Many are celebrating the end of the real estate bust. But what about all those delinquent borrowers? Isn't that still a problem?
Irvine Home Address … 19 BENNINGTON Irvine, CA 92620
Resale Home Price …… $632,400
I will creep
Into your thoughts
Like a bad debt
That you can't pay
Take the easy way
And give in
Morrissey — The More You Ignore Me, The Closer I Get
Many buyers today believe that the variety of government props to the market have saved the day and house prices have resumed their steady, upward climb. The changing mix of sales has certainly propped up the median price. The cost per square foot — which is a better indication of what people are getting for their money — has not changed much. Since early 2009 when the Federal Reserve started buying mortgages to lower interest rates, prices have stabilized. They bounced last spring and pulled back during the winter, and it looks to be repeating the cycle this year.
In 2009, pricing was held up at very low transaction volumes. In 2010, the volume is picking up a little, but inventory is creeping up as well. Can this spring rally can hold as we push through 800 properties for sale?
The bottom line is that prices will hold up as long as inventory is not released too quickly. It can be absorbed by the depleted buyer pool, at least that is the advice economists are giving banks.
Millions of New Foreclosures Will Stifle, Not Crush Housing Market, Say Economists
Every once in a while, the term "shadow inventory" makes it into the business headlines. Invariably, stories warn of a looming flood of foreclosures that will drag the housing market down as soon as homeowners begin to feel optimistic again.
But what is shadow inventory — and is it really such a big threat?
Different experts have different definitions. Some only include homes that have already been repossessed by banks and are awaiting distressed sales. Others include those whose owners are long-overdue on mortgage payments, while others still count homes whose owners would like to sell but are waiting for conditions to improve.
8 Million More Foreclosures May Be Waiting
"The definition of shadow inventory has gotten out of control," says Rick Sharga, senior vice president at RealtyTrac, an online market for distressed homes.
As a result, estimates of homes in the shadows vary widely between 2 million and 8 million. By comparison, approximately 5.5 million homes are expected to change hands this year, of which about a third are in some kind of distress.
High estimates usually include include repossessed homes that have not yet been listed for sale, homes that have been moved from the delinquent bucket and into foreclosure, and homes that are more than 60 days delinquent.
"Theoretically you could say up to 7 million homes are in the pipeline, but not all of them will go into the market and if even if they do, not all of them will hit at once," says Sharga. Given the current pace of sales, Sharga believes shadow inventory could be cleared by the end of 2013, at which point the housing market can begin a real recovery.
RealtyTrac's president is saying no recovery until 2013. If by recovery he means we break out of this bottoming formation, his estimation is as good as any. It will vary market to market.
Shadow Inventory Can Be Lethal
The problem with shadow inventory is that it does not simply represent additional supply. It's supply of the worst kind: distressed homes that are often in hard-hit regions, often in a state of disrepair. Homes in foreclosure have more power to drag down real estate prices and keep them depressed for years to come.
"If you can buy a cheap foreclosed home next door to a normal home, many people will choose to buy the discounted home," says Celia Chen, housing analyst at Moody's Economy.com. She estimates that 4.6 million homes are currently waiting in the shadows, almost a whole year's worth of housing supply.
Months of supply on its own doesn't sound so bad. Unfortunately, this inventory is still growing and it is being sold at a rate that will not clear it for many years, at the rate of current sales, it will take 60 months just to clear Irvine, and it is one of the better markets.
Shadow Inventory Stuck In Limbo
Like many other analysts, Chen believes we still have a long way to go before real estate prices begin recovering. Some expect a recovery to begin in the middle of next year, others don't see it coming for several more years.
There are many reasons that shadow inventory is so difficult to gauge.
For one thing, financial institutions that own distressed mortgages are not saying exactly how many homes they hold. Firms have generally been releasing their supply of distressed homes slowly into the market for fear of crushing prices.
Another problem is that nobody knows exactly how many homes will make it out of the government's "Home Affordable Modification Program." Chen estimates that only 45 percent of the 1.2 million loans that are aiming for a modification will actually succeed, while the rest will likely end up in foreclosure.
While these numbers certainly are cause for concern, the good news is that this shadow inventory is unlikely to cause a shock to the system similar to the initial crash.
That last sentence was pure emotional comfort with little basis in fact or history. For prices to remain firm, and unstable cartel of banking interests must keep them that way.
No Nuclear Event in Housing
"Much as during the arms building between the U.S. and the Soviet Union, neither one ever launched a nuclear attack for fear of causing complete destruction," says RealtyTrac's Sharga. "You're not going to see a nuclear event happen in the housing market either."
There will not be a nuclear event if the banks continue withholding inventory and allowing people to squat. That is the price paid by the banks and ultimately the taxpayer. The collapse of the cartel may not be nuclear, but it could certainly drive prices down.
Esmael Adibi, economics professor at Chapman University says shadow inventory is actually a good thing because it means that financial institutions – primarily lenders and investors who own the delinquent mortgages – are holding on to the inventory instead of dumping it into the market.
A good thing? I have heard Dr. Adibi speak before, and I could picture him saying that. First, this is good for whom exactly? Banks? They must love having a bazillion delinquent loans? Buyers who have to pay higher prices? Dr. Adibi sits on the board of at least one bank, and they do listen to his advice. Look for the banks he advises to sit on their REO and be the last to liquidate. This is his endorsement of widespread squatting.
Adibi says financial institutions are not only holding on to their inventory in order to avoid crushing the market, but also because they believe they might get a better deal once prices have recovered slightly.
"Can you imagine if all those homes ended up in the market now?" he says. "Things would be much worse."
Yes, I can imagine that pretty well, and "much worse" is a matter of perspective. A conspiracy to keep prices elevated and keeping families priced out of them is not my idea of "much better." Notice also that he said they are holding out for better deals. This is cartel behavior, but what happens when some of the members of the cartel want to get out quicker? What about those banks whose business plan is not to hold this inventory until prices come back?
Prices are about as good as they are going to get for banks for quite some time. Low interest rates make reasonable payments on huge loans. Look at today's property. A $632,400 property only costs the owner a little over $2,500 a month to own. The payment is no longer the problem; the amount financed is staggering. As long as payment affordability is reasonable, people will buy homes. If the banks can prevent too many of them from entering the market, prices will not fall.
What about the 3,600 distressed properties in Irvine?
I recently wrote that Nearly 500 Properties Are Currently Scheduled for Foreclosure Auction In Irvine. There are about 900 properties in the foreclosure pipeline about about 2,700 in shadow inventory. Last month we sold 228 properties, and this is the prime selling season. In any market where distressed inventory has exceeded 50%, prices have cratered, so if we chipped away at the 3,600 number with about 120 sales a month, it will take 30 months to clear out the garbage — assuming we don't add any more to it.
How common are the Ponzis? Is the number of truly distressed debtors only 3,600 in Irvine. Based on the sample we encounter here daily on the blog, I estimate the number to be higher. Of all the people you know, what percentage are Ponzis? Is it less than 10% or more like half? The more common the Ponzis, the greater the likelihood of a protracted real estate bust. Too many people took on too much debt so they could pretend and look rich. There is far less wealth here than commonly believed. People here are very good at faking it.
Used, abused, and left for garbage
- The owners of today's featured property drained it like their neighbors. The property was purchased on 7/31/1991 for $309,000. The owners financing is unknown but they probably put 20% down and financed $247,200.
- My records pick up with a $100,000 HELOC on 7/16/2002.
- On 4/26/2004 they refinanced the first mortgage for $275,000, so the owners were conservative up to then.
- On 5/11/2004 they opened a $100,000 HELOC.
- On 4/15/2005 they refinanced with a $589,600 first mortgage.
- On 12/12/2005 they opened a $139,000 HELOC.
- On 8/20/2007 they refinanced with a $630,000 first mortgage and a $125,000 HELOC.
- Total property debt is $755,000.
- Total mortgage equity withdrawal is $507,800 if they maxed out the HELOC.
- Total squatting time is at least 18 months.
Recording Date: 07/20/2009
Document Type: Notice of Sale
Recording Date: 04/14/2009
Document Type: Notice of Default
Recording Date: 04/13/2010
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
I want to call your attention to the last two notices. Note that the NOT was refiled one day before the 1 year period was up. This is evidence of the bank doing nothing to stop the squatting.
Irvine Home Address … 19 BENNINGTON Irvine, CA 92620
Resale Home Price … $632,400
Home Purchase Price … $309,000
Home Purchase Date …. 7/31/1990
Net Gain (Loss) ………. $285,456
Percent Change ………. 104.7%
Annual Appreciation … 3.6%
Cost of Ownership
$632,400 ………. Asking Price
$126,480 ………. 20% Down Conventional
4.91% …………… Mortgage Interest Rate
$505,920 ………. 30-Year Mortgage
$129,606 ………. Income Requirement
$2,688 ………. Monthly Mortgage Payment
$548 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$53 ………. Homeowners Insurance
$0 ………. Homeowners Association Fees
$3,289 ………. Monthly Cash Outlays
-$458 ………. Tax Savings (% of Interest and Property Tax)
-$618 ………. Equity Hidden in Payment
$240 ………. Lost Income to Down Payment (net of taxes)
$79 ………. Maintenance and Replacement Reserves
$2,531 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,324 ………. Furnishing and Move In @1%
$6,324 ………. Closing Costs @1%
$5,059 ………… Interest Points @1% of Loan
$126,480 ………. Down Payment
$144,187 ………. Total Cash Costs
$38,800 ………… Emergency Cash Reserves
$182,987 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 2,503 sq ft
($253 / sq ft)
Lot Size: 6,215 sq ft
Year Built: 1979
Days on Market: 3
Listing Updated: 40331
MLS Number: S619509
Property Type: Single Family, Residential
Great opportunity to buy in Northwood. Good floorplan, living room, family, dining room, 2 fireplaces, inside laundry and large backyard. No HOA or Mello Roos. Desirable school district.