I found a few interesting cartoons to share this weekend. I guess brutal represssion is getting harder to hide these days, and blogging can be dangerous.
There are a some interesting blog posts for you to check out:
Former model home in the exclusive area of Lombard Court in Woodbury!
Hard to find single level home full of upgrades including an open floor
plan featuring a large kitchen with granite counters, pull outs,
breakfast bar, custom window treatments, custom built-ins, crown
moldings, rich wood flooring, truly a must see! Enjoy entertaining your
guest in the relaxing courtyard, take a dip in one of the many
association pools, roast marsh mellows in the fire pit, wind down with
a soak in the association spa at sunset! Close to parks, shopping,
freeways, and Award winning schools! Wheelchair accessible, Don t miss
this opportunity!
Don’t miss this opportunity to get trapped in a one bedroom apartment for a decade…
I hope you are having a good time this beautiful weekend. I am finally going to take my son to Wild Rivers and enjoy the waterpark.
The big news this week was the introduction of regulatory reform of the financial services industry. I hope they get it right. Calculated Risk has a great overview of the reform proposals. It contains links to many documents including the governments white paper on the subject.
We have been updating and expanding our library and knowledge base. It is a work in progress.
In the two and one-half years I have been writing for the blog, I have completed many detailed analysis posts. The complete list can be found in our Analysis section (soon to be renamed Library). The goal is to organize all of the posts into different topics so finding them is easier. Also, I plan to add links to outside posts and academic papers people may find interesting related to the topic. Another project I am working on is to document the collective wisdom of our forums. There are a number of frequently asked questions that have been discussed at length in the fourms. This library project will be ongoing, and I will incorporate additional data as I find it or generate it myself.
The vision of the IHB has always been to be a free resource providing real estate education to everyone. The development and expansion of our library is part of our ongoing committment to provide you with the information and analysis you want. If you have any comments or suggestions, please let me know.
Back when I started writing for the IHB, we used to get about 500 visits a day. Now we get about 5,000. As I was setting up the library, I came across one of my early posts that I had forgotten about. It was one of my more creative efforts, so I thought I would revisit it here today. If you missed it the first time, I hope you enjoy it. From May 21st, 2007:
So, bye-bye, Miss American Pie Drove my Chevy to the levee But the levee was dry And them good old boys were drinkin’ whiskey and rye Singin’ this’ll be the day that I die This’ll be the day that I die
One of the hallmarks of a great song is its ability to be interpreted in different ways. American Pie is an allegory of our times, an ode to the death of our housing market.
With leverage drying up, the party is over. The last drink is for the
death of the market itself, and with it’s death, the death of the
American Dream of home ownership for thousands of overextended
homedebtors.
When a bubble in a financial market pops, it doesn’t explode in
spectacular fashion like a soap bubble, it is more comparable to a
breached levee which releases water slowly at first. Once the financial
levee is ruptured, the equity reservoir loses money at increasing
rates. It washes away the imagined wealth of homedebtors everywhere
until the reservoir is nearly empty and the torrent turns to a trickle.
Ultimately, the causes of failure are examined, the financial levee is
repaired, and the reservoir again holds value, but not until the dreams
and equity of homedebtors are washed away.
New Century Financial
Do you recall what was revealed The day the music died?
The poster child for the great residential financial bubble of the
00’s will be New Century Financial. The date of their financial
implosion will be regarded as the Day the Market Died. The
death of New Century Financial will come to represent to death of loose
lending standards and the beginning of the cycle of credit tightening
as I described in my last post, The Anatomy of a Credit Bubble. Many people currently see the elimination of sub-prime lending as being the problem. It is much larger than that. It is the changes in behavior caused by loose lending standards epitomized by New Century Financial that will be the undoing of the housing market.
100% Financing
The most damaging change in buyer behavior was caused by 100%
financing: potential buyers quit saving. Once 100% financing became
widely available, it was enthusiastically embraced by all parties: the
lenders suddenly had a huge source of new customers to generate high
fees, the realtors and builders now had plenty of new customers to buy
more homes, and many potential buyers who didn’t have savings were now
able to enter the market. It seemed like a panacea; for two or three
years, it was.
Now for ten years we’ve been on our own And moss grows fat on a rollin’ stone But that’s not how it used to be
There is a problem with 100% financing (which was masked by the
rampant appreciation brought about by its introduction): high default
rates. If you want a glimpse into the irresponsible mind of a typical
100% financing borrower, go read the post and comments in Update: an FB situation 14 months later. The FB stated in the comments,
“However, I take exception to the idea that I’m taking
food out of someone’s mouth by sticking the bank with the loss. An
appraiser made the valuation, and I got a loan. No one forced New
Century to give me the loan to buy the house, but they did. They
confirmed the value, and thus, assumed all risk, especially since I
went no money down with an, at the time, 720 mid-FICO, and the wife as
well.”
This borrower signed papers promising to repay money to New Century.
He gave his word. How does it follow that New Century took all the
risk? How does the presence or absence of a downpayment impact whether
or not a borrower will live up to their commitments and
responsibilities? We all know the answer: When people don’t put their own money into the transaction, they don’t feel responsible for what happens. At one point, the FB was celebrating, “I was planning on claiming insolvency to the IRS through my job loss, anyway, but they didn’t even give us a 1099!” Does it make you want to turn him in?
The courtroom was adjourned No verdict was returned
The more money people have to put in to the transaction, the less
likely they are to default. It is that simple. Taken to its extreme,
100% financing becomes the ideal tool for fraud. The FB from above
probably intended to repay the loan when he got it, he just didn’t feel
much of a sense of responsibility to the loan when the going got tough.
People who commit fraud have no intention of repaying the loan from the
start. Fraud is much easier to commit with 100% financing because the
bank will loan you the full amount of an inflated appraisal. It is much
harder to commit fraud when the bank will only loan you 80% of a
property’s value.
The point here is not about being irresponsible or committing fraud,
it is about defaults. High loan-to-value loans have high default rates;
this will cause 100% financing to disappear, and it will make other
high LTV loans much more expensive, so much so as to render them
useless. OC Fliptrack documented the elimination of the 100% LTV loans
at HSBC. It is all part of the ongoing credit tightening cycle.
The problem for the future housing market created by 100% financing
is that people quit saving money for downpayments. People respond to
incentives. This is basic economic theory. The availability of 100%
financing removed the incentive to save for a downpayment. People
responded; our national savings rate went negative as people stopped
saving and borrowed instead. This is going to create a huge problem
going forward: nobody has the newly required downpayments.
Elimination of Entry Level Buyers
Oh, and there we were, all in one place A generation lost in space With no time left to start again
People who currently own entry level housing (2 bedrooms or less and
small 3/2s) are bagholders. With the elimination of 100% financing,
they have missed their chance to sell to a greater fool. Even if these
fools were still out there (they have been decreasing in number), they
no longer have the ability to borrow all the money required to buy, and
they have no way to make up the difference. The entry level market was
destroyed the moment 100% financing was eliminated because nobody has a
downpayment.
Collapsing from the Bottom Up
The players tried for a forward pass With the Jester on the sidelines in a cast Now the half-time air was sweet perfume While the Sergeants played a marching tune We all got up to dance Oh but we never got the chance
Housing markets collapse from the bottom up. The
first sign of a troubled real estate market is a dramatic reduction in
volume. This is particularly pronounced at the lower end of the market
for reasons outlined above. Since the lower end of the market has a
more dramatic drop in volume than the top of the market, the median
stays at artificially high levels which is not reflective of pricing of
individual properties in the market. In other words, things look better
than they are.
The graphic on the right (borrowed from Calculated Risk) shows the
problem when the entry level is eliminated. For a more detailed
analysis, please read Why the Sub-Prime Meltdown is a Problem.
As the problem at the entry level becomes more serious, more and more
transactions higher up the house chain fall out of escrow. Volume
plummets, and the whole market seizes up. That is where we are today.
There will be no summer bounce this year.
Helter Skelter in a summer swelter The birds flew off with a fallout shelter Eight miles high and falling fast
Eight Miles High and Falling Fast
The market will not stay seized-up forever. Many bitter renters have
complained about greedy sellers, but it isn’t the sellers who determine
market prices, it is the buyers. Think about this: what if every seller
in the market decided they would not sell for less than $10,000,000?
Would houses suddenly become worth $10,000,000? Of course not because
no buyers could afford to pay that much. Buyers determine the market
price by putting in competing bids. Sellers can decided to accept or
reject the highest bid. If all bids are rejected, there is no market
because there is no transaction.
Buyers are never forced to buy, it is always a choice; however,
sellers may face circumstances when they are forced to sell. Over the
past several years, greedy buyers motivated by rising prices and fueled
by loose lending standards were able to bid prices up to ridiculous
levels. None of them were forced to buy. The exotic financing was not a result of high prices, it was the cause of high
prices. Those of us who are financially conservative and do not wish to
take on debt under terms which will put us into bankruptcy have been
competing with those afflicted with Southern California’s Cultural Pathology. It is a competition we were all better off losing.
Now the tables are turned. The once greedy buyers are becoming
desperate sellers, their dreams of riches from perpetual appreciation
in tatters. Many will be forced to sell due to their inability to make
their mortgage payments. Those that hang on will be homedebtors with
50% or more of their income going toward paying off an asset which will
be declining in value. It is not a set of circumstances I envy.
Prices will fall. We will see weakness at the bottom first, but it
will work its way through all market strata. It is only a matter of
time. Will you remember The Day the Market Died?
A long, long time ago… I can still remember How that music used to make me smile…
I can’t remember if I cried When I read about his widowed bride, But something touched me deep inside The day the music died…
I met a girl who sang the blues And I asked her for some happy news But she just smiled and turned away I went down to the sacred store Where I’d heard the music years before But the man there said the music wouldn’t play
And in the streets the children screamed The lovers cried, and the poets dreamed But not a word was spoken The church bells all were broken And the three men I admire most The Father, Son and the Holy Ghost They caught the last train for the coast The day the music died
If the “green shoots” meme is for real, I am not seeing it.
Since this recession began in December of 2007, we have had never-ending denial from government and the media as to how bad this situation really is. In early 2008, the Federal Government passed a stimulus package that pumped some money into the economy and bought us a little time. It wasn’t enough. By late summer of 2008, the problems had not resolved themselves, and we finally had a major economic meltdown in late 2008.
When Obama came to office, the Federal Government passed another even larger stimulus package, and the Federal Reserve lowered interest rates to zero. As a result, we have managed to put a temporary and artificial floor under house prices locally (although they continue to fall nationally), and we have inflated both the stock market and the commodities market. There is no fundamental reason for asset values anywhere to be rising, but the influx of money from the Government and the FED is pumping up values anyway.
The problem with these artificially induced price rallies is that they do not reflect underlying fundamentals. There is no need for businesses to expand right now because there is very little demand, and consumers keep losing jobs. Absent government stimuli, prices would still be falling.
I work on the front lines of the land development industry in Southern California. I watch markets for residential and commercial properties, and in particular, I closely watch the demand for new development. I can tell you right now that there is none. Private land development across California is practically non-existent. There is some public works stuff going on, and a few school and healthcare projects, but for the most part, land development is dead.
Economists who have studied the economic cycles of the past have noted a strong correlation between land development activity and the broader economy. On academic paper goes as far as to say that Housing is the Business Cycle.pdf.
The past does not always repeat itself, and it is possible that we will have an economic recover that does not coincide with the resurgence of housing and land development. I hope so because right now, housing and land development is not showing any green shoots.
I had the following email exchange with a mortgage broker:
Question: With our limited inventory, many affordable properties are seeing numerous
bids, sometimes over the ask. Do you think this phenomenon will stop due to the
higher rates?
Answer: This rate Tsunami hasn’t even made the news yet. When I mean news, I mean buyers don’t realize that their Pre-Qual letters are now worthless and payment expectations are shattered. Realtors also have no idea what will happen when 45% of all sales suddenly stop – meaning 1st timers will start holding back buying distressed homes. These buyers are very rate sensitive and will sit idly by waiting for rates to improve. Since rates won’t be back in the sub 4.5% range (7.0 point cost today to get a 4.5% rate!) only price reductions will make the sales perk back up. This is a 30 day problem. In other words, the fit has hit the shan and 30 days from now is when everyone will finally get a whiff of the trouble this means.
In our forums, this same broker had this to say:
Here’s how I think it’s playing out – from a cynics perspective.
Timmy G went to Beijing for a dressing down. Our Chinese Overlords
(OCO) are not going to invest long term at sub 3% rates. The short term
rate auctions last week went well, but next week comes a 3y/10y/30yr
auction that was likely to be a disaster. Timmy convinced OCO that if
the US floats rates to the upper 3’s – as they are now – that OCO
should invest. Next week you’ll either see a great Treasury auction or
a crappy one. If OCO buys a bunch, mortgage rates which are currently
way oversold will settle into the upper 4’s, low 5’s. If the auction is
a steaming pile, 6.0% mortgage rates are on their way.
That said though, of the 1.2t the Gubmint is committing to spend on
Mortgage Backed Securities, they’ve only spent 500b. A TARP’s worth of
ammo is still out there.
I think the above observations are on the mark.
We know there are a number of properties going to hit the market due to the pent up supply of the foreclosure moratoria. The price levels we will see this fall and winter will be influenced by the amount of supply, but it will largely be determined by the terms of financing and in particular mortgage interest rates. If rates go back up to 6% or higher, prices are going to fall a great deal. If they can be maintained at 5% or less, the drop will be much more subdued. We will see what happens.
Property type: Detached SFR Square footage: 3000 square feet or more Bedrooms: 4 or more Bathrooms: 3 or more Preferred enclaves in preference order: (1) Turtle Ridge, (2) Quail Hill, (3) Turtle Rock, or (4) Woodbridge Specifications: (1) View or extremely well landscaped yard (similar to 111 Nighthawk), (2) Move-in ready, and (3) Plenty of natural light. Price: 1.5 million or below — buyer is willing to pay fair market value based upon comparable properties Sample properties: 1) 30 Canyon Terrace 2) 37 Tall Hedge 3) 37 Hedgerow 4) 111 Nighthawk
If you have a property meeting these specifications you would like to sell, please contact Shevy Akason at Evergreen Realty shevy.akason@evergreenrealty.net (949) 769.1599 (This is a compensated post)
