The decade of the naughts is past; get over it.

Irvine Home Address … 27 LILY POOL Irvine, CA 92620
Resale Home Price …… $1,298,800

{book1}

I turn on the tube and what do I see
A whole lotta people cryin’ “Don’t blame me”
They point their crooked little fingers ar everybody else
Spend all their time feelin’ sorry for themselves
Victim of this, victim of that
Your momma’s too thin; your daddy’s too fat

Get over it
Get over it
All this whinin’ and cryin’ and pitchin’ a fit
Get over it, get over it

Get Over It — The Eagles

Recap of Past Predictions

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

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

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

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

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

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

I got that one right, and

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

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

Predictions for 2010

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

Mortgage interest rates will increase in 2010

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

Inventory will increase in 2010

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

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

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

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

Sales volumes will increase in 2010

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

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

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

Legislators will consider subordinating GSE loans to artificially increase the lending limit to save the Coastal California market.

If the GSEs wanted to raise the funding cap from
$729,000 to $1,229,000. They could simply allow their mortgages to be
subordinated to a single fixed-rate mortgage up to $500,000, and the
GSEs would be insuring their $729,000 mortgage as a second. The
interest rate on the first would be even lower than the GSE
mortgage—what risk is there? The GSEs would be taking on substantially
more risk, but it would allow them to underwrite loans on more
expensive properties, save the Coastal California housing market (not),
and pass enormous losses on to the US taxpayer.

Don’t be surprised when someone suggests this as a Treasury Department leak and we read it in the MSM. Obviously, I think this is a spectacularly bad idea, but lenders won’t, particularly if they think they can pass losses on to us.

“Assumability” will become the financing buzz word of the next decade

Yesterday I noted that fixed-rate mortgage rates had bottomed. IMO, we are likely to embark on a 20 year cycle of increasing interest rates as we keep one step behind inflation overheating our economy and burning off government debt in a pyre of our devalued currency. In a rising interest rate environment, there is significant value in a seller’s financing, if a future buyer can assume the loan.

Refinancing and mortgage equity withdrawal will not be part of our economy for the next decade

Increasing interest rates mean refinancing is at an end, and mortgage equity withdrawal will also be curtailed. When prices were rising and debt was getting ever cheaper, mortgage equity withdrawal exploded. In a rising interest rate environment, borrowing costs go up and home prices do not appreciate as much (or in our case any at all), so there is little equity to withdrawal, and the cost of borrowing and spending this money is very high.

The housing ATM is broken until we enter another long-term phase of lower interest rates. The rules have changed, and we are now entering an inflationary world. Get used to it.

Irvine Home Address … 27 LILY POOL Irvine, CA 92620

Resale Home Price … $1,298,800

Income Requirement ……. $276,945
Downpayment Needed … $259,760
20% Down Conventional

Home Purchase Price … $1,299,500
Home Purchase Date …. 3/4/2005

Net Gain (Loss) ………. $(78,628)
Percent Change ………. -0.1%
Annual Appreciation … 0.0%

Mortgage Interest Rate ………. 5.26%
Monthly Mortgage Payment … $5,744
Monthly Cash Outlays ………… $7,670
Monthly Cost of Ownership … $5,710

Property Details for 27 LILY POOL Irvine, CA 92620

Beds 5
Baths 4 full 1 part baths
Size 4,000 sq ft
($325 / sq ft)
Lot Size 6,051 sq ft
Year Built 2005
Days on Market 4
Listing Updated 12/23/2009
MLS Number S599684
Property Type Single Family, Residential
Community Northwood
Tract Arbr

Executive well-appointed luxury home situated on a prime cul-de-sac adjacent community park, absolute showroom condtion, elegant formal entry w/rich distressed hardwood floor, large mainfloor suite, huge gourmet kitchen w/sit-up center island w/deep sink, granite countertops w/full backsplash, stainless appliance package, built-in KitchenAid refrigerator, dual convection ovens, six burner cooktop, walk-in pantry plus butler’s pantry w/wine storage compartment, separate formal living/dining rooms, family room w/built-in entertainment center, in- ceiling surround system, rock-face fireplace, decorator paint, finely designed drapery, berber carpet, shutters, crown moulding, leaded glass, lighted ceiling fans, oversized master suite extends to luxuriously upgraded master bath w/step-in shower, deep oval soaking tub, generous size walk-in wardrobe closet, professionally designed backyard w/BBQ/refrigerator/firepit, fountain, resort-lifestyle association amenities, Irvine School District

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
September 2006.

Have a great weekend,

Irvine Renter

What do you think was the biggest real estate story of 2009?

Irvine Home Address … 240 LEMON Grv Irvine, CA 92618
Resale Home Price …… $274,900

{book1}

Should auld acquaintance be forgot,
and never brought to mind?
Should auld acquaintance be forgot
and days of auld lang syne?

For auld lang syne, my dear,
For auld lang syne,
We’ll take a cup o’ kindness yet
For auld lang syne

Auld Lang Syne — Robert Burns

Since today is the final day of 2009, and the final day of this decade, I want to examine the biggest residential real estate news stories of 2009, and recap the biggest news story of the decade, the Great Housing Bubble.

Prices Didn’t Go Down (much)

Depending on where you were, prices began to stabilize in 2009, and the mainstream media saturated us with bottom calling. Don’t be confused, the decline in house values continues despite spin. Ordinarily, I would be celebrating market stabilization (contrary to popular belief, I am not a permabear). However, the more interesting stories of 2009 relate to the reasons prices did not go down in 2009 – they should have — and they would have if not for the other major news items.

Shadow Inventory Builds

Shadow Inventory is a problem that stems from the solutions to the core problem of the housing bubble; overpriced homes and the oversized debt that inflated home values. The mountain of Ponzi debt and a deteriorating economy puts borrowers in circumstances where they default, and with government encouragement, including various Bailouts and False Hopes, the defaulting borrowers stay in their houses rent-free until lenders improve their capital ratios, thus helping politicians avoid soup lines and Obamavilles. The solution to the default problem is amend, extend and pretend; the result of the solution to the default problem is Shadow Inventory.

The major story of 2009 is the deferral of all real estate market problems through the creation of Shadow Inventory. Policy makers had many options, and they chose the most politically expedient; they deferred dealing with the reality of defaults by pandering to false hopes, manipulating financial markets, and creating a massive overhang of eventually-to-be-for-sale homes.

In Shadow Inventory Orange County, I defined Shadow Inventory; (it) is the total of Preforeclosure Inventory, REO and some other sources.
Preforeclosure Inventory includes all mortgages currently 60 days or
more behind on their payments that are likely to become foreclosures
but not yet REO.” Currently, this Foreclosure backlog is estimated at 1.7M, and the problem is getting worse since Serious U.S. mortgage delinquencies up 20 percent. This is important because a glut of shadow properties could hurt housing prices.

Borrowers are defaulting in large numbers

I don’t think anyone denies that California notices of default hit record. The default rate was 10.7% in September, but it is projected to hit 14% by the end of the year, and foreclosures for “seriously delinquent loans” topped 1 million in Q3. There is no way, short of ignoring data, to think we do not have a shadow nventory problem because homedebtors are making their payments. The only question is what to do about it. The current solution is to attempt loan modification programs… endlessly….

Loan Modification Programs Fail

In SI OC, I noted, “Despite rumors to the contrary, loan modification programs have been completely ineffective. Very few people actually get the modifications, and most of those people re-default and end up in foreclosure anyway. If these programs were effective, it would show up in high cure rates; 6.6% is not very high.” Results have not improved much for loan modification programs as borrowers with modified loans are falling into trouble. It is so bad that the Treasury Needs a Plan B for Mortgages. If you want the real scoop, someone can explain The Real Reason Mortgage Modifications Fail.

Lenders Are Foreclosing… slowly

With the plethora of moratoria winding down, foreclosures fall, but banks bracing for next big wave. Since it is obvious foreclosures have not kept pace with defaults, at some point, foreclosure rates will increase; Los Angeles-area foreclosure rate increases in October.

The Federal Reserve Buys Agency Paper

The Federal Reserve actually began buying agency debt in late 2008, Fed Buys $5 Billion in Agency Debt, but the program did not take over the mortgage market until mid 2009, and just recently, Treasury has uncapped the support for Fannie and Freddie for the next three years. Of course, the problem with this is that Fannie Mae Losses May Exceed $200Bn.

Without this support according to Geithner: “none … would have survived”. He is wrong, of course, as the only real losers would have been lenders, investors and the people who inflicted this terror upon us, but selling fear has enabled him to secure billions of dollars in aid and direct government bailouts. Not a bad deal — for the bankers.

Payment Affordability Hits Bottom

As I wrote in Low-End Payment Affordability, I believe the cost of ownership on a monthly payment basis has hit bottom for low end properties in Irvine, and in many of the subprime dominated markets like Riverside County. Although I believe prices will fall further, mostly due to inventory issues, payment affordability will get worse as higher interest rates make for smaller loan balances.

Fixed-Rate Mortgage Rates Hit Bottom

Ben Bernanke may have his shortcomings as a central banker, but if his actions speak for his perception of the direction of interest rates, then fixed interest rates have bottomed because Ben Bernanke refinanced his ARM to a fixed-rate mortgage. Why would our central banker convert to fixed if he knows the FED, the organization he runs, is going to push interest rates lower? He wouldn’t. Ben Bernanke himself has called the bottom in fixed-rate interest financing. Others have speculated that the Fed will hike all interest rates — in 2011. I have no idea.

Projected slowly declining prices with overhanging fears of larger drop

No sources with any credibility are predicting price increases for 2010 because California house values are likely to be down in 2010. It isn’t rocket science; Many counties in California are still overpriced. Massively overpriced, and because prices are too high, and financing is getting ever tighter, prices will go down.

If the government manipulations are successful, we will see the path of “ice” in my illustration above. People who think we will see 2006 prices by 2013 are delusional. IMO, it is unlikely prices will move higher, particularly in the face of rising interest rates. At any point, we could be facing the “fire” scenario because our house prices are inflated by every historical measure — other than payment affordability. Are you comfortable buying the “ice” scenario?

Should you buy or shouldn’t you buy? That is the question.

When I first wrote about when to buy, my simple rule was to buy
when it was less expensive to own than to rent. This is a good rule,
but when payment affordability is artificially manipulated by FED
policy, the rule needed a caveat; so now I say it is a good time to buy
when it is cheaper to own than to rent, and it is during a period of no
direct government manipulation through tax credits, mortgage interest
rate manipulation, and so on. Until these government props are removed,
and until some time has passed to see the impact foreclosures will have
on inventory, I don’t feel comfortable saying it is a “good” time to
buy in Irvine. The good news is we are approaching the time when the conditions are right.

I would say it is a good time for certain families who are (1) able
to take advantage of tax incentives, (2) they know they are going to
live in the house for a decade or more, and (3) they are paying a price
where a fixed-rate mortgage makes the cost of ownership lower than the
cost of rental. As long as the stars and the moon align, then it is a
“good” time to buy.

As time goes on, The categories of circumstances where buying now is
wise will expand. For now, it is confined to the circumstances I
outline above.

{book4}

Every Sunday for the next 21 weeks, I will repost The Great Housing Bubble in its entirety. I find that the email and post versions are more informative than the book in some ways. The end notes, which few ever read in a book, are at the end of each post. A wealth of information and research is contained in the end notes. Also, the shorter format is more easily digested giving time to review the ideas presented. I hope you enjoy your review of the Great Housing Bubble.

The complete text of The Great Housing Bubble is spread out over 21
blog posts. Every word of it is there, including the end notes with
extra information.

Welcome to The Great Housing Bubble

What Is a Bubble?

Conservative House Financing – Part 1

Conservative House Financing – Part 2

Conservative House Financing – Part 3

Fundamental Valuation of Houses – Part 1

Fundamental Valuation of Houses – Part 2

Valuation of Lots and Raw Land

The Credit Bubble – Part 1

The Credit Bubble – Part 2

The Housing Bubble – Part 1

The Housing Bubble – Part 2

The Housing Bubble – Part 3

Bubble Market Psychology – Part 1

Bubble Market Psychology – Part 2

Bubble Market Psychology – Part 3

Future House Prices – Part 1

Future House Prices – Part 2

Future House Prices – Part 3

Buying and Selling During a Decline

Preventing the Next Housing Bubble – Part 1

Preventing the Next Housing Bubble – Part 2

Irvine Home Address … 240 LEMON Grv Irvine, CA 92618

Resale Home Price … $274,900

Income Requirement ……. $58,617
Downpayment Needed … $9,622
3.5% Down FHA Financing

Home Purchase Price … $140,000
Home Purchase Date …. 4/30/1992

Net Gain (Loss) ………. $118,406
Percent Change ………. 96.4%
Annual Appreciation … 3.8%

Mortgage Interest Rate ………. 5.26%
Monthly Mortgage Payment … $1,467
Monthly Cash Outlays ………… $1,960
Monthly Cost of Ownership … $1,590

Property Details for 240 LEMON Grv Irvine, CA 92618

Beds 2
Baths 1 full 1 part baths
Size 1,051 sq ft
($262 / sq ft)
Lot Size n/a
Year Built 1983
Days on Market 3
Listing Updated 12/26/2009
MLS Number S599740
Property Type Condominium, Residential
Community Orangetree
Tract Vl

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

Two bedroom, 2 bath, lower level condo with covered carport. Ceramic tile flooring in living room, dining room, kitchen and hallway. Unit has very private enclosed brick patio area. Good location in complex. Close Spectrum with its shops, theatres, restaurants and specialty shops. Also close to frewways 5 and 405.

Did you know that the only pressure on lenders to dispose of their real estate owned comes from shareholders?

Irvine Home Address … 15 MORRO BAY Irvine, CA 92602
Resale Home Price …… $1,629,000

{book1}

So sure
So sure you are
Nothing can
Touch you now
I need to know
Did you think of me
But you’re forgettng me now
Slow down
Don’t be so
Eager to let me go
Realise it could change you
It could change your mind

Repetition — Blur

Today I briefly want to again Revisit Option ARMs, and I want to address a common misperception about REO; lenders do not have to sell REO due to regulatory pressure. Shareholders may dissuade lenders from becoming real estate investors, but the banking regulators will not.

The Option ARM Kingpins: Who Holds the Elusive Option
ARMs?

$189 Billion Securitized and Outstanding and big Three of Wells
Fargo, JP Morgan, and Bank of America Playing with Time.

There have been many charts … and much of the confusion is around a few key points:

-1. Banks have been circumspect given the actual number of option ARMs

-2. Many option ARMs are in California (roughly 60 percent of the market)

-3. Many of those behind on payments are now simply not paying their mortgage but banks are not moving

It is hard to quantify the above data since this is something banks
would like to hide. Nearly 60 percent of all current outstanding
option ARMs are in the hard hit state of California.
As many of you know, the median price of a home in California has
fallen by 50 percent. The peak in home prices was reached in 2007, the
last year option ARMs were made in mass. Since that time, option ARMs
were merely ticking financial bombs.

…

But what if homeowners balk? Many in California are strategically
defaulting. In many cases, unless their mortgage meets with market
rents many will walk away. Also, the California unemployment and
underemployment rate is at 23 percent so no amount of modifying can
help out with a loss of income.

So let us sum up the option ARM market:

$750 billion in option ARMs were originated between 2004 and 2007.
The top 10 option ARM originators cornered over 60 percent of the
market. Of these, many are now part of the too big to fail banks.
We know that $189 billion is still securitized in investor portfolios
while many billions are still on the banks books (i.e., $107 billion
with Wells Fargo and $50 billion with Chase). The bottom line is the
option ARM issue is still here and we will be contending with this for
the next couple of years.

That doesn’t sound very good, does it?

From yesterday’s discussion about Shadow Inventory, matt138, said, “Shadow Shadow inventory – the people who are currently thinking, “why the hell am I still paying if nobody else is?” I did some calculations and my result was: A LOT.”

What I find interesting is how much of the Option ARM problem has already been resolved (probably through foreclosure). If $750B was issued, and only $200B remains, only 20%-25% of the Option ARM problem remains — at least in the form of Option ARMs. Many of these original borrowers already went through short sale, foreclosure or walked away. The Option ARMs didn’t go away due to market sale because the homedebtors were all underwater, and these loans did not go away through successful loan modification because cure rates are very low.

The good news is 75% of the Option ARM holders appear to have defaulted early. The bad news is most of the homes of these borrowers will end up as REO sold on the open market, it is only a matter of when. This problem is going to be stretched out as long as possible, and the abundance of overhead supply will prevent appreciation from saving the market for many years.

Lender’s Options for REO

The lenders I have spoken with are genuinely concerned about the auditors forcing them to reclassify loans. Many lenders are not properly categorizing their loans for accounting purposes — the still have it on their books as if it is a good loan and the borrower is making their payments. Many, many non-performing residential loans are still classified as performing while lenders have the shield of government loan modification programs. The reality is many of these loans are not performing, they are never going to, and lenders are not being forced to recognize this fact until their balance sheet ratios support it.

Regulators are not concerned with what a lender does with the REO it picks up through the foreclosure process as long as the losses are accurately accounted for — in theory. Once the REO department gets a property, the only pressure they get to sell property comes from through management from shareholders.

Shareholder Pressure

People who invest in banks are investing in a business that writes loans and carries loans on its balance sheet. If a balance sheet becomes polluted in the eyes of investors with real estate assets, it starts to look less like a bank and more like a real estate investment trust or a hedge fund. When banks cease to be banks, investors bail out and stock prices crumble — at least that is the belief of bankers, so the management does not want to hold real estate. Also, REO is lingering evidence of prior poor lending practices, and nobody wants to keep that around.

The implication for the market is simple, there will be no forced dump of REO instigated by bank regulators. That isn’t to say we don’t have a huge pig to send through the snake, but it can be digested in smaller pieces rather than one massive chunk. We may (probably will) see a cartel arrangement evolve, but the large amount of supply and the competition to dispose of it will serve as a drag on prices until the inventory is exhausted. In some markets that will take decades.

Direct from an Asset Manager

As part of my work, I go to Building Industry Association meetings on a regular basis. As a courtesy to them, I am keeping my sources anonymous, but should any of you wish to attend a BIA meeting, you can see and here these people yourself. The meetings are open to the public for a fee.

At a recent meeting I listened to asset managers from two major West Coast banks. I asked one of these asset managers to detail his banks policy toward REO based on market conditions. He said that in markets where they do not see recovery in a longer-term horizon (think Lancaster), they may sell at reduced prices to clean up the mess; however, if they do see the market recovering in a reasonable time, they will hold the property, and perhaps even rent it out while values improved. In short, the REO departments of these banks are empowered to act as responsible asset managers trying to obtain the greatest recovery for the bank. This also means there will be no massive inventory dump forced by a government regulator.

Each bank will evaluate its own financial circumstances, its exposure to the market and other factors and pursue a policy of maximizing recovery while disposing of these assets. Certain banks will dump in some markets and hold in others. It will be the chaotic collapse of a cartel with much volatility, and most likely slowly declining prices for several years as lenders slowly release their inventory to obtain price recovery.

Blue skies are not here yet.

Irvine Home Address … 15 MORRO BAY Irvine, CA 92602

Resale Home Price … $1,629,000

Income Requirement ……. $337,684
Downpayment Needed … $325,800
20% Down Conventional

Home Purchase Price … $791,875 ???
Home Purchase Date …. 3/28/2001

Net Gain (Loss) ………. $739,385
Percent Change ………. 105.7%
Annual Appreciation … 8.3%

Mortgage Interest Rate ………. 5.01%
Monthly Mortgage Payment … $7,004
Monthly Cash Outlays ………… $9,040
Monthly Cost of Ownership … $6,540

Property Details for 15 MORRO BAY Irvine, CA 92602

Beds 4
Baths 4 full 1 part baths
Size 4,464 sq ft
($365 / sq ft)
Lot Size 8,285 sq ft
Year Built 2000
Days on Market 4
Listing Updated 12/10/2009
MLS Number P713549
Property Type Single Family, Residential
Community Northpark
Tract Cmbr

**Bring your checkbook & RUN…DONT WALK!** Drop-Dead GORGEOUS & *PRICED TO STEAL!* PREMIUM GREENBELT Location, Serene PRIVACY & Tranquil PARK VIEWS! Rare *OVERSIZED LOT* w/Huge ENTERTAINERS BACKYARD! Location! LOCATION! **THIS HOME SURPASSES EVERY HOUSE IN THIS PRICE RANGE!** Must See to Believe! Exquisite Architecture w/Romatic Archways, Dramatic 10-Ft Ceilings, Walls of Windows, Splendor of Natural Light & Inviting French Doors that Welcome Outdoor Living & Entertaining! Spacious Open Design offers 4 Bedrooms w/Bath en suite (Including Main Floor BR & BA) & BONUS ROOM (Optional 5th BR) plus Office, Exercise Rm/Study, & Elegant Formal Living & Dining. Huge Gourmet Kitchen w/Chefs Island Opens to Charming Breakfast Nook & Generous Family Room w/access to Sprawling Backyard & Custom BBQ. An Entertainers Delight! Master w/Retreat, Fireplace & Huge Closet plus Generous secondary bedrooms w/walk-in closets & tranquil park views! EVERY ATTENTION TO DETAIL! *ACT FAST!* Only ONE like this!!!

This description is awful on every level. It contains (1) RANDOM CAPS LOCK, (2) three exclamation points, (3) random asterisks, (4) numerous cliches, (5) over-the-top writing, (6) Intermittent Caps, (7) cheap techniques to create urgency, (8) and a general lack of substance. If the nonsense were strpped from the description, the number of words cuts in half and the reader is spared needless distraction.

My data records do not show the original purchase price, but it does show me the original first mortgage. I assumed the mortgage was 80% of the purchase price. That may not be correct.

As borrowers, the owner’s of today’s featured property did not add to their mortgage. Kudos. That is a rare accomplishment worthy of recognition.

Since I first estimated Shadow Inventory others have been trying to figure out how big the problem really is. Today’s featured property is an example of Shadow Inventory finally coming to light.

Irvine Home Address … 12 FOXHILL Irvine, CA 92604
Resale Home Price …… $594,900

{book1}

If you ever feel like something’s missing
Things you’ll never understand,
Little white shadows sparkle and glisten,
Part of a system, a plan

White Shadows — Coldplay

One of the carryovers of the Great Housing Bubble zeitgeist is the high level of suspicion about the people who are gaming the system to their advantage. The general public has little or no perception of the Titanic forces competing for their money, and discussions about sinister elements at the Federal Reserve sounds like conspiracy-theory nonsense to some.

Similarly, discussions of “Shadow Inventory” sound like the ravings of madmen. But those of us paying careful attention to the numbers know we have a problem. These ravings are the voice of reason staring at the chaotic struggle of greed and pointing out the economic ripples. These ripples are growing to a tsunami of foreclosed properties.

I am utterly astonished at the level of Government intervention, but we will see more. IMO, if you look far enough down the road, losses to the FHA — losses directly absorbed by the US Taxpayer — will finally call an end to government market props. Pressure is already building to increase downpayment requirements and eliminate tax subsidies. FHA is subprime, and everyone knows it. Will this batch walk away when they go underwater? Probably.

Shadow Inventory Revisited

In Shadow Inventory Orange County, I explored one method of calculating or estimating the number of
truly distressed property owners in Orange County. Since then, others
have written on the same subject including a new blog I am introducing today.

New Blog

I like to recognize excellence when I see it, and I found a new blog through Patrick.net called Finance my Money. The “About” doesn’t say much about the author, and the blog has only been around since August of 2009, but I found two excellent posts there:

California Notice of Defaults hit Record in 2009: Approximately 476,000 Notice of Defaults but Foreclosures Fell. HAMP Most Active in California. Approximately 5,900 Permanent HAMP Mods in California.

California Housing Inventory Mystery: 206,000 Homes on MLS but is the Real Inventory 412,000 or closer to 618,000?

The first post confirms, “California is at the center of the foreclosure wave. Of the 306,000
foreclosure filings in November 23 percent hit in California. You
cannot talk about housing distress without looking at the state of
California. The California housing market will be in a slump for many
years and there are a variety of reasons why California housing will see no recovery in 2010.
One of the most important leading indicators of housing distress is
notice of defaults. With so much talk about housing recovering the
data is showing that 2009 will set a record in terms of NODs filed in
California. 476,000 notice of defaults will be filed by the end of the
year setting a pace of over 1,300 NODs filed per day in 2009.”

In Shadow Inventory Orange County, I discussed that one method of leaving Shadow Inventory is by curing the loan, generally with a loan modification. Since loan modifications are billed as a housing market panacea, it is worth seeing how these programs have done:

Many have argued that HAMP will help many of these loans. California is the largest HAMP state:

Yet the above number is a misnomer. In fact, nationwide only a handful of modifications have become permanent:

Of the 759,000 HAMP trials started only 4 percent have become
permanent. This number is abysmal. In fact, if we take the 148,000
trial mods in California we can assume that only 5,920 have made it to
the permanent stage. We had 476,000 notice of defaults filed in 2009!
The HAMP is merely a delay of reality.

The cure rate was 6.6% back in September. It isn’t improving.

In defense of the HAMP program, the cure rates will get better because there are people who have made 1 or 2 months payments that will cure when they get to three months, so there is a lag in the reporting. The headlines will ignore the lag two months from now when the real cure rate is revealed.

For what it is worth, I guestimate cure rates will be between 10% and 15% as currently defined; however, there will be pressure to lower the bar. Did you notice three months is considered permanent? Three years maybe, but three months of consecutive payments doesn’t seem like much to ask. Despite how low this bar is, it could go lower. In fact, this program could fail to produce a single loan that survived to a market sale or payoff, and by their standards it would be a success.

We pick up the Shadow Inventory issue again in the second post:

So even though notice of defaults for 2009 are reaching the 475,000
mark actual defaults for the year are going at a pace of 230,000. In
other words, there is a major gap in the data. This isn’t because
loans are curing either. Recent cure rates are under 5% and for
California, they are even lower. So most of those 475,000 notice of
defaults are going to become additional inventory at some point. In
fact, how many of those 475,000 homes are even listed in the 206,000
current inventory? That is the major question and brings up the shadow
inventory trends.

A recent report from Amherst Mortgage Insight tackled this question:

There is another method of calculating shadow inventory. It’s out there, and the lenders don’t really want you to know it.

Irvine Home Address … 12 FOXHILL Irvine, CA 92604

Resale Home Price … $594,900

Income Requirement ……. $123,320
Downpayment Needed … $118,980
20% Down Conventional

Home Purchase Price … $852,000
Home Purchase Date …. 10/17/2005

Net Gain (Loss) ………. $(292,794)
Percent Change ………. -30.2%
Annual Appreciation … -8.4%

Mortgage Interest Rate ………. 5.01%
Monthly Mortgage Payment … $2,558
Monthly Cash Outlays ………… $3,160
Monthly Cost of Ownership … $2,510

Property Details for 12 FOXHILL Irvine, CA 92604

Beds 4
Baths 2 full 1 part baths
Size 2,522 sq ft
($236 / sq ft)
Lot Size 5,400 sq ft
Year Built 1975
Days on Market 4
Listing Updated 12/10/2009
MLS Number F1827782
Property Type Single Family, Residential
Community El Camino Real
Tract Dc
According to the listing agent, this listing is a bank owned (foreclosed) property.
REO.CASH ONLY! Open bright & airy. Landscaped backyard. Close to parks, schools, malls and freeways. 4 Bed + 2.5 Baths.

This was a loan issued by Nationpoint; it didn’t perform very well. The owner of this property paid $852,000 on 10/17/2005. He used a $680,000 first mortgage, a $170,000 second mortgage, and a $2,000 downpayment. On 6/20/2006 he got $10,000 out of the property. About a year later, he stopped paying the mortgage.

Foreclosure Record
Recording Date: 03/05/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)

Foreclosure Record
Recording Date: 11/30/2007
Document Type: Notice of Default

Foreclosure Record
Recording Date: 11/30/2007
Document Type: Notice of Rescission

Foreclosure Record
Recording Date: 11/14/2007
Document Type: Notice of Default

This property was purchased on 7/15/2008 for $620,034 by DEUTSCHE BANK NATIONAL TRUST CO, ; FIRST FRANKLIN MORTGAGE LOAN TRUST 2006.

Shadow inventory coming to light?

There is not much chance of this property selling for asking price as comps are much higher. This property will be bid up well over asking — not because Fundamental Value says so — it is overpriced at listing price on that basis, but if you look at what buyers are able to finance today, comps for this house are much higher than $600,000.

Today’s featured property is in the Woodbridge Cottages. I picked it only for its street name.

If you find humor about flatulence offensive, you are warned not to read the remainder of today’s post.

Irvine Home Address … 68 RACINGWIND Irvine, CA 92614
Resale Home Price …… $825,000

{book1}

They’re all dying. Dying inside
Slowly. Drowning in pride.
Reeking of lies. Proud of their lives.
Proud of their dead. Proud of the blood that shed.
Dying. Dying inside, slowly. Drowning in Pride.

Of Human Pride and Flatulence — Catttle Decapitation

One of the joys of writing for the blog is finding creative ways to tie properties to other things. The street names offer a fertile field for funny affiliations, occasional alliterations, rhymes and ruminations. That being said, I have never taken “fart propulsion” as a theme for a post before; however, given the street name, I could not resist.

I like these cottage homes. The front elevations are attractive, the floorplans are functional, and there is a nearby community park that is very nice. On the downside, you don’t have a back yard, and the density is very high.

I want to point out a land planning trick used to get more yield. If you look closely at the houses I have highlighted, they all have one thing in common; there is no street in front of them. On the downside, between (1) guests and (2) owners who fill their garages with possessions and must park on the street, the sidestreet parking near these units is full most the time (see photo).

For those who like less asphalt — and who doesn’t — eliminating the street takes out an ugly element that consumes much land. This is an area where the developer’s desire for density and a buyer’s desire for a detached house are in alignment. Expect to see much more of this kind of planning in the future. Hopefully, they will put in more guest parking.

Irvine Home Address … 68 RACINGWIND Irvine, CA 92614

Resale Home Price … $825,000

Income Requirement ……. $170,047
Downpayment Needed … $165,000
20% Down Conventional

Home Purchase Price … $189,000
Home Purchase Date …. 4/24/1998

Net Gain (Loss) ………. $586,500
Percent Change ………. 336.5%
Annual Appreciation … 13.1%

Mortgage Interest Rate ………. 4.96%
Monthly Mortgage Payment … $3,527
Monthly Cash Outlays ………… $4,440
Monthly Cost of Ownership … $3,270

Property Details for 68 RACINGWIND Irvine, CA 92614

Beds 4
Baths 3 baths
Size 2,252 sq ft
($366 / sq ft)
Lot Size 3,024 sq ft
Year Built 1980
Days on Market 14
Listing Updated 11/24/2009
MLS Number S597050
Property Type Single Family, Residential
Community Woodbridge
Tract Ch

This is a one of a kind custom home in Woodbridge Cottages. Highly upgraded throughout. Move in ready. Beautiful new casement windows and French doors. Gorgeous staircase and mouldings. Granite countertops and custom cabinets in kitchen . Teak hardwood flooring and Ralph Lauren carpeting. Fireplace in Master Bedroom and Living Room. Indoor laundry room with cabinets galore! Walking distance to award winning Irvine Unified School District neighborhood elementary, middle and high schools. This is a must see…….absolutely charming.

one of a kind custom home in Woodbridge Cottages? Unique tract homes? Hmmm…

These people stand to make a fortune; however, in typical Irvine style, they have doubled their mortgage debt. With $450,000 already spent, it isn’t the windfall it should be, but that is our new way of living, I guess.

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
September 2006.

Have a great weekend,

Irvine Renter

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