Many who "bought the dip" in 2007 and 2008 are discovering the market correction is more severe than they realized.
Today's featured property is one of the ugliest in Irvine, but some knife catcher saw an opportunity — an opportunity to get sliced….
Irvine Home Address … 3922 CLAREMONT St, Irvine, CA 92614
Resale Home Price …… $485,485
Sweet child in time, you'll see the line
Line that's drawn between the Good and the Bad
See the blind man, he's shooting at the world
Bullets flying, ooh taking toll
If you've been bad – Oh Lord I bet you have
And you've not been hit oh by flying lead
You'd better close your eyes, you'd better bow your head
Wait for the ricochet
Deep Purple — Child in Time
Buying into a declining market on speculation is a fools game. When I first studied stock trading, I noticed an important truth about picking tops and bottoms versus playing a trend; every attempt to pick a top or a bottom fails except the last one which is a big winner. Every attempt to trade momentum is a winner except the last one which is a big loser. It is better to hit many singles trading momentum than it is to try to hit home runs picking bottoms.
Many active buyers today are basing their decision on the belief that the market has bottomed, and they are betting on appreciation. They may be right, but I rather doubt it. It is much wiser safer to wait and see if positive price momentum can continue through the removal of government market props and the disposition of shadow inventory.
The state of the housing market has long reached a point where it's good news to hear, "It's not getting worse." Unfortunately, according to a firm that tracks borrowers behind on their mortgages, you can conclude at best, "It's getting worse, but less quickly."
Rising sales, largely spurred by first-time buyer credits, have given people hope that the beleaguered housing market has finally hit bottom and is even showing signs of life. It's been impossible, however, for me to get excited about this, considering that the number of people falling behind on their loan payments is growing, not shrinking. Unemployment continues to produce new delinquencies, and it's been many quarters now since we were talking only about subprime mortgages. No, delinquencies are hitting regular old fixed-rate mortgages to borrowers with good credit, too.
And here's the latest report from Lender Processing Services out of Jacksonville, Fla.: Delinquency rates have hit historic highs. More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure, with another 1 million properties either bank-owned or sold out of foreclosure. An incredible 10% of all U.S. loans are delinquent.
The worst-hit areas are the usual suspects: the boom-and-bust states of Florida, Nevada, Arizona, California, plus the economically savaged areas of Michigan and Ohio. Also up there are Mississippi, Georgia, Indiana and Illinois. But few states are escaping the problem; it's just that the worst states are so, so bad it makes the others look relatively good.
LPS says, "The pace of deterioration has slowed." That's the supposed good news. But I have a hard time thinking optimistically about this, not just because in January alone 346,000 borrowers fell behind on their payments for the first time. The other disturbing statistic is that older loans make up a higher percentage of new delinquencies — that means people who already had fallen behind and pulled themselves out of it (maybe through a loan modification program) are delinquent again. This confirms what many have said about the federal programs to reshape mortgages into loans people can actually pay: They're not doing the job for enough people.
The sheer number of bad loans surely means more foreclosures, which means more houses on the market being sold at bargain-basement prices. And that means we'll watch our property values continue going down, down, down.
Bulls are dismissive of shadow inventory as if it is just another argument bears make about house prices. Shadow inventory is a result of every expedient decision lenders made to avoid recognizing losses.
Every problem bears noted over the years — ARM loans, liar loans, negative amortization loans, artificially low interest rates, excessive speculation with 100% financing and so on — have all proven to be prescient. The predictable result of each of these problems is mortgage default followed by foreclosure which leads to more inventory and lower prices. Lenders have merely delayed this step-by-step process by refusing to foreclose. That doesn't make the problem go away; it just makes the problem worse. Appreciation from a strong economy is not coming, and even if it were, it wouldn't counteract the effect of so many distressed homeowners.
Lender Processing Services Chart Porn
Last week when I posted One Defaulting Owner’s Free Ride: Three Years and Counting, many wondered how common it was to find home debtors who have not made payments for a very long time. Take a careful look at the numbers in the chart below. According to LPS, there are almost a quarter million homeowners who have squatted for more than two years, and 33,723 of them have not begun the foreclosure process.
The shadow inventory and foreclosure problem is growing. For each property we resolve through the foreclosure process another two and one-half properties are defaulting.
If you had a virus, and if the medication you were taking to combat the disease were killing viruses at a slower rate than they reproduced, would you consider yourself healthy or improving?
Can you find good news in these conclusions?
Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. “There’s no plausible fundamental explanation for that,” he says.
Why? Simple, he says: Economic fundamentals are all going in the other direction. Rental apartment vacancies are reaching record highs. Many segments of the housing market are still oversupplied. And the core demographic in the country—the baby boomers—are reaching the age where they’re more likely to downsize, buying less house in the years to come.
Far from some rosy estimates that housing is going through a temporary, once in a lifetime downturn, and that once the market bottoms, homes will again appreciate well beyond the rate of inflation, Mr. Baker argues that home prices are far more likely to increase annually at the rate of inflation, at best.
“If anything, I expect housing to be weaker than normal rather than stronger over the next decade,” he says. “People who say this is a temporary story, there’s no real reason to believe anything like that.”
The recent burst of good housing news has been fueled by government stimulus, including the tax credit, low mortgage rates and easy financing from the Federal Housing Administration. Mr. Baker, who had been a skeptic of the tax credit, concedes that it has worked. So, too, he says, has the FHA effectively supplied credit to goose sales.
But that’s likely for the worse, he argues, taking the opposite view of policymakers at the FHA.
“As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011,” he says. “In so far as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner. We didn’t do those people a favor.”
We are not doing ourselves any favors as taxpayers who are guaranteeing the inevitable losses these loans will incur. When our current batch of knife catchers realize they overpaid and prices are not going to recover any time soon, they will strategically default.
Knife Catchers and the second wave of foreclosures
Today's featured property is an example of what Dean Baker is worried about: defaults and foreclosures among those who were encouraged by the government to overpay during the price decline.
I first profiled today's featured property back in September of 2007 in You Ugly:
This listing is the least desirable single family detached home in Irvine. Everything about this property is a negative:
- It is 36 years old.
- There is no back yard.
- It only has 1 full bathroom.
- The front elevation has no windows. It looks like a 3 car garage next to a 2 car garage. Nice…
- The colors are awful. Check out the dark brown flooring and the blue cabinets and walls. The view of the block wall is a reminder of your prison sentence.
- The living room has three incompatible shades of ugly.
- The house itself is right on the 405 on ramp at Culver. A location guaranteed to have maximize noise and air pollution as people accelerate onto the freeway.
- If that wasn't bad enough, it is adjacent to a huge power pole with enough electricity running through it to make your hair stand on end and give your children brain cancer. Perhaps the hum of the power lines drowns out the freeway noise. Who knows?
I would not live in this house.
The property was purchased on 2/28/2008 for $458,500. The owner used a $412,650 first mortgage and a $45,850 down payment. It appears he paid for less than one year before giving up:
Recording Date: 02/11/2010
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Recording Date: 04/01/2009
Document Type: Notice of Default
The lender, HIGH TECH LENDING INC, danced for ten months before deciding to push this owner out.
Ideal Home Brokers and Financed Trustee Sales
Today's featured property, ugly as it is, will probably sell to a third party at auction. Thanks to 5% interest rates, recent comparable sales value the property at $500,500 — which surprises me that the owner is not trying to sell it an get his down payment back — but this property is headed to auction.
If a buyer steps forward and puts 3% down on a $485,485 purchase price, our hard-money capital partner will authorize us to go to auction and bid on the property. In the event we are the successful bidder, the property is automatically in escrow with the buyer who placed the down payment.
Personally, I can't recommend anyone pay $485,485 for this house, but based on the requirements of our hard money lender and the other costs in the deal, that is the price we must charge to make the deal work.
Irvine Home Address … 3922 CLAREMONT St, Irvine, CA 92614
Resale Home Price … $485,485
Home Purchase Price … $458,500
Home Purchase Date …. 2/28/2008
Net Gain (Loss) ………. $(2,144)
Percent Change ………. 5.9%
Annual Appreciation … 2.7%
Cost of Ownership
$485,485 ………. Asking Price
$16,992 ………. 3.5% Down FHA Financing
5.05% …………… Mortgage Interest Rate
$468,493 ………. 30-Year Mortgage
$101,097 ………. Income Requirement
$2,529 ………. Monthly Mortgage Payment
$421 ………. Property Tax
$101 ………. Special Taxes and Levies (Mello Roos)
$40 ………. Homeowners Insurance
$50 ………. Homeowners Association Fees
$3,142 ………. Monthly Cash Outlays
-$419 ………. Tax Savings (% of Interest and Property Tax)
-$558 ………. Equity Hidden in Payment
$34 ………. Lost Income to Down Payment (net of taxes)
$81 ………. Maintenance and Replacement Reserves
$2,280 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,855 ………. Furnishing and Move In @1%
$4,855 ………. Closing Costs @1%
$4,685 ………… Interest Points
$16,992 ………. Down Payment
$31,387 ………. Total Cash Costs
$34,900 ………… Emergency Cash Reserves
$66,287 ………. Total Savings Needed
Sq. Ft.: 1222
$/Sq. Ft.: 375
Lot Size: 5,521 Sq. Ft.
Property Type: Residential, Single Family
Style: One Level, Traditional
Year Built: 1971
You'll love this great home in a wonderful school district. The light and bright floorplan features neutral carpet, pergo flooring and cathedral ceilings. The large yard provides lots of space for entertaining & play. This home is located just steps to the community pool and park. Plus, there are no Mello Roos! This is a bank owned property. Bring us an offer!