Oh come all ye faithful Joyful and triumphant Oh come ye, oh come ye to Bethlehem
Sing choirs of angels Sing in exultation Oh sing, all ye senders of the heaven above Oh Come All Ye Faithful — Nat King Cole
Merry Christmas from the IHB
I hope you are enjoying this Holiday whatever your faith or belief. Few are working today, and for those that are at their jobs, thank you for giving up your Holiday to make ours possible.
Beds 4 Baths 3 baths Size 3,650 sq ft ($342 / sq ft) Lot Size 6,000 sq ft Year Built 2002 Days on Market 9 Listing Updated 12/16/2009 MLS Number S599020 Property Type Single Family, Residential Community Northpark Tract Tria
A must see. Best floorplan in track. 3 bedrooms downstairs (including master) and one studio master with loft upstairs. Built-in BBQ and fountains. Travertine in living room, family room and kitchen.
Does is seem right to you that this property has appreciated at 9.3% per year every year since 2002? I don’t see how these houses maintain these price levels.
Beds 2 Baths 2 baths Size 1,517 sq ft ($322 / sq ft) Lot Size n/a Year Built 2006 Days on Market 3 Listing Updated 12/15/2009 MLS Number U9005224 Property Type Condominium, Residential Community Airport Area Tract Marq
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Stylish urban high-rise living in a highly desired end-unit with rounded walls of glass. This very chic property is located on the 13th floor of the Marquee Park Place towers & offers one of the best views available. Floor-to-ceiling windows & balconies with fabulous panoramic city lights & mountain views. Home is showcased with sophisticated finishes & style including Ralph Lauren paint and artistic design and photography by DominickJR.com Rich cherry hardwood flooring throughout the living, dining & kitchen areas. A cozy fireplace enhances the spacious living room. The modern gourmet kitchen is open to the living room and includes GE Mongram stainless steel appliances & gorgeous granite countertops. Designer furnishings are available for purchase. Marquee Park Place towers offer extensive amenities including 24 hour concierge, resort-style pool, spa, fitness center & entertainment rooms. Centrally located to world-class shopping, restaurants, the airport, freeways & beaches.
As an artistic shot, I really like the photo above. The radiating shadows and the way the sun brings out the tone of the wood, the rhythmic curve of the window lines, the distant view, there is much to like about this photo; however, it is not supposed to be an art shot, it is supposed to convey accurate information about the property. It fails.
Again, this is an intesting way to focus attention on the Buddha, but a horrible way to display a bathroom.
Notice the amount of distortion in these photographs. Do you think that room divider in the left photo really curves like that. The photo on the right is misleading, IMO. That is a straight counter, and it looks like it arcs nearly 90 degrees. The distortion is so bad it makes you think the room looks nothing like it really does.
What I get from these photos is (1) the sense that I need my eyesight checked, and (2) someone dropped acid before shooting these pictures and created some fantastic art that is an embarrassment for showing property.
A court is in session, a verdict is in No appeal on the docket today Just my own sin The walls are cold and pale The cage made of steel Screams fill the room Alone I drop and kneel Silence now the sound My breath the only motion around Demons cluttering around My face showing no emotion Shackled by my sentence Expecting no return Here there is no penance My skin begins to burn
Underwater homeowners who do not walk away are trapped in a prison of their own choosing. Our Government, the Federal Reserve and the lending oligarchs have conspired to make that choice for people and keep them in perpetual debt servitude.
One author whose voice I admire on the housing bubble is Dean Baker, Co-Director of the Center for Economic and Policy Research, in Washington, D.C. He has written a great piece titled, FHA Troubles Are Likely to Curtail Demand, that is the focus of today’s post.
Most modification plans leave homeowners without equity and paying excessive housing costs.
The Federal Housing Authority has been taking steps over the last month to tighten its standards on the loans it guarantees, most notably by dropping several initiators who have had especially bad track records. While this is a necessary and appropriate step given its financial situation, tighter standards from the FHA will have a dampening impact on the housing market in the coming year.
Remarkably, little attention has been given to the extent to which the FHA filled the gap created by the collapse of the subprime market. At the peak of the bubble in 2006, subprime mortgages accounted for almost a quarter of all mortgages. This share fell to near zero in subsequent years. The FHA, which had been marginalized by the explosion of subprime, saw its share increase from less than 3 percent of the market in 2006 to 23 percent this year. In a context of falling house prices and double-digit unemployment, this rapid expansion virtually guaranteed that the FHA would face problems.
Now that the FHA is tightening up, its market share will presumably fall back towards its historic level in the 8-10 percent range. While some FHA borrowers will be able to find other loans, many will not. If the FHA market share drops by 10 percentage points and half of the would-be FHA borrowers cannot find mortgages elsewhere, this implies a drop in demand of 5 percent, or more than 250,000 potential buyers. This will have a substantial impact on the housing market.
Subprime crowded out FHA during the bubble. FHA fell from
its historic norm of 8%-10% of the market to being only 3%. Why go
through the brain damage of FHA (the application process is rigorous)
when the application process for subprime was nil?
Now that subprime
has imploded, FHA has filled in as the only lender willing to accept less than 20% down, so their market share has gone up to replace subprime. Can low downpayment programs prop up a falling real estate market?
Monthly Percentage Change of Owners’ Equivalent Rent, 2000-2009
The continuing decline in nominal rents is making it ever more apparent that the main beneficiaries of mortgage modification programs are likely to be banks. Under some of the proposals being discussed, the government would pay up to $50,000 to keep homeowners in their homes. In the vast majority of these situations, even after a loan has been modified, homeowners will be paying considerably more on their mortgage and other ownership costs than they would to rent the same home. In the markets that were most inflated by the bubble, this difference can be well over $1,000 a month. In other words, each month that the government keeps the family in their home as a homeowner is a further drain on their income and savings.
This is what I have been saying here at the IHB for years. To me, the most obvious sign of the bubble was paying a premium for ownership. When rents are less than the cost of ownership, appreciation is required to compensate for the additional cost. Once appreciation goes away, it is crazy to pay more to own than to rent. As many have pointed out, rents are falling, and cashflow values fall along with them. This trend will continue until the recession is over locally.
Back to the post:
Also, in the vast majority of cases, homes are sufficiently underwater such that there is no reasonable prospect that the homeowner will ever build up equity in their home. It seems that many policymakers even now have not come to the grips with the housing bubble. They fail to recognize that the surge in house prices from 1996 to 2006 was a one-time blip that is now in the process of being corrected. There is no more reason to expect that house prices will rise back to bubble-inflated levels than there is to believe that the NASDAQ will return to the peaks of the Internet bubble in 2000. As a result, most of the homeowners who receive modifications are likely to find that they either have to bring cash to a closing, arrange a short sale, or default at some future date.
If mortgage modifications cause homeowners to pay more money for housing for each month they stay in their home and still leave them with no equity when they sell their home, it is difficult to see how this policy helps homeowners. The money that the government pays out is going to banks and other lenders, allowing them to collect much more money on their loans than would likely be the case without modifications. Unlike the TARP funds, which were loans that had to be repaid with interest, the money that the government pays in modifications is simply given to banks.
Policymakers who are interested in helping homeowners facing foreclosure must focus on developing policies that either ensure that homeowners will be paying comparable amounts to the rent on a similar unit and/or that they will actually have equity in their home at the point where they sell it. A policy that both raises monthly housing costs and leaves homeowners with no reasonable prospect of accruing equity is not helping homeowners.
The only reason people are not pissed off about loan modification programs is because they still believe houses will be back at peak values in a couple of years. There are many people who are trying to stay in houses that are dramatically underwater because they believe the rate of appreciation they witnessed during the bubble will return soon. With the direct and unprecedented manipulation of mortgage interest rates by the Federal Reserve, many homedebtors believe the Government has their back when in reality, the Government is bending them over.
I am of the opinion that the FHA is going to be forced to tighten lending standards and increase downpayment requirements because if they don’t the FHA will lose money just like subprime, and the US taxpayer will finally call an end to the madness — years later, some bean counter will produce a report claiming the FHA made money while stabilizing the market; the report will be bullshit.
The road ahead is clearly through the FHA. Stabilizing the bottom of the market is a foundational step. After we reach the bottom, those that purchased will gain equity and begin the chain of move-ups that signifies a healthy real estate market. We are many years from that level of market stability.
Beds 1 Baths 1 full 1 part baths Size 868 sq ft ($329 / sq ft) Lot Size n/a Year Built 1999 Days on Market 6 Listing Updated 12/14/2009 MLS Number S598717 Property Type Condominium, Townhouse, Residential Community Oak Creek Tract Oakp
According to the listing agent, this listing is a bank owned (foreclosed) property.
Elegant townhome in the highly sought-after and gated Oak Creek community featuring a spacious master suite, one & one-half baths, sun-splashed patio & direct-access two car garage with custom storage cabinets. Large living & dining room with recessed lighting and sliding glass door access to balcony. Beautiful designer upgrades include hardwood floors, custom paint, plantation shutters and custom baseboards! Gourtmet kitchen, opens up to the living room, boasting honey-maple cabinetry, built in microwave, pantry and recessed lighting. Spacious master suite with walk-in closet and master bath with dual sinks. Just steps to resort-style pools, spas, fitness center, tennis, basketball, volleyball, award-winning schools and Oak Creek Village Center with Gelson’s Market and upscale shops & restaurants.
Yesterday, we discussed walking away, and today, I want to explore the issue a little further and look at both an Irvine property owner and a Wall Street Journal columnist who are 10% underwater and thinking about walking away.
“One in four borrowers is underwater on a mortgage in the U.S.
Count me among them.
My family’s modest, suburban New Jersey house is now worth about
$30,000 less than our current balance. We never dreamed of walking
away, but the idea of “strategically defaulting,” is something we had
to at least consider. Many others have, too, as my colleague Mark
Whitehouse reported in Thursday’s Journal (See American Dream 2: Default, Then Rent.)
We’re not home flippers or boom-era borrowers who opted for an
exotic loan with no documentation. In buying our house, we believed we
were making a life decision.”
The author spends some time describing his house search, then he added:
“We weren’t oblivious to the fact that people were stretching to buy
homes. We were adamant about getting a fixed-rate loan–rates really had
nowhere to go but up, so why would we want an adjustable rate? (That
line of thinking turned out to be an epic fail–30-year fixed rates have
been at less than 5% for weeks lately.)”
What? This guys sees his decision to use a 30-year fixed at historic low interest rates as an epic fail? He really thinks that because the Federal Reserve is doing something it has never in history done — direct purchase of Agency debt to support mortgage interest rates — and because of this interest rates ticked down slightly, so this was an epic fail on his part? It was the most intelligent thing the guy did, and he thinks it was a mistake! If people believe fixed-rate mortgages are a mistake, then we are going to be in for decades of housing market instability.
“It came time to deal with the finances. Because we were plunking down only 7% or so on the down payment, we were faced with a steep insurance fee. I was naively insulted by this PMI-the idea that we were risky borrowers out of the box. So we opted for a “piggyback” loan, a second loan that would cover the rest of the down payment and allow us to avoid the PMI. We would pay about the same per month, and when our home’s value rose, we would refinance and combine the two loans into one. A lot of the people I turned to for advice were recent homebuying colleagues facing similar questions, or longtime owners who were doe-eyed by low interest rates. I don’t recall anyone saying “Dude, wait a few years.””
Apparently, this guy wasn’t reading the bubble blogs that were loudly proclaiming that he was an idiot, and that he should have waited a few years.
Notice the idea that you refinanced into a larger mortgage later after the house value goes up. Sounds very rational, and it works really well as long as house prices only go up. The author goes on,
“We never considered purposefully defaulting, but then again we’re not falling down a catastrophic, high six-figure equity hole. After reading Mr. White’s paper, though, we decided to run some numbers, pulling together basic info on our loan, tax bracket and rental prices for comparable homes in our area, and plugged them into this calculator at PayorGo.com. This was by no means a scientific appraisal. I had to enter how long we expected to be in our home, and I really couldn’t answer “as long as it makes financial sense.” So I said seven years. I don’t know how realistic that is — my kids will be about 12 years old then. Apparently, if my home doesn’t rise 1.94% in value over the next seven years, we should call it quits.
We wouldn’t. Although, if I were laid off and unemployed for more than a few months we might have to.”
This guy should call it quits because his house is probably not going to rise in value by 1.94% every year for the next seven years. In fact, it probably will not rise at all, and it will very likely decline more in the interim. He continues,
“The price drop sometimes feels like an apparition. On paper, my home is considered less valuable than what I am paying for it. In reality, it is the same home (warts and all) that I liked when I signed the papers.”
Part of the reason it feels like an apparition is because this guy is in denial! He doesn’t have to face the consequences of his mistake, so it doesn’t feel like one. I leave the author with the last word,
“I’m not blind to the pitfalls-if I was offered a job in another city, we wouldn’t be able to sell; we can’t get a home-equity line of credit because we already tapped it. Still, my biggest challenge week to week is operating the leafblower. And if I knew in 2006 that in 2009 I’d be able to get the same home for a 20% discount AND still get a low rate, I never would have pulled the trigger.
What I do know is that this is our first home. It is where our kids-going on 5 years old- are growing up. We love our neighbors and the school system. We put in central air. I still remember the feeling of getting those keys handed to me the first time. We have sentimental equity. Home buying wasn’t a zero-sum financial game of win or lose.
The Fitzgeralds are technically underwater, but we don’t feel like we are drowning.”
Brian R. Fitzgerald is an editor at WSJ.com. Email: Brian-R.Fitzgerald@wsj.com
Beds 4 Baths 2 full 1 part baths Size 2,300 sq ft ($304 / sq ft) Lot Size n/a Year Built 2004 Days on Market 3 Listing Updated 12/16/2009 MLS Number S599151 Property Type Condominium, Residential Community Northwood
’tis the Season to get a Great Deal! This incredible ‘almost new’ Bella Rosa detached home offers a private, cul-de-sac location in the gated area of Northwood II. This open layout features, a downstairs bedroom and bath, a beautiful granite countered, gourmet kitchen with a center island, that opens to the spacious family room and dining area. On this same level is the indoor laundry room. The direct access garage is appointed with built-ins. Upstairs has a HUGE Master bedroom, with two walk-in closets, and a luxurious master bath with sunken tub, separate shower, and dual vanities. Two additional bedrooms, a bath, and an office niche complete the second level. The enclosed yard is an entertainer’s delight… very private and the beautiful hardscape makes for a great area to hold parties. The ammenities of this gated community includes a resort-style pool, clubhouse, picnic areas, outdoor fireplace, and more. Location is everything here…This is a must-see before it is gone!
This is a must-see before it is gone! It feels urgent to me, does it feel urgent to you?
For many underwater homeowners, walking away from their mortgage debt is the best financial decision; however, most will not walk away from their mortgages. Enough borrowers will default to make a steady stream of properties like today’s.
From the lands lying at the end of World I am bringing this dress as a gift, it is Made with the purest silk She smiled at me, She never wore the dress Touching the fabric was like holding Nothing in your hand
Nothing in your hand; it is what underwater homedebtors have. They occupy a house — just like renters do — but most of them do so at a huge premium to renting. Underwater homedebtors have no equity; what they do have is the dream of equity in the future. They have a position in a financial market that most resembles an option contract that is out-of-the-money.
People who are underwater today and paying a premium are still hoping they will get a return on those premium dollars when their house value rises above their mortgage and puts them back in-the-money. Mostly this is based on fantasy or Zillow Zestimates or some other such nonsense, when in reality, their property values will likely decline further, and it will take much longer than they want for prices to come back. That is the way financial bubbles deflate.
Most people will not walk away. Most will continue to suffer in silence wait the decade or more for prices to recover. People become invested in the process. Once they have held on for two or three years too long, they feel committed to seeing it through, and many will. This was the experience of the early 90s, and since that bubble wasn’t near so massive, the market did recover in 8-10 years and life went on.
{book3}
The Great Housing Bubble was much, much larger than the bubble of the 90s, and we have not deflated back to stable price levels yet. Those that hang on will likely wait much longer than those who bought in the last bubble.
Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis
Brent T. White
Abstract
“Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.”
“This article suggest that most underwater homeowners don’t default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure – consequences that are in actuality much less severe than most homeowners have been led to believe. Moreover, fear, shame, and guilt are not mere “transaction costs” that homeowners calculate according to their own personal tolerance for each. Rather, these emotional constraints are actively cultivated by the government, the financial industry, and other social control agents in order to induce individual homeowners to act in ways that are against their own self interest, but which are – wrongly this article contends – argued to be socially beneficial.”
I totally agree with the observation made here. The powers-that-be are working in a coordinated effort to convince people to keep hanging on, not because it helps the borrower, but because it benefits the lender. The culmination of these efforts is a series of Bailouts and False Hopes.
“Unlike lenders who follow market norms, individual homeowners are encouraged to behave in accordance with social norms of “personal responsibility” and “promise-keeping.” Thus, individual homeowners tend to ignore market and legal norms under which strategic default might not only be a viable option but also the wisest financial decision. As a result, individual homeowners have born a disproportionate share of the costs of the housing meltdown.”
When a borrower defaults at a bank, it is a tiny blip on some complicated financial statement of a large, faceless lender — the same lender that made a fortune putting the borrower into an unstable loan to begin with. Lenders made the problem, but they are trying, hoping, praying they can pass off the responsibility to everyone else — particularly underwater homeowners. It is the individual homeowners who bear the greatest burden and it is the borrowers who will pay the price through a decade of debt slavery with the feeble hope of appreciation to bait them on.
{book2}
IMO, this is where it gets even worse. For the whole system to hold together, kool aid intoxication must be sustained. If the underwater homeowners truly accepted the idea that prices may not come back in a reasonable time — and prices will never come back as quickly as homedebtors imagine — people will default in larger numbers.
In one of the more damning portions of the paper, Dr. White writes:
… social control agents such as the government, the media, and the financial industry use both moral suasion and disinformation to cultivate these emotional constraints in homeowners.
Is he a conspiracy-theory nutter, or is he an accurate observer of what is going on? I will let you decide.
Should You Walk Away?
I found a link to a site, Pay or Go. With a few simple inputs the site will tell you whether or not it is in your best interest financially to walk away. It also has a number of informative links to major newspaper articles on the subject.
The calculator on the site has an important note that drives to the heart of the problem: people believe house prices appreciate faster than they really do.
IS IT IN MY ECONOMIC INTEREST TO WALK AWAY?
You decide. This calculator is just a tool to help. Numerous variables are involved but the biggest is probably your assessment of the future of housing pricing. No one can predict future prices, but the conventional wisdom says that it is probably not realistic to believe that housing prices will increase by more than 4%-8% per year on average.
It seems obvious to me that one of problems people were having with this tool was that they put in assumptions for appreciation that are too aggressive. It is the same kind of thinking that inflated the bubble.
Faith in market kool aid is not enough. With a massive overhead inventory of those who want or need to get out at breakeven (including the lenders and their shadow inventory), no amount of wishful thinking is going to make prices rise. Timing Does Matter. Low interest rates may help cushion the blow, but peak prices are not right around the corner.
I am starting to believe that kool aid intoxication may never go away, particularly now that it is in the government’s best interest to keep it tasty and keep it flowing.
Beds 3 Baths 4 baths Size 868 sq ft ($329 / sq ft) Lot Size n/a Year Built 2007 Days on Market 62 Listing Updated 11/7/2009 MLS Number 9405653 Property Type Condominium, Townhouse, Residential Community Columbus Grove Tract Oakp
According to the listing agent, this listing may be a pre-foreclosure or short sale.
A MUST SEE! 3BED+4BA+3CAR GARAGE W/WIDE OPEN VIEW IN PRIME LOCATION. HARD WOOD FLOORS & UPGRADED CARPET,GRANITE COUNTERS IN KITCHEN, GE PROFILE STAINLESS STEEL APPLIANCES,SPA,CLUB HOUSE, TENNIS CT. CITY LIGHTS, NEAR THE DISTRICT FOR ALL SHOPPING, DINING & ENTERTAINMENT,BIKING, RUN/WALK.
ALL CAPS
A MUST SEE! Wow! I am so motivated….
I could have titled this post, “How to Lose a Fortune Quickly.” A 30% drop in just over 2 years is remarkable… documenting the transaction that began 5 months after I started warning buyers on the IHB… that is priceless.
