What will 2011 bring?

Irvine Home Address … 55 GRAY DOVE Irvine, CA 92618

Resale Home Price …… $1,350,000

But now, I stand alone with my pride

And dream, that you're still by my side

But that was yesterday

I had the world in my hands

But it's not the end of my world (ooh ooh ooh)

Just a slight change of plans

That was yesterday

But today life goes on

No more hiding in yesterday (ooh ooh ooh)

'Cause yesterday's gone

Foriegner — That was Yesterday

For the last few years, I have started with predictions. Last year, I had this recap and predictions:

Recap of Past Predictions

First, I wrote Predictions for 2008, and last year I wrote Predictions for 2009. Nothing too bold or surprising either time:

“Most of the macroeconomic conditions I made in 2008 are still operative, and several of the predictions I made which came true will likely repeat in 2009. These are:

1. 2008 will see the worst single-year decline in the median house price ever recorded
2. One or more of our major financial institutions and one or more of our major homebuilders will fail
3. A severe local recession
4. I predict we will see many more angry homedebtor’s troll the blog

I do not believe 2009 will see median house prices decline as much as 2008, but I do believe they will drop significantly, particularly in high-end neighborhoods. The low-end neighborhoods are closer to the bottom than to the top, so 30%+ declines in these neighborhoods are not likely. The high end neighborhoods will experience big drops. Most did not drop 30% last year, so they have more room to drop. The unemployment rate is high, and the economy is in recession which will put pressures on home prices. The dreaded ARM problem is not going away, and these loans will start blowing up this year and on through 2011.”

Not much has changed from my review of the situation a year ago. Lenders did manage to avoid dealing with the problem for a full year, so prices did not budge, and we now have a massive shadow inventory.

“However, there is one bright spot for the housing market that will blunt the declines in 2009: ultra-low mortgage interest rates. We will see properties at rental parity in 2009. The low interest rates are going to reduce the cost of borrowing to the point that many properties will reach rental parity this year.”

I got that one right, and

“With the low interest rates, and with the foreclosures resulting from this year’s loan resets being a year away, we are in a good position to see our first bear market rally. This summer, we might see two or three months of sustained appreciation.”

That happened too, and it happened for the reasons described. As I have noted on other occasions, these conditions are not sustainable.

Predictions for 2010

In looking ahead to 2010, I see a number of important factors that will influence the housing market. Many of the issues discussed today will be the focus of future posts.

Mortgage interest rates will increase in 2010

I don't know how high they will go, but mortgage interest rates will begin their ascent to a (somewhat) natural market. Any stable homeowner who has not refinanced should do it now or forever miss their chance.

This one I got wrong, but only barely.

The interest rate on the mortgage averaged 4.86% in the week ended Thursday, up from 4.81% in the prior week, according to Freddie Mac, a buyer of residential mortgages. A year ago, this mortgage averaged 5.14%.

“For the year as a whole, 30-year fixed mortgage rates averaged just below 4.7%, which represented the lowest annual average since 1955, when the average price of a home was $22,000,” said Frank Nothaft, chief economist at Freddie Mac, in a statement.

With the rise in interest rates over the last 6-8 weeks, interest rates are now within 0.28% of where they started the year, and the strength of the trend reversal suggests we will likely see 5.14% interest rates and perhaps higher in 2011.

I have no idea what interest rates will do. I think they will move higher, but I haven't beaten a coin flip so far. Perhaps the explicit government gurantee on FHA and GSE debt will keep money in residential mortgages even as better rates of return in riskier assets entices some investors. If risk adverse money thinks mortgage loans are a bulletproof investment because the US government is specifically backing the repayment of the loan through the insurance sold by FHA and now the GSEs. This guarantee may cause money to pool in residential mortgages for safety and keep interest rates very low for a long time. It could go either way, and I have no foresight for either scenario. Flip a coin: heads rates go up, and tails rates go down. Ask the magic 8-ball, “Will interest rates go up?” It told me, “Maybe.”

The direction of mortgage interest rates is important for two reasons. One, it motivates people to lock in long term rates. The days of floating your rate lock are over. Playing for short term volatility by delaying your rate lock fights against the broader trend. Rising rates will also stop the refinance market. The days of Ponzi borrowing cheap money are over.

The second reason higher rates is important is because higher rates create costs that cannot be passed on to a borrower who is already borrowing at their limit (see everyone in California). As interest rates go up, the amounts people can finance with a 31% DTI go down. You can't escape the math.

1. Incomes must go up — which doesn't seem likely in the face of high unemployment — or
2. Debt-to-income ratios are relaxed so borrowers can borrow more. That is called a Ponzi scheme, so to avoid further losses, the DTI will stay capped at 31% for the foreseeable future.
3. Loan balances must decrease. This is the most likely scenario since incomes are not going up, and neither are DTI ratios.

Smaller loan balances makes for lower bids from potential buyers. The desire for real estate may be strong, the measurable demand will be shrinking along with loan balances. Prices would have to move lower with the inventory that needs to move through the system.

Inventory will increase in 2010

Eventually, lenders are going to have to foreclose on properties, kick out the squatters, and resell the houses in the resale market. Inventory is coming; how much of that we will see in 2010 is anyone's guess, but I believe we will see much more than we saw in 2009.

Affordability will improve as mid to high end properties are released to the market, and prices of the houses of greatest interest to buyers in Irvine should come down because, despite the buyer interest, there are more properties in distress than there are buyers interested in obtaining them.

One year ago there were 446 homes on the MLS. On the last business day of 2011, there were 725 homes for sale in Irvine. That's an increase of over 60%! I mark that down as a win.

Properties selling at or below rental parity becomes the norm in 2010.

As I have noted on other occasions, many properties, even in Irvine, are trading at or below rental parity. This will happen more often, and it will happen at higher and higher price points.

This is what we observed in late 2010 due to falling prices and super low interest rates.

Sales volumes will increase in 2010

Despite the rumors of a healthy real estate market, transaction volumes remain 15% below historic norms on a seasonally adjusted basis. Sales volumes will increase due to greater supply, and prices will go down.

Sales were up slightly, but not much. Unemployment continues to be a problem and the lack of a move-up market continues to plague sales.

Prices in Irvine will fall 2%-5% in 2010

Increasing interest rates will decrease affordability, and increasing supply will force saleguaranteehe market. The combination will cause prices to begin a multi-year slow decline similar to the 1994-1997 period. The price decline will not be orderly, and the relative stability in the median will mask seismic shifts within the market at sales composition changes (more mid to high end properties will sell) and prices of individual properties decline.

Even though the rally fizzled out, it may have carried prices up enough to stop them from going negative year-over-year. I concede defeat.

Basically, my outlook for 2011 is unchanged from 2010. (1) Inventory will go up. (2) Properties selling at or below rental parity will be the norm. (3) Sales volumes will increase. (4) Prices in Irvine will fall 2% to 5% in 2011.

Whatever the result, the leg down in pricing from the double-dip will be the last move down in this market cycle. The housing market will bottom at different times in different market tiers. I think the biggest discounts will be at the high end going forward. The lowest tier of the housing market may have already hit bottom. If not, it will bottom first. With low end support producing the first wave of move-up equity buyers, the slow grinding declines of higher price points can finally cease, perhaps in 2014. During the next three years, expect a range-bound housing market with a slightly lower bias.

If you want a series of projections on the housing market I like, check out Calculated Risk's post:

Question #1 for 2011: House Prices

Two weeks ago I posted some questions for next year: Ten Economic Questions for 2011. I'm working through the questions and trying to add some predictions, or at least some thoughts for each question before the end of year.

1) House Prices: How much further will house prices fall on the national repeat sales indexes (Case-Shiller, CoreLogic)? Will house prices bottom in 2011?

There is no perfect gauge of “normal” house prices. Changes in house prices depend on local supply and demand. Heck, there is no perfect measure of house prices!

That said, probably the three most useful measures of house prices are 1) real house prices, 2) the house price-to-rent ratio, and 3) the house price-to-median household income ratio. These are just general guides.

Real House Prices

The following graph shows the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter).

Click on graph for larger image in graph gallery.

In real terms, both indexes are back to early 2001 prices. Also both indexes are at post-bubble lows.

As I've noted before, I don't expect real prices to fall to '98 levels. In many areas – if the population is increasing – house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.

If real prices fall to 100 on this index (seems possible) that implies about a 10% decline in real prices. However what everyone wants to know is the change in nominal prices (not inflation adjusted). If real prices eventually fall 10%, that doesn't mean nominal prices will fall that far. House prices tend to be sticky downwards, except in areas with a large number of foreclosures. That is key a reason why prices have been falling for years, instead of adjusting immediately.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through October 2010 using the Case-Shiller Composite 20 and CoreLogic House Price Index.

This graph shows the price to rent ratio (January 1998 = 1.0).

I'd expect this ratio to decline another 10% to 20%. That could happen with falling house prices or rents increasing (recent reports suggest rents are now increasing).

Price to Household Income

The third graph shows the Case Shiller National price index (quarterly) and the median household income (from the Census Bureau, 2010 estimated).

Once again this ratio is still a little high, and I'd expect this ratio might decline another 10%. That could be a combination of falling house prices and an increase in the median household income.

This isn't like in 2005 when prices were way out of the normal range by these measures, but it does appear prices are still a little too high.

House Prices and Supply

The final graph (repeat) shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted).

House prices are through October using the composite 20 index. Months-of-supply is through November.

We need to continue to watch inventory and months-of-supply closely for hints about house prices. Right now house prices are falling at about a 10% annual rate.

Note: there have been periods with high months-of-supply and rising house prices (see: Lawler: Again on Existing Home Months’ Supply: What’s “Normal?” ) so this is just a guide.

My guess:

I think national house prices – as measured by these repeat sales indexes – will decline another 5% to 10% from the October levels. I think it is likely that nominal house prices will bottom in 2011, but that real house prices (and the price-to-income ratio) will decline for another two to three years.

Some of you take this far too seriously

I enjoy writing for the IHB, and I try to do it the best I can given the new demands on my time. I don't get to spend as much time in the comments as I would like, but i do read them every day and participate from time to time. Mostly I have said what I had to say in the post, and making a comment would have merely restated the post, so i don't bother. I prefer others to have the last word.

When I started out writing for the IHB back in early 2007, people needed to be warned about the impending house price crash, and I was unequivocal in my message not to buy a house. As the price crash ran its course, house prices in many markets became very affordable, but Irvine has only recently seen some deals trade at or below rental parity. In some markets the discount to own versus renting is close to 40%. Can you imagine that?

With the changing conditions, I began to change my message. I began telling people they can buy with the understanding that the house price may likely decline for a few years then recover slowly. If you need to sell in the next 3 to 5 years, don't buy now. Shevy has been saying the same thing since we began working together. It's still true, but the bottom window may be in 1 to 4 years rather than 3 to 5. Buying does not hurt on a nominal basis if you hold for at least 7 years. By then between the loan amortization and the stabilized market, there should be enough equity to pay a realtor and get out, perhaps with a few extra dollars if we inflate another bubble.

When I write for the IHB, i like to be creative, and sometimes that includes trying to capture an emotion or attitude in a cartoon or pull it out of a news story. Sometimes will will advocate positions or write in a certain style because it is fun, not because it is some deeply held belief. I enjoy the humor in the stories, and the culture of home price appreciation Ponzies is a funny item to document. They are part of the housing story. I didn't cast the part, I merely report the activity and note it for what it is. It's the entitlement that is shocking to me. And the huge dollar amounts borrowed and spent is shocking too. These borrowers ripping off the banks that gave them the free money… well, what does two wrongs make?

I don't stress much about the Ponzis. I write about them because they are the story. They are not the majority in Irvine. Most people here are good people who work hard and save money. Kudos to them. However, Ponzies have a significant presence as evidenced by the property records, and the toll the market must pay for their activities is yet to be paid.

The IHB is still just a hobby. I write some crazy stuff about housing, and people stop by to read it. It's a laugh. Don't take it too seriously. I don't.

Seriously, we will continue to improve

Writing for the IHB is a great personal discipline for me. It takes habits and deadlines that must not be missed. I have tried to make each post feel thought through and cared about. I want to continue to present information to a high standard. Unfortunately, I must accomplish this within the time available. I will improve in 2011.

We plan to provide more market data and other information. I don't know what form that will take, but I would like to present understandable housing market data. There are other bells and whistles we are considering, but for now, I will remain mum until we have something ready to debut.

Most people who look for a home in Irvine search on the internet and when they do, they nearly all find the IHB. Unfortunately, not all of these people find what they are looking for. We hope we can serve more of their needs with future site enhancements.

Irvine Home Address … 55 GRAY DOVE Irvine, CA 92618

Resale Home Price … $1,350,000

Home Purchase Price … $1,110,000

Home Purchase Date …. 12/5/2007

Net Gain (Loss) ………. $159,000

Percent Change ………. 14.3%

Annual Appreciation … 6.4%

Cost of Ownership

————————————————-

$1,350,000 ………. Asking Price

$270,000 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$1,080,000 ………. 30-Year Mortgage

$281,763 ………. Income Requirement

$5,844 ………. Monthly Mortgage Payment

$1170 ………. Property Tax

$450 ………. Special Taxes and Levies (Mello Roos)

$225 ………. Homeowners Insurance

$175 ………. Homeowners Association Fees

============================================

$7,864 ………. Monthly Cash Outlays

-$1511 ………. Tax Savings (% of Interest and Property Tax)

-$1281 ………. Equity Hidden in Payment

$536 ………. Lost Income to Down Payment (net of taxes)

$169 ………. Maintenance and Replacement Reserves

============================================

$5,777 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$13,500 ………. Furnishing and Move In @1%

$13,500 ………. Closing Costs @1%

$10,800 ………… Interest Points @1% of Loan

$270,000 ………. Down Payment

============================================

$307,800 ………. Total Cash Costs

$88,500 ………… Emergency Cash Reserves

============================================

$396,300 ………. Total Savings Needed

Property Details for 55 GRAY DOVE Irvine, CA 92618

——————————————————————————

Beds: 3

Baths: 3 full 1 part baths

Home size: 2,717 sq ft

($497 / sq ft)

Lot Size: 5,227 sq ft

Year Built: 2007

Days on Market: 58

Listing Updated: 40485

MLS Number: S637990

Property Type: Single Family, Residential

Community: Portola Springs

Tract: Lasc

——————————————————————————

Beautifully customized home with spacious floor plan and architectural features such as rounded corners and door arches. Highly upgraded throughout including the gourment kitchen with granite countertops, custom cabinetry, high end stainless steel appliances and a wine frig/bar area. Travertine flooring downstairs, designer carpet upstairs, custom cabinetry in all baths, solid wood doors, custom shutters, surround sound system, epoxy finished garage floor and much more. The tropically landscaped backyard includes over $100k in upgrades with a travertine patio, pool, spa, BBQ, bar and firepit. Must see to appreciate!

gourment?

The bear rally has ended. The next leg down will likely lead us to the true bottom of real estate prices.

Irvine Home Address … 2100 TIMBERWOOD Irvine, CA 92620

Resale Home Price …… $359,900

The Spirit of the Woods is like an old good friend.

Makes me feel warm and good in-side.

I knew his name and it was good to see him again.

Cause in the wind he's still a-live.

Oh Fred Bear

Walk with me down the trails again.

Take me back, back where I be-long.

Fred Bear

Ted Nugent — Fred Bear

As I noted in a previous post, House prices resume their downward trend, the false bottom of 2009 is being tested by a languishing real estate market.

Housing Recovery Stalls

Fresh Fall in Home Prices Is Headwind for Economy; Other Signs Still Strong

By S. MITRA KALITA And SUDEEP REDDY — DECEMBER 29, 2010

A new bout of declining home prices is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing.

Home prices across 20 major metropolitan areas fell 1.3% in October from September, the third straight month-over-month drop, according to the S&P/Case-Shiller home-price index released Tuesday. Many economists expect the declines to continue into at least next spring, erasing most of the gains made since prices bottomed out in early 2009.

The housing market, which appeared poised for a recovery earlier in the year, now could be heading for a second downward drift.

“This looks like a double-dip [in housing] is pretty much on the way, if not already here,” said David Blitzer, chairman of the Standard & Poor's index committee. “Somebody who thought last year that it's going to be straight up from here was wrong.“

That's right. The bears were right, and the bulls were wrong.

Enough gloating. Back to the serious business of documenting the ongoing collapse of real estate prices.

Other news in recent weeks, however, has offered hope the economy is on the cusp of strong, sustainable growth. Retail sales returned to levels seen just before the recession started in 2007. Manufacturing continues to expand. U.S. exports are back to where they were just before the financial crisis.

Optimism among heads of small businesses and large corporations is also near pre-recession levels. And tax legislation that includes a one-year payroll-tax cut for most workers has boosted prospects.

Yet the twin forces of jobs and housing remain trouble spots. The labor market has added a million jobs in the past year, but that pace is far too slow to offset an unemployment rate that climbed to 9.8% last month.

Job worries are hampering consumer confidence despite strength in holiday sales and a rising stock market. The Conference Board, a business research group, said Tuesday that its confidence index fell to 52.5 from 54.3 in November, as consumers' views about job availability worsened.

The index, after rising through May as the economy showed early signs of improvement, now has retreated to its level of a year ago. The percentage of people planning to buy a home is also back to where it was a year ago, erasing improvement seen in early 2010.

U.S. Consumer-Confidence Index Slips

In the Case-Shiller data, all 20 cities in the index posted month-over-month declines in October.

As for year-over-year data, only four areas—Los Angeles, San Diego, San Francisco and Washington, D.C.—showed prices higher than in October 2009. Six markets hit their lowest since prices started falling four years ago, dropping below their spring 2009 levels, when most regions saw prices bottom out. The six were Atlanta, Miami, Seattle, Tampa, Charlotte, N.C., and Portland, Ore.

Prices in several markets, including Las Vegas and Cleveland, are nearly down to 2000 levels.

The low end in Las Vegas is trading at the early 90s levels. The good stuff still hangs on at 2004 prices. The good stuff will continue to decline, but investors and new owner-occupants will keep low-end prices stable.

The housing index was driven down by factors including the expiration of a federal tax credit for buyers who signed contracts by April 30, which caused demand to fall off.

Prices also were weighed down by a huge inventory of foreclosed homes, which tend to sell at sharply discounted prices.

In recent months, according to the National Association of Realtors, foreclosure and other distressed sales have represented more than 30% of home sales—and more than half in some states, such as Nevada.

Wells Fargo & Co. projects prices will drop 8% more by mid-2011, given high supply. “Demand is still dead in the water,” said Wells economist Sam Bullard.

Prices also face other hurdles: slightly rising mortgage rates, and homeowners who owe more on their houses than they're worth, and thus may walk away as values dip further.

The owners under pressure include Tasha McLaughlin, a 33-year-old mother of two in Sacramento's South Natomas neighborhood. She and her husband, Steve, bought their two-bedroom house in 2004 for $256,000, intending to stay about five years. After 11 months of trying to sell it between 2006 and 2007, the family took it off the market.

“Everyone is saying we should foreclose or claim bankruptcy, but I have a moral issue with that,” said Mrs. McLaughlin. “The more we try to pay the mortgage and pinch pennies, the more we get punished.”

Now, with a similar home down the block listed for $80,000, the McLaughlins are accepting that they won't recoup their losses anytime soon. Their interest-only loan is set to increase their current $1,600 monthly payment to $2,200 in seven years. If they were to default on their mortgage and walk away, they calculate that in about the same time, seven years, their credit scores would be stable enough to allow them to buy again elsewhere.

“I am just going to swallow my pride and walk out. I have to,” said Mrs. McLaughlin. “The market for homes is not going up.“

Housing analysts agree that markets such as Sacramento, Las Vegas and parts of Arizona and Florida are at risk of more declines. “These places relied so heavily on mortgages and real estate for their economy that we're going to see a two-tiered recovery,” said Chris Mayer, a professor of real estate at Columbia Business School. “Luxury spending is not going on across the country—it's happening among highly skilled consumers who live in the places that have seen some recovery.”

Homes remain a key part of Americans' wealth. Households held $6.4 trillion of home equity at the end of the third quarter, alongside $12.2 trillion in stocks and mutual-fund shares, according to Federal Reserve data.

For every dollar decline in housing wealth, consumers reduce spending by about a nickel in the subsequent 18 months, Moody's Economy.com chief economist Mark Zandi estimates. He cautioned that other factors, such as the stock market's strength and tax credits, could offset this effect.

“People feel poorer when their houses are going down in value,” said Jack Fitzgerald, chief executive of Fitzgerald Auto Malls, which has a dozen locations along the East Coast. He is seeing many customers who could buy new cars choosing used cars instead, “spending as little as they can.” While sales are improving, he expects them to grow only slowly, given all the consumer uncertainty.

Still, the overall economy's dependence on housing diminished greatly since the financial crisis, said Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm. “Consumers have shown us they can still spend even if home prices go down,” she said. But falling home values “put a lid on the recovery and the magnitude of it.”

I don't believe house prices will fall a large amount from here. They will go down, particularly at the high end, but with an improving economic picture, demand for housing will improve. Considering it has been hovering near historic lows for years, it is bound to pick up some in 2011. Much will depend on the course of interest rates and unemployment. If interest rates move higher and unemployment stays high, house prices may fall significantly, but if interest rates remain low, and if unemployment drops, we won't see a significant uptick in prices because hte overhead supply, but we could see a big increase in sales volumes. That would be great for clearing the market.

100% financing deal emerges from 2.5 years of shadow inventory

Today's featured property was purchased on 9/16/2005 for $509,000. The owners used a $356,300 first mortgage, a $152,700 stand-alone second, and a $0 down payment. The defaulted about three years ago.

Foreclosure Record

Recording Date: 05/12/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/09/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 11/02/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 06/04/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/21/2008

Document Type: Notice of Default

Since this was a purchase money, non-recourse mortgage, the bank was in no hurry to foreclose and take the loss. There is no prospect of recovery on this loan. The finally got around to foreclosing on 7/19/2010 for $431,484, then they spent several months preparing it for sale — which looks like they did nothing.

Are the shadow inventory deniers still making fools of themselves, or has everyone accepted that shadow inventory is real and not that hard to find?

Irvine Home Address … 2100 TIMBERWOOD Irvine, CA 92620

Resale Home Price … $359,900

Home Purchase Price … $509,000

Home Purchase Date …. 9/16/2005

Net Gain (Loss) ………. $(170,694)

Percent Change ………. -33.5%

Annual Appreciation … -6.3%

Cost of Ownership

————————————————-

$359,900 ………. Asking Price

$12,597 ………. 3.5% Down FHA Financing

5.07% …………… Mortgage Interest Rate

$347,304 ………. 30-Year Mortgage

$75,116 ………. Income Requirement

$1,879 ………. Monthly Mortgage Payment

$312 ………. Property Tax

$100 ………. Special Taxes and Levies (Mello Roos)

$60 ………. Homeowners Insurance

$242 ………. Homeowners Association Fees

============================================

$2,593 ………. Monthly Cash Outlays

-$311 ………. Tax Savings (% of Interest and Property Tax)

-$412 ………. Equity Hidden in Payment

$25 ………. Lost Income to Down Payment (net of taxes)

$45 ………. Maintenance and Replacement Reserves

============================================

$1,940 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,599 ………. Furnishing and Move In @1%

$3,599 ………. Closing Costs @1%

$3,473 ………… Interest Points @1% of Loan

$12,597 ………. Down Payment

============================================

$23,268 ………. Total Cash Costs

$29,700 ………… Emergency Cash Reserves

============================================

$52,968 ………. Total Savings Needed

Property Details for 2100 TIMBERWOOD Irvine, CA 92620

——————————————————————————

Beds: 2

Baths: 1 bath

Home size: 1,270 sq ft

($283 / sq ft)

Lot Size: n/a

Year Built: 2005

Days on Market: 73

Listing Updated: 40526

MLS Number: P755549

Property Type: Condominium, Residential

Community: Northwood

Tract: Cust

———————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

Like new! Immaculate one bedroom + loft (used at a bedroom) townhouse built in 2005 located in the desirable Collage complex. Unit features include brand new paint and carpet throughout, fireplace, one car garage, patio with pool views, walk-in closet and storage room. Complex is equipped with beautifully manicured landscaping, pool, spa and secure gate access. Property will be sold with washer, dryer, stove/range and dishwasher.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend and a happy new year,

Irvine Renter

Society is predictably changing its views and attitudes toward strategic default.

Irvine Home Address … 20 WOODS Trl Irvine, CA 92603

Resale Home Price …… $2,059,000

Yes

this is the year

To make your decision.

Yes

this is the year

To open up your mind.

If you've been holding back kind of slack

Now's the time to get the things you need.

There ain't no reason why you should be shy

The Three Degrees — Year of Decision

Anyone who is underwater on their mortgage and struggling with payments is considering strategic default. Many of these people will succumb to mortgage distress whether or not they chose the timing of their default. They are debt zombies. Many others who are underwater and struggling could survive the real estate recession and divert significant family money toward excessive loan payments, but they see the advantages of a lower housing cost, so many of them are choosing to strategically default because it is in their best interest financially to do so.

Many of those who chose not to strategically default make this choice because they believe making the payment is a moral obligation — an obligation above and beyond what is written in the contract. Banks are relying on those borrowers motivated by their perceived morality to keep making payments. Unfortunately, there is no longer a moral stigma associated with strategic default (accelerated default is a more accurate term).

Banks need a moral stigma to be associated with loan repayment. If the transaction were viewed by borrowers as a simple business transaction — which it is — then issues of morality are not effective at cajoling debtors into repayment, particularly when default is in the best interest of the debtor. Banks have long relied on borrower morality to get repaid.

Due to the events of the Great Housing Bubble, borrowers no longer feel a moral obligation to repay their mortgage debts. Borrowers view the system as corrupt. Many borrowers believe greedy lenders inflated prices with oversized loans to pad their own profit margins. Those borrowers are correct in their views and beliefs, and based on that view, many borrowers no longer feel compelled by morality to repay their mortgage debt.

More see walking on mortgage as a viable plan

'Strategic default' losing stigma as homes go deeper underwater

By Jane Hodges

msnbc.com contributor msnbc.com contributor

updated 12/20/2010 12:11:34 PM ET

More Americans than ever are showing a willingness to walk away from their underwater homes, according to a recent survey. Chris Kelly is a perfect example of someone who never thought she would send the bank “jingle mail” — mailing the keys back. But she did.

Until last year Kelly, a 46-year-old administrative assistant, was living in a 3,000-square-foot home she owned with her ex-husband in the Seattle suburbs.

The duo had put the three-bedroom, three-and-a-half bath home on the market before finalizing their divorce in the spring of 2009 but had no luck luring move-up buyers to the $600,000 home even after price markdowns.

Kelly wound up living there solo, struggling to make the mortgage payments. But as she kept writing checks, and worrying, she became aware that she’d have to make a hard choice: Leave the house while she still had decent savings, or pay until she’d emptied out all her accounts and then enter foreclosure.

In the latter scenario, she’d have to look for a lease with no money left for a deposit. Either way, she’d lose the home, whose value had dropped underwater — below what the couple owed on it.

I know people who have wiped out their personal and retirement savings because they were unable to get themselves to default while they still had the ability to pay. It's like the slot machine gambler that refuses to get up until every last dollar has been lost. The decision to default gets forced upon them when they can no longer raid savings or Ponzi borrow to make payments. Decision by indecision is very painful in cases where accelerated default would have proven beneficial.

“It was a pretty clear decision,” says Kelly, who now lives in Austin, Texas. “I knew I had to walk away. The longer I stayed there, the worse my credit would be and the harder time I’d have finding a rental.”

So a year ago she walked way, joining the growing number of Americans willing to turn their backs on homes they can neither sell nor afford to keep. The real estate industry calls this “strategic default,” referring to people who choose to walk away even when they can technically afford to continue paying their mortgage.

Lenders would certainly prefer all borrowers to be dutiful on their way to the debtors gallows by draining every last drop of savings rather than considering options and making a “strategic” or considered decision.

Nearly half, 48 percent, of homeowners with a mortgage said they would consider walking away from their home if they owed more on it than it was worth, according to a Harris Interactive survey released this month. The survey was conducted in November for real estate listings site Trulia and foreclosure research firm RealtyTrac.

Just six months ago, a similar survey indicated that only 41 percent of consumers would consider walking if they were underwater on their mortgages.

Is a 7% movement in this statistic meaningful? I think it is. Who do you think this 7% who changed their minds are? Who else would be thinking about it? Those faced with the decision, of course. A certain amount of the stigma will fall away as people know “good people” including family, friends, and acquaintances that have elected to accelerate their defaults. The trend will be for this statistic to trend toward complete acceptance over the next several years.

“It’s a phenomenon we haven’t seen before in the housing market,” said Rick Sharga, senior vice president of RealtyTrac. “The mindset of why people purchase a home has changed over the past decade.”

In the early 2000s, as home prices rose sharply and steadily, many buyers saw their home as an investment. But in the wake of the housing bust, it's clear that a home has become far more of a “utility” — a form of shelter — than an investment.

Actually, only the public perception has changed. Houses have never been a good long-term speculative investment. The rate of appreciation only matches inflation, the carrying costs are high, the transaction costs are high, and the market is prone to bouts of illiquidity. Given these circumstances, only during brief periods of upward volatility (sucker rallies) is it possible to reap major appreciation benefits from owning residential real estate. It has always been about utility of ownership, but people are only now detoxifying from the kool aid enough to see it.

Over the next year, hundreds of thousands of homeowners will face the question of whether to walk away as their mortgage payments spike.

Sharga said that $300 billion worth of adjustable rate mortgages are expected to reset upward over the next 12 to 15 months, adding on average $1,000 to monthly mortgage payments on homes that already are worth 30 percent to 50 percent less than their original sale price.

Remember, it isn't the reset of the interest rate that is a problem because rates are still low, the real problem is the recasting of these loans from interest-only to fully amortizing. The recasts add significantly to the payment as Sharga suggested above.

Roughly 23.2 percent of all single-family homeowners who have a mortgage are underwater on their property, according to third-quarter data from Zillow. (Zillow estimates that 40 percent of single-family homes are owned, with the rest mortgaged.)

Major banks, including Bank of America and Wells Fargo, are preparing to work with these owners through modification programs that may include principal reduction or temporary interest-only loan payments until markets improve and refinancing is possible, Sharga says.

But clearly, many homeowners may have motivation to walk. They’ll see their mortgage payments spike at a time when their home value is underwater the deepest.

American homeowners lost $1.7 trillion in home value during 2010, a far higher loss of equity than the $1 trillion lost during 2009, according to Zillow data released earlier this month. Zillow also reported on a blog that less than one-fourth of the 129 metro areas it tracks showed home value gains in 2010.

In addition, the impacts to credit from a foreclosure are typically less damaging than those from a bankruptcy, which hits more lines of credit and loans than just the home loan. According to Barry Paperno, consumer operations manager at myFico.com, the consumer site for Minneapolis-based credit scoring company Fair Isaac Corp., a personal bankruptcy can shave 130 to 240 points off a person’s credit score, while a foreclosure typically reduces a score by 85 to 160 points. (FICO scores range from 350 to 850, with higher scores better.)

“It’s serious, and it certainly complicate future purchases,” Paperno says. “Compared to a bankruptcy, though, the score impact can be surprisingly different.”

The latest Harris survey also revealed some interesting gender differences in attitudes about strategic default: Men were nearly 50 percent more likely than women to consider walking away from an underwater loan, with 57 percent indicating willingness, vs. 40 percent of women.

That one surprises me. It may be interesting to see that broken down by who manages the money in the family. It's probably a higher percentage among those who face the realities of the bills than those that do not.

Pete Flint, CEO of Trulia, said that this may indicate men take a more investment-minded approach to homeownership and evaluate when to walk as a financial decision, while women may view their property as a home and have a harder time with the concept of leaving it even under fiscal duress.

Kelly embodies both approaches. She says she was torn about the decision, but couldn’t let sentiment overtake what, ultimately, was a move toward self-preservation.

“I never thought that this was something that would happen,” she says. “I loved that house.”

Is this about survival, or is this about entitlement? Ultimately, each borrower evaluates financial alternatives, determines the emotional toll to be paid, and finally makes a decision and acts on it. Some may consider that survival, but it is really the survival of entitlement. It is wise to squat in a nice home and avoid sending those resources to a lender, and it is wise to find a comparable rental for less than the former house payment. That's why borrowers quit paying and squat until finally moving into a rental. It's a trend we will see more of in 2011.

They didn't risk much of their money

Prior to the housing bubble, if you owned a $2,000,000 home, it meant you probably had more than a $1,000,000 in equity because very few borrowers tried to manage a note over $1,000,000. During the housing bubble, loans over $1,000,000 became common. Too common.

• Todays featured property was purchased for $1,987,500 on 9/30/2006, right at the peak. The owners used a $1,490,300 first mortgage, a $298,050 second mortgage, and a $199,150 down payment.
• Two months later on 12/6/2006 they opened a $250,000 HELOC and had immdieate access to their downpayment money plus another $50,850 in free money.
• On 3/6/2007 they refinanced with a $1,770,000 Option ARM with a 2% teaer rate and obtained a $150,000 HELOC.
• They quit paying a few months ago.

Foreclosure Record

Recording Date: 11/01/2010

Document Type: Notice of Default

Irvine Home Address … 20 WOODS Trl Irvine, CA 92603

Resale Home Price … $2,059,000

Home Purchase Price … $1,987,500

Home Purchase Date …. 9/30/2006

Net Gain (Loss) ………. $(52,040)

Percent Change ………. -2.6%

Annual Appreciation … 0.8%

Cost of Ownership

————————————————-

$2,059,000 ………. Asking Price

$411,800 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$1,647,200 ………. 30-Year Mortgage

$429,740 ………. Income Requirement

$8,913 ………. Monthly Mortgage Payment

$1784 ………. Property Tax

$433 ………. Special Taxes and Levies (Mello Roos)

$343 ………. Homeowners Insurance

$420 ………. Homeowners Association Fees

============================================

$11,894 ………. Monthly Cash Outlays

-$1683 ………. Tax Savings (% of Interest and Property Tax)

-$1954 ………. Equity Hidden in Payment

$817 ………. Lost Income to Down Payment (net of taxes)

$257 ………. Maintenance and Replacement Reserves

============================================

$9,332 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$20,590 ………. Furnishing and Move In @1%

$20,590 ………. Closing Costs @1%

$16,472 ………… Interest Points @1% of Loan

$411,800 ………. Down Payment

============================================

$469,452 ………. Total Cash Costs

$143,000 ………… Emergency Cash Reserves

============================================

$612,452 ………. Total Savings Needed

Property Details for 20 WOODS Trl Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 4 full 1 part baths

Home size: 3,800 sq ft

($542 / sq ft)

Lot Size: 10,236 sq ft

Year Built: 2006

Days on Market: 348

Listing Updated: 40519

MLS Number: S600723

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Arez

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

This Luxury Built Pardee Home is situated at the end of the cul-de-sac Nestled alongside Nature. Step thru the Gated entryway to two sitting areas, Built-in BBQ features Granite top seating gather around the firepit or just enjoy the nearly 10,000 sq. ft. lot and upgraded hardscaping. 5 bedrooms & Bonus Room allow room for any family needs. Designer Mahogany cabinetry, Viking Professional Stainless Steel appliances, Blt-in desk, Baltic Brown Granite Counters Center island w/bar seating. Living/Family Room Fireplaces. Spacious Family Room with cozy breakfast nook. Laura Ashley Plantation Shutters throughout. Recessed Lighting, Wired for surrond sound or security. 3 car garage features Remoteless entry & Epoxy flooring. Master suite features elegant Master Bath with jacuzzi tub and dual shower fixtures. Upstairs laundry room. Upgraded carpeting and neutral decor makes it easy for this to be your new home, VERY CLEAN and hardly lived it.

In the past nine years, almost 108,000 more people moved out of Orange County than moved in. Where will the demand for housing come from?

Irvine Home Address … 35 COLUMBUS Irvine, CA 92620

Resale Home Price …… $649,000

All my bags are packed I'm ready to go

I'm standin' here outside your door

I hate to wake you up to say goodbye

But the dawn is breakin' it's early morn

The taxi's waitin' he's blowin' his horn

Already I'm so lonesome I could die

So kiss me and smile for me

Tell me that you'll wait for me

Hold me like you'll never let me go

Cause I'm leavin' on a jet plane

Don't know when I'll be back again

Oh babe, I hate to go

John Denver — Leaving on a Jet Plane

The California Ponzi scheme economy collapsed as the Great Housing Bubble deflated. I have documented over a thousand cases of HELOC abuse here in Irvine, California. Most economists underestimate the economic stimulus of millions of homeowners being given hundreds of thousands of dollars in free money by our banks. Now that this money is gone, Orange County home prices too high for incomes or rents, and Orange County home sales are falling with prices to follow.

These economic woes are prompting families to leave the state. With new household formation near historic lows as we get off the Ponzi juice, there is little tangible demand for housing, and prospects for this demand increasing appear weak.

People keep moving out of O.C.

December 27th, 2010, 3:20 am — posted by Jan Norman

In the past nine years, almost 108,000 more people have moved out of Orange County than moved in, according to newly released data from the state Department of Finance.

The out-migration was higher in 2005 through 2007, which would coincide with the soaring price of Orange County housing. Between 2009 and 2010, 6,475 residents moved out, but the county’s population grew 28,190 because 12,223 people from foreign countries moved in, the Dept. of Finance said.

Since 2000, Orange County’s population has increased 335,882, the Dept. of Finance estimates. That growth comes from residents of other nations, legal and “unauthorized” as the department labels them.

Loren Kaye, president of the California Foundation for Commerce and Education, does the calculations for the whole state in this article for Fox & Hounds Daily. California gained 350,000 residents from 2009 to 2010, he reports but 72,484 more people moved out of state than moved in from other parts of the United States. The gain was from more births than deaths of current residents and foreign immigrants.

The Dept. of Finance based its estimates on driver license address changes, birth and death records, tax return data, Medicare and Medi-Cal enrollment, immigration reports, elementary school enrollments and number of people living in group quarters.

Bill Watkins, director of the Center for Economic Research and Forecasting at California Lutheran University, has a more complete analysis of current Californians moving elsewhere at newgeography.com. Among his negative points:

• The projected $28 billion state budget deficit with shortfalls in excess of $20 billion a year anticipated by the California Legislative Analyst’s Office
• Unemployment that is 30% higher than the national average (12.4% in November)
• California’s credit rating is among the lowest in the U.S.
• California’s loss of 1.3 million manufacturing jobs
• California’s 41st ranking in creating scientific, technical, engineering and math jobs

“In just a couple of decades, California has gone from being America’s economic start, a destination for ambitious people from around the world and abundant with opportunity, to home of some of America’s most depressed communities,” Watkins wrote.

And what's worse is the supposed prosperity of the last couple of decades was built on a foundation of Ponzi borrowing on inflated home prices.

“California isn’t broken,” replied State Treasurer Bill Lockyer and Stephen Levy, director of the Center for Continuing Study of the California Economy, in this Los Angeles Times opinion piece. Among their arguments:

• California’s state government general fund expenditures are $2,246 per person less than 10 years ago.
• The state’s number of businesses per capita “held steady” from 2000 to 2009.
• The state’s share of domestic film industry jobs is 45% in 2010, compared to 44% in 2000.
• Businesses moving to other states accounted for “just 1.7% of California’s job losses” from 1992 to 2006, according to the Public Policy Institute of California. (It did not include data for 2007 to 2010.)
• California’s gross state product grew 27.2% from 1999 to 2009, higher than the U.S. as a whole.

“California no doubt faces serious challenges. But our obstacles are not insurmountable,” Lockyer and Levy wrote. “California has the most diversified economy in the country. It has the most diverse population and the youngest.”

With all these people moving out, who is going to be buying Orange County homes?

Irvine Ponzi of the day

I have my own indicator of when the housing market will recover: the day I can't find a property for sale with HELOC abuse. I have contended for years now that mortgage equity withdrawal and peak buying has created far more debt than borrowers can comfortably pay without continued Ponzi borrowing. Until the Ponzis are wiped out, they will implode a few at a time and continue to put distressed properties on the market.

Most distressed Ponzis are waiting for house prices to come roaring back so they can resume their unconstrained borrowing and profligate spending. That isn't going to happen. The weight of distressed inventory is going to keep the market from appreciating for quite some time.

• Today's featured property was purchased for $494,000 on 12/8/2003. The owner used a $444.600 first mortgage and a $49,400 down payment.
• On 12/23/2004 she refinanced with a $455,000 first mortgage and obtained a $73,312 HELOC.
• On 12/28/2006 she obtained a $572,000 Option ARM with a 2.25% teaser rate.
• On 6/26/2007 she obtained a $123,500 HELOC.
• Total property debt is $695,500 plus negative amortization.
• Total mortgage equity withdrawal is $250,900.
• Total squatting time 11 months so far.

Foreclosure Record

Recording Date: 08/30/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/27/2010

Document Type: Notice of Default

Irvine Home Address … 35 COLUMBUS Irvine, CA 92620

Resale Home Price … $649,000

Home Purchase Price … $494,000

Home Purchase Date …. 12/8/2003

Net Gain (Loss) ………. $116,060

Percent Change ………. 23.5%

Annual Appreciation … 3.8%

Cost of Ownership

————————————————-

$649,000 ………. Asking Price

$129,800 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$519,200 ………. 30-Year Mortgage

$135,455 ………. Income Requirement

$2,809 ………. Monthly Mortgage Payment

$562 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$108 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$3,480 ………. Monthly Cash Outlays

-$482 ………. Tax Savings (% of Interest and Property Tax)

-$616 ………. Equity Hidden in Payment

$257 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves

============================================

$2,720 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,490 ………. Furnishing and Move In @1%

$6,490 ………. Closing Costs @1%

$5,192 ………… Interest Points @1% of Loan

$129,800 ………. Down Payment

============================================

$147,972 ………. Total Cash Costs

$41,700 ………… Emergency Cash Reserves

============================================

$189,672 ………. Total Savings Needed

Property Details for 35 COLUMBUS Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 1 full 1 part baths

Home size: 1,507 sq ft

($431 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1978

Days on Market: 249

Listing Updated: 40310

MLS Number: P731953

Property Type: Single Family, Residential

Community: Westpark

Tract: Othr

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Short sale. Sale subject to bank approval.