Open Thread 8-8-2009

I looked out this morning and the sun was gone
Turned on some music to start my day
I lost myself in a familiar song
I closed my eyes and I slipped away

So many people have come and gone
Their faces fade as the years go by
Yet I still recall as I wander on
as clear as the sun in the summer sky

More Than A Feeling — Boston

I hope you are enjoying the beautiful Southern California summer sky. I will probably be at Wild Rivers this weekend enjoying an Irvine amenity. I hope they develop a suitable replacement before they knock that park down for more offices. The office market will be down for a few years, so perhaps there is still time to get a new water park built.

Matt Padilla wrote a great post this week on the foreclosure problem: Foreclosure wave gathers momentum. I am seeing a great deal of misplaced bullishness lately. The market is tight due to government manipulation, but they can only hold back the tide so long.

Marilyn Kalfus wrote Surf City home offered for $2.3 million reverts to the bank as a update to the post I did on HELOC Abuse Huntington Beach Style.

Beautiful Boy — John Lennon

I want to wish my son a happy birthday.

Cookie… So nice…

Here are some interesting charts for you:

Agricultural land was the last real estate bubble in the US that saw a 300% increase followed by a 50% decline.

I love these charts Rich Toscono did for Voice of San Diego:

23 thoughts on “Open Thread 8-8-2009

  1. Freetrader

    Yikes. Guessmation using rental parity rule of thumb. OK, so a one bedroom apartment would rent for, what, $1,400? Subject HOA dues gives you $1,100. Subtract net of tax property taxes of, I dunno, $300. So the rent equivalent is around $800 a month. What is the net present value of $800 a month over 20 years (it can be discounted for 30 years or infinity, since that is around the same number). It depends on the discount rate you use, but that would give you some kind of range. I’m thinking the real value of that place is about $150k? Those ridiculous HOA dues are a killer…without them the value would be another $50k or so higher.

    1. Geotpf

      But it’s Irvine. Everything in Irvine sells for well above rental parity. However, even accounting for that, this particular condo is overpriced for the market. It would sell at $300k, or twice rental parity.

      Purchasing in Irvine is a sucker’s bet, IMHO.

      1. irvinewtf

        Buying 2x rental parity only makes sense if you are hoping to capture appreciation. Even in Irvine people probably understand that’s unlikely to happen any time soon. I am really astonished by the prices for condos around here. And basically half that building is for sale. The same floor plan higher up in the building is on sale for $200k less, but that doesn’t seem to worry the seller of this unit. And who buys a 1-bedroom apartment anyway?

      2. bigmoneysalsa

        “Everything in Irvine sells for well above rental parity”

        Today. Not always that way in the past and probably not always that way in the future.

      3. Freetrader

        I think this assumption that a 1 bedroom aparently should sell for “well above rental parity” is pretty difficult to swallow, Irvine or not. It’s in a new building but that’s about the only ‘intangible.’ The only people who would want to buy something like this and who would not be planning on turning it into a cash-flow rental (or alternatively, hoping to quickly trade up) would be a single, retired folks. I am not sure we can count on a wave of silver-hairs to get in a frezied bidding war for an apartment that doesn’t even have a place for the grandkids to stay.

  2. E

    Enjoying the California sky?

    Nah…enjoying the So. Florida sun & beaches this week.

    Friendly people…beautiful women…laid back.

    I thought this place was supposed to be lame.

    I guess I was wrong.

  3. Norcal

    The article you linked to is great, but I’d like to know if anyone has more specific data about the default rate on Option ARMs. We’d know more about whether it’s one giant wave or a coujple of smaller ones if we could see a graph correlating default on ARMs with the reset dates of those ARMs. Does anyone have this info?

  4. Before Gore Kneel

    @IrvineRenter,

    I am starting to suspect that banks are widely using Fed money to hold properties out of the foreclosure market, thereby keeping prices from bottoming properly. (For example, Innovest’s tables) Comment?

    1. Chris

      Mark-to-Fantasy: report the properties/mortgages/swaps that you’re holding (instead of auctioning) in whatever figment of your pricing imagination every quarter.

      AIG: thank you for paying me the billions that I’ve lost in the market..whew, I thought I would never get that insurance moola back.

      TARP: a filler for the banks until AIG pays up (using, of course, Uncle Sam’s moola).

      Any more questions?

    2. thrifty

      Before Gore…
      Can you explain exactly how a bank can use the funds made available to it to hold the properties?

    3. Geotpf

      As far as I can tell, the amount of actual bank owned properties not on the market is minimal. Now, the amount of properties that are in pre-foreclosure but have not yet been foreclosed upon is fairly high. At least some of those will never get foreclosed upon-they will either be made current, get loan mods, or become short sales.

    4. MalibuRenter

      I have been having a discussion on this point on another site. A bank can pledge its mortgages at the Fed window and get cash in return. Some of the haircuts off of face value of the loans are large. See http://www.frbdiscountwindow.org/discountmargins.pdffor the amounts of haircut. The Fed applies the largest discount to home equity loans valued at face value. If you pledge $100 of face value home equity loans, they will only give you $50 in return.

      For mortgage portfolios which are retained by banks, the banks can get 70% of face value. I regard this as much too high. I suspect some strong adverse selection. The banks which have the most need for cash tend to be ones in weaker financial condition. Not enough for the FDIC to take them over (yet), but weaker than average.

      The banks with problems also probably were dumber than average on the loans they made and retained. Therefore, their loan portfolios probably have a higher LTV than elsewhere.

      The banks in trouble disproportionately made loans in places where home prices have dropped more than the national average. Would you give 70 cents for every dollar of face value for a portfolio of Miami condos? Las Vegas houses? Central Valley anything?

      For banks who have pledged such collateral to the Fed, I assert that doing an actual foreclosure can easily consume cash. For a $100 face value loan where the lender will recover $50, they will have to give the Fed $70 when it leaves the portfolio being used for security. I am not certain of this, but have not yet had anyone direct me to a reference showing something else happens.

      I did have a fairly knowledgeable person try to assert that you can only post performing loans with the Fed. They have not yet been able to prove this, especially if it’s a big portfolio with a moderate number of problem loans. Even if they are right, it could lead to another problem: banks might not be very fast or accurate in reporting which loans are problem loans. The longer they can pretend, plausibly deny, or even lie about loan performance, the longer they can avoid sending more cash than the loan is worth to the Fed. How many banks might be doing this? I have no idea. While I would hope it’s zero, there are 8000+ banks, some have been taken over with assets much less than 70% of face value. Others are under various orders to get more capital or improve their reporting.

      There are some other contexts where a similar pattern would repeat outside of the Fed window.

      1. thrifty

        MalibuRenter:
        Thanks for the link and thoughts on mechanism. Obviously, the handling of hundreds of billions, perhaps a trillion and a half dollars, of taxpayer monies is anything but transparent.
        btw, is Dallas weather still as nice as Malibu 🙂

        1. MalibuRenter

          Dallas weather has been alternately hot and rainy over the past few weeks. Mrs Malibu would like to move back to LA.

  5. winstongator

    Unless there is an excess of people demanding units like the 1/1 in Watermarket, prices can fall well below rental parity. RP works for owner occupants, if you want a cash-flow positive investment the price will need to be lower. People are looking for anything that will generate yield, but they also now acknowledge that preservation of capital is important too.

    1. Freetrader

      Looks like that one has been taken down from Redfin? Considering the massive HOA dues, the thing is priced a good 3x what it is worth. For it to be worth, say, $350,000 there would have to be some real intangible associated with it…let’s see…Proximity to night life? No. Services? Not really. Jobs. Possibly. And it’s 10 miles from the beach.

  6. dafox

    I made a chart of LA from the 90s bust similar to the first SD chart. Click for a bigger version.

  7. Denny Horner

    If we consider the massive HOA dues, the thing is priced a good 3x what it is worth. I cannot see anything since this is 10 mile away from the beach.

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