The conditions which have the most immediate impact on house prices are the current price levels, housing demand, and available supply. If prices are too high, if demand is too low, and if available supply is too high, prices will move lower as the market seeks a new equilibrium.
The banks have been working to manipulate the market through constricting supply. Lenders have convinced the government and the shoeple that building an enormous shadow inventory is a good thing as long as it temporarily keeps prices elevated. Few loan owners disagree, but those looking for affordable housing find the situation untenable, and many of those potential buyers choose not to buy while potentially deflationary conditions persist.
Prices are too high
So are prices really too high? What is the evidence?
House prices historically have only kept pace with inflation.
Another look at similar data…
We are closer to the bottom than to the top, but based on historic trends both inflation adjusted (top chart) and in nominal terms (bottom chart) prices are simply too high.
Demand is low
It has been a while since realtors have blathered on about "pent up demand," but as a reminder, Desire is not Demand:
Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit. True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand. When realtors make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.
So when I say demand is low, I mean the ability of people to put forth sufficient dollars to purchase properties at today's prices is lower than historic norms. Is there any data to back this claim?
The government and the banking cartel has injected the housing market with excessive stimulation through low interest rates and tax subsidies, yet demand is at historic lows.
The above charts are national numbers, but the local numbers are not any better….
So why is demand so low? Two reasons: (1) unemployment is very high and it isn't projected to get much better any time soon, and (2) the large number of foreclosures has tainted the potential buyer pool with bad credit.
Without a dramatic economic recovery, demand is not going to increase, and few economists are predicting a vigorous economic recovery.
High levels of supply
What evidence do we have that supply is high?
The most troubling part of the elevated inventories is the accumulation of shadow inventory. In order to hold current price levels, banks slowed their foreclosure rates, embarked on amend-extend-pretend, and allowed a great deal of squatting by delinquent borrowers. The above chart is a conservative estimate from First American Core Logic. Other estimates are not so rosy.
When you compare the above chart with the one from First American Core Logic, the most obvious difference is the measure of shadow inventory. The chart above assumes very few of the currently delinquent mortgages will be cured whereas the First American data assumes a healthy cure rate brought about by an improving economy. The real answer is probably somewhere in between, but the situation is probably much worse than First American Core Logic would lead you to believe.
So why are the banks building this huge shadow inventory? They don't have much choice if they wish to remain solvent.
Banks will eventually need to write down this bad debt because prices will not recover as long as the debt overhang exists. If banks had to write down their debt to current values today, they would likely be insolvent, and many would be bankrupt.
Japan had a similar set of circumstances when their real estate bubble burst in 1989. It didn't turn out well for them either.
Months of supply points to lower prices ahead
The statistic most cited when examining the balance between supply and demand is the months of supply, the number of months it would take to clear the inventory as current sales rates.
Months of supply has been elevated all year, and back in August it hit the highest level ever recorded. When this indicator exceeds six months, prices generally fall. It first broke above six months in mid 2006 as the market peaked. The months of supply fell off quickly in 2009 as banks stopped foreclosing and began their policy of amend-extend-pretend, but the indicated spiked again with the expiration of the tax credits and it has remained elevated as prices have rolled over in a second leg down.
If the asking price is high enough, it isn't a short sale.
I often giggle to myself when I see a WTF asking price followed by a statement that a property is a standard sale. Well, sure it is a standard sale if the seller asks enough to pay off the Ponzi loans they took out.
Today's featured Ponzi bought this house on 9/30/1998 for $215,000. She used a $171,600 first mortgage and a $43,400 down payment.
On 5/17/2001 she obtained a $50,000 HELOC.
On 9/3/20003 she refinanced with a $223,300 first mortgage.
On 5/14/2004 she obtained a $100,000 HELOC.
On 11/10/2005 she refinanced with a $375,000 first mortgage.
On 12/18/2006 she refinanced with a $392,500 first mortgage.
On 10/31/2007 she obtained a stand-alone second for $50,000.
Total property debt is $442,500, so this is a standard sale, assuming she doesn't have to drop her WTF asking price much.
Total mortgage equity withdrawal is $270,900 including her down payment.
Do you want to pay $468/SF for this tiny house to pay off this lady's debts?
Charming detached cottage home in Northwood Pointe. This is the LOWEST PRICED DETACHED HOME that's a STANDARD SALE in Northwood Pointe. Beautifully maintained with laminate wood floors & upgraded neutral carpet & paint. Gourmet kitchen with sparkling white tile counters & white cabinetry opens to living room & dining area. Living room features a cozy gas fireplace, & built-in media unit. French doors open to a secluded front porch area. The dining nook features built-in seating & shelves. From the kitchen, enter a serene garden w/patio area, & wrap around yard- great for relaxing & entertaining. Custom window coverings accent the home. Located on a quiet interior cul de sac street, with one of the larger lots for this floorplan. Association amenities include heated pool, lighted tennis courts, sport courts, playground areas, BBQ's. Walking distance to award winning schools-Canyon View Elem., Northwood High. Close to Tustin & Irvine Marketplace for dining, shopping, entertainment.
California home buyers live in a fairytale world where house prices go up forever and provide them with endless spending money. It's a seductive tale, and many people put their heads in the clouds (or is it up their a$$), live the fairytale and borrow and spend themselves into oblivion. It doesn't matter how much you pay as long as someone else has to pay the bills.
December 1st, 2010, 1:00 am — posted by Jon Lansner
Despite horrific drops in the values of Orange County housing, a local home still practically costs what three typical American homes go for. Yes, one home here or three somewhere near Main Street U.S.A.
That’s one measure of local affordability, on a national scale. Just ponder fresh National Association of Realtors’ home price data for metropolitan areas: A typical Orange County house sold in the third quarter (median selling price: $508,400), cost 2.86 times the median-priced American home (cost: $177,900 in the third quarter!)
It’s equally troubling in a historic context: This Orange County premium remains higher now that it was in 1989 — the peak of the previous run-up in local housing prices.
Let's be clear about what is not happening here: There is not premium for a premium. There is a premium for Orange County real estate compared to the rest of the nation because Orange County residents have higher incomes. However, the premium on the premium paid by Orange County loan owners is causesd by people foolishly over-extending themselves to capture appreciation caused by people foolishly over-extending themselves. It is a self-reinforcing delusion punctuated by periods of steep declines when reality becomes unavoidable.
To be fair, this “Orange County premium” peaked at 3.42 American homes for one Orange County house in 2004. A 19% drop in local prices vs. a 3% drop nationally in the ensuing six years help narrow the local-vs.-national pricing gap.
So, the big question: Is the premium “worth it?” The math suggests that O.C.’s weather, culture and usually above-average salaries — and usually a good job market — supports pricier local housing.
Yes, local imcomes support higher prices, but only to the degree that incomes are higher than other areas. The rest is foolishness and kool aid intoxication.
And since 1982, local housing on average has costs double — eh, 2.38 times to be exact — to buy here compared to that mythical median-price American house.
Current economic weakness, no less some major challenges and the local and state level, bring the size of the premium deserved by Orange County housing into question for the future. Remember, one way to increase demand for housing is to be an attractive draw for out-of-towners seeking new employment of lifestyle.
Who is going to come to Orange County and pay these bloated prices? What high-paying business is going to expand here given the high home prices, high commercial rents, high state taxes, and dysfunctional state government that continually enacts business-unfriendly legislation? And what high wage earners are going to come here so they can pay more taxes and spend 40% or more of their income to live in a house half as nice as what they left behind?
Despite claims to the contrary put forth in the comments, house prices here are not justified by local incomes….
November 22nd, 2010, 9:30 am — posted by Jon Lansner
The price of entry to Orange County remains high.
Metro
Price
Income
Ratio
Honolulu
$621,000
$83,600
7.4
San Francisco
$725,000
$101,000
7.2
New York-NJ
$420,000
$64,700
6.5
O.C.
$530,000
$83,600
6.3
Santa Cruz
$502,000
$84,000
6.0
Los Angeles
$353,000
$61,200
5.8
San Jose
$575,000
$100,400
5.7
San Luis Obispo
$380,000
$69,800
5.4
San Diego
$390,000
$74,100
5.3
Oxnard
$413,000
$86,300
4.8
Nation
Price
Income
Ratio
U.S.
$177,000
$62,000
2.9
Metro
Price
Income
Ratio
Springfield, IL
$116,000
$74,100
1.6
Utica-Rome, NY
$90,000
$57,800
1.6
Grand Rapids, MI
$91,000
$58,900
1.5
Elmira, NY
$85,000
$58,600
1.5
Battle Creek, MI
$81,000
$56,900
1.4
South Bend, IN
$70,000
$53,600
1.3
Decatur, IL
$73,000
$57,600
1.3
Saginaw, MI
$61,000
$49,500
1.2
Detroit
$52,000
$52,000
1.0
Monroe, MI
$63,000
$63,900
1.0
Here’s another measure showing that despite steep price declines, Orange County homes are still costly compared to the rest of the nation — especially when local incomes are figured in!
FiServ’s recent home-price outlook contained intriguing stats on 212 markets and the relationship between the median selling price of homes (for second quarter 2010) in major metropolitan areas across the nation and the local household median incomes from 2009.
What did FiServ find?
In Orange County homes sold for 6.3 times the median family income.
That’s a little more than double the nationwide median of 2.9 years worth of income vs. median home prices.
Orange County ranks as the fourth-highest cost ratio of the 212 markets tracked.
California dominated the 10 costliest list with 8; only Honolulu (No. 1) and New York (No. 3) were from outside the Golden State.
Where’s the “cheapest” housing by this measure? Five of the 10 at the bottom are from Michigan — including Detroit at one year’s salary for a home!
Orange County residents put twice as much of their wage income toward housing than do people living in the rest of the country. Why is that? They do because they think they will get rich owning California real estate. It is foolishness on a grand scale.
Some have argued that housing is scarce, therefore, people are bidding up prices to get whatever is available. If that were true, rents would be correspondingly high. Rents do not support local pricing.
December 2nd, 2010, 4:48 pm — posted by Jon Lansner
Orange County homes are far pricier than most of the housing in Southern California when compared to respective rents in the 7-county area.
County
Ratio
Year Change
O.C.
302
+6%
Santa Barbara
297
+19%
Ventura
259
-2%
San Diego
235
+3%
L.A.
210
+5%
Riverside
183
+15%
San Bernardino
141
+13%
All SoCal
212
+8%
That’s the conclusion of fresh statistics from the Real Estate Research Council of Southern California that involved the age-old buy-or-rent debate.
The council’s math compared median selling prices by county from DataQuick and average asking rents from RealFacts. For the third quarter, Orange County home-sale prices were 302 times local monthly rents — a cost ratio 42% higher than the regional average and the highest of the seven SoCal counties tracked.
Orange County has been the region’s priciest place to own a home by this math since the first quarter of 2008 when Santa Barbara County was tops. In the third quarter, Santa Barbara was second priciest by this measure, with its median sale prices 297 times typical monthly rents.
By this math, renting looked a bit better in the third quarter vs. the previosu three months as the ownehsip cost index rose 6% in Oraneg County and 8% regionwide.
Yet, clearly, tumbling home-sale prices has helped narrow the buy-to-rent gap in recent years. Since the cyclical peak for this ownership-cost ratio five years ago, the Orange County buy-to-rent ratio has fallen 34% while the regional ratio is off 41%.
So Orange County loan owners pay far more for housing as a percentage of their incomes, and they pay far more than is justified by the local rents. So what happens when reality catches up the fantasies of appreciation?
December 1st, 2010, 12:36 pm — posted by Jon Lansner
Sellers of Orange County’s upper-crust properties are doing the deepest discounting.
Recent stats from HousingTracker.net — which tracks prices of homes listing for sale in brokers’ MLS system — show:
At the 75th percentile — the midpoint by price of the upper half of homes listed – Orange County’s asking price in November ran $694,833 – that is down 2.9% vs. the previous month and off 9.8% vs. the year earlier. This marker for Orange County’s higher-priced homes has fallen on a year-over-year basis for eight consecutive months.
At the 25th percentile — the midpoint of the lower half of homes listed – the asking price in November ran $299,940 – that is -2.2% vs. the previous month and 0.1% vs. the year earlier. This marker for Orange County’s cheaper homes has risen on a year-over-year basis for a year. (Arguably, an 0.1% gain isn’t much of an advance!)
The changing fortunes of these two niches puts the pricing gap between top and bottom at 122% — or $365,840 — the thinnest difference in listing prices between high and low ends since April 2008.
This gap was at its peak at 167% — or $500,000 — as recently as August 2009. Since then the “bottom” pricing — the 25th percentile — has been flat while the top’s asking prices — the 75th percentile — dropped 16%!
By the way, the actual median listing price — the 50th percentile — for November was $432,600, down 3.2% in a month and down 3.8% in a year.
The downward trend in asking prices for high-end properties is unmistakable. It will also continue for the foreseeable future because prices are way, way too high. Once the banks get around to foreclosing on the squatters in more expensive homes, inventory will swell further and prices will continue their descent.
Condo values and volatility
One of the more obvious signs that real estate was in a bubble was the price change and price levels of condominiums. Condo values are historically the most volatile. These are typically undesirable or semi-desirable properties, but once kool aid intoxication takes over and lenders fuel the flames with cheap debt, prices really catch fire.
All real estate is valuable in a housing bubble because appreciation rewards everyone. Since condos are relatively inexpensive, it is an easy way for the small-time specuvestor to play the game. The demand for these assets rises to the limit of lender folly during the boom, and it falls to its utilitarian value during a bust. Since people prefer larger detached properties, condos have limited utility, and prices fall precipitously.
It is truly astonishing what people were willing to pay for old, fee-laden, and cramped condos in Irvine. Today's featured property was purchased for $410,000 on 3/23/2006. It was probably a bargain at the time considering it has two bedrooms. There were some one-bedroom units that sold for over $400,000 in Irvine at the peak. The owners used a $328,000 first mortgage, a $82,000 HELOC, and a $0 down payment.
They quit paying the mortgage sometime in early 2009.
Foreclosure Record
Recording Date: 08/20/2009
Document Type: Notice of Default
Since this property is empty, the bank is in no hurry to foreclose. Instead after almost 500 days on the market, it dances to the tune of amend-extend-pretend.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
SHORT SALE APPROVED FOR $295,000 BUT 2ND LIEN HOLDER IS STILL CRUNCHING NUMBERS ON WHAT THEY WILL ACCEPT TO RELEASE LIEN. MOTIVATED SELLER. Beautiful, bright and airy 2- bed / 1.5 Ba COndo, Upper-Corner unit. Great Location, walking distance to Irvine Valley Community College. SUBMIT ALL REASONABLE OFFERS. SELLER WILL GIVE EACH OFFER SERIOUS CONSIDERATION.
2ND LIEN HOLDER IS STILL CRUNCHING NUMBERS ON WHAT THEY WILL ACCEPT TO RELEASE LIEN — That is the story will all short sales. Short sales are primarily a negotiation between the delinquent borrower and the second lien holder. It's the main reason short sales take forever and rarely transact.
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.
In September, home prices continued to slip, and the declines were very widespread. The Case-Schiller Composite 10 City index (C-10) fell 0.67% on a seasonally adjusted basis, and is up just 1.52% from a year ago. The broader Composite 20 City index (which includes the cities in the C-10) fell by 0.80% on the month and is up 0.55% from a year ago.
In August, the year-over-year gains were 2.50% for the C-10 and 1.61% for the C-20, so it looks like the year-over-year gains are rolling over. Of the 20 cities, only one (Washington DC, and it was only up 0.05%) posted a gain on the month, while 19 saw prices fall. Year over year, five metro areas saw gains and 15 suffered losses.
In August, there were also 19 down and just one up. It thus looks like a new downtrend in housing prices is under way.
It is difficult to argue with data. Prices are falling again — and not simply because they always drop a little bit at the end of the year — prices are falling all over the country on a seasonally adjusted basis.
Consider Seasonal Adjustments to Prices There is a seasonal pattern to home prices, and thus it is better to look at the seasonally adjusted numbers than the unadjusted numbers. Most of the press makes the mistake of focusing on the unadjusted numbers.
While the 0.55% rise in the C-20 year over year in isolation is not the end of the world, it hardly makes up for the damage that was done in the popping of the housing bubble, and it is also unlikely to last. From the April 2006 peak of the housing market, the C-10 is down 29.83%, while the C-20 is off by 29.56%.
Calculated Risk has created a great chart compiling house prices calculated by the Case-Shiller method back to the mid 1970s. It clearly illustrates the two previous bubbles largely concentrated on the coasts as well as the Great Housing Bubble.
As you can see from the chart, the Federal Reserve attempted to halt the house price decline before it reached its natural bottom. Perhaps they prevented an overshoot to the downside and saved many banks from going under. If they did, it was at an enormous cost that will ultimately be borne by taxpayers.
The Case-Schiller data is the gold standard for housing price information, but it comes with a very significant lag. This is September data we are talking about, after all, and it is actually a three-month moving average, so it still includes data from July and August.
Existing home sales have been weak since the home buyer tax credit expired (see "Used Home Sales Fall"). In the process, the inventory-to-sales ratio has been extremely high, at 10 months, although that is down from the June peak of 12.5 months. That is what we saw during the implosion of housing prices that took place in 2007 or 2008. Housing prices are going to fall again in the coming months.
It is hard to find much of a silver lining in the month to month data. Only Washington DC posted an increase, and that was anemic at just 0.05%. Only three other cities kept the decline to less than 0.5%: Las Vegas down 0.21%, Denver down 0.30% and L.A. down 0.43%.
On the other hand, there were five cities that posted month-to-month declines of over 1.5%. The Twin Cities were the hardest hit, plunging 2.21%, followed by Cleveland with a 2.00% decline. Portland was down 1.72%, Detroit fell 1.61% and Phoenix fell 1.55%. Those are similar in magnitude to the monthly declines we were seeing three years ago during the first wave of the housing price implosion.
I doubt the upcoming price declines will approach the depth of the previous drop, but it interesting that the decline is picking up speed and it now rivals the rate of decline from three years ago.
Results by Region
On a year-over-year basis, the strongest cities are in California, which was an early poster child for the housing bust. However, even there the year-over-year gains are starting to erode. San Francisco leads the way with a 5.43% rise, followed by San Diego, up 4.94%. LA was in fourth place with a 4.32% year-over-year increase.
DC was in third place with a 4.40% gain. Boston was the only other city with a year-over-year gain, and it was up just 0.39%. As recently as July, the year-over-year gains in California were 11.06% in SF, 9.26% in SD and 7.5% in LA.
There were nine metropolitan areas where the year over year declines were more than 2.5%. Chicago fared the worst with a 5.63% decline, followed by 4.36% in Tampa. It is not going to take global warming to put that entire city underwater — the housing market has already accomplished that.
Charlotte, which early on seemed relatively immune from the housing bust, is down 3.72% year over year. Portland is down 3.63%, and Detroit is off 3.15%. In other words, significant year-over-year declines are happening in just about every corner of the country.
Declines in the areas which did not rally during the bubble are most likely the result of deteriorating employment in the local economies in those areas. Without the bubble rally to facilitate over-borrowing and to create distressed loan owners, other factors must be driving the declines.
The graph below tracks the cumulative declines for each city over time. If the red bar is shorter to the downside than the yellow bar for a city, it indicates that prices in that city have risen since the start of this year.
In every city prices are below where they were in April 2006, but there is a huge variation. Las Vegas is the hardest hit, with prices down 57.57% from the peak, followed by Phoenix down 53.65%. Three more cities are down more than 40%, Miami (down 47.92%), Detroit (off 45.19%) and Tampa (with a 43.53% decline).
At the other end of the spectrum are Dallas (down only 6.26%), Charlotte (off 8.13%) and Denver (down 10.25%). (Note: the percentage declines I am quoting are from when the national peak was hit, the numbers in the graph are relative to that city’s individual peak, so there is a little bit of difference.)
No Support for Home Prices
The homebuyer tax credit was propping up home prices, but now with that support gone, prices are resuming their downtrend. People had until June 30 to close on their houses, and they had to agree to the transaction by April 30. That pulled sales into those months that might otherwise have happened in July or August. The credit was up to $8,000, so almost nobody would want to close their deal in early July and simply leave that money on the table.
The tax credit is a textbook example of a third party subsidizing a transaction. When that happens, both the buyer and the seller will get some of the benefit. The buyer gets his when he files his tax return next year, the seller gets hers in the form of a higher price for the house.
Since the tax credit is now over, that artificial prop to housing prices has been taken away. Sales of existing houses simply collapsed in July, after the credit expired, and have remained depressed ever since. The extremely high ratio of homes for sale to the current selling pace is sure to put significant downward pressure on prices.
There is still quite a bit of “shadow inventory” out there, as well. That is, homes where the owner is extremely delinquent in his mortgage payments and unlikely ever to make up the difference, but that the bank has not yet foreclosed on or foreclosed houses that have not yet been listed for sale.
Take a good hard look at the second graph (also from this source) and tell me what you think is going to happen to housing prices over the next few months. A normal market has about six months of supply available. During the bubble, the months of supply generally ran closer to four months, and prices were soaring. It was not until inventories climbed above the six month mark that prices started to fall.
The really collapsed as the months of supply moved into the double digits. The extensive government support for the housing market — including the tax credit, but also the Fed buying up $1.25 Trillion in mortgage paper to artificially depress mortgage rates — helped boost sales and bring the months of supply back down. Now that support is over, and the months of supply far exceed the worst we saw during the heart of the bust (Note: the graph is not updated to include the September data).
Calculated Risk created another interesting chart showing the relationship between months of supply and the monthly price change in the Case-Shiller. He inverted the price change data so the correlation is more obvious.
As you can see, when months of inventory goes up, prices go down. The only way prices hold up is if sales rates remain very low. If banks continue to hold out for top dollar, the inventory will never clear out.
The tax credit was not a very effective means of stimulus, but it did help prop up prices, and that is a pretty important accomplishment, even if it proves to be ephemeral.
Was it really? Why was it so important to temporarily prop up prices? Let's recap what was really accomplished:
create false hope among debtors,
prevent prices from bottoming,
delay the recovery of prices and the economy,
keep homebuilding in the doldrums,
keep a few zombie banks in business,
keep prices artificially high to price out would-be buyers,
and add billions to the bill for taxpayers.
What about that list is positive?
The credit cost the government about $30 billion. A large part of that money went to people who would have bought anyway, but perhaps would have done so in July or August rather than May or June. To the extent it rewarded people for doing what they would have done anyway, it did nothing to stimulate the economy.
Also, turnover of existing houses really does not do a lot to improve the economy. It is the building of new houses that generates economic activity. And it is not just about the profits of D.R. Horton. A used house being sold does not generate more sales of lumber by International Paper or any of the building products produced by Berkshire Hathaway or Masco. It does not put carpenters and roofers to work. New homes do.
While housing prices are important to the economy, the level of turnover in used houses is not. Home equity is, or at least was, the most important store of wealth for the vast majority of families. Houses are generally a very leveraged asset, much more so than stocks. Using your full margin in the stock market still means you are putting 50% down. In housing, putting 20% down is considered conservative, and during the bubble was considered hopelessly old fashioned.
As a result, as housing prices declined, wealth declined by a lot more. For the most part, we are not talking vast fortunes here, but rather the sort of wealth that was going to finance kids' college educations and a comfortable retirement. With that wealth gone, people have to put away more of their income to rebuild their savings if they still want to be able to send the kids to college or to retire.
The decline in housing wealth is a very big reason why retail sales have been so weak. With everyone trying to save, aggregate demand from the private sector is way down. If customers are not going to spend and buy products, employers have no reason to invest to expand capacity. They have no reason to hire more workers.
The cycle of deflation is difficult to stop once it gets started. Bernanke is right to be concerned. However, he is foolishly optimistic in his belief that he can do something about it. He can print a lot of money — which he is doing right now — but he will have to print a lot more to get consumers to change their behavior.
Underwater Mortgages Lead to Foreclosures
Also, as housing prices fell, millions of homeowners found themselves owing more on their houses than the houses were worth. That greatly increases the risk of foreclosure. If the house is worth more than the mortgage, the rate of foreclosure should be zero. Regardless of how bad your cash flow situation is — due to job loss, divorce or health problems for example — you would always be better off selling the house and getting something, even if it is less than you paid for the house, then letting the bank take it and get nothing.
By propping up the price of houses, the tax credit did help slow the increase in the rate of foreclosures.
Still, 23% of all houses with mortgages are worth less than the value of the mortgage today. Another five percent or so are worth less than five percent more than the value of the mortgage. If prices start to fall again, those folks well be pushed underwater as well.
On the other hand, it is not obvious that propping up the prices of an asset class is really something that the government should be doing. After all, it is hurting those who don’t have homes and would like to buy one.
It pisses me off every day to see my government working against my best interest with my tax dollars, particularly in a blatant giveaway to greedy and stupid bankers and greedy and stupid loan owners.
Support for housing goes far beyond just the tax credit. The biggest single support is the deductibility of mortgage interest from taxes. Since homeowners are generally wealthier and have higher incomes than those that rent, this is a case of the lower middle class subsidizing the upper middle class. Also, even if they are homeowners, people with lower incomes are more likely to take the standard deduction rather than itemize their taxes. The mortgage interest deduction only applies if you itemize.
It is also worth keeping in mind in the current debate over extending the Bush tax cuts for just 97% of the population as Obama has proposed, or for 100% of the population as the GOP insists on, that the $250,000 per couple threshold is for adjusted gross income, not the top-line income. Thus, a couple with income of $274,000 (in wages) but who pay $2000 a month in mortgage interest, would not see an increase in their taxes at all.
Housing Prices to Find a Lower Floor
The real problem though is that, now that the tax credit is over, prices will find their more natural level. Fortunately, relative to the level of incomes and to the level of rents, housing prices are now in line with their long-term historical averages, not way above them as they were last year.
In other words, houses are fairly priced — not exactly cheap by historical standards, but not way overvalued, either. That will probably limit how much price fall over the next six months to a year to the 5 to 10% range, rather than the 30% decline we saw from the top of the bubble. That, however, is more than enough of a decline to do some serious damage.
This authors assessment is a good one. I concur with what he wrote above.
The Case-Schiller report was weaker than the consensus expected. The second leg down in housing prices is underway, but fortunately will probably be a much shorter leg than the first one.
Still, that is bad news for the economy. Used homes make very good substitutes for new homes, and with a massive glut of used homes on the market, there is little or no reason to build any new ones.
Residential investment is normally the main locomotive that pulls the economy out of recessions. It is derailed this time around, and there seems to be little the government can do to get it back on track.
There is nothing the government can do to increase residential investment, and they shouldn't try. If they simply let the market work without continuing manipulation, the problem will fix itself, and the economy will improve.
Unfortunately for California, what our economy needs is a huge home price rally and lenders stupid enough to give out HELOCs like drugs at a rave. The California Economy Is Dependent Upon Ponzi Borrowers like the one I am featuring today. How will we make up for the loss of hundreds of thousands of dollars in consumer spending per household?
High end Ponzi borrowing
HELOC abuse is not restricted to social class or income level. It is a common misconception that only the poor and subprime borrowers don't know how to manage their money. High wage earners are equally likely to go Ponzi, particularly if they are trying to keep up with the other Ponzis in the neighborhood or in their social circles. Since high end homes are more expensive, the Ponzi borrowing was more extreme there. No matter how much people make, if they are offered free money, they will take all they are given — even if it costs them their house.
Today's featured property was purchased on 4/29/1999 for $528,000. The owners used a $422,000 first mortgage, a $52,750 second mortgage, and a $53,250 down payment.
On 5/15/2000, after about 1 year of ownership, these owners refinanced with a $540,000 first mortgage, withdrew their $53,250 down payment, and got an extra $12,000 in spending money.
On 3/2/2001 they got a private-party loan for $35,000.
On 3/18/2003 they refinanced with a $650,000 first mortgage and obtained a $32,000 HELOC.
On 8/31/2003 they refinanced with a $738,750 first mortgage.
On 3/19/2004 they obtained a $150,000 HELOC.
On 5/31/2005 they refinanced with a $847,000 Option ARM with a 1% teaser rate.
On 5/31/2005 they obtained a $121,000 HELOC.
On 10/25/2006 they got their final HELOC for $250,000.
Total property debt is $1,097,000 plus negative amortization assuming they maxed out the HELOC.
Total mortgage equity withdrawal is $622,250.
They spent the house, and now they are likely to be a short sale.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Gorgeous open concept luxury home nestled on quiet cul de sac in highly sought-after gated community. Huge kitchen opens to family room. Spacious master suite. Upstairs bonus/loft area. WOW!
The latest estimate to clear shadow inventory is 40 months. Based on tightening credit standards and very low sales rates, this estimate is likely too low.
How many of you lurk in the shadows waiting for lenders to release their shadow inventory? Personally, I refuse to become a debt slave, so I've been watching, and I've been waiting in the shadows for my time.
Las Vegas has demonstrated that if you lower prices, sales rates go up. All estimates of time to clear the shadow inventory assume sales rates will be at or near historic norms. Right now, that isn't happening. In August Existing-Home Sales Sank to Lowest Level Ever Recorded. Inflated markets like Orange County see sales rates about 20% or more below normal.
As the economy improves and people go back to work, the sales rate will improve somewhat, but until prices are lower, sales will not improve enough to clear out the shadow inventory in a timely manner.
Further, estimates of shadow inventory are static. They are not estimating how many more homes will be added to shadow inventory as other borrowers give up and accelerate their defaults. The big false assumption here is that an improving economy will eliminate the mortgage distress and people will start paying back their loans again. That isn't going to happen. The debt is far too large. Many of the people who are hanging on will eventually succumb to the debt disease. As these people give up, they will add new delinquencies to shadow inventory.
The market needs a cathartic event. The kool aid intoxicated borrowers need to puke up their debts and clear the system. Until then, the economy will sputter as the over-indebted give up their meager incomes to keep the illusion of solvency at our major banks.
If you thought the U.S. housing market is showing any signs of improvement, a new report by New York City-based Fitch Ratings puts the damper on that view.
Fitch says seven million homes in the "shadows" will take 40 months to clear.
The agency defines the shadow supply of properties as loans that are delinquent, in foreclosure, or real-estate-owned (REO) by the servicer. Fitch says based on recent liquidation trends, it will take at least 3 ½ years to clear this existing distressed inventory.
DSNews.com reports that according to the ratings agency, the number of months between the date of the borrower's last payment and the date of liquidation has steadily increased over the past several years, and is now at more than 18 months on average.
While the volume of newly delinquent mortgages has begun to improve in recent quarters, Fitch says liquidation rates of existing distressed properties have been constrained by weak demand and expanded initiatives to modify loans for troubled borrowers, DSNews reports.
On top of that, the agency's analysts believe the recent discovery of defects in the residential mortgage foreclosure process will further extend liquidation timelines, slowing the resolution of distressed properties in the shadow inventory and preventing home prices from finding a floor.
"While the reduced volume of distressed sales since 2009 has temporarily helped home prices, Fitch believes that the extension in foreclosure and liquidation timelines is simply prolonging the housing correction underway," the agency reported.
The total number of troubled loans reached a peak in early 2010 and had begun to show some improvement prior to the most recent foreclosure moratoriums resulting from documentation issues, Fitch said.
Fitch says for judicial foreclosure states, such as Florida, it is expected to take longer than the national average of 40 months to resolve the distressed loans, while for non-judicial foreclosure states, like California, the inventory will likely be resolved faster.
The agency points out in its report that the market's ability to absorb the supply of distressed homes has been affected by limited demand for home purchases, DSNews reports.
While interest rates are near historical lows and affordability has improved, fewer potential buyers can qualify for new loans due to the heightened credit standards, Fitch says.
Fed: Banks expect tight lending standards for foreseeable future. "In general banks have stopped tightening standards (they are already very tight), and demand has stopped falling (there is little demand for loans). …[A] special question asked banks whether their current level of lending standards remained tighter than the average level over the past decade and, if so, when they expected that standards would return to their long-run norms, assuming that economic activity progressed according to consensus forecasts. For all loan categories, substantial fractions of respondents thought that their bank's lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run average levels for the foreseeable future."
Banks will never return to the standards to the 00s unless they want to lose a trillion dollars again. What we now consider tight standards — 20% down and conventionally amortized loans — were the standards prior to the housing bubble. All we are doing is returning to what works and what's stable.
Additionally, high unemployment, weak consumer confidence, and uncertainty about the future of home prices have prevented some potential buyers from entering the market.
"Recent concerns about the title-transfer process for foreclosed homes could further weigh on demand," Fitch noted.
The agency says at this point, it is still unclear how much the foreclosure process will be extended specifically due to document defects.
However, even prior to recent developments, Fitch assumed the ultimate resolution of the backlog of distressed properties would result in further home price declines and prevent sustained home price increases for a number of years, DSNews reports.
"Fitch is currently assuming approximately a further 10 percent home price decline nationally, with the majority of the adjustment occurring by the end of 2012," the agency says.
"However, the timing of the adjustment will be affected by the timing of the distressed inventory resolution."
How long will it take? I estimate it will take five to seven more years before this mess is behind us. For three to five years, the foreclosure machines will be operating 24/7 at the maximum rate the market will absorb. After that, it will take another two to four years of elevated foreclosure volumes to finish the job. It's a bit like draining a bathtub when your drain is partially clogged. It's going to take a long time, and there isn't much that can be done to speed the process.
The owner of today's featured property paid $465,000 on 10/23/2003. She used a $372,000 first mortgage, a $93,000 second mortgage, and a $0 down payment.
On 12/30/2004 she refinanced into an Option ARM for $486,500.
Two months later on 2/3/2005 she opened a HELOC for $67,000.
Total property debt is $553,500 plus 3 years of missed payments, negative amortization, and fees.
Total mortgage equity withdrawal is $88,500.
Foreclosure Record
Recording Date: 02/08/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 12/03/2008
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 08/28/2008
Document Type: Notice of Default
Foreclosure Record
Recording Date: 08/08/2007
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 05/25/2007
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 01/24/2007
Document Type: Notice of Default
First the bank lost a great deal of money, and now a flipper is going to lose money too.
This property was purchased by a flipper (Mamo Properties Inc.) on 8/23/2010 for $470,000. I don't know what they thought they could sell this for, but it looks like they spent about $20,000 fixing the place up, and with the other costs and fees, they are likely in this for over $500,000. Unless this is a no-cost listing, the flipper is going to lose money.
While I was raising money for the fund, I told many people that I was hesitant to buy in Orange County because in July and August, I was watching flippers pay what I thought was too much, and I believed prices were going to roll over. So far, both my observations have proven correct.
How much do you think this flipper will lose on this property?
-$371 ………. Tax Savings (% of Interest and Property Tax)
-$668 ………. Equity Hidden in Payment
$26 ………. Lost Income to Down Payment (net of taxes)
$62 ………. Maintenance and Replacement Reserves
============================================
$2,232 ………. Monthly Cost of Ownership
Cash Acquisition Demands
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$4,990 ………. Furnishing and Move In @1%
$4,990 ………. Closing Costs @1%
$4,815 ………… Interest Points @1% of Loan
$17,465 ………. Down Payment
============================================
$32,260 ………. Total Cash Costs
$34,200 ………… Emergency Cash Reserves
============================================
$66,460 ………. Total Savings Needed
Property Details for 14 BLUEBELL Irvine, CA 92618
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Beds: 2
Baths: 2 full 1 part baths
Home size: 1,508 sq ft
($331 / sq ft)
Lot Size: n/a
Year Built: 2000
Days on Market: 31
Listing Updated: 40484
MLS Number: S635284
Property Type: Condominium, Residential
Community: Oak Creek
Tract: Acac
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Quiet, Cul-De-Sac location. This beautiful home shows like a model featuring maple hardwood floors, new upgraded carpet, gourmet kitchen with granite countertops and new appliances. Great floorplan with dual master suites: Oversided garage, one suite with full bath on ground level and one suite with loft/office on top level. Tropical Oasis backyard with palm trees. Enjoy resort-style amenitities such as pool and spa. Walk to shopping, dining and more!
Not long ago I noted, Low Interest Rates Are Not Clearing the Market Inventory. Well, I am not the only one who has noticed. Richard Fisher, President of the Federal Reserve Bank of Dallas, has also noted that low interest rates will not fix the ailing economy, but super low rates will have many deleterious effects not anticipated by others at the Fed.
by JACOB GAFFNEY — Monday, November 8th, 2010, 3:28 pm
The environment of exceedingly low interest rates is great for banks, according to Richard Fisher, President of the Federal Reserve Bank of Dallas, but is doing little to help the overall economy get back on track.
"Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand," he told the Association for Financial Professionals in San Antonio Monday.
Home loan demand is well off historic highs as Existing-Home Sales Sink to Lowest Level Ever Recorded and refinance demand has dropped because everyone either already has refinanced or they are unable to because they are under water on their mortgage. Plus, who is anxious to use low interest rates to buy assets at inflated prices? There is only one sure-fire way to stimulate demand: lower the price. Fix the Housing Market: Let Home Prices Fall.
On the weekend open thread, the clearest example of lower prices stimulating demand can be readily seen in Las Vegas:
Notice the crash in prices has resulted in a large boost in sales. Buyers in Las Vegas are currently more active than they were at the peak of the bubble.
So how is Southern California doing?
While home prices have bounced off the false bottom, the rate of sales has declined significantly from the peak and remains at very low levels? Why is that? Why are sales rates higher in Las Vegas than in Southern California relative to the peak?
It's the price.
Every once in a while I see threads in the comments where the sales strength of the market is touted. Look carefully at the charts above: sales rates are down in Southern California — way down. Anything else is spin. Yes, people are buying homes, but they are buying far fewer of them because the prices are too high. In Las Vegas more people are buying homes because the prices are lower. In fact, they are so much lower that outside people like me are buying homes because the prices are so low.
Lower prices stimulate demand, not lower interest rates.
Back to the article….
Liquidity seems to exist in other markets, notable commodities, he said. But it worries him that the money markets aren't coming back strong enough and short-term lending to small business remains restricted to a point of macroeconomic pain.
"It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers," he said.
Who are the banks going to loan that money to? The over-indebted American consumer? Few creditworthy borrowers exist in the current economic environment. Too much bank money is tied up in non-productive loans, non-productive assets, and low yield government treasuries.
Fisher claims that banks already hold over $1 trillion in excess reserves. Holdings of government securities as a percentage of total assets on bank balance sheets are growing, he said, and loans as a percentage of assets are declining.
The recent Fed cash pump, referred to as QE2, will also keep rates low and weaken the dollar, Fisher said. And the inflow may not stop at the current allotment to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, which is on top of the amount projected to replace the paydown in mortgage backed-securities.
"I could not state with conviction that purchasing another several hundred billion dollars of Treasuries — on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities — would lead to job creation and final-demand-spurring behavior," he said. "But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed."
Wow! A guy at the Fed who really gets it. Bernanke has openly stated he wants a weaker dollar too help stimulate inflation. The excess liquidity is bound to find its way into momentum plays as money chases the few asset classes with any real prospects and other money follows. This speculation leads to mis-allocations of resources and continued economic weakness. The theft from savers is obvious. Have you seen the interest rate on your savings account lately?
This activity should put the stature and independence of the Fed at risk. It is clear the Fed exists to promote moral hazard and prevent the normal cleansing function of recessions from occurring.
Despite the Feds best efforts, house prices in Las Vegas have crashed back to mid 90s levels, and because of it, the debt is being purged, citizens have affordable housing, sales rates are up, and the groundwork is being laid for a healthy recovery.
Because of the Feds best efforts, house prices in Orange County remain elevated at 2003-2005 prices, and because of it debt is being preserved, citizens have expensive housing, sales rates are down, and a sustained economic recovery is being delayed and weakened.
Las Vegas will prosper because once the crash has erased the excess debt, home owners will have more spending money as a percentage of their income than Orange County residents will have. This extra spending money will make its way to auto dealerships, local restaurants, and other businesses.
Borrowers in Orange County will be spending a much higher percentage of their incomes on interest and debt service, and only the hope of future mortgage equity withdrawal based on herd-induced appreciation keeps the whole system together. The local economy will suffer as local incomes are diverted to far-away interest recipients who are not stimulating the California economy. We can have high house prices or a vibrant economy, but we can't have both without Ponzi borrowing.
Federal Reserve chairman Ben Bernanke recently defended QE2 in an editorial in The Washington Post:
“This approach eased financial conditions in the past and, so far, looks to be effective again. … Easier financial conditions will promote economic growth … lower mortgage rates will make housing more affordable and allow homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
Whenever I read one of Bernanke's statements, I assume he says stupid things like that because he has to. It frightens me that he might actually believe it. I think Greenspan believed his own bullshit.
First, easier financial conditions — whatever that means — will not necessarily promote economic growth. Bernanke's zero interest rate policy hasn't fixed things so far. It has prevented asset prices from crashing to market-clearing levels, but I consider that a failure of policy; Benanke considers that a success.
Second, lower mortgage interest rates will not allow underwater loan owners to refinance, and even if they did, they still have too much debt relative to their incomes. Financing enormous sums at 4% isn't doing borrowers any favors as long as they have too much debt.
Third, lower bond rates may not encourage businesses to invest. What will they invest in? What is there a demand for that is not already over-supplied? Real estate? LOL!
Forth, higher stock prices — when inflated by air from the Federal Reserve — are Ponzi profits likely to evaporate once the Fed stops its inflationary policies. Is this a sustained element of demand upon which we should build our economy?
Fisher said he is already seeing foreign money go to other lands, funds that would normally be diverted into the American economy and that if more careful steps aren't taken, the nations can experience "super ordinary" levels of inflation.
The sad part of our policy is that we will export the inflation we tried to create at home. Japan's decades-long low interest rate policy helped inject excess liquidity into other Asian economies over the last 20 years, yet inflation in Japan remains elusive. It's hard to say where our excess liquidity will end up. China perhaps? Like water seeking its natural level, the liquidity will flow somewhere, and that isn't likely to be into the inflated real estate values in Southern California. With such low cap rates and only the prospect of Ponzi profits, why would rational money flow there? To pick up "investments" like today's featured property?
Orange County's version of a cashflow property
Most investors in Orange County who claim they are cashflow investing are still buying because they plan on obtaining and spending the price appreciation as income. it isn't true cashflow investing. Today's featured property is the type of property a cashflow investor should look for. It is near the university, so it is easy to rent, and it is relatively small, so there is not as much maintenance. The HOAs are ridiculously high, and so is the price relative to rents, but if you can extract equity to boost your returns, properties like this can be profitable. The problem is that appreciation is not stable and consistent, and it may or may not materialize. Contrary to popular belief, it will not materialize here to any degree over the next several years. As a true cashflow investment, this one is a loser.
This property was purchased on 8/3/1999 for $235,000. The owner used a $223,250 first mortgage and a $11,750 down payment. Even at that price, this isn't a particularly good cashflow investment. With the huge HOA, this property doesn't start to be attractive until it gets below $150,000.
On 11/30/1999 he opened a $24,750 HELOC. Think how that boosted his return.
On 11/6/2000 he obtained another HELOC for $47,000. If you can extract an additional $20,000 a year from the property, suddenly the cashflow looks much better. Of course, since that is an unsustainable Ponzi scheme, I don't consider that much of an investment.
On 11/15/2001 he refinanced the first mortgage for $236,000 and obtained a $29,500 stand-alone second.
On 9/23/2002 he refinanced with a $260,000 first mortgage and obtained a $32,000 HELOC. Notice the steady mortgage equity withdrawals are mimicking income. In reality, he is steadily increasing his debt.
On 3/3/2004 he refinanced with a $260,000 first mortgage and obtained a $223,000 HELOC.
On 1/4/2006 he obtained a $60,000 HELOC.
On 3/1/2006 he refinanced with a $480,000 first mortgage.
On 3/17/2006 he obtained a private party loan for $150,000. Given the short timeframe between the two loans, I wonder if the private party knew he was subordinate to that huge new first mortgage?
Total property debt is $630,000.
Total mortgage equity withdrawal is $406,750 over a seven year stretch. If you believe that is sustainable, this property was a tremendous bargain when he purchased it in 1999. Since this has proven not to be sustainable, it was a costly mistake. He made good money during the bubble, but now he doesn't have any income from this property, and his credit is ruined. In this instance, I would rather be the tortoise than the hare.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
APPROVED SHORT SALE at $450,000.00 !! 2 Bedroom , 3 bath attached condo. With upgraded kitchen, granite counters and custom cabinets. Great location, near Univeristy High School and UCI.
IHB Special Event
Tomorrow night, Wednesday, November 10, 2010, at 6:30, there will be an IHB special event at Dave and Busters in the Irvine Spectrum. We will be gathering in the patio room to the left as you enter.
We have a long history of these events. Back in 2007, the first meetings were held when we still kept our identities secret. The biggest meeting was two years ago in November 2008, when I revealed my identity on the cover of the OC Register and held the big book-signing event for The Great Housing Bubble.
We have continued our meetings on and off over the last two years. During the summer, we held a number of meetings to raise money for the fund. I want to invite all the fund investors to come out on Wednesday evening. I can give you an update on my progress in person. Also, anyone else considering investing can come out and talk to me about getting in before the November 18 closing date.
One thing that was interesting about the investor meetings was how many long-term readers attended these events — readers I had never met. I would like to invite all the lurkers out there to attend as well.
Everyone is invited to a night of real estate talk, free appetizers and drinks, and a chance to meet with some reporters who find these IHB gatherings interesting. Please come out and show your support for the IHB.
Beautifully maintained with laminate wood floors & upgraded neutral carpet & paint. Gourmet kitchen with sparkling white tile counters & white cabinetry opens to living room & dining area. Living room features a cozy gas fireplace, & built-in media unit. French doors open to a secluded front porch area. The dining nook features built-in seating & shelves. From the kitchen, enter a serene garden w/patio area, & wrap around yard- great for relaxing & entertaining. Custom window coverings accent the home. Located on a quiet interior cul de sac street, with one of the larger lots for this floorplan. Association amenities include heated pool, lighted tennis courts, sport courts, playground areas, BBQ's. Walking distance to award winning schools-Canyon View Elem., Northwood High. Close to Tustin & Irvine Marketplace for dining, shopping, entertainment.
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Fed: Banks expect tight lending standards for foreseeable future
