The fix is in to stabilize prices through restricting supply. Will the cartel arrangement hold up and permit an orderly liquidation of REO without crashing prices?
Irvine Home Address … 14911 SUMAC Ave Irvine, CA 92606
Resale Home Price …… $719,000
{book1}
Where were you when I was burned and broken
While the days slipped by from my window watching
And where were you when I was hurt and I was helpless
Because the things you say and the things you do surround me
While you were hanging yourself on someone else's words
Dying to believe in what you heard
I was staring straight into the shining sun
Lost in thought and lost in time
While the seeds of life and the seeds of change were planted
Outside the rain fell dark and slow
While I pondered on this dangerous but irresistible pastime
I took a heavenly ride through our silence
I knew the moment had arrived
For killing the past and coming back to life
Pink Floyd — Coming Back To Life
Is the housing market coming back to life? Am I being foolishly cautious to believe the massive inventory of delinquent borrowers will be a problem for the market?
The fix is in
Whether through concerted effort, foreclosure moratoria, or a coincidental paralysing reaction to crashing prices, banks stopped processing foreclosures as borrowers went delinquent in mid 2008. By early 2009, banks stabilized prices by constricting supply through dis-approving short sales and allowing widespread squatting. The banking regulators who are supposed to watch over lender's non-performing loans are turning a blind eye and allowing the amend-pretend-extend dance to go on. As far as I can tell lenders are going to continue on this path for the foreseeable future.
Everyone in the homebulding and development industries has responded to the apparent stabilization to provide new product to the market. Houses are being built and sold, loans are being written, and people are going to work. I think that is great, but there is one big problem: distressed inventory.
What are we going to do with all those homes?
Whenever I attend a Building Industry Association meeting, I ask the same question, "What are we going to do with all those homes?" Nobody really knows the answer.
Everyone hopes the lenders can meter out the supply at a rate that allows some amount of new construction and doesn't crash prices. The lenders hope the same. The problem is the arrangement is a cartel, and each bank has incentive to cheat and liquidate its non-performing assets. Banks need that capital, and it is wasted while it is tied up in a squatter's loan or vacant property. The incentive to liquidate is stronger than the incentive to hold out for higher prices, particularly since liquidation of the cheaters leads to lower prices for those who hold on.
Imagine the thousands of properties in distress being held until there is sufficient price and volume for lenders to liquidate. This is overhead supply. Until the market absorbs these homes, prices are not going higher. Perhaps in the short term, the limited supply can move prices up, but eventually, lenders need to foreclose and liquidate otherwise they have purchased a large number of properties and given them to squatters.
Today's featured property
This property was originally purchased on 10/28/2005 for $795,000. The owner used $636,000 first mortgage, a $159,000 second mortgage, and a $0 down payment. He defaulted in late 2006, and the property was purchased by U S BANK NA, ; HOME EQUITY ASSET TRUST 2006-1HOME EQUIT, ; SELECT PORTFOLIO SERVICING on 05/22/2007.
Foreclosure Record
Recording Date: 04/27/2007
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 01/25/2007
Document Type: Notice of Default
I first wrote about today's featured property in Pass the Knife from last July. Back then, the owner was asking $650,000 and couldn't get it. Now they believe the market has appreciated 10% and they can get $719,000.
Irvine Home Address … 14911 SUMAC Ave Irvine, CA 92606
Resale Home Price … $719,000
Home Purchase Price … $600,000
Home Purchase Date …. 5/14/2010
Net Gain (Loss) ………. $75,860
Percent Change ………. 19.8%
Annual Appreciation … 238.0%
Cost of Ownership
————————————————-
$719,000 ………. Asking Price
$143,800 ………. 20% Down Conventional
4.94% …………… Mortgage Interest Rate
$575,200 ………. 30-Year Mortgage
$147,861 ………. Income Requirement
$3,067 ………. Monthly Mortgage Payment
$623 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$60 ………. Homeowners Insurance
$42 ………. Homeowners Association Fees
============================================
$3,792 ………. Monthly Cash Outlays
-$748 ………. Tax Savings (% of Interest and Property Tax)
-$699 ………. Equity Hidden in Payment
$275 ………. Lost Income to Down Payment (net of taxes)
$90 ………. Maintenance and Replacement Reserves
============================================
$2,710 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,190 ………. Furnishing and Move In @1%
$7,190 ………. Closing Costs @1%
$5,752 ………… Interest Points @1% of Loan
$143,800 ………. Down Payment
============================================
$163,932 ………. Total Cash Costs
$41,500 ………… Emergency Cash Reserves
============================================
$205,432 ………. Total Savings Needed
Property Details for 14911 SUMAC Ave Irvine, CA 92606
——————————————————————————
Beds: 5
Baths: 2 full 1 part baths
Home size: 2,350 sq ft
($306 / sq ft)
Lot Size: 5,000 sq ft
Year Built: 1972
Days on Market: 8
Listing Updated: 40312
MLS Number: S617168
Property Type: Single Family, Residential
Tract: Cp
——————————————————————————
FAVORITE FLOORPLAN IN COLLEGE PARK WITH 5 BEDROOMS AND 2.5 BATHS .OVER 2 YEARS OLD PAINT IN AND OUT , RECESSED LIGHTING , NEW FLORRING , NEW GAS STOVE , SECTIONAL GARAGE DOOR , GRANITE COUNTERTOP , STAINLESS STEEL APPLIANCE , CELLING FAN . CLOSE TO SCHOOL, SHOPPING,PARK , ASS POOL , FWY. BEST PRICE FOR THIS SIZE OF HOUSE IN IRVINE .
FLORRING? CELLING? This listing agent has random double-letter disorder.
I love the abbrviation for "association." I typically add an OC to the end to form "assoc." Although, an OC ASS POOL might be nice too….
{book3}
Despite the threat of overhanging supply and uncertainty about what will happen with distressed inventory, builders are building and selling homes.
Building Is Booming in a City of Empty Houses
By DAVID STREITFELD Published: May 15, 2010
LAS VEGAS — In a plastic tent under a glorious desert sky, Richard Lee preached the gospel of the second chance.
The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”
Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.
Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.
We have bulldozed thousands of homes on paper by tieing them up with squatters or allowing them to stay empty. Jim Cramer was right about bulldozing significant areas of Riverside County. We have. We bulldozed houses on paper by pretending and acting as if the houses are not there. It is even worse in Las Vegas.
Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.
“There’s a surprising rebound in the hardest-hit markets,” said Brad Hunter, chief economist with the consultant Metrostudy. “People are buying again.” From the recession’s lows, construction has nearly doubled in Las Vegas, Phoenix and Tucson. It is up 74 percent in inland Southern California and soaring in Florida.
Some of the demand is coming from families that are getting shut out of the bidding for foreclosures by syndicates that pay in cash, and some is from investors who are back on the prowl.
This statement is accurate, but it fails to capture what is really happening. The demand is still very low. Total construction and sales are far below the lowest low experienced since WWII. The blue line in the chart below is single-family residential development and construction. The bottom of the trough of the early 90s would feel like a housing boom relative to current activity levels.
The recovery we are seeing in the new home construction market is completely a result of the tight constriction of resale real estate by the banks. The inventory sits over the market waiting for banks to do something. Right now, the banks are feeling rewarded by doing nothing; prices are going up, and on paper, they are doing much better. Of course, they eventually have to sell those homes, and the demand is not infinite. As they sell, either prices will go down or appreciation will be held in check for decades.
Land and labor costs have fallen significantly, so the newest homes are competitively priced. …
“We’re building them because we’re selling them,” Mr. Anderson said. “Our customers wouldn’t care if there were 50 homes in an established neighborhood of 1980 or 1990 vintage, all foreclosed, empty and for sale at $10,000 less. They want new. And what are we going to do, let someone else build it?”
Builders are suppliers who react to market conditions. Builders do not make a market, nor do they exercise much influence over it. If conditions are such that a profit can be made building homes, that is what builders are going to do.
All of this goes contrary to the conventional wisdom, which suggests an improved market for builders is years away. Nationwide, new home sales at the beginning of this year plunged to a level below any recorded since 1963, when the figures were first officially tabulated.
The entire building industry is on life support. The minimal amount of homes we are building right now isn't enough to sustain very many people. We had over-employment in the building industry during the bubble, but now employment is so low that many qualified and experienced workers are having to retrain themselves for other work. The small core of knowledgeable professionals that we will need when real demand returns to the housing market is barely getting by.
Simply put, the country already has too many houses, the legacy of wide-scale overbuilding during the boom. The Census Bureau says there are two million vacant homes for sale, about double the historical level. Fewer new households, moreover, are being formed as families double up for economic reasons, putting a further brake on demand.
… “Housing is construction. It’s tables. It’s paint. It’s couches. It’s toilets,” said Sally Taylor, a specialist in liquor and gambling establishments who attended the American West festivities. “If we build more houses, we’re creating more jobs.”
… Analysts have calculated that it could take as long as a decade for inventories to return to their precrash levels and for demand to once again exceed supply. That is a grim prospect for any owner who hopes to accrue equity through rising prices.
That is why buyers should never purchase because of dreams of appreciation riches. That is kool aid intoxication, and it will be revealed as the illusion it is at the worst possible time.