The Lenders Are the Market, Orangetree, Irvine

Lenders are completely in control of the pricing in many markets around California and the rest of the Country, and they control the lowest tier of the market here in Irvine. What will they do with their power?

244 Lemon Grv garbage

Asking Price: $263,500

Address: 244 Lemon Grove, Irvine, CA 92618


Bonus question: Would you buy on a freeway?

I Wanna Rule the World — 10CC

I wanna be a boss
I wanna be a big boss
I wanna boss the world around
I wanna be the biggest boss
that ever bossed the world around

Lenders will be the bosses of the Irvine market because they will control the majority of for-sale property in the market. They already control many markets where REOs make up more than 50% of all sales. They completely control the bottom market strata here in Irvine, and as foreclosures work their way up the property ladder, they will end up controlling our entire real estate market.

A couple of weeks ago, I wrote about Irvine’s Future REO Inventory. In that post, I noted the following:

Foreclosure is a four step process: (1) the borrower quits making
payments, (2) the lender issues of Notice of Default, (3) the lender
issues a notice of Trustee Sale, and (4) the foreclosure auction occurs
on the courthouse steps. Steps 1, 2 and 3 are separated by 90 days
each. At any time during this period, either the borrower can get
current with their payments, or the borrower and lender can agree to a
loan modification. If either contingency occurs, the foreclosure
process is aborted.

California passed SB1137 to force lenders to try harder to reach
borrowers in default and work out a loan modification plan. Also, the
GSEs and many large banks were on voluntary or mandated foreclosure
moratoria. This caused a dramatic decline in Notices of Default (step
2). Unfortunately, as I noted Moritorium on Defaults Announced,
stopping lenders from issuing notices does nothing to prevent borrowers
from actually defaulting (step 1). Borrowers everywhere stopped making
payments, and lenders merely stopped issuing notices about it.

I borrowed the chart below from Mish’s blog showing the delinquency rate since January of 2006 (#1 above — people who quit making payments). As you can see, there has been a steady increase in the delinquency rate. This is the first step in the foreclosure process. Unless a borrower who goes delinquent cures this delinquency, the property will work its way through the system and ultimately become REO.

In the past, people cured their delinquencies either by selling the property or borrowing the payments from another source. In today’s market, they cannot sell because they are underwater, and creditors have cut off other lines of credit; therefore, the two primary methods of curing default have been removed. Of course, this assumes that people want to cure their delinquency. When their is no equity in the property, and when the cost of ownership exceeds the cost of rental, there is little incentive to cure delinquency. In short, people walk.

Since the primary methods of curing delinquencies have been curtailed, and since the desire to cure is also diminished, the cure rate has dropped to near zero. Since the cure rate is near zero and likely to stay that way, new delinquencies will end up as foreclosures. The current delinquency rate is 9.12%. That means that over 9% of all homes with a mortgage are entering the foreclosure pipeline right now. The rate of delinquency is still getting worse.

In the astute observations last week, Dafox posted a link to Orange County foreclosure data. One of the charts created from this data is shows the number of NODs and foreclosures with the foreclosure numbers shifted by one year to account for the duration of the foreclosure process. I have taken the delinquency chart based on national data and guestimated the loan delinquency rate in Orange County based on national trends. I combined the two data sources into the chart below.

The purpose of the chart is to illustrate the pipelines of inventory currently working its way through the system. Remember just because a lender hasn’t filed a NOD does not mean people are not going delinquent on their payments; these properties make up the “Delinquency Inventory.” The foreclosure tsunami will continue to build until delinquencies stop rising and actual foreclosures catch up. There are no “green shoots” here.

Another kind of inventory known as “pipeline inventory” is the number of properties moving from NOD through to foreclosure. These properties will become REO unless the loans are cured.

OC Inventory Pipelines

The chart demonstrates that lenders were processing their foreclosures as they were obtaining them through mid 2007; there was little delinquency or pipeline inventory. In late 2007 as the various foreclosure moratoria began, lenders began falling behind on their filing of NODs and their foreclosure processes.

The foreclosure moratoria were supposed to workout
several million loans and stop people from entering the foreclosure
process. As we all know, this process has been a fiasco. The number of
loan modifications completed is a very small percentage of the number
of delinquencies, and 70% of those loan modifications default in 6
months. Other than buying the banks a little time, the foreclosure
moratoria were a failure.

The delays in foreclosure caused a buildup of properties in the system in the form of delinquency inventory and pipeline inventory. Unless the delinquencies and defaults are cured during the process–which seems unlikely–these properties will become REO.

As we all know becoming REO is only part of the story. Once a property becomes REO, it must be disposed of by the bank. The inventory owned by the bank but not being sold in the open market is known as “shadow inventory,” and estimates of this number vary widely. I cannot find a data source to verify the number, but the rumor is that there are 50,000+ bank owned properties in the five-county area of Southern California.

Add together loan delinquencies, pipeline inventory and shadow inventory, and you have a huge number of homes that will emerge from the system as must-sell inventory.

It will take years for the lenders to catch up on all the loan delinquencies they are facing because they are falling further behind every day. The result of all this inventory in the hands of lenders is a complete domination of the market by REO.

What will lenders do?

The fantasy of fence sitters everywhere is that lenders will either by choice or by force will dump large numbers of properties on the market all at one time and create so much must-sell inventory that prices roll back to the stone ages. I rather doubt 1970s prices are on the horizon. There will be regulatory pressure on the lenders to dispose of their assets, but an extreme rollback in prices would be so disruptive, that regulators will likely give the lenders some room to work off their inventories without causing a catastrophic collapse of asset values. So the question is, “How low will they go?”

Lenders are not completely stupid (kool aid insane perhaps, but not utterly clueless). Most understand cashflow valuations, and they can recognize price levels where it is cheaper for people to own than it is to rent. Once they cross that threshold, they know they can entice a renter to purchase a property from them because it really is a good deal. Depending on the desirability for long-term owner occupancy, they may have to increase their discounts in order to find a buyer, but it isn’t very likely that lenders will allow asset values to drop far below rental parity because even they recognize the value there.

IMO, once lenders gain total control of housing markets with the inventory they have, they will push prices down to rental parity and attempt to hold them there. There will be some pressure from regulators to dispose of assets, but there will be a pushback from lenders who recognize the floor of values rental parity creates. This tension will keep prices at these levels until the inventory of REO is flushed through the system.

It is hard to estimate how long this flushing process will take without hard numbers. Based on the current state of our economy, the huge number of bad loans yet to reset, and the general trend illustrated in the charts above, I would estimate we will not see a peak in foreclosures until 2012, and it will be three to five years after that before the inventory is purged from the system. It will take a decade to work off the excesses of The Great Housing Bubble.


244 Lemon Grv garbage

Asking Price: $263,500

Income Requirement: $65,875

Downpayment Needed: $52,700

Purchase Price: $350,358

Purchase Date: 5/8/2009

Address: 244 Lemon Grove, Irvine, CA 92618

Beds: 2
Baths: 2
Sq. Ft.: 1,023
$/Sq. Ft.: $258
Lot Size:
Property Type: Condominium
Style: Contemporary
Stories: 1
Floor: 1
Year Built: 1983
Community: Orangetree
County: Orange
MLS#: S575496
Source: SoCalMLS
Status: Active
On Redfin: 13 days

2 Master Suites Each With Its Own Bath. Mirroed Wardrobes. Central Air
Conditioning. Inside Laundry. Extra Storage Space. Nice Patio. Carport


Aurora Loan Services did not mess around with this property:

They bought it at auction on 5/8/2009 for $350,358.

Foreclosure Record
Recording Date: 04/10/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000174390

Foreclosure Record
Recording Date: 01/02/2009
Document Type: Notice of Default
Document #: 2009000000595

This property is tracking right on the statutory limits. Relative to what we have been seeing, this one is on the fast track. Given the rapid deteioration of low end pricing, it is wise to get this done as quickly as possible.

Pricing of these low end properties are still above cashflow investor levels, so quick foreclosure and sale provides opportunity for the lender to bequeath future depreciation to a knife catcher.

228 Orange Blossom

Asking Price: $130,000

Income Requirement: $32,500

Downpayment Needed: $26,000

Purchase Price: $62,500

Purchase Date: 10/29/1997

Address: 228 Orange Blossom #34, Irvine, CA 92618

Beds: 1
Baths: 1
Sq. Ft.: 471
$/Sq. Ft.: $276
Lot Size:
Property Type: Condominium
Style: Other
Stories: 1
Floor: 1
View: Creek/Stream
Year Built: 1976
Community: Orangetree
County: Orange
MLS#: F1786080
Source: SoCalMLS
Status: Active
On Redfin: 240 days

Charming end unit. Lower level one bedroom with full bathroom and
kitchen. Inside laundry. Living room and patio area overlooking water
stream and soothing sounds of a waterfall. 1 car port. Association has
pool, spa, tennis courts and clubhouse. Excellent location next door to
Irvine Valley College. Near 5 and 405 Freeways, Irvine Spectrum
Entertainment Center, Business District, Shopping. Located in Building
# 12.

IMO, this is a well executed price drop. They started high enough to get some of their money back, after an initial look, they began methodically lowering the price, and they did so at an unpredictable interval so potential buyers could not just wait a certain number of days expecting further declines. Of course, it can be argued that such a large price drop reflects too high a starting asking price. This is probably an accurate criticism, but with as fast as the low end collapsed, it is hard to say for sure.

Date Event Price
Apr 20, 2009 Price Changed $130,000
Mar 26, 2009 Price Changed $140,000
Mar 17, 2009 Price Changed $150,000
Mar 03, 2009 Price Changed $160,000
Jan 08, 2009 Price Changed $175,000
Oct 08, 2008 Listed $180,000
Oct 29, 1997 Sold $62,500

This property was a classic “put” to the bank. The owner paid $62,500 on 10/29/1997 using a $35,000 first mortgage and a $27,500 downpayment. She only borrowed against the property once during the bubble taking out a $20,000 loan in late 2003–that is until 7/23/2007 when she took out a $212,000 first mortgage. Her timing was great because two weeks later the credit crunch hit, and financing these properties became significantly more difficult.

Why even look for a buyer when the bank will give you 100% of peak value?

426 Orange Blossom

Asking Price: $179,900

Income Requirement: $44,975

Downpayment Needed: $35,980

Purchase Price: $315,500

Purchase Date: 2/29/2007

Address: 426 Orange Blossom #202, Irvine, CA 92618

Beds: 1
Baths: 1
Sq. Ft.: 662
$/Sq. Ft.: $272
Lot Size:
Property Type: Condominium
Style: Other
Stories: 1
Floor: 1
Year Built: 1977
Community: Orangetree
County: Orange
MLS#: S565326
Source: SoCalMLS
Status: Active
On Redfin: 98 days

Charming one bedroom, one bathroom ground-level condo with pleasant
patio area. Unit includes washer and dryer and dual paned windows.
Water and waste included in the HOA dues.

The property was purchased at auction for $268,814 on 2/20/2009. The owners lost their $50,000 downpayment.

Foreclosure Record
Recording Date: 01/05/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000002015

Foreclosure Record
Recording Date: 08/22/2008
Document Type: Notice of Default
Document #: 2008000402030

The discount on this property is remarkable: 43%. The sad part is that it is still overpriced. It is probably near rental parity, but this isn’t a property an owner-occupant wants. This must fall to cashflow investor levels, and it isn’t there yet.


Will the Cartel Collapse?

Implicit in my belief that prices will hold at prices between rental parity and cashflow investor levels is the belief that a variety of lenders holding properties will behave as an informal cartel and hold prices at levels above where supply and demand would find its own equilibrium. Cartels are inherently unstable because each member has an incentive to cheat. There is the possibility that the collapse of cartel pricing may push prices even lower. I doubt this will happen, not because the cartel will be stable, but because I believe cashflow investors will provide sufficient demand to mop up any supply. I might be wrong.

What do you think the lenders will do?

65 thoughts on “The Lenders Are the Market, Orangetree, Irvine

  1. Dan in FL

    IR –

    The biggest wrench in the system is going to be securitized trusts. How fast are the servicers required to sell the properties they service. Is there any leeway for the servicers to hold on to the properties so as to not flood the market?

    The rules for servicers are pretty draconian, so they may be required to sell at a price lower than they would like.

    Also, the banks will still have to deal with declining rental prices. Overbuilding, inflated rents, and migration will lead many areas to lower rent, which translates into a lower rental parity. I’d love to see a number that compares the number of people in the country vs. the current housing level.

  2. MalibuRenter

    If anything stops the cartel from collapsing, it will be regulators. However, a significant portion of loans are not owned by banks, nor guaranteed by fannie/freddie. Because real estate is local, this means you could get local collapses, or not. In places where only a few lenders or guarantors were active, the cartel might hold. Places with lots of securitization, where most homes were above the conforming limits, are where cartels are least likely to hold.

    That sounds like coastal California.

  3. OC Progressive

    I’m going to stick with my theory of massive lender incompetence here, with organizations that have been raped, merged, and hollowed out to the point that there is no core competence left.

    And I’ll also point out that we’ve seen that the concept of market efficiency is a myth in an age where kleptocratic financiers hold such sway?

    How will massively incompetent lenders behave?

    They may in fact behave as an informal cartel, but not because of intent, but instead because they can’t even figure out who owns the mortgages, much less make intelligent decisions about what to do with them.

    California’s decline into a depression was briefly forestalled by moratoria, stimulus money, and misplaced optimism.

    As the state budget implodes, we’ll spiral downwards, with little sympathy from the rest of the country.

    1. Dan in FL

      Have to agree with the concept of “hollowing out” the banks. The banks can hardly keep track of all of their internal workings…not sure they’ll be able to handle the complex machinations of sustaining a cartel.

      I think it was Modguy who pointed out a couple weeks ago where his boss was on tv spouting about loan mod programs that never made it down to the worker bee level. When it comes to most banks, the left hand does not know what the right hand is doing.

  4. Chris

    IR, I’ll be a knife-catcher if you can help me buy this property for $150k. No financing necessary (all cash).

    1. IrvineRenter

      There is a market price point where it makes sense as an all-cash transaction. IMO, that is the absolute bottom because cashflow investors will come in and mop up.

      We are seeing this right now in the commercial real estate market. I recently attended a distressed asset workshop attended by asset managers from large banks. Their REO dispositions are all-cash deals. No lenders anywhere are loaning on commercial real estate right now. It is a classic Minsky rollback to cash levels. Prices are cutting in half.

      BTW, the commercial real estate bust will be the next “surprise” that the MSM will start discussing this fall. So much for green shoots….

      1. alan

        I agree.

        Could you start a new sister blog, or and profile the office buildings on the market.

        1. MalibuRenter

          Even better, let’s see if any of those office buildings, hotels, or malls did cashout refis. I’ll bet something in OC had a cashout refi that’s bigger than your usual single family home atm transaction.

          Maybe a weekend post? “How This Mall Owner Extrated $x million”.

        2. irsx02

          I second this idea. In fact, you could use one of the weekend posts to discuss Commercial Real Estate in Irvine. It would be a great benefit to us readers to learn how real estate works in the commercial sector. Loans, rent, price per sq ft, fundamental values, etc. all have similar ideas and metrics between residential and commercial real estate.
          Maybe we’ll all learn something in residential RE prices when comparing to Commercial RE.

    2. Geotpf

      Which one? The first or the third? The second is already listed at $130k.

      I assume you mean the third.

      One question is, what would these rent for? For $150k on the third property (and a $300 HOA fee-ouch), it would have to rent for $1,200 or more to be profitable. You probably could get that, methinks.

      My Riverside apartment was almost exactly the same size as the second property-that is, tiny. Of course, my apartment was a dump, without inside laundry, a patio, or a car port (did have a pool). But it rented for $675 a month-which is more than the payment on the house I bought (not counting taxes and insurance).

  5. lowrydr310

    My uncle got burned on a condo in Orangetree during the last bubble; he bought a 2BR in ’89 for $150K, then sold it in 2001 for just a few thousand more than he originally paid.

    They’re not bad condos, and the location is nice. My only gripe would be the lack of a garage; I’m not a fan of assigned carport parking.

  6. newbie2008

    If the owners have a second that recourse, after the first FC on the property, does the second have any recourse to go after the owner? Is the action on accepting the first’s FC count as a single action?

    A relative is looking to prepay a year’s rent on a long term lease. How can she make sure the owner will not do a walk away and leave her holding the bag?

    1. Geotpf

      The second is typically completely wiped out in such a circumstance.

      As for a lease, leases stay with the property, not the owner. That is, if it’s foreclosed upon or sold, her lease is still legally valid and enforcable to the new owner.

      There’s the making of a pretty good scam here, find somebody willing the prepay a long lease (at a discount, of course), then stop paying the mortgage. Not only is the bank stuck with the upside down house, they are stuck with a tenant who isn’t generating income for them.

      1. Dan in FL

        Not sure about CA, but this would not be good advice in Florida.

        1. The mortgage gets wiped out in a FC. The Note, which is the actual debt, is still valid on a second mortgage. It’s now an unsecured note, but the second note holder can still sue for payment.

        2. The lease, and the tenant, are usually wiped out in Florida. I would suggest your relative go find an attorney in her area to advise her on the best way to protect herself. An hour of legal fees could save her thousands.

        1. newbie2008

          Thanks for the advise. From the TV programs about this happening in CA, it looks like #2 is correct.

          As for #1, why aren’t the seconds going after the borrower? I’ve not seen it happen. What’s the status of limitation in bring a suit for defaulting?

  7. Lee in Irvine

    “I would estimate we will not see a peak in foreclosures until 2012”

    Calamity I say, calamity.

  8. MalibuRenter

    The more I think about this, the more I realize “all real estate cartels are local”. Unlike oil, where lots of producers create similar raw materials which go through similar processes of refining in numerous countries, real estate markets are very local.

    Thus, an Irvine cartel might hold up, and a Newport Beach one might collapse. To destroy a cartel’s hold in an area, all you need is one bank to start underselling the rest by a substantial amount, or…

    anyone else who is selling a house might bring prices down. Probate sales, or longstanding owners who paid off loans might take the comps down. Related party (e.g., parent to child) transfers might show mildly below market numbers and put pressure on the comps. Unless the cartel includes builders, an area with new construction might have the builder or their bankruptcy liquidators killing the comps.

    In an area where a cartel succeeds in keeping offering prices up, we may simply see very few sales. If areas nearby are significantly cheaper, people will move to the other neighborhood.

    1. ockurt

      I think that was our situation when we snapped up a probate sale. The owner who passed had paid down his loan significantly so the estate could sell the property for much lower than recent comps would suggest.

      So far I feel like we got a good deal as a similar floorplan that was an REO sold for $50k higher than ours…next year might be a different story…

      P.S. Any heat/humidity in Dallas yet?

      1. MalibuRenter

        Pretty much Santa Barbara summer weather here the last 3 weeks. Supposed to get much warmer in the next few days.

  9. Sue in Irvine

    I see 25 Whispering Wind 92614 is for sale. $1,099,000. That is a beautiful street with many remodels. This one is very nicely done. I walk my dog in this area and a few streets over 4 remodels are currently in process. A few more were recently completed. Stay and remodel as opposed to moving?

    1. Chuck

      Sue – I live in this neighborhood and have run by 25 Wispering Wind often (I’ve probably seen you out walking your dog)! I think the owner is a decorator/interior designer and it has been very well updated. It is amazing what you can do if you bought back when prices were reasonable (it looks like their purchase was at around $500k. This neighborhood does have a lot of long term residents and a lot of them have upgraded their houses. Isn’t that the way is should be – buy at a good price, live in the house a long time and update as you can afford it? Kind of different from buying at the peak of the bubble and trying to flip the house a year or two later….

      It will be interesting to see what this sells for – it is very nicely done but pretty pricey per square foot compared to some other homes that have sold in Woodbridge recently.

  10. thrifty

    A couple of questions for any taker(s):
    1. June 1 was the start of another 3 mo moratorium in Cal. Is this going to delay significant numbers of f/c again?
    2. An current article quantitating the mortgage problem states, “… there are still about half a trillion dollars’ worth of option ARMs, which allow borrowers to add unpaid interest to the principal they owe. There’s an even more alarming $2.5 trillion in “alt-A” loans…”
    Option ARM is a type of loan; alt-A is a type of borrower. I see loads of articles quoting numbers in this manner. To me, the numbers are meaningless since the categories overlap, perhaps very significantly – am I correct or missing something?

  11. Lubizinho

    Just a quick note to say thanks for all the hard work. I really appreciate the thought and detail that goes into every post. I’ve been reading since CNBC linked to the blog a couple of months ago. I’m not located in Califoria, but I find so much of the content to be very valuable.

    Given that I’m not in SoCal, I wondered if anything has been written about how to take some of the analysis on IHB and apply it to other markets. For example, I’d like to know if there are any shortcuts to determine where rental parity in my community. Does determining the average rent in my area require me to spend an afternoon crunching numbers out of an apartment guide or does is there some friendly beauracrat downtown that knows this stuff?

    If it hasn’t already been done, an interesting future post would be an outline of how an amatuer could cobble together some analysis of his/her own market.

    Thanks again for the daily content.

    1. dafox

      IR has a calculator (see the top header for the link) for rental parity, etc.
      I like to use to check nearby rentals. I have no idea what areas it covers though.

      anyone else have sites that have a good mix of nearby rentals to a location?

    2. IrvineRenter

      The easiest way to get rental comps is to contact a local realtor who can provide them. Otherwise, find a site like dafox linked to. Finding good rental comps is the most vexing part of the valuation puzzle.

      1. Geotpf

        What do you think about using Craigslist to find comps? It’s a little messy and primitive, so you have to wade through a lot of listings that don’t apply, but it seems to work.

        1. IrvineRenter

          Yes, Craigslist works well in areas it covers. If you live in a more rural area classified ads like Craigslist may provide some data points, but it has problems. The biggest issue with relying on classified ads is that you only know the “ask” not the actual transaction price.

          1. Geotpf

            Is there any list (on the MLS or elsewhere) of actual rental rates? It’s not like a purchase where the sale price is public record. I think you pretty much are stuck with using the “ask” prices.

          2. thrifty

            There is an MLS listing for rentals. A realtor friend set up criteria in San Clemente (zip code(s), price range) and I get one or two updates daily. I’ve been following the rental market in the $1800/mo and less category for over a year while simultaneously following the MLS for sale listings -planning to ultimately rent or buy depending on whether a great deal happens. In the last 12-18 mos. no great deals in either category. Both have shown a decline in prices. Available rentals are double the number they were a year ago. Rental prices are being reduced more frequently but only on, roughly, 10-15% of listings and usually about 5-10% lower than the initial price gets the unit rented.

          3. Geotpf

            But aren’t those “ask” prices (on the rental MLS)? That is, you probably can’t find out what a property rented for.

          4. thrifty

            Yes. They are all ask. However, after following for over a year and seeing only a small minority with asking rents having to be dropped before being rented, it seems very reasonable to assume that those who didn’t lower their price rented for the asking price. Additionally, the majority rent in about 2-6 weeks. And don’t forget that the rental market is not the sales market. Rents “rent” faster and there are a lot fewer of them.

          5. Illuminatus

            You can search the MLS for “closed” leases – -and find out what the agent “listed” as the rental price (I am dubious about the MLS for using as I have seen many shenanigans by agents – -some called “mistakes” but some of them were clearly purposeful – -and you don’t know if they got a free month’s rent as an inducement for a year lease, which effectively drops the rental rate, etc. – -just like when they enter sale prices in the MLS- – thee concessions aren’t usually there). Moreover, in many instances they are rented but are “cancelled” instead. I figure it’s b/c they didn’t want to disclose the final price and didn’t want to lie (like that Portabello sale in CdM).

          6. thrifty

            Can’t disagree that any listing can be abused. The question is how often has it occurred in the last 12-18 mos.on several hundred listed rentals. I suspect the large majority of rentals were at or within 5% of the listed rent. And that’s close enough to estimate, repeat estimate, what rental would be on a potential investment property. Then drive the area, take down phone #s of for-rent units and see what a few landlords or agents offer a “poseur” renter with questions. Gotta be some truth in there somewhere!

  12. AZDavidPhx

    Foreclosure: Now an Upscale Blight

    By Peter Coy

    optimistic analysts are looking for a recovery in the all-important housing sector. They got some ammunition on June 2 from the National Association of Realtors, which said that its Pending Home Sales Index jumped in April by the most in more than seven years.

    But housing can’t revive as long as the market is being flooded with homes that are falling into foreclosure. And far from going away, the problem is broadening. It’s not just about subprime anymore. Now, people with excellent credit who never dreamed of getting in financial trouble are being dragged down.

    Any illusion that prime loans would emerge unscathed was shattered by a May 28 report from the Mortgage Bankers Assn. “For the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures,” the bankers said. Nearly 13% of loans were delinquent or in foreclosure. The problems were worst in the bubble states of California, Florida, Arizona, and Nevada.

    The biggest factor in this second wave of foreclosures is the inability of distressed homeowners to sell in order to pay off their debts. Prices in bubble cities such as Los Angeles, Phoenix, and Miami are down less at the high end of the market than at the bottom. According to research by the National Association of Realtors, there are enough $750,000-plus homes on the market to cover more than 40 months’ worth of demand at the current rate of sales. That’s four times the rate of oversupply in the housing market as a whole.

    Unemployment is exacerbating the problems at the top of the market. And many families in that segment of the population built their finances on the assumption of continuous full employment, so they can’t cover the mortgage when even one spouse is out of work.

    Consider the plight of Stephanie and Bob Walker, who bought a $799,000, three-bedroom home in Los Angeles with a view of the Hollywood sign in 2006 but are losing it because last year Bob stopped getting computer consulting work that used to pull in about $240,000 a year. Bob eventually landed a job paying $60,000, and Stephanie found work as a $13-an-hour temp, but it wasn’t enough to cover their mortgage and credit-card debt, which was swelled by about $130,000
    worth of home renovations
    . They listed the house last year for an “optimistic” $875,000 but didn’t get any takers. After months of price cuts and threats of foreclosure from the bank, they’re days from closing on a sale at $700,000 that will assuage their primary mortgage lenderβ€”but leave them under pressure from other creditors. “We had no expectation things would come crashing down as fast as they did,” says Stephanie. “We had no one to blame but ourselves. We didn’t have a backup plan if he lost his job.”

    The economics at the top of the market aren’t as advantageous as they are at the bottom, where first-time home buyers are flocking to lower-priced homes, spurred by low interest rates, temporary tax credits, and a drop in prices that has made owning cheaper than renting in many cities. At the high end, homes are too expensive for most first-time buyers, and move-up buyers can’t purchase a home without selling property they already own.

    1. AZDavidPhx

      It makes you wonder if these first time knife catchers that are flocking to the low end of the market actually plan on living in these homes for 30 years.

      Even if it is cheaper than renting on a monthly payment basis, if you factor in:

      1.) Monthly equity burn
      2.) Rising interest rates
      3.) Cost to re-sell in 5 years (Fees, commissions, etc)
      4.) Maintenance

      I find it hard to believe that these buyers are going to come out ahead in the end and they will risk being stuck.

      1. Geotpf

        Some people will, some people won’t. Cash flow investing works best if you buy and hold, IMHO. If somebody buys something with the intent to rent it out, holding on to it forever makes a lot of sense (rents will probably go up over time but the monthly payment (assuming a mortgage) will stay steady). Of course, in that case, they may sell if the market skyrockets eventually.

        As for low end due to location and not size, it depends. I’m in Riverside, but I work near my house. I intend to live here forever. But somebody who lives here but is commuting to the OC might be looking to move up eventually to be closer to work.

        As for the properties in this blog entry, if they are purchased to rent out, then holding on makes sense. But people who buy them to live in probably intend to move up eventually.

        1. AZDavidPhx

          Investors, sure – but the article is specifically saying “first time home buyers” which I interpret as people buying a place to live in – not buy and rent out. I would assume that the majority of these buyers are going to use a 30 year loan.

          How many people live in the first house they buy for 30 years? I don’t think very many. So one would assume that these first timers are hoping to move up in a few years.

          By the time that they re-sell, I would think that the accumulated cost of owning along with equity burn will outpace the cost of renting all that time.

          I’m just saying that I question it when these people justify buying a house because it is “cheaper than renting” when what they really mean is that the monthly payment will be lower which may mean it is cheaper when you look at it with a very fine granularity but if you step back look at the big picture, it’s actually more costly when you add up years of interest payments, taxes, maintenance, equity burn, re-sell costs, closing costs, and increasing costs of borrowing.

          All that an you are risking being stuck in a house, unable to relocate for a new job, and possible foreclosure if you lose your job in an unstable economic environment.

          In short, it seems incredibly stupid for any non-cash buyer to purchase a house right now.

          1. Geotpf

            I think it makes sense to purchase if it really IS cheaper than renting in one’s neck of the woods, and one intends to stay put for a long period (more than five years). I am a first time home buyer, and the house I bought is the one I intend to die in. That’s because, in Riverside, things are now so far beyond rental parity that I was able to buy a house large enough to raise a family in for a very low cost (even though I’m single). I can not comphrend a circumstance where I would outgrow this house. The house is larger than I really need right now (and larger than the ones I was initially looking for), but I got such a good deal there was no way I could pass it up.

            But I’m a rare case-although probably not all that rare in the Inland Empire. Now, in the OC and LA, especially in places like Irvine, things are different.

          2. Sue in Irvine

            πŸ˜‰ Hey.geo, how do you know your future wife will want to live there? You better fix it up real nice for her and your 3 future children.

          3. Geotpf

            It’s a nice place, IMHO-but since there is no future Mrs. Geo right now, who knows? I do think it would be a good place to raise a family. The street is nice and schools are within easy walking distance. The family room is very large. Kitchen needs work, though, but nothing a little money can’t fix. (The weak kitchen may have been one of the reasons there was minimal competition when I bought it-I can see women, or men who are cooks, vetoing it on the kitchen alone-but, like I said, it’s fixable.)

          4. IrvineRenter

            I did that too. I built a 4 bedroom home for myself when I was single. Sold it 4 years later….

          5. tacoshark

            If owning the place is cheaper than renting then the wise “first-time home buyer” would not be stuck in the house or incur equity burn if they rent out the house when they “move up”. As long as you can save money on a monthly basis and then cover the monthly expenses with rent after you move out, then it is not difficult to come out ahead.

      2. Paul P.

        AZ… I’m a renter (cash-rich because a divorce made me sell at the peak)… My observation is that it is near-impossible buy, and have a mortgage cheaper, than renting an equivalent property.

        The issue with renting is 2-fold…

        1) Relentless rent-increases or…

        2) Owners want to move-back-in

        I would really like to buy the newish place I’m renting. If bought at a fair price, my monthly payment would jump by 40% yikes (note it is not for sale).

        In CA, we have Prop-13. Should Prop-13 (property tax) be repealed (a possibility, however small) then CA homeowners are doomed.


  13. OC Progressive


    Looking at the text of the new law that’s going into effect, it isn’t really a moratorium, but instead a stretching out of the time from NOD to trustee’s sale.

    California’s non-judicial foreclosure process
    requires a mortgage loan servicer to wait at least three months between filing a notice of default and issuing a notice of sale. As amended, this bill extends that time period by 90 days for owner-occupied homes where the first loan was recorded between January 1, 2003 and January 2,2008.

    Lenders who have a loan modification program in place can apply for an exemption.

    And it doesn’t do anything with Heloc Abusers who bought before 2003. One of your recent posts showed that the average loan origination date for HELOC abusers going into foreclosure was 2002.

    Given the very long delays already between notice of default and sale, this really looks like another well-intentioned exercise in futility, that may not have any tangible effect.

    1. IrvineRenter

      It may have the effect of artificially stimulating the California economy for a while. Each person who lives here and has no housing payment is putting that money into our local economy.

      One of the big problems with high home prices is that 30% to 50% of the gross income of Californian’s goes to some bondholder somewhere. When everyone defaults, and nobody forecloses, this money stays here in California. When you think about it, that is an enormous economic stimulus that will disappear when people are pushed out of these rent-free homes and actually have to start paying rent somewhere.

  14. Geotpf

    Nice pile of trash in the photo in the first listing. Seriously, how hard is it to move the junk away to take the photo?

  15. Anonymous

    Went to last night and counted houses. Here is the summary:

    Irvine as a whole:
    71 bank owned properties
    222 properties going to auction
    476 preforeclosure properties

    For just zip code 92603:
    7 bank owned
    (2 Quail HIll, 5 Turtle Ridge)

    28 going to auction
    (15 Quail Hill 2 Shady Canyon, 5 Turtle Rock, 6 Turtle Ridge)

    47 preforeclosure
    (19 Quail Hill, 3 Shady Canyon, 13 Turtle Rock, 12 Turtle Ridge)

    1. Anonymous

      re” Counted houses” – I mean the little icons on the map – which are both condos and houses

  16. dafox

    hey, IR, I got better data for you re: 9% dq rate (nationally)

    CA, Alt-A 90 days late = 11.3%

    Sadly, it wont give county data. I’ve done some color matching in photoshop, and you can see where OC is on the scale (look for the red line)

    I’m sure someone else has a bit of time to check Irvine zip codes on the color chart. I did lol @ Newport coast looking darker than a lot of other locations!

  17. Blueberry Pie

    My parents bought a house in 1973 (Ventura county) for about $35,000. My mom did not work. I think my dad was earning less than $30,000 (but felt his income was very good at the time).

    What are the chances that this bubble collapse will be so severe that it changes the mindset of homeowners for a generation? If homeowners never assume their home will appreciate in value, won’t it be a bit of a self-fulfilling prophecy, and could prices flatline for 20+ years? Is there any chance that home prices could fall all the way back to 2:1 income ratios?

    1. Geotpf

      That’s a lot different than now. That’s just a little more than one year’s income (assuming “less than $30,000” means something like $27k). Do you think somebody making, say, $110k a year would buy the 471 square foot condo at $130k to live in? Of course not.

      1. Blueberry Pie

        I agree, it is very different now. But should it be? The house my parents owned was an average 4Br, 2ba house. Nothing fancy. Should houses like that really cost 3 or 4 times yearly household income? How did things change? Did more and more people just decide over the past 35 years to stretch their income a little further in order to afford houses, to the point that 3.5 times income becomes an acceptable number?

        1. Geotpf

          During the bubble, 3.5 times was considered very conservative. Part of the reason we are where we are at now.

        2. thrifty

          Blueberry Pie:
          It wasn’t long ago that 2.5-3x your annual income was considered a reasonable figure with debt/income ratio of 28% for your house payment (piti) and 36% for all monthly payments (house, credit cards, other loans, etc) added together (divided by your monthly gross income). It still makes sense. Anyone with higher ratios is assuming a significant change will occur – higher income, sale of home, etc – that will ultimately free up enough discretionary income to enjoy life on a day to day basis again.

        3. IrvineRenter

          “Did more and more people just decide over the past 35 years to stretch their income a little further in order to afford houses, to the point that 3.5 times income becomes an acceptable number? ”

          Yes, that is exactly how it happened. The prices of California real estate reflect a deeply rooted cultural pathology. Perhaps the collapse of the housing bubble will change that; perhaps not.

      2. AZDavidPhx

        Do you think somebody making, say, $110k a year would buy the 471 square foot condo at $130k to live in?

        I don’t believe that those “income requirement” numbers are genuine. If you are willing to save up 50K and borrow only 80K, I have no doubt that the “income requirement” will drop way way way down.

    2. AZDavidPhx

      I really hope that this ultimately happens, but it seems likely that we are going to end up with a continuation of a perverted system with a bunch of bandaids carefully placed along the gaping wounds.

      The masses are still obsessed with housing’s investment potential.

      The government could very easily fix the problem of housing speculation by heavily taxing the profits on home sales. They could also eliminate the mortgage interest deduction. This would allow prices to fall to their ultimate bottom and change people’s attitudes about housing as a commodity and make it more worthwhile for people to put their money into CDs and bonds than into a box that rots in the sun.

      Unfortunately, all we have seen so far are efforts by the government to keep the current system in place while doing just enough damage control to ensure that none of their business partners lose any money.

      Too many of the people in charge have too much personal interest in the current system as the majority of them have prospered from it to get where they are.

  18. tlc8386

    The problem I recall is when you heard normal folks exclaiming hey my house is worth hundreds of thousands of dollars more than I paid for it and I have done nothing to it in 20 years.

    This is when you knew we were in a bubble when regular living day to day folks had hit rich in their minds and started to live this way. This is when the trouble started buying RE to make money got everyone investing.

    The herd mentality flocked into housing. And now we who sold or stayed renting have to wait for the great unwinding to continue to occur.

    Problem is though will housing take 10 years to correct because it took 10 years to make this bubble–

  19. barren_Irvine

    I know this is not the right context, but I just couldn’t resist this.

    πŸ˜† πŸ˜† πŸ˜†

  20. Yuva

    With the economic crises still not abating i dont think the delinquency rate is going to drop, so i think it will be prudent to busy such foreclosed homes. I agree with the post.

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