The market has a funny way of dealing with financial folly: crashing house prices have turned off the housing ATM and stopped HELOC abuse… for now.

Irvine Home Address … 43 LEUCADIA #76 Irvine, CA 92602

Resale Home Price …… $539,000

She dreams of cheap land, children,

Towels labeled his and hers

Plaster ducks in pairs

Flying up the stairs

Some of that piggy bank lovin'

Some of that piggy bank lovin'

Some of that piggy bank lovin'

Piggy bank love

Piggy bank love

The Bonzo Dog Band — Piggy Bank Love

Everyone in California loves that Piggy Bank in their house. Most people here are so kool aid intoxicated that they take the free money for granted. It is just another California entitlement.

Americans Tap $8.3 Billion in Home Equity, Least in a Decade

Americans in the second quarter tapped the smallest amount of home equity in a decade, showing households are focused on repairing tattered finances.

No. It shows that households don't have any home equity left and that the housing ATM has been turned off. The writer of this article is implying the lack of mortgage equity withdrawal is a prudent choice of wise financial managers. Do any of you believe that?

Owners took out $8.3 billion while refinancing prime home loans as borrowing costs dropped from April through June, down from $8.4 billion in the previous three months and the least in 10 years, according to a report today by McLean, Virginia-based Freddie Mac. Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.

Hurray! People are paying down their mortgages. Paying down debt is always the wisest choice. Debt is not tool, and sophisticated people do not use it to finance their daily lives. Posers do.

Instead of extracting cash to binge on everything from cars to vacations as in previous recoveries, owners are refinancing to improve terms and reduce mortgage payments. The mending of household balance sheets means consumers will be in a better position to join the recovery once employment picks up.

“It’ll put consumers on firmer ground going forward,” said Michael Bratus, an economist at Moody’s Economy.com in West Chester, Pennsylvania. “It’ll give consumers more confidence.”

If it were only true. In reality, it will provide a litte more capacity to hold and service debt which is what most fools will do.

A report yesterday from the Conference Board in New York showed confidence dropped in July to a five-month low on concern about jobs and wages. Americans may eventually become less pessimistic as they repair balance sheets and their financial situation improves.

So-called cash-out loans, in which borrowers increase their loan amounts by at least 5 percent, accounted for 27 percent of all refinanced loans in the three months to June, capping the lowest three-quarter share on record. Cash-out refinances peaked at 88 percent in mid 2006.

OMG! Eighty-Eight percent of refinances took out cash in 2006. Does anyone still doubt that we had a HELOC Economy?

No ‘Cash-Out Boom’

“This is a rate-and-term refinance boom as opposed to a cash-out boom,” said Michael Larson, a housing analyst at Weiss Research in Jupiter, Florida. “Five years ago you had people liquidating equity to finance debt-fueled consumption. Now, refinancing gives them breathing room.”

Figures from the Mortgage Bankers Association signal the drive to take advantage of record-low mortgage rates has accelerated this month. The group’s refinancing gauge for the week ended July 16 reached the highest level in a year. Refinance applications accounted for 79.4 percent of all mortgage requests, the most since April 2009.

This is a misleading use of statistics. There has been no acceleration in refinances. The reason refiance applications accounted for a higher percentage of total applications is because applications for purchase are at record lows. That is also why interest rates keep falling. The supply of money available exceeds the number of applicants that demand it, so competition to put that money to work is forcing interest rates lower.

Ron Keating, a 50-year-old federal employee in Woodbridge, Virginia, said he lowered his monthly mortgage payment by about $150 after refinancing.

“The less I pay, the better,” he said in a telephone interview.

Borrowing Costs

The average rate on a 30-year fixed mortgage fell to a 4.56 percent in the week ended July 22, the lowest since Freddie Mac, the second-biggest buyer of U.S. mortgages after Fannie Mae, began keeping records in 1971. At that rate, monthly payments for each $100,000 of a loan would be about $510, down about $40 from a year ago when the rate was 5.2 percent.

The median homeowner cut their mortgage rate by 0.9 percentage point in the second quarter, according to Freddie Mac. On a $200,000 loan, that would lead to a savings of $1,300 in the first year.

The money will contribute to a pickup in growth over the next two years, according to a forecast by economists at Moody’s Economy.com. They project consumer spending, which accounts for 70 percent of the economy, will grow 3 percent in 2011 and 4.5 percent the following year. Purchases are likely to climb 2.1 percent this year.

I would be remiss if I didn't point out that not everyone thinks that consumer spending is 70 percent of GDP.

The effect of HELOC abuse — and now the lack thereof — has been obvious here in California. The chart below from Calculated Risk shows just how dramatic the decline in MEW has been:

U.S. “Home Equity” Loans Revealing

A Bloomberg headline today read “Americans Tap $8.3 Billion in Home Equity, Least in a Decade”. This is indeed a very news-worthy figure. Sadly, you won't learn anything about this issue from reading Bloomberg's ridiculous “spin” of this news.

At the peak of the U.S. housing-bubble, Americans were initiating more than $800 billion/year of such loans. They are now on a pace to take-out loans amounting to less than 5% of that gargantuan figure…and yet this same, propaganda-machine talks about a “recovery” in the housing market.

Wow! A 90% reduction in MEW. No wonder the economy is sputtering.

“It'll put consumers on firmer ground going forward. It'll give them more confidence,” quotes Bloomberg, from an “economist” named Michael Bratus. Note the use of contractions to make his statement sound like a “cheer”. The only thing he forgot to add was “Rah! Rah! Rah!”

If only Americans were getting on “firmer ground”, and thus had any reason to be more “confident”. Here's what is happening in the real world. After going on the most insane borrowing-binge in the history of our species, based upon all the “home equity” which Americans thought they had, that “equity” has all evaporated – but the trillions in debt remain.

The result: Americans hold less “equity” in their homes than at any time in history: not during the Great Depression, nor at any other time. Indeed, for the first time in history U.S. banks hold more equity in U.S. residential real estate than American “homeowners” themselves. U.S. “home equity” loans have collapsed not because Americans are “repairing their balance sheets” (as the Bloomberg propaganda suggests).

Instead, U.S. homeowners (except for the small minority with full-ownership of their homes) are leveraged-to-the-hilt with debt – and can't afford to borrow one more penny. Secondly, the banks won't lend these over-leveraged consumers any more money. And third, there is no “equity” to borrow against. You can call this process “repairing balance sheets” – as long as you include the observation that it will take a full generation to “repair” the damage of the Wall Street-induced credit-stampede (for those homeowners who survive the process).

Then Bloomberg gets plain silly. “This a rate-and-refinance boom as opposed to a cash-out boom,” quotes Bloomberg, this time citing a suit-stuffer named Michael Larson (identified as a “housing analyst”).

“Hello” Mr. Larson! Home-equity loans collapsed to less than 5% of their peak, which at least 95% of English-users would describe as a “crash”. One can only wonder what numbers it would take to cause this “housing analyst” to use the word “crash” instead of “boom”. One might even suspect that this “housing analyst” makes more money in a strong real estate market – and so his characterization might be a tiny bit biased.

The only truth in Larson's statement was his observation that the only activity taking place this in this market is respect to the (small number of) credit-worthy borrowers who are able to take advantage of the zero-percent-panic-interest-rates to refinance a minute piece of this mountain of debt (no more than 1%). Other than that, this market is dead.

The problem is that these over-leveraged “homeowners” are now about to face a worse, and much, much longer collapse in the U.S. housing market – which will make the collapse after the first housing-bubble look like nothing but a passing, bad-dream. What is ahead will be nothing less than a waking nightmare. There are no surprises here. A second collapse of the U.S. housing market was always 100% certain – but the Obama regime can be "thanked" for making it worse, courtesy of the second "bubble" they created in this market.

All of this has been detailed in recent commentaries, so I won't bore regular readers by re-hashing it. Instead, it is time to once again remind readers where this is leading. As I have maintained since shortly after the U.S. housing burst, and hidden facts began to emerge, this was a deliberately manufactured bubble (i.e. a deliberate scam) – which was designed to do exactly it has done: to rapidly accelerate the transformation of middle-class, Americans to poor, 21^st century serfs.

Indeed, we are already very close to the definition of a “serf”: someone who toils for a mere “subsistence” living – where all they are able to do is barely buy enough food to survive, while they pay “rent” to their “landlords” (the banks).

The banks “own” these homes, not the “homeowners”. For at least 25% of these “homeowners”, the balance owing is either so large that they could never pay-off their mortgage, or only do so through ultimately paying two or even three times what these homes are worth. The extremely modest number of “mortgage modifications” only seek to stretch-out the length of these mortgages. While that results in lowering current, monthly payments (and may make it possible to “service” the mortgage), it can add up to $100's of thousands of dollars (in extra “interest”) on what the “homeowner” must pay – to actually become a homeowner.

In short, for a rapidly growing segment of the U.S. population, they can either never become true “homeowners” (and are thus destined to always be “serfs”); or, their “freedom” from their banker/landlord can only be “purchased” by paying many times what these homes are really worth. Now, with the “second bubble” having burst, this trend is going to accelerate exponentially: as housing prices fall, “equity” continues to evaporate, loan-terms get stretched-out, wages continues to fall, and more and more simply lose their jobs; the transformation from “homeowner” to “serf” will progress relentlessly.

I love that rant. I have nothing to add.

I am not quite as bearish and as pessimistic as the author of that piece, but I share his attitude toward debt and the impact this mountain of debt is having on our economy and our society. Besides writing about the perils of debt, I do the only thing I can — I don't have any.

Another HELOC implosion

• The previous owner of today's featured property paid $520,000 on 12/1/2003. She used a $389,925 first mortgage, a $77,985 second mortgage, and a $52,090 down payment.
• On 11/2/204 she obtained a $145,000 HELOC.
• On 4/15/2005 she refinance with a $487,500 Option ARM.
• On 6/24/2005 she got a $102,900 HELOC.
• Total property debt was $590,400.
• Total mortgage equity withdrawal was $122,490.
• Total squatting time was about 18 months.

Foreclosure Record

Recording Date: 07/24/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 03/16/2009

Document Type: Notice of Default

The flipper that bought this property was probably counting on a further bump in prices this summer. It didn't happen. They have been lowerin their price and reducing their margins. Like the another property they bought in Irvine, they did nothing to improve it. We are still a pergraniteel market, and flippers who don't make the necessary improvements don't get the prices they want.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 43 LEUCADIA #76 Irvine, CA 92602

Resale Home Price … $539,000

Home Purchase Price … $465,600

Home Purchase Date …. 5/25/2010

Net Gain (Loss) ………. $41,060

Percent Change ………. 8.8%

Annual Appreciation … 60.0%

Cost of Ownership

————————————————-

$539,000 ………. Asking Price

$107,800 ………. 20% Down Conventional

4.60% …………… Mortgage Interest Rate

$431,200 ………. 30-Year Mortgage

$106,579 ………. Income Requirement

$2,211 ………. Monthly Mortgage Payment

$467 ………. Property Tax

$120 ………. Special Taxes and Levies (Mello Roos)

$45 ………. Homeowners Insurance

$282 ………. Homeowners Association Fees

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

$3,125 ………. Monthly Cash Outlays

-$371 ………. Tax Savings (% of Interest and Property Tax)

-$558 ………. Equity Hidden in Payment

$186 ………. Lost Income to Down Payment (net of taxes)

$67 ………. Maintenance and Replacement Reserves

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

$2,449 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,390 ………. Furnishing and Move In @1%

$5,390 ………. Closing Costs @1%

$4,312 ………… Interest Points @1% of Loan

$107,800 ………. Down Payment

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

$122,892 ………. Total Cash Costs

$37,500 ………… Emergency Cash Reserves

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

$160,392 ………. Total Savings Needed

Property Details for 43 LEUCADIA #76 Irvine, CA 92602

——————————————————————————

Beds: 3

Baths: 3 baths

Home size: 1,826 sq ft

($295 / sq ft)

Lot Size: n/a

Year Built: 2002

Days on Market: 50

Listing Updated: 40374

MLS Number: S620673

Property Type: Condominium, Residential

Community: Northpark

Tract: Mont

——————————————————————————

TURNKEY STUNNER IN HIGHLY SOUGHT AFTER NORTHPARK COMMUNITY! Can close in 30 days or less. Not a short sale or REO. Freshly painted throughout and NEW carpet. The room design of the living room, kitchen and dining area allow for maximum enjoyment of this open floor plan with soaring ceilings. Enjoy preparing meals in your gourmet kitchen with an abundance of cabinet space and breakfast bar. NEW 18×18 Ceramic tile in Kitchen, bathrooms and upstairs laundry room. Master suite boasts walk-in closet, vanity area, dual vanities, large oval soaking tub and separate shower. Laundry room conveniently located upstairs. Within walking distance to Beckman High and Northpark square Plaza for shopping! TUSD schools share an excellent reputation for education and have a top notch staff. Association Ammenities include, Basketball Court, pool, Children's play areas, park, picnic and barbecue areas!

Today's featured property is the largest loss in Irvine to date at $2,650,000. Will the flipper turn it around, or will he be a knife catcher?

Irvine Home Address … 29 BLACK HAWK Irvine, CA 92603

Resale Home Price …… $3,599,999

This time, you have to face your future

Although it’s just a dusty road

It’s clear that backing down don’t suit you

I’d hate, to break your sacred code

People, along for the ride

High noon, getting closer

I think you’ll find, everybody loves a loser

So you’ll be fine, you won’t be lonely long

Morcheeba — Everybody Loves a Loser

I recently wrote a post titled How to Lose $1,100,000 in Irvine Real Estate. That condo in the North Korea Towers was the largest closed-sale to closed-sale loser I had seen to date. Today's featured property shatters that record.

This property was purchased in 2005 for $5,925,000. It was purchased at auction in 2010 for $3,275,000. The closed-sale to closed-sale loss is $2.650,000.

A $4,485,000 Option ARM!

This is perhaps the worst loan I have seen to date. Washington Mutual underwrote a cash-out refinance for $4,485,000 to the previous owner of this property. WTF!

This property was purchased on 5/9/2005 for $5,925,000. The owner used a $4,147,500 Option ARM first mortgage and a $1,777,500 down payment. Apparently, this owner is a big developer in Las Vegas. He was probably solvent when this loan was made. The prospects for recovery are pretty grim right now.

On 12/15/2006 he refinanced with a $4,485,000 Option ARM. I guess he needed $350,000.

It's loan like these that inflated high end prices beyond all reason, and it is the delinquency on these loans and eventual liquidation that is going to cause the high end to come tumbling down. With delinquency rates on $1,000,000+ loans over 15%, this isn't a one-off. This is one of many where the owners aren't paying. Since most of these jumbo loan are held on the balance sheets of banks, we aren't seeing the distressed properties hit the market yet. But since this one was WAMU, which is backstopped by the FDIC, Chase is liquidating its holdings. More will follow.

Foreclosure Record

Recording Date: 06/15/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/11/2010

Document Type: Notice of Default

Nerves of steal

If I had access to that kind of cash, I would not have touched this deal. I don't care how steep the price reduction is, there is almost no market for properties at these price points, and there is no valuation metric I trust. The flipper who bought this put $3,275,000 of his own cash down to buy a property he really has no idea what he can sell for. Maybe he will make the $350,000 he has priced for. Perhaps he will get bids over his asking price. Or perhaps, this property will sit there forever along with the numerous other over $2,000,000 properties waiting for buyers who are few and far between. I wish him luck.

Irvine Home Address … 29 BLACK HAWK Irvine, CA 92603

Resale Home Price … $3,599,999

Home Purchase Price … $5,925,000

Home Purchase Date …. 5/9/2005

Net Gain (Loss) ………. $(2,541,001)

Percent Change ………. -42.9%

Annual Appreciation … -8.0%

Cost of Ownership

————————————————-

$3,599,999 ………. Asking Price

$720,000 ………. 20% Down Conventional

4.60% …………… Mortgage Interest Rate

$2,879,999 ………. 30-Year Mortgage

$711,843 ………. Income Requirement

$14,764 ………. Monthly Mortgage Payment

$3120 ………. Property Tax

$800 ………. Special Taxes and Levies (Mello Roos)

$300 ………. Homeowners Insurance

$500 ………. Homeowners Association Fees

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

$19,484 ………. Monthly Cash Outlays

-$1947 ………. Tax Savings (% of Interest and Property Tax)

-$3724 ………. Equity Hidden in Payment

$1240 ………. Lost Income to Down Payment (net of taxes)

$450 ………. Maintenance and Replacement Reserves

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

$15,503 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$36,000 ………. Furnishing and Move In @1%

$36,000 ………. Closing Costs @1%

$28,800 ………… Interest Points @1% of Loan

$720,000 ………. Down Payment

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

$820,800 ………. Total Cash Costs

$237,600 ………… Emergency Cash Reserves

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

$1,058,400 ………. Total Savings Needed

Property Details for 29 BLACK HAWK Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 6 full 1 part baths

Home size: 7000

($514 / sq ft)

Lot Size: .48 ac

Year Built: 2005

Days on Market: 7

MLS Number: 10-466827

Property Type: Single Family, Residential

Community: Shady Canyon

——————————————————————————

THIS IS NOT A SHORT SALE, CORPORATE OWNED REO BARGAIN . .(please see cancelled listings for pictures) Reminiscent of the Spanish Revival Estates of California's Montecito District, 29 Black Hawk in Shady Canyon is the perfect marriage between Old World ambiance and World Class amenities found only in the finest custom homes. Located on an expansive private lot bordering Bommer Canyon and the pastoral Irvine Ranch open preserve, this custom residence features 5 bedrooms, 6.5 baths, an office/library, a sun-drenched pool with cabana which includes a shower, fireplace & 1/2 bath. With the finest in custom features and fixtures, artisan applied Venetian Plaster, top-of-the-line appliances, state-of-the-art media and electronics, a finished 3-car garage and a 2,500 bottle wine room , 29 Black Hawk is the idyllic setting to enjoy the California lifestyle.

Still a bear at the high end

Many people seem to think the trouble has passed for the high end and that these properties somehow escaped the ravages of the bubble. Well, so far that has proven true because lenders are not foreclosing, owners are continuing to list at WTF prices, and very little is selling. Lenders are not going to give away these homes. They will have to foreclose and put these properties in the hands of owners who can afford them.

Take a careful look at today's featured property and think about the many that are like it. This property's value was inflated to $6M by stupid lending. The buyer who had $1,777,500 cash available generally would have purchased a home for no more than $2,777,500 as loans over $1M used to be very rare. You can't deduct the interest on a loan over that amount, and there aren't many people with the income to support the payments on loans that large. However, during the housing bubble, massive loans became common, and they were used to inflate property values all over the California coastline.

Nobody is underwriting $4,485,000 loans today, nor is anyone likely to any time soon. The buyer to replace this previous owner will not be so leveraged, and as a result, this house will sell for much less. Think about it, if the high end were a safe haven, wouldn't a cash buyer come along and pay $2,400,000 over the current asking price to get the value back up to $6,000,000? Doesn't the fact that a $6M home is selling for 45% off going to impact the values of other homes in the area. Is the buyer of this property getting this property at a steal?

Loans were the air of the housing bubble. Nobody is providing any air to the jumbo market. We have a huge number of homes that can only be afforded by a very small number of people. The high end is going to be crushed, and the fallout will reverberate through the entire chain of housing values. Picture it like an ice cream cone on a hot day. The top slowly melts downward, and the resulting ooze spreads out over the rest of the housing market.

Income-Price mismatch

The basic problem is a mismatch between the number of people who can afford a property and the number of properties available at any given price point. In Orange County, there are not enough properties being made available at the low end — a phenomenon that has stabilized prices there, and there is an overabundance of properties available at the high end. Even Steve Thomas's made-up numbers show that.

The problem is much deeper than unemployment related market distress. There are simply not enough households that earn the kind of money required to support high end prices. During the bubble, all the home values were raised in the neighborhood, and many people could not afford they houses they lived in. In order for prices to remain high, when these people sell, they must sell it to someone who can afford the property. If that buyer is not available, the price must be lowered to find a buyer that can afford the property.

Banks are not foreclosing on high end properties because they know there is no replacement buyer available. Prices will need to take a big step down just like today's featured property. Lenders are fantasizing that borrowers will go back to work and make enough money to support these prices. It may work in certain areas, but most of jumbo loan land prices are going to fall significantly.

For those who think the high end is stable and the market has recovered, how do you explain this property?

Prices are due to take a double dip in 2011. Will that finally signal it is time to buy?

Irvine Home Address … 3131 MICHELSON Dr #306 Irvine, CA 92612

Resale Home Price …… $274,900

Another turning point

A fork stuck in the road

Time grabs you by the wrist

directs you where to go.

So make the best of this test

and don't ask why.

It's not a question

But a lesson learned in time.

It's something unpredictable

but in the end it's right.

I hope you had the time of your life.

Green Day — Time of Your Life

I originally projected that house prices would fall more and that they would bottom in 2011. With the government manipulation of mortgage rates and the plethora of incentives, it doesn't appear that prices will fall as much as I thought. It has also likely delayed the bottom until 2012 or even later depending on interest rates. However, timing the bottom tick isn't necessary to find compelling reasons to buy property. If prices move lower in 2011 and interest rates remain low, payment affordability will make houses cost less than competing rentals. For those who plan to own for the long term and who are willing to become landlords if they need to move, 2011's lower prices may provide conditions that warrant buying rather than remaining a renter.

Shadow Inventory to Push 2011 Home Prices Lower than '09: Altos Research

House prices will continue to drop through the rest of the year and will begin 2011 lower than they were in 2009, according to a webinar hosted by Scott Sambucci, vice president of data analytics for Altos Research.

The culprit behind the forecast is the weight of the shadow inventory of homes yet to hit the market. But, Sambucci said, anyone who generalizes the size and length of time it takes to clear the shadow inventory will be wrong.

“The recovery period is dependent on inventory,” Sambucci said. “But different markets move differently. It’s important to get local.”

Other firms have released estimates of the national shadow inventory and the general time it could take to clear it.

According to Morgan Stanley, the shadow inventory of foreclosures could top 7m properties and take nearly four years to clear. The credit rating agency, Standard & Poor’s, put the total aggregate balance of the shadow inventory at $480bn worth of loans and would take nearly three years to clear.

I have noted a more concerted effort among clueless realtors to dismiss the idea of shadow inventory. Some of this is due to a misunderstanding of exactly what shadow inventory is. Shadow inventory is composed of delinquent loanowners — those home-occupying squatters who are not paying their mortgage — that have not yet been served a notice by their lender to begin foreclosure proceedings. Since cure rates are so low, these represent a shadow inventory because these properties don't show up in foreclosure lists yet almost all of these people will end up as distressed sales, either by short sale or foreclosure. I have to wonder if some of these local realtors think Morgan Stanley, Standard & Poors, Barclays Capital, and numerous other market watchers are simply making this stuff up.

I agree with the statement above that anyone who generalizes the time it takes to clear this market will be wrong — they will all be too optimistic. It will take much longer than any of these parties estimate. Have you seen anyone be overly pessimistic about the problems in housing to date?

Barclays Capital reported that it could peak at 4.7m in the summer of 2010. The research firm, Capital Economics, said the shadow inventory could reach 5.5m by the end of 2011.

According to Altos Research, the 20-city composite price index, which measures home prices on a rolling 90-day scale, bottomed in 2009 because of the shadow inventory, whatever the estimate.

That is the same point I have made over and over again. We are experiencing a false bottom because banks stopped foreclosing on people. These foreclosures are distressed inventory that must come to the market and be cleared. Perhaps delaying the clearing process and trickling them over time is in their best interest, assuming the cartel can maintain some pricing support. No matter the reason, it is likely that prices will fall again once this inventory is pushed through the system.

It rose to a peak in July 2009 and fell to where it is now in July 2010 (see graph below). Sambucci said it should drop below the 2009 bottom and start at a new low in 2011 before rising back up to the same levels seen in 2010.

But that was a general forecast, and specific markets behave differently. Recovery times can even differ at the ZIP code level within metropolitan statistical areas (MSAs). His example was Sacramento, thought to be one of the MSAs worst hit by the subprime mortgage crisis. Sambucci took a closer look.

Altos looked at three areas within the Sacramento MSA: Carmichael, Rancho Cordova, and Davis. In Carmichael (the black line in the graph below), prices actually increased at the end of 2008 while prices in Davis (brown line) dropped slightly to peak later at the end of 2009. Rancho Cordova (green line) prices ended 2008 at its bottom and has slowly climbed since.

Going forward, the recovery times have shifted. Prices in Carmichael plummeted in the fall of 2009 and began its recovery there. Prices in Davis are still falling and have dropped below its two neighbors. The key, Sambucci said is for analysts to find those inflection points when inventory and pricing levels change and begin to trend. From these points, inventories will continue in whatever direction they're pointing, whether it be moving up or moving down.

“The shadow inventory in each market,” he said, “has momentum.”

The lending cartel will have varying degrees of success in different markets. In markets where there are smaller number of delinquent borrowers relative to the number of homes, there will be less pressure on pricing, and the cartel may hold together. However, in areas with large numbers of foreclosures and delinquent borrowers, there will be a stronger incentive for the cartel members to cheat and liquidate their properties into what little demand remains.

Fiserv projects 4.9% decline in house prices over next 12 months

* by Diana Golobay

* 11:38 AM July 29, 2010

Fiserv, financial services technology provider, found that national average house prices rose 2% in Q110 from a year before, but predicted a drop in prices is coming.

The overall increase — the first yearly gain since 2006 — is driven by a few local markets, and prices look to continue to fall overall in the year to come.

Fiserv projects that single-family house prices are likely to fall another 4.9% over the next 12 months as tight economic circumstances continue. Continued high unemployment and a large number of distressed properties remaining in markets like Florida, Arizona and Nevada are weighing on the housing market.

Steep house price declines are anticipated to continue in hardest-hit markets. For example, average prices in Nevada, Arizona and Florida are expected to fall 11.1%, 10.8% and 8.8%, respectively, from Q110 to Q111.

“The stabilization of residential real estate markets will take many years as buyers and sellers try to find price levels that clear large inventories of vacant homes from the market,” said Fiserv chief economist David Stiff. “Consequently, we expect to see prices bounce up and down around their lows for the next two to three years, especially in markets that experienced the largest home prices bubbles.”

I don't know why California wasn't on this list giving how massive the housing bubble was here.

Stiff added: “This will result in alternating bouts of optimism and pessimism regarding the housing market recovery, similar to what we have seen for the economy as a whole. This will make it difficult to know exactly when the housing market has reached its bottom.”

The projections are based on the Fiserv Case-Shiller Indexes, which found that single-family house prices rose an average 2% in Q110 over the previous-year quarter. It marked the first yearly gain since 2006.

Strong price increases in markets like the San Francisco Bay Area and Washington DC drove the overall increase. On a local basis, however, prices were down in 303 of the 384 metro areas studied for the index.

The largest yearly gains in house prices occurred in lower-priced segments of metro markets — which Fiserv said indicated the recent rebound in prices can be traced to the first-time homebuyer tax credit’s effect on demand.

“Although part of the rebound in the less expensive market segment is due to improving affordability, it is likely the rising sales volumes and prices of low-priced homes were mostly due to the tax credit,” Stiff said. “When the tax credit expires, sales activity for low-priced homes will drop causing a moderate decline in overall home prices.”

Stiff previously noted that buyer optimism likely drove gains in 40% of the metros in Q409.

The latest Standard & Poor’s (S&P)/Case-Shiller House Price Index (HPI) found that house prices in 20 major metropolitan areas rose 1.3% in May from April and 4.6% from a year earlier.

I suppose you could call the government efforts to stimulate market demand a limited success. It put in a false bottom and stopped the freefall of prices nationwide. Perhaps by stopping the momentum of the price declines it gave both buyers and lenders confidence to re-enter the market. Of course, with the widespread declines that will follow now that these stimuli are gone, those people who optimistically bought "the bottom" with the government props will see values drop below their entry point, and they too will feel trapped for several years. Let's hope they are saving money versus a rental.

The time to buy is coming

My writing has been labeled as doom and gloom by my detractors who think I only write about the negative to sensationalize and draw readers. The fact is that I merely call them as I see them. For the realtors whose livelihood depends on creating false urgency in buyers, my message has not been well received. Obviously, I couldn't care less.

Despite my pessimism about future pricing, we are approaching a time when buying may be the right choice for many people. At the end of last year, I made a list of caveats as to why people may not want to buy now. It included the following: " it is a good time to buy when it is cheaper to own than to rent, and it is during a period of no direct government manipulation through tax credits, mortgage interest rate manipulation, and so on."

In many areas even in Orange County, you can find nice single-family detached homes for less than rental parity. California still maintains a credit, but the federal government's tax credits incentive has expired, and the Federal Reserve's program of buying down interest rates is over. In short, the primary conditions I mentioned to hold off buying have been met.

The remaining reasons to consider renting over buying is the presence of shadow inventory and historically low interest rates. However, there is no way of knowing how long these conditions will persist. Interest rates will likely go back up soon, and that will contribute to pricing pressure as we will have a first-time buyer dominated market for the foreseeable future. Interest rates will have a major impact on future resale value, and it likely won't be positive. How long will you wait for interest rates to rise in order to lower pricing? It may take a while. Also, shadow inventory will be with us for a very long time. Are you willing to wait another four or five years for that to clear? I don't know if I am that patient, and being someone who isn't buying for appreciation, I don't need to be.

To me, the housing bubble was easy to spot for one simple reason: you couldn't rent out a house for enough to cover the cost of ownership with stable financing. There was no viable plan B. Once prices drop to rental parity, that is no longer true. If you bought a home today at or below rental parity, and you had to move 3 years from now, you probably couldn't sell it for a profit, but you could always rent it out and not lose any money. That is a viable plan B. Being a landlord isn't for everyone, but it does provide an avenue of escape for those who have to move when their properties are worth less than they paid.

If prices take another leg down this fall and winter — an outcome that seems more and more likely — and if interest rates remain low, we will start to see many properties trading at or below rental parity in Irvine. I will still tell people not to buy because they worry about being priced out or because they think they can make money on resale because neither of those outcomes will happen. However, for those who plan to stay for the long term who wouldn't mind being a landlord if they needed to move, payment affordability has value. I have advised people to Use FHA Financing because Loan Assumption is the Appreciation of the Twenty-Teens.

For those who have been reading this blog for almost four years and waited patiently for a cautious green light, your time may soon be at hand. I won't be calling a bottom. I will merely be reporting on conditions as they are and warning people of the risks they face just as I always have. As affordability improves, the risks lessen, and the premium for ownership changes to a premium for renting — which is where it should be. Once it starts costing me significantly more each month to rent than to own, don't expect me to stay a renter very long. We aren't there yet, but we may be soon enough.

How to lose money flipping in Irvine

I was asked recently if I had seen any losing property flips purchased at trustee sale. I had not. However, I knew that despite the discount at auction, if a bidder does not accurately estimate the resale value, losing is a very real possibility. So I set out to find a loser in Irvine. I only had to look at the North Korea towers to find one. What a surprise.

These condos are purely a cash market. I don't know this for certain, but I doubt there are any lenders willing to give a loan in there. The HOA delinquency rate must be very high, so the GSEs won' touch this place. And since cashflow values to investors is around $225,000, there isn't much reason for a cash buyer to pick up these units. Of course that doesn't stop the occasional foolish speculator from trying. Based on my previous posts on this property, it isn't a stretch for me to say that I would not have purchased a flip in this tower.

The original owner paid $759,000 for this black hole on 3/27/2006. He used a $607,200 first mortgage, a $151,800 HELOC, and a $0 down payment. It is possible that he put money down and didn't use the HELOC, but what would you guess he did?

The NOD was filed in January which means he was delinquent by September 2009, but you have to think he was delinquent much earlier than that and was part of shadow inventory. Do you think he continued to make payments on the mortgages and his HOA dues when it was obvious his speculative flip he bought with no money down was not working out? I rather doubt he made any payments since 2008, but I have no way to know.

In any case, a flipper bought this beauty at auction on 5/21/2010 for $300,469. I don't know if he incurred any sales expenses or if he had to pay much in back taxes, but you have to guess his cost is closer to $315,000. With his current $274,900 asking price, he is certainly going to lose money — probably a lot of it.

Home Address … 3131 MICHELSON Dr #306 Irvine, CA 92612

Resale Home Price … $274,900

Home Purchase Price … $300,469

Home Purchase Date …. 5/21/2010

Net Gain (Loss) ………. $(42,063)

Percent Change ………. -14.0%

Annual Appreciation … -35.1%

Cost of Ownership

————————————————-

$274,900 ………. Asking Price

$9,622 ………. 3.5% Down FHA Financing

4.60% …………… Mortgage Interest Rate

$265,279 ………. 30-Year Mortgage

$54,357 ………. Income Requirement

$1,360 ………. Monthly Mortgage Payment

$238 ………. Property Tax

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

$23 ………. Homeowners Insurance

$998 ………. Homeowners Association Fees

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

$2,619 ………. Monthly Cash Outlays

-$126 ………. Tax Savings (% of Interest and Property Tax)

-$343 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$34 ………. Maintenance and Replacement Reserves

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

$2,201 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,749 ………. Furnishing and Move In @1%

$2,749 ………. Closing Costs @1%

$2,653 ………… Interest Points @1% of Loan

$9,622 ………. Down Payment

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

$17,772 ………. Total Cash Costs

$33,700 ………… Emergency Cash Reserves

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

$51,472 ………. Total Savings Needed

Property Details for 3131 MICHELSON Dr #306 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 1,292 sq ft

($213 / sq ft)

Lot Size: n/a

Year Built: 2006

Days on Market: 57

Listing Updated: 40380

MLS Number: S619614

Property Type: Condominium, Residential

Community: Airport Area

Tract: Marq

——————————————————————————

HIGH TECH GLASS AND CONCRETE TOWER IN THE MIDDLE OF THE BUSINESS DISTRICT IN IRVINE, WALKING DISTANCE TO SHOPS IN RESTAURANTS; GREAT LIFESTYLE: FULL TIME CONCIERGE, FITNESS CENTER, POOL, JACCUZZI AND SAUNA. THE ULTIMATE IN CITY LIVING! CORNER END UNIT AT GROUND LEVEL ON GREENWAY WITH VIEW OF CITY. LUXURIOUS CONDO: HIGH CEILINGS, PANORAMIC WINDOWS, FIREPLACE, GOURMET KITCHEN WITH EUROPEAN CABINETS, GRANITE COUNTERTOPS, STAINTLESS STEEL APPLIANCES, CHERRY HARDWOOD FLOORS IN LIVING SPACE, INSIDE LAUNDRY WITH WASHER AND DRYER INCLUDED. READY TO MOVE IN.

STAINTLESS? ALL CAPS

Questions of the day:

Will you wait until interst rates have risen to historic norms and shadow inventory has cleared to buy a home?

Is payment affordability using stable financing good enough even though prices may decline further?

The GSEs have stopped fooling around and begun foreclosure proceedings in earnest.

Irvine Home Address … 39 DESERT WILLOW Irvine, CA 92606

Resale Home Price …… $959,000

You got a fast car

I want a ticket to anywhere

Maybe we make a deal

Maybe together we can get somewhere

Any place is better

Starting from zero got nothing to lose

Tracy Chapman — Fast Car

For the last two years, the GSEs under direction of our government have been trying to make deals with people on loan modifications to keep them in their houses. Together they could have kept some of the distressed inventory off the market. It didn't work out that way.

The dismal failure of these programs was completely predictable because most of the people in trouble could never afford the homes they bought. Everyone was trying to get ahead, and like cars packing in to the fast lane, the volume of traffic brought things to a standstill. Any place is better than were these debtors are now. Most can rent for far less than their current and future payments, many are underwater, and few have any realistic hope of equity for the foreseeable future.

Starting from less than zero, they have nothing to lose… except perhaps their debts.

GSE Foreclosure Starts Start Coming Faster in 2010

The level of foreclosures starts in mortgages owned by Fannie Mae and Freddie Mac, the government sponsored enterprises (GSE), is at its highest point ever in 2010 as the rate of new foreclosures continues to increase.

The June 2010 Mortgage Monitor data provided by Lender Processing Services (LPS) Applied Analytics shows that the spike in foreclosure starts is greatest at 6+ months of delinquency. Analysts have suggested that this may be occurring due to the recent increase in HAMP cancellations. Total foreclosure starts for 2010 are at 1.46m, compared to 1.68m for the same period in 2009 and 1.25m in 2008, to be sure, but the rate at which the starts increase during 1H10 is at the fastest pace LPS Applied Analytics has seen.

Look at that massive spike! The GSEs have stopped fooling around with borrowers. While the commercial banks are shifting their emphasis to short sales to liquidate their backlog of delinquent loans, the GSEs are ramping up their foreclosures.

In a conversation about the findings, vice president Herb Blecher said that "HAMP trials originally were meant to last three months, but almost 1.3m mortgages were trialed in a short period and so we know that some trials run four, five or six months before they are either converted or cancelled."

To be sure, the official HAMP default rates are different, standing a 1.7% after six months — a claim that's hotly disputed.

After delaying the process for two years with a series of failed loan modification programs, the most recent of which being HAMP, the government appears to be giving up on delinquent borrowers. Nobody can reasonably argue that the government didn't do everything it could to save people's homes encourage widespread moral hazard through its indefinite squatting programs.

However, LPS finds that the foreclosure trend is not bleeding over into the market-at-large. Delinquencies and foreclosures remain stable, though elevated, with seasonal trends somewhat muted. Foreclosure starts on non-agency mortgages have also been relatively stable over the last several months, as have the rates on 90+ days default.

In short, for every mortgage performing, the mortgage data analytics firm finds two are deteriorating. At a loss mitigation conference last week, Edward DeMarco, acting director of the Federal Housing Finance Agency, said that banks should consider foreclosing when borrowers are not being rehabilitated.

We are falling farther and farther behind and building an ever-larger shadow inventory.

There are some in government who see the right answer and are pointing the way.

FHFA Director DeMarco: No "Silver Bullet" for the GSEs

… He said that streamlined and transparent loss mitigation is "critical" to saving the GSEs. In the Q&A, DeMarco told an attendee that the FHFA believes the area of principal forgiveness remains "fraught with difficulty,"

Is that secret code for "its a dumb idea that isn't going to happen?" Do any of you want to see the army of HELOC abusers be given a free pass and be allowed to keep their homes?

People get principal reduction all wrong. What we should have is foreclosure, which provides debt reduction, then we should forgive those debts through bankruptcy. The debt needs to be foregiven, but the people need to move out of the houses they can't afford and didn't pay for first. Foreclosure is a superior form of principal reduction.

and in cases "where there is no borrower," even if homeowners are avoiding contact, then the bank should foreclose.

"If you have an abandoned property or a borrower not willing to discuss or work with anything, then get going," he advised.

This is why the transition to short sales will ultimately fail. There are far too many properties that are empty, or where the loan owner has simple stopped responding to the lender. Many of the latter group are simply going to squat until they are kicked out.

And it isn't only the GSEs that are increasing foreclosures. Some banks are finally getting around to booting out the high-end squatters.

Foreclosures boom among nation's most creditworthy

A record number of borrowers once judged the most creditworthy are heading into foreclosure as the job market leaves more homeowners unable to keep up with mortgage payments.

Foreclosures among borrowers with prime conforming loans have shot up 425% since January 2008, according to Lender Processing Services, which compiles mortgage data. Conforming loans are those eligible for purchase by Fannie Mae and Freddie Mac, the federal agencies that buy mortgages from lenders.

Jumbo prime loans not eligible for purchase by Fannie or Freddie have done even worse — foreclosures on those have increased nearly 600%.

Jumbo loans are typically mortgages worth more than $729,750.

Those percentages are so large because the number was so small in January 2008. These numbers will continue to increase as the hopelessly overextended accelerate their defaults.

"Jobs is a major impact. It's a huge factor," says Ken Shuman, a spokesman with Trulia.com, a real estate search engine. "A lot of homeowners on the higher end are also savvy investors. They're seeing their home has lost 30% of their value, we're seeing a lot of strategic defaults."

A strategic default occurs when a borrower stops paying a mortgage they can afford to pay, often because the house's value has fallen below the loan balance.

An accelerated default occurs when a borrower stops paying a mortgage they can't afford to pay long term, often because the payment will increase, the house's value has fallen, and they can rent something for far less.

While the U.S. may be seeing signs of a peak in foreclosures in some of the hardest-hit markets, foreclosure activity continued to rise in many of the nation's metropolitan areas in the first half of the year.

HOME PRICES: Homes will sell if priced right; foreclosures have impact

CHART: Metro area foreclosure filings for the first six months of 2010

INTERACTIVE MAP: State-by-state look at the foreclosure problem in 2Q

RealtyTrac reports today that 154 of 206 U.S. metropolitan areas with populations of 200,000 or more posted year-over-year increases in foreclosure filings, covering properties in various stages of the foreclosure process.

The top 20 metro areas with the highest foreclosure rates were in four states — Florida, California, Nevada and Arizona, according to the report.

Other RealtyTrac findings:

•94,466 properties received a foreclosure filing in the Miami-Fort Lauderdale-Pompano Beach metro area during the first half of 2010, more than any other metro area.

•The metro area with the second-highest total filings was Los Angeles-Long Beach-Santa Ana, which had 93,263.

•Las Vegas continued to post the nation's highest metro foreclosure rate in the first half. One in 15 of its housing units received a foreclosure filing — more than five times the U.S. average.

Foreclosures are falling one month then rising the next as lenders grope for solutions to the catastrophe they're facing. The only thing that has been constant is the delinquency rate that has risen for the last three years and continues to rise.

The answer to the problem is a combination of short sale and foreclosures, and to clear the market of the mortgage debris will require low interest rates, low prices, and more qualified buyers. We have the low interest rates, we will have lower prices, and as for qualified buyers, that may take a while.

He paid how much?

I am always astounded when I see what people paid in Columbus Grove.

• The original buyer paid $1,273,000 for this property on 4/19/2006. He used a $1,082,050 first mortgage and a $190,950 down payment.
• After waiting the minimum two month period, he refinanced with a $954,750 first mortgage and a $142,000 HELOC — and gave up his non-recourse protections in the process.
• On 5/16/2008, he added another to the title and trashed their credit too.

Foreclosure Record

Recording Date: 11/18/2009

Document Type: Notice of Default

He didn't get much squatting time as this was sold to our flipper at auction on 5/21/2010 for $785,000. That is $488,000 less than the original buyer paid. Not a bad deal for the flipper.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 39 DESERT WILLOW Irvine, CA 92606

Resale Home Price … $959,000

Home Purchase Price … $785,000

Home Purchase Date …. 5/21/2010

Net Gain (Loss) ………. $126,050

Percent Change ………. 16.1%

Annual Appreciation … 82.8%

Cost of Ownership

————————————————-

$959,000 ………. Asking Price

$191,800 ………. 20% Down Conventional

4.62% …………… Mortgage Interest Rate

$767,200 ………. 30-Year Mortgage

$190,070 ………. Income Requirement

$3,942 ………. Monthly Mortgage Payment

$831 ………. Property Tax

$550 ………. Special Taxes and Levies (Mello Roos)

$80 ………. Homeowners Insurance

$175 ………. Homeowners Association Fees

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

$5,578 ………. Monthly Cash Outlays

-$946 ………. Tax Savings (% of Interest and Property Tax)

-$988 ………. Equity Hidden in Payment

$332 ………. Lost Income to Down Payment (net of taxes)

$120 ………. Maintenance and Replacement Reserves

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

$4,096 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,590 ………. Furnishing and Move In @1%

$9,590 ………. Closing Costs @1%

$7,672 ………… Interest Points @1% of Loan

$191,800 ………. Down Payment

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

$218,652 ………. Total Cash Costs

$62,700 ………… Emergency Cash Reserves

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

$281,352 ………. Total Savings Needed

Property Details for 39 DESERT WILLOW Irvine, CA 92606

——————————————————————————

Beds: 5

Baths: 3 full 1 part baths

Home size: 3,200 sq ft

($300 / sq ft)

Lot Size: 5,282 sq ft

Year Built: 2006

Days on Market: 12

Listing Updated: 40376

MLS Number: S624539

Property Type: Single Family, Residential

Community: Columbus Grove

Tract: Alex

——————————————————————————

This property is in backup or contingent offer status.

Fabulous floorplan!!! Offering approx. 3200 sq. ft. with all the ammentities …Rich hardwood floors downstairs with new carpet and paint. Gourmet kitchen with granite counters and stainless appliances. Rod iron staircase. Attached three car garage.

ammentities?

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 don't forget to come join us Sunday evening from 5:00 to 9:00 at JT Schmids.

Irvine Renter