Today’s featured property was purchased by a flipper in 2006 for $555,000. The original financing information is gone, but he did manage to refinance for $564,000 with an Option ARM with a 1.25% teaser rate. Despite buying very near the peak, through consistent HELOC withdrawal, this flipper did manage to pull out $9,000 before walking away.
Foreclosure Record Recording Date: 10/29/2009 Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Foreclosure Record Recording Date: 07/24/2009 Document Type: Notice of Default
When pundits discuss the phenomenon of walking away from a mortgage debt, they assume that people really planned on paying back that money when they got it. This erroneous assumption fails to recognize that most Californians never plan to repay the loan out of their wage income. If they could incidentally pay it back when they sold the property, that was OK, but most borrowers never think they will actually pay back the large sums they are borrowing; repayment is the house’s responsibility.
I don’t think lenders fully understand there is a segment of the borrowing population that lives from one infusion of borrowed cash to the next (or maybe they do know and don’t care). These people will ride the next wave of appreciation and spend it until they implode again. When the lenders lose a few trillion next time, I won’t feel sorry for them.
Beds 4 Baths 1 full 2 part baths Size 1,897 sq ft ($324 / sq ft) Lot Size 5,130 sq ft Year Built 1971 Days on Market 3 Listing Updated 11/11/2009 MLS Number S595717 Property Type Single Family, Residential Community Walnut Tract Cp
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Great Home in College Park! Located in cul-d-sac, steps away from award-winning elementary school. Scraped ceilings, upgraded kitchen, remodeled bathrooms, new windows throughout, hardwood flooring, etc.
Redfin shows the 2003 purchase but not the 2006 one. i have used the 2003 figures above to provide some context. Apparently, this property has managed to appreciate at 3.6% per year since 2003. Does that seem right to you?
I’ve been sitting here ’bout half the night. Oh, mama, fill my cup up. Said I came to waste some time. I think I’m gonna jump up. I’m singin’, I’m dancin’ most every night. And I want to do that with you babe. Let’s do this bottle right. Oh, oh, baby, bottoms up.
“PRICES HAVE BOTTOMED!!!” said Kool aid man in his new condo, “Are you ready to PARTY!!! BOTTOMS UP!!!” I’ll spare you the “bottoms up” photo… you can still see it, can’t you?
Is this a bottom in pricing? That depends on interest rates, but I feel confident that I can call the bottom on payment affordability. It will never be less expensive on a payment basis for a relatively low-income wage earner to buy property at market prices.
Over my years of working in the land development industry, I have worked on a number of low-income affordable projects. I worked on my first one in my mid 20s, and I felt noble about helping working families get good housing. Without going into a treatise on affordability programs, I will tell you they all rely on some form of market price controls to ensure properties stay affordable.
Low-income units are in high demand, and the demand often fails to meet the supply. It is very unusual in California when market priced homes compete with low-income subsidized housing. When it does, the activity is great for the community and for the low end of the housing market. Those who seemingly had been “priced out forever” can finally afford homes — assuming some flipper doesn’t crowd them out.
From today’s listing, “WHY RENT WHEN YOU CAN OWN?”
It seems to me that we do not need to subsidize low-income housing when open-market condos go for prices that allow people to live there who make $24,000 a year ($12.50 per hour wage). Payment affordability is extraordinary at these interest rates. It is not surprising that anything below the $500,000 price level in Orange County gets snapped up by 20 eager bidders.
The myriad of government distortions to the market has created a shortage of supply in price ranges where the GSEs and the FHA underwrite, and almost nothing at other prices. Armageddon awaits the non-GSE supported markets; they do not enjoy government price support.
There is no guarantee the Government will continue price supports in the face of political or financial market forces. It is likely they will maintain some level of backstop support as long as necessary to prevent a national catastrophe — possibly worse than the current recession. Sometimes the Least Bad Scenario is the correct path to chose. Since this path is also bad, it will endlessly be second guessed.
Both the Government and the lenders are crossing their fingers and hoping they can absorb the upcoming foreclosures without causing the cascading defaults that really crush prices (think Las Vegas). We will almost certainly see pockets of this throughout Orange County, and the substitution effect will create ripples in price and volume that will create unusual (unsustainable) price spreads between neighborhoods.
Selling homes at the last market bottom
Back in September of 2007, an astute observer known as Bubblegum sent me some images of marketing materials produced in 1997 — the last market bottom time. I originally posted them in The Market Bottom:
I followed that image with this line, “Since I began writing on this blog, I have stated I will buy when the
cost of ownership equals the cost of rental. An advertisement like this
— when it reflects reality — would motivate me to buy. How about you?” Well, as you can tell from my statement, I had no clue that the Federal Reserve and the GSEs would increase affordability artificially lowering interest rates.
The equation has changed for me. With payment affordability, I believe a window is open, but only if you really are going to be a long-term homeowner. Unfortunately, most people who buy plan on staying long term, but life intervenes, and sometimes they need to move. Statistics show home ownership lasts about 7 years. Between Government manipulation and the inflation that is likely to follow, it does not make sense on an inflation adjusted basis to buy today and have the same amount of a devalued currency later, but on a nominal basis, the numbers may look right.
Sometimes all the deflation and inflation talk does my head in, but they are important concepts, and they can have a big impact on your financial life.
Beds n/a Baths 1 bath Size 415 sq ft ($304 / sq ft) Lot Size n/a Year Built 1977 Days on Market 2 Listing Updated 11/11/2009 MLS Number U9004904 Property Type Condominium, Residential Community Northwood Tract Othr
According to the listing agent, this listing is a bank owned (foreclosed) property.
WHY RENT WHEN YOU CAN OWN? WELCOME HOME TO THE CITY OF IRVINE, ONE OF THE VERY BEST CITIES IN ORANGE COUNTY. THIS PROPERTY IS JUST THE RIGHT SIZE FOR YOUR ACTIVE LIFESTYLE. THE UNIT IS A ONE BATHROOM STUDIO, THAT LIVES LARGER THAN YOU CAN IMAGINE, WITH CLOSE TO 415 SQUARE FEET OF INTERIOR LIVING SPACE, AND A PRIVATE PATIO, YOU WILL BE ENJOYING THIS INTIMATE RESIDENCE UPON MOVING IN. THE PROPERTY IS PART OF AN ASSOCIATION THAT PROVIDES A POOL, A SPA, AND COMMON AREAS THAT HELP TO CREATE THE FEELING OF LIVING IN A RESORT. YOUR LOCATION IS FANTASTIC, YOU ARE CLOSE TO ALL THE GOOD THINGS IN IRVINE; SCHOOLS, PARKS, RECREATION, SHOPPING AND TRANSPORTATION. SO COME HOME TO IRVINE AND START TO LIVE THE BEST OF TTHE ORANGE COUNTY LIFESTYLE TODAY… BUYER SHOULD INSPECT THE PROPERTY WITH A PROFESSIONAL INSPECTOR.
Just to illustrate the impact of interest rates on pricing, take a look at today’s property which as originally purchased in conditions very similar to ours in 1994; in fact, I would go as far as to say 2009 is most similar to 1994 as things play out. When this property was purchased in December of 1994, the contract mortgage interest rate was 9.2% — very near the 40-year average of 9%.
Let’s calculate the owners income based on a the affordable payment based on an 80% loan, a 9.2% interest rate and a 31% DTI… the payment is $400… HOAs were lower then, but the monthly out-of-pocket would still be $550… so, $550 / 0.31 = $1,775 monthly gross income or $21,300 per year. If you inflation adjust this number forward to allow for local income growth since 1994, you get $31,311 in today’s income dollars. Back in 1994, this was not as payment affordable as it is today.
The Government controlled housing markets enjoy payment affordability,
but price ranges outside the conforming loan limit are subject to
market forces, and price and supply pressures will build at higher price ranges, but as long as the interest rates stay low, prices will remain high relative to historic measures.
The great part of Wide World of Sports was not always the events they covered; in fact, they were often quite boring. The show had a unique way of getting you to tune in each week, and sometimes you would stay and watch the entire show.
The opening sequence featured many different images of winning and losing, but none are more famous than ski jumper Vinko Bogataj, whose tumbling faceplant of March 21, 1970 was featured from the early 1970s onward under the words “…and the agony of defeat.” Bogataj’s fail is featured in Rich Hall‘s book Sniglets as “agonosis,” which is defined as “The syndrome of tuning in on Wide World of Sports every weekend just to watch the skier rack himself.” It is an indelible image that captures the complete failure of individual performance.
Sports provide a great microcosm of the struggles of life. The agony of defeat is something we all experience when an investment goes bad or a business deal doesn’t work out. Most of us suffer in obscurity and silence. The only evidence of the pain is the vapor trails on the web showing asking and sales prices and debt going bad. Far from being obscure statistics, these are our neighbors — or were our neighbors. It is hard to say where they end up after foreclosure.
Beds 3 Baths 3 baths Size 1,800 sq ft ($361 / sq ft) Lot Size n/a Year Built 2004 Days on Market 3 Listing Updated 10/27/2009 MLS Number S594108 Property Type Condominium, Residential Community Quail Hill Tract Ivwr
According to the listing agent, this listing is a bank owned (foreclosed) property.
Beautiful 3BR/3BA detached home with views! Custom tile entry leads to open living, dining rooms. Living room has a large balcony and media niche. Nice upgraded kitchen with granite countertops and newer appliances. Each bedroom has it’s own private bath. There is a large master bedroom with ceiling fan. Lots of additional built in storage. Oversized 2 car attached garage with epoxy flooring.
This property was purchased on 6/23/2004 for $640,500. The bank just bought it at auction for $561,267, and now they are hoping to get their money back from the FED supported prices. When the property was originally purchased, the owner used a $519,272 first mortgage, a $97,363 second, and an $18,130 downpayment.
At some point, he knew he was in trouble, so he tried to sell it. He spend a year and a half listing, delisting and chasing the market down.
Oct 27, 2009
Aug 26, 2009
Sep 16, 2008
Sep 13, 2008
Sep 03, 2008
Sep 03, 2008
Aug 21, 2008
Jun 15, 2008
May 21, 2008
Apr 12, 2008
Feb 26, 2008
Dec 19, 2007
Dec 06, 2007
Dec 06, 2007
Oct 18, 2007
Oct 18, 2007
Sep 19, 2007
Sep 19, 2007
Aug 29, 2007
Aug 28, 2007
Aug 23, 2007
Jul 01, 2007
Jun 30, 2007
May 30, 2007
May 20, 2007
May 16, 2007
May 05, 2007
Apr 10, 2007
He finally gave up in late 2008 as evidenced by the final delisting and…
Foreclosure Record Recording Date: 05/28/2009 Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Foreclosure Record Recording Date: 02/26/2009 Document Type: Notice of Default
It looks to me like he defaulted as the moratorium was put in place and got a few extra months. Perhaps the banks were behind in processing? Perhaps he continued to make payments even after he delisted in late 2008?
The agony for this foreclosure statistic is apparent. He over-borrowed and over-bought, and the weight of payments was crushing, so he tried to get out from under the dead weight. The property is listed for sale, and the owner relinquishes his dreams of prosperity slowly as he chases the market down. When he finally realizes the piggy-bank is empty, he capitulates; Atlas lets the world fall.
Everyone is invited to our next IHB Block Party next Monday, November 9. 2009, at JT Schmids at the District.
I attended the UCLA Anderson Forecast for Orange County last Thursday. The keynote speaker, Ramin Toloui an Executive Vice President for PIMCO, was very good. The speaker for the Orange County Outlook, Mark Schniepp the Director of the California Economic Forecast, was awful.
Commercial Real Estate Forecast
The forecast for commercial real estate was not very positive. The commercial real estate market is facing the same woes as residential, but with an 18-month lag. Rents are falling, vacancy is rising, financing is difficult to find, and most borrowers are over-leveraged. It will take many years for the commercial market to recover.
Ramin Toloui was an excellent speaker. He explained the solvency
problem of over-leveraged borrowers facing refinancing (he was speaking
about commercial, but the same applies to residential). A property
purchased in 2007 for $100M may have $80M worth of debt (it probably
has even more). This debt will need to be refinanced during the next 5
years. The value of the property has cut in half, and the new lender is
demanding 30% equity. When this property needs to be refinanced, the
borrower’s loan will be capped at 70% of $50M which is $36M; they need to roll over
$80M. The gap is too large to be overcome. If the spread were smaller,
creative financing may be able to bridge the divide, but as it stands,
we are going to see massive deflation in the commercial lending market.
The problem of insolvency Toloui described is the same facing ARM
reset debtors in the residential market. A property purchased in 2006
for $1,000,000 with little or no money down will be worth about
$800,000 when the ARM resets. A lender will look at comps and limit the
loan to 80% of 800,000. The borrower will need to come up with the cash
to finance the difference between $640,000 and whatever they owe. Not
many will have $300,000 sitting around, and many who do will not want
to waste it by dumping it into a depreciating asset. The FED is trying
to solve the problem of residential insolvency by lowering interest
rates. The commercial loan market will have no such luxury.
This presentation was the best part of the morning.
“For fifty years, the UCLA Anderson Forecast has provided
forecasts for the economies of California and the United States. Founded by professor
Robert M. Williams in 1952, the national forecast has been recognized as one of the
most accurate, and has a reputation for being unbiased – a factor that the numerous
corporate and Wall Street forecasts cannot lay claim to. The UCLA Anderson Forecast
for California is the most widely followed and oft-cited in the state and was unique
in predicting both the seriousness of the early-1990s downturn, and the strength of
the state economy’s rebound since 1993.
I call bullshit.
What I saw on Thursday looked a bit like trained seals balancing a ball on its nose to get a feast of fish. Whatever objectivity and credibility they believe they have, it isn’t reflected in rigorous analysis leading to objective conclusions. Instead what is presented is a bit more like Gary Watts with a shotgun blast of statistics supporting a predetermined bullish(it) conclusion.
The main problem I have with forecasts like these is their lack of direct causation.
Once you have accurate data, the analysis of this data must focus on cause and effect. There must be direct causation linking a specific set of conditions to the outcomes these conditions will produce. A good analysis demonstrates this direct causal link in a clear and unambiguous manner. When an analysis relies on indirect causation, it is weak; when an analysis relies on implied causation, it is worthless.
House prices are directly correlated with amounts borrowed.
Amounts borrowed are directly correlated with the interest rate offered.
Amounts borrowed are directly correlated with the borrowers debt-to-income ratio.
Artificially low interest rates (reset issue) and exotic financing cause foreclosures.
Foreclosures cause higher interest rates.
Foreclosures above a certain threshold cause house prices to decline.
Declining house prices causes more foreclosures. (note the causally related downward spiral)
Declining house prices and increasing foreclosures cause lenders to lower debt-to-income ratios and raise interest rates.
Lower debt-to-income ratios and rising interest rates cause amounts borrowed to decline.
Less amounts borrowed (in conjunction with foreclosures) causes house prices to decline.
Notice the focus is always on correlation and causation forming a
chain of events leading to an inevitable conclusion. A good analysis
centers the debate around the premises. If the premises are true and
accurate, the conclusions cannot be denied.
In contrast, a bad analysis states a conclusion and offers support
through indirect or implied causation. When you read through the Gary Watts Real Estate Outlook 2007 you find yourself asking, “How does that impact house prices?” It is a question that is never answered.
The UCLA Anderson Forecast for Orange County is full of statistics just like a Gary Watts support, but the lack of direct causation weakens it significantly.
Residential Real Estate
I knew the presentation was in trouble when the speaker tells the audience to feel secure in buying a house because prices are at the bottom. I felt like I was being sold a used car or listening to a briefing by Baghdad Bob. He even called out the commenters on the blogs of the OC Register as “doom and gloomers.” I felt the camaraderie of the bubble blog world being challenged; besides, we were right.
The presentation is a series of charts and graphs similar to my analysis posts. There were a number of slides on defaults and foreclosures that looked very much like mine in Shadow Inventory Orange County.
There was a moment when the presenter was commenting on how defaults keep rising, but due to moratoriums foreclosures dropped for a time. I was thinking, “yes, that is shadow inventory.” But with a wave of his hands, he stops and says, “don’t worry about it, foreclosures will go down.”
Did I hear him properly? How can you lead people right up to the problem, show it to them, and then deny that it is there? He offered no explanation as to what happens to this inventory. He did say if there is any future inventory problem that it will be absorbed by rising prices.
What is supposed to lead us to believe that the UCLA Anderson Forecast is correct? Their say so? That plus a report full of fancy graphs and trivial statistics is all you get.
Let’s say the UCLA boys had taken their wonderful data and applied some historic parallels and direct causation to call a bottom. That would have impressed me. The analysis might have looked like this (with some help from Calculated Risk):
Let’s look at the direct causation between these events and speculate on whether or not it should happen differently this time around.
The recession in the early 90s was caused by a slowdown in housing and real estate just like this one. That recession also saw slowdowns in defense contracting and other industries that made problems even worse. The recession ended in 1992, but the effect lingered as people had to be retrained to work in other fields, so unemployment did not peak until 1993. The delay between the end of the recession and the peak in unemployment is well documented.
There were many reasons for the foreclosure crisis of the mid 90s, and we have all of those problems back with more force. The foreclosures caused by unemployment do not occur on the day a borrower loses their job. The delay caused by draining all sources of savings, maxing out credit lines and utilizing legal maneuvers can slow the process for two or three years — as we have seen with properties profiled here daily; therefore, it is reasonable to assume foreclosures will peak two or three years after a major unemployment crisis. In fact, I would argue it is unreasonable to assume that foreclosures have peaked for this cycle — as the UCLA Anderson Forecast does — considering unemployment has not peaked, and the newly unemployed will cause defaults.
Last time around house prices bottomed as foreclosures peaked. It is unclear if either one caused the other. For example, if house prices bottomed simply because prices were affordable and supply was low, then foreclosures may peak not because borrowers are not distressed, but because distressed borrowers can sell into the resale market rather than go through foreclosure. Remember, foreclosures are not a sign of distress as much as they are a sign of distress that cannot be masked by selling in the open market.
The more commonly accepted conclusion is that once the pressure of distressed inventory was removed from the market — foreclosures ran their course — then prices rose because there was not overhanging supply keeping prices down. This explanation sounds reasonable, but is doesn’t explain why there was not a lag time between the peak of foreclosures and prices rising to work off the inventory. This lack of lag leads me to believe rising prices were partially responsible for falling foreclosures — something the UCLA Anderson Forecast is counting on this time.
Neither explanation of the coincidence in timing between the peak of foreclosures and the bottom of the market give us any indication of whether or not this phenomenon will repeat. I suspect it will not because the foreclosure volume is so large that there will be a significant period of time to work off the inventory, and contrary to the primary conclusion of the forecast, I do not think it is reasonable to assume that rising prices will magically absorb our shadow inventory because it is too large.
Well, we can throw out 2009 or 2010 because prices cannot bottom before unemployment peaks and foreclosures peak. On this basis alone, I am confident the UCLA Anderson Forecast is wrong. If unemployment peaks in 2010, and if there is a two or three year delay between the peak in unemployment and the peak in foreclosures caused by various delay tactics, then foreclosures should not peak until 2012 or 2013. If this corresponds to the bottom again, then we will bottom in 2012 or 2013. If we have a significant lag between the peak in foreclosures and the bottom of the market due to a glut of inventory, then we may not bottom until 2015.
Don’t do out and buy a house because you believe we are at the bottom. We aren’t.
Beds 3 Baths 2 full 1 part baths Size 1,689 sq ft ($293 / sq ft) Lot Size 2,462 sq ft Year Built 2005 Days on Market 8 Listing Updated 10/28/2009 MLS Number P708154 Property Type Single Family, Residential Community Walnut Tract Othr
HOME BUILT IN 2005 NEAR IRVINE HIGH SCHOOL. 3 BEDROOMS, 3 BATHS, BONUS LOFT/OFFICE WITH RECESS LIGHTING. MASTER SUITE HAS DOUBLE SINKS, SPA TUB AND WALK IN CLOSET. FORMAL AND CASUAL DINNING WITH FIREPLACE. LOW MONTHLY HOA THAT INCLUDES 2 POOLS, 2 TENNIS COURTS AND CLUB HOUSE. UPGRADED KITCHEN AND BATH WITH GRANITE COUNTER TOPS AND STAINLESS STEEL APPLIANCES.
These undesirable properties are getting pounded. This infill site is between the 5, a shopping center and an old condo development next to the high school. It has every combination of negative.
Are any of you getting away to Las Vegas this weekend? Perhaps you might want to speculate in their housing market. Others have done so well recently… not!
If there is any market in the country that is the textbook example of a bubble it is Las Vegas. Take a good look at the Case-Shiller price chart for Las Vegas and the graphic for the psychological stages of a bubble market, and you see reality matches the concept perfectly.
Beds 3 Baths 3 baths Size 1,904 sq ft ($309 / sq ft) Lot Size n/a Year Built 2001 Days on Market 3 Listing Updated 10/7/2009 MLS Number P706106 Property Type Condominium, Residential Community West Irvine Tract Othr
According to the listing agent, this listing is a bank owned (foreclosed) property.
Beautiful open floor plan with plenty of upgrades including built in entertainment center. Granite countertops throughout, Jet spa tub, Large Master Bedroom with Master retreat large enough for office. Window shutters throughout. Great schoold district. Close to shopping, entertainment and freeways.
Today’s featured property was originally purchased for $679,000 on 12/3/2004. The owner used a $543,200 first mortgage and a $135,800 downpayment. On 10/28/2005 he opened a HELOC for $107,000, but it isn’t clear that he took it out and spent it. He probably wishes he did.
Foreclosure Record Recording Date: 07/22/2009 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2009000391119
Foreclosure Record Recording Date: 04/10/2009 Document Type: Notice of Default Document #: 2009000177255
Downey Savings — or now the FDIC — owns the property. They are hoping to make a few bucks back on the flip. This poor guy has all the damage of a foreclosure, but he didn’t extract his equity and have any fun. Too bad.
And so concludes another week at the Irvine Housing Blog, chronicling the Irvine home market since September of 2006.