will hold to this fantasy as long as possible, but when the payments overwhelm them — probably when their Option ARM recasts — they will give up and lose the house in a foreclosure. Properties like this one represent “overhead supply” that must be cleared out before there is any possibility of price appreciation.
No more champagne
And the fireworks are through
Here we are, me and you
Feeling lost and feeling blue
It’s the end of the party
And the morning seems so grey
So unlike yesterday
Now’s the time for us to say…
Happy new year
Happy new year
May we all have a vision now and then
Of a world where every neighbour is a friend
Happy new year
Happy new year
May we all have our hopes, our will to try
If we don’t we might as well lay down and die
You and I
Sometimes I see
How the brave new world arrives
And I see how it thrives
In the ashes of our lives
Oh yes, man is a fool
And he thinks he’ll be okay
Dragging on, feet of clay
Never knowing he’s astray
Keeps on going anyway…
Happy New Year — ABBA