Warren Buffet owns a manufactured home company whose clients have not gone delinqent on their payments despite the economic hardship.

Irvine Home Address … 4 SAGE #32 Irvine, CA 92604

Resale Home Price …… $284,900

This all to mobile home

Is calling after you

Well, this all too mobile home is killing me

And there's nothing that you can do to set me free

Steely Dan — This All Too Mobile Home

Last week we discussed how Texas demonstrated that access to home equity and the desire to spend it fueled the housing bubble. Today, we are going to look at how loose lending standards and low down payments were directly responsible for the loan delinquencies leading to foreclosures.

Many market observers have contended that unemployment, not toxic mortgages, is largely responsible for the high delinquency rate. Other factors such as land use regulation have also been identifies as potential culprits. It is difficult to firmly establish that low down payments and high debt-to-income ratios are responsible for the high rates of mortgage delinquency because the same terms were available everywhere.

If we could find a group of American home buyers who did not have access to the crazy mortgage market of the bubble, then would have a basis of comparison. Fortunately, there is such a group: manufactured home buyers.

Buyers of manufactured homes generally can't get the same kind of financing as a site-built home. Most sellers of manufactured homes either provide their own financing or have relationships with shady lenders. Therefore, these buyers operate completely outside of the normal financing mechanisms that went haywire during the housing bubble. Any differences in performance between loans in these two systems should be very instructive.

Buffett’s Subprime Housing Solution

Mar. 3 2011 – 12:05 pm — Matt Schifrin

Last weekend after Berkshire Hathaway released Warren Buffett’s annual letter, there were a flurry of articles and blog posts hanging off Warren’s every word.

One part of his long letter that didn’t get a huge amount of ink was the section on Clayton homes, a big manufactured home company that Berkshire owns.

By all rights the company should be in the crapper like most of the other mobile and manufactured home companies. Palm Harbor Homes of Texas went bankrupt and is now being purchased by another troubled firm Cavco Industries. Another, Skyline Corp., has seen its market cap halved.

There is a housing depression out there and modular homes aren’t exactly flying off the shelves.

However, as you will see from the following excerpt from the Berkshire Hathaway annual letter, things are holding up fairly well at Clayton. Business is way down, but importantly Clayton’s net loss percentage of average loans has stayed low at 1.72% in 2010.

As Mr. Buffett points out, Clayton’s average buyers have low credit scores and they don’t get the same government backed benefits as buyers of “site” built homes. Clayton lends to the subprime crowd. However, unlike the cowboys employed during the housing boom by men like Angelo Mozilo of Countrywide Credit, Clayton lenders knew that their companies would be holding onto the loans they originated.

Says Warren, “If we were stupid in our lending, we were going to pay the price. That concentrates the mind.”

Here is Buffett’s excerpt on Clayton Homes:

At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.) Sales would have been terrible last year under any circumstances, but the financing problems I commented upon in the 2009 report continue to exacerbate the distress.

To explain: Home-financing policies of our government, expressed through the loans found acceptable by FHA, Freddie Mac and Fannie Mae, favor site-built homes and work to negate the price advantage that manufactured homes offer.

We finance more manufactured-home buyers than any other company. Our experience, therefore, should be instructive to those parties preparing to overhaul our country’s home-loan practices. Let’s take a look.

Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it purchased.) At the origination of these contracts, the average FICO score of our borrowers was 648, and 47% were 640 or below. Your banker will tell you that people with such scores are generally regarded as questionable credits.

Nevertheless, our portfolio has performed well during conditions of stress. Here’s our loss experience during the last five years for originated loans:

Year Net Losses as a Percentage of Average Loans

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.53%

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27%

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17%

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86%

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.72%

Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income.

Prior to when housing markets were a Ponzi scheme, lenders used to have conservative guidelines for down payments and debt-to-income ratios. Lenders knew that if there was some financial distress in the family that there was enough margin for distress that most would keep making their payments. Warren Buffet's experience with Clayton Homes demonstrates the wisdom of this approach.

Look at the low default rates and losses associated with Buffet's lending. These were subprime borrowers who went through the Great Recession, and their default rates remain under 2%. Considering the default rate on site-built homes using so-called financial innovation is near 10%, it's fair to say that Warren Buffet's underwriting standards were much better. Why is that?

In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

So if there is risk of loss, lenders take lending more seriously. Hmmm… Despite the common-sense nature of this idea, the lending industry has strongly resisted the Dodd-Frank requirement of keeping 5% of the loans they originate on their books. These fools are worried about the losses on 5% of their portfolio while Warren Buffet is retaining 100% of his.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

Warren Buffet is right. Higher down payment requirements and debt-to-income values at less than 31% (28% is better) results in fewer loan delinquencies and foreclosures. It really is that simple.

Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.

But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.

To read Berkshire Hathaway’s 2010 shareholder letter click here.

Doesn't it make sense that higher down payment requirements and lower debt-to-income ratios makes for a more stable housing market? The more equity people have, the less likely they are to go underwater and consider strategic default. The lower the debt-to-income ratio, the easier it is for borrowers to make payments, particularly during times of financial distress.

Of course, stricter underwriting standards means we will issue fewer loans and seller fewer houses at lower prices. Few in the real estate community want that, so the pressure will remain to lower standards and inflate another housing bubble in under the guise of increasing affordability. Warren Buffet proved that larger down payments and tighter lending standards are a more viable long-term business strategy.

Livin' Large

The owner of today's featured property spent every penny of his free money the moment it materialized. This guy had his mortgage broker on speed dial.

• He paid $275,000 on 12/11/2002. Prices were too high then, but they were to go much higher. The owner used a $247,500 first mortgage and a $27,500 down payment.
• On 12/11/2003 he refinanced with a $253,000 first mortgage.
• On 6/11/2004 he refinanced with a $332,000 first mortgage.
• On 3/18/2005 he refinanced with a $368,000 first mortgage.
• On 4/28/2006 he refinanced with a $404,000 first mortgage and a $50,500 HELOC.
• Total property debt is $454,500, assuming he maxed out the HELOC. Don't you think he did?
• Total mortgage equity withdrawal is $207,000. That's a huge take over a three and a half year period, almost $5,000 per month. No taxes, all cash.

He must have had a good time.

Foreclosure Record

Recording Date: 01/18/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/18/2010

Document Type: Notice of Default

Irvine Home Address … 4 SAGE #32 Irvine, CA 92604

Resale Home Price … $284,900

Home Purchase Price … $275,000

Home Purchase Date …. 12/11/2002

Net Gain (Loss) ………. $(7,194)

Percent Change ………. -2.6%

Annual Appreciation … 0.4%

Cost of Ownership

————————————————-

$284,900 ………. Asking Price

$9,972 ………. 3.5% Down FHA Financing

4.85% …………… Mortgage Interest Rate

$274,929 ………. 30-Year Mortgage

$57,988 ………. Income Requirement

$1,451 ………. Monthly Mortgage Payment

$247 ………. Property Tax

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

$47 ………. Homeowners Insurance

$277 ………. Homeowners Association Fees

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

$2,022 ………. Monthly Cash Outlays

-$136 ………. Tax Savings (% of Interest and Property Tax)

-$340 ………. Equity Hidden in Payment

$19 ………. Lost Income to Down Payment (net of taxes)

$36 ………. Maintenance and Replacement Reserves

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

$1,601 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,849 ………. Furnishing and Move In @1%

$2,849 ………. Closing Costs @1%

$2,749 ………… Interest Points @1% of Loan

$9,972 ………. Down Payment

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

$18,419 ………. Total Cash Costs

$24,500 ………… Emergency Cash Reserves

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

$42,919 ………. Total Savings Needed

Property Details for 4 SAGE #32 Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1123

$254/SF

Lot Size: –

Property Type: Residential, Condominium

Style: Two Level, Traditional

Year Built: 1976

Community: Woodbridge

County: Orange

MLS#: P771720

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

FANTASTIC BUY ON THIS 3 BR 1.5 BA TOWNHOME VALUE PRICED FOR QUICK SALE! TILE ENTRY, FORCED AIR HEATING, OPEN & BRIGHT KITCHEN WITH GRANITE COUNTERTOPS AND NEWER MAPLE CABINETS, SEPARATE LAUNDRY ROOM, NEWER SLIDING DOOR IN DINING AREA, PRIVATE PATIO, GOOD SIZE BEDROOMS, AND CARPORT. SUPER MOTIVATED SELLER. SUBMIT!!!

It's easy to feel sorry for the multitudes losing their houses. However, each loss is someone else's gain.

Home Address … 6820 ROLLING OAKS CT, LAS VEGAS, 89131

Resale Home Price …… $239,900

Like a roller in the ocean,

life is motion

Move on

Like a wind that's always blowing,

life is flowing

Move on

Like the sunrise in the morning,

life is dawning

Move on

ABBA — Move On

People get caught up in their empathy with those losing their family homes to foreclosure. Its easy to get sucked in to the emotional stories of victimhood and believe that perhaps we should stop foreclosures.

We all forget that the distressed debtor who rented money from the bank to occupy the house and appear on title will turn over the property to a new buyer who is not as indebted. This new buyer will be able to sustain ownership under stable, government-backed financing terms.

Pain for Some Families Presents Possibilities for Others

By Doug McKelway — Published February 24, 2011

As much as the bursting of the real estate bubble devastated the economy, destroyed hopes, and caused untold pain, there is a silver lining for would-be home buyers in today's market. All that pain presents the potential for great bargains for the right buyer.

In most American cities, the cost of real estate is lower than it’s been in decades. On average, home prices in the U.S. have fallen more than 27 percent below their peak prices. But even that figure is deceiving, because it doesn't take into account the desperation of some hard-pressed sellers to ditch their homes.

Often faced with the hard realities of pay-cuts, lay-offs, and neighborhoods devalued by short-sells and foreclosures, sellers have less negotiating power.

“If I have a foreclosure on a house six houses away, I'm going to lose value in my house. If I have another foreclosure ten blocks away down the street I'm going to lose additional value. And then it compounds itself,” said John Taylor of the National Community Reinvestment Coalition.

But this loss in value is the buyers gain. Amy Bohutinsky of real estate Web site Zillow.com, which tracks prices closely across the nation, sees a pattern in some depressed markets.

“If a home is listed at one price, ultimately it sells for 10 or 15 thousand dollars less,” Bohutinsky said. “That means buyers have negotiation power.”

Buyers have enormous power when there is excessive supply, particularly in a declining market. In a declining market smart sellers are extra motivated because another buyer willing to pay that price really isn't going to come along. In an appreciating market, sellers can always trade money for time. If sellers want more money, they simply have to wait for the market to come to them. In a declining market, sellers do not have that luxury.

And where are those markets with the best real estate deals? Lawrence Yun, chief economist for the National Association of Realtors, said the best buys often tend to be in those areas where the race to build was greatest in the boom years, and where foreclosures are common.

“In places like Miami, one can pick up a nice condo for about $60,000. Same situation in Las Vegas because of so much abundant foreclosed inventory, the banks are just releasing property at deep discounted prices,” Yun said. “We are seeing the transaction increase once the prices are drastically reduced.”

Bohutinsky says three metropolitan areas in Florida, in particular, offer extraordinary bargains: Orlando, Tampa, and Sarasota. But Yun adds many other metropolitan areas offer prime buys.

“In middle America between the mountains — the Appalachian Mountains and Rocky Mountains — the median prices are about $120,000,” Yun said. “Anyone with a stable decent job would be able to buy a home.” Zillow.com's figures also suggest that Minneapolis, Chicago and San Luis Obispo, Calif. have seen precipitous declines in housing prices at some income levels and leaving bargains for would-be-buyers.

But if those people with stable jobs are not yet clamoring to pick up distressed properties, there's a good reason. Experts believe that the market may not yet have hit bottom.

The market hasn't hit bottom. It doesn't take a genius to read a chart and see that we are making new lows.

Buyers should be skittish, but there is a price point where the savings versus rentiing is great enough to lure buyers to the market. Very few people are renting by choice in Las Vegas despite the dropping prices. Moving from renting to home ownership with either get you 40% more home or cost you 40% less money. That incentive pushes most off the fence, and Las Vegas's sales volumes have been above peak levels for quite some time.

“We know that home values are still falling across much of the U.S., and that they probably will continue to fall throughout this year,” Bohutinsky said. “At Zillow.com, our economists are saying that the bottom is likely be somewhere between the mid and latter half of the year, and from there, home values will probably stay at the bottom for the next year or two.”

And the prospect of flipping homes? Buying and selling for a quick profit? Those days may be gone for all but the most seasoned investors.

“Mortgages are harder to come by,” Bohutinsky said.”Your average Joe is not going to go be able to go and obtain multiple mortgages on all of these homes and be able to hold out for a decade for home prices to recoup and actually make some money on this.”

Most experts agree that values will increase at a much more modest pace, once the market bottoms out. That may be a welcome change after the rollercoaster that home owners have ridden the last few years.

It won't be welcome at all by the legions of appreciation buyers in Orange County.

Merry Christmas and happy new foreclosure

I bought this house on December 7, 2010. The above was the actual picture of the property I used to evaluate it as a potential flip taken the morning of the auction.

Do you see the carefully groomed landscape and the Christmas reindeer in the front?

These people liked this house, and they didn't want to lose it. I was buying it eight days before December 15th when the local constables who handle evictions stop all activities for the holidays.

Was I going to be Grinch this year?

Cash-for-keys

I always prefer a negotiated settlement to eviction. It takes too much time to evict, and the occupants aren't too careful on their way out with their belongings.

These former owners have few tenant holdover rights. If i want them out, I can have them forcibly removed in short order. In Nevada, they get a 5-day notice to get out followed by a 3-day notice before the constable arrives to remove them by force if necessary. This is dangerous work, and they do carry weapons.

Technically, the former owners owe me rent from the day of the foreclosure sale. The typical negotiation is to offer free rent for three weeks with cash incentives if they move out quicker. The cost of money dictates that i can offer up to $500 per week if they are out early, and it improves overall revenues and profits.

I wasn't about to expedite an eviction to see if I could kick this family out two weeks before Christmas. We negotiated a deal where they could stay until January 10th if they agreed to leave certain appliances, be careful when moving furniture, leave the fixtures and fans, basically leave the place undamaged so we can do preparations for sale quickly and with limited expense.

Sue for unlawful foreclosure

We needed to exchange written documents, and they avoided meetings until it became apparent to us that these occupants did not intend to follow through on their agreement. Just before Christmas, we received a lawsuit notification, and with the justice system basically shut down the last two weeks of the year, we had no options, and the holdover owner got one last peaceful Christmas in their former dream home. I truly hope they enjoyed it. Denial has its rewards.

On the 3rd of January, we filed suit to get them removed, and after some legal finagling, we got a 30-day notice filed with a calendar set to expire in early March. These owners genuinely believed they were somehow going to keep this house. After more than two years with no payments, their house was called to auction, and now they are no longer on title. Only their bodies and their possessions remain.

As the eviction clock is winding down, we get a communication from the owners asking us if our original cash-for-keys offer was still on the table. They would get out that weekend if I gave them $1,500. Of course, my first thought is, screw you, your willing to take my money after lying to me, suing me, and generally pissing me off. Go to hell! After a few moments to think rationally, I sent Jacki over with a big smile on her face to agree to their demands.

They got out in a weekend, I got the house in immaculate condition — I knew any loan owner in foreclosure who bothers to put out decorations and maintains their yard that well probably maintained the inside well. They did. We got the house on the market the next weekend (last weekend) with minimal fix up expense.

A bitter pill to swallow

These former owners loved this home. Jacki told me they were very bitter about the entire situation, the failed appreciation, the failed dodgy loan, the failed loan modification, the failed attorney savior. Despite the anger and bitterness, after telling their story, they were polite to Jacki when she inspected the property and paid them off.

When I think about borrowers like these, I do wish it had turned out differently for them. This particular family were peak buyers. They paid $399,991 for a property I bought 5 years later at auction for $170,000. The comps have weakened since I bought this property, and I will likely have to discount it to move it. These owners owed double what this property is worth today. What were they supposed to do?

The new family that buys here will enjoy a substantially lower cost of ownership. instead of the $2,500+ monthly cost the former owners had, the new buyer will spend less than $1,200 a month to live in this place. These people won't have HELOC riches any time soon, but they will have a cost-of-living that leaves them enough spending money that the HELOCs aren't necessary.

What is the best resolution for properties like this one? Do we give every existing loan owner principal reduction to keep them in place? Forgive the Ponzis their debts at my expense? I wouldn't feel very good about that one. Would you?

Do we allow them to squat forever and deny the new family their home? Perhaps foreclosure is a good solution after all.

Silverstone Ranch

This property is in a real estate development known today as Silverstone Ranch. The golf course in this project was developed by Meadowbrook Golf Group from 1999-2000. As a young, single project manager, I was making periodic trips to Las Vegas to oversee the design and construction of the golf course and clubhouse. I used to time my trips to inspect on Thursdays and Fridays and stay through Sunday night and take the red-eye home. You have to imagine I had a good time….

Home Address … 6820 ROLLING OAKS CT, LAS VEGAS, 89131

Resale Home Price … $239,900

Home Purchase Price … $170,000

Home Purchase Date …. 12/17/2010

Cost of Ownership

————————————————-

$239,900 ………. Asking Price

$8,397 ………. 3.5% Down FHA Financing

4.23% …………… Mortgage Interest Rate

$231,504 ………. 30-Year Mortgage

$45,412 ………. Income Requirement

$1,136 ………. Monthly Mortgage Payment

$208 ………. Property Tax

$20 ………. Homeowners Insurance

$280 ………. Homeowners Association Fees

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

$1,644 ………. Monthly Cash Outlays

-$102 ………. Tax Savings (% of Interest and Property Tax)

-$320 ………. Equity Hidden in Payment

$13 ………. Lost Income to Down Payment (net of taxes)

$30 ………. Maintenance and Replacement Reserves

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

$1,264 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,399 ………. Furnishing and Move In @1%

$2,399 ………. Closing Costs @1%

$2,315 ………… Interest Points @1% of Loan

$8,397 ………. Down Payment

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

$15,510 ………. Total Cash Costs

$19,300 ………… Emergency Cash Reserves

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

$34,810 ………. Total Savings Needed

Property Details for 6820 ROLLING OAKS CT, LAS VEGAS, 89131

——————————————————————————

Beds: 4

Baths: 2.5

Sq. Ft.: 2,551

$/Sq. Ft.: $94

Lot Size: 5,663 Sq. Ft.

Property Type: Single Family Residential, Detached

Year Built: 2005

Community: Centennial Hills

County: Clark

MLS#: 1123306

Source: GLVAR

Status: Exclusive Right

On Redfin: 6 days

Cumulative: 7 days

——————————————————————————

MOVE IN READY! Not a Short Sale or REO. Quick Response from Seller. 2-Story Home, 4 Bedroom, 2-1/2 Bath in a Golf Course Community, open floorplan, large kitchen with center island and breakfast bar.

BTW, as an update to the post where I featured 622 WOOD ROSE CT, HENDERSON, 89015. After that post, we lowered the price to $118,900. The property is in escrow at full asking price to a VA buyer.

The Tea Party is a right-wing political movement with some common sense views on foreclosure I can embrace, and some nutty ideas about renters I can't.

Irvine Home Address … 15 PONTE Irvine, CA 92606

Resale Home Price …… $1,075,000

She said save me

Save me

When there is no truth,

let's end this lie tonight.

This is easy to understand,

without your best eyes.

The Tea Party — Save Me

The political left has consistently been wrong on the foreclosure issue. There is a populist issue for the left to embrace: affordability. instead, they are choosing to pander to distressed homeowners. The robo-signer scandal only gained traction because the political left kept pandering to the false belief that people were wrongly foreclosed upon.

I found today's featured articles interesting because they are articles from the left lampooning the beliefs of the Tea Party. This represents a consistent narrative for the left, yet I find myself totally agreeing with the Tea Party about foreclosures and disagreeing with some stupid comments they made about renters.

Tea Party on Foreclosure: “They Bought Houses They Couldn’t Afford”

By Ilyce Glink — Jan 26, 2011

We already know some Tea Party members don’t believe renters should vote.

But how do they feel about foreclosure? And, where does the Tea Party stand on the real estate crisis that has almost brought the American financial system to a standstill?

CNBC’s Rick Santelli’s now famous rant is credited with kick-started the Tea Party movement, even though Santelli has denied he is a part of the party and that his comment was anything other than spontaneous combustion (i.e., great TV).

Rick Santelli was right: “The government is promoting bad behavior… do we really want to subsidize the losers' mortgages… This is America! How many of you people want to pay for your neighbor's mortgage? President Obama are you listening? How about we all stop paying our mortgage! It's a moral hazard“

Santelli yelled: “Why don’t you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages. Or would we like to at least buy cars and buy houses in foreclosure and give them to people that might have a chance to actually prosper down the road, and reward people that could carry the water instead of drink the water?”

But it turns out that kicking folks out of their homes is a core tenet of the Tea Party movement. In an exchange with Stephen Colbert, Freedomworks leader Brendan Steinhauser admitted that bailing out anybody, from banks to homeowners with bad mortgages is unfair. He also believes that most folks facing foreclosure bought homes they couldn’t afford.

Good for him. Mr. Steinhauser is right. Bailing out anybody is a bad idea because it is unfair to those who are not being bailed out.

(What about folks who could afford their homes with the jobs they had at the time, only to lose them in the worst recession since the Great Depression?)

Well, those people received unemployment benefits and ample opportunities to obtain a loan modification. Responsible homeowners are not losing their homes. And while we are all shedding tears for unemployed homeowners, what about unemployed renters?

She writes as if we have a national homeowner entitlement to subsidized housing in a recession. If we are going to subsidize loan owners with squatting privileges, why don't we do the same for renters? Where is the renter's Bill of Rights (and free handouts)? In my opinion, the political left would be wiser to pander to renters and side with affordability advocates, traditional supporters of the left.

It looks like 2011 is going to be the worst year on record for foreclosures, according to Rick Sharga, of RealtyTrac (I’ll post the latest numbers tomorrow).

TeaParty.org cares enough about foreclosures to run the press release on its website. With 5 million homeowners behind in their mortgage payments, foreclosures have hit just about every community in this country, with near-misses for millions more, including Tea Party candidate Christine O’Donnell.

With that daily does of sensationalism, we will leave behind the intelligent ideas of the Tea Party on go on to some foolish comments made by one of its leaders.

Tea Party: Don’t Let Renters Vote

By Ilyce Glink — Dec 1, 2010

What to know what the Tea Party says about foreclosures and the housing crisis?

Nearly two years to go until the next Presdential Election and already the Tea Party is deciding how to slice and dice voters.

Here’s a new Tea Party plank: Don’t let renters vote.

Gawker reported that Judson Phillips, president of prominent Tea Party group Tea Party Nation, has a terrific idea: “The Founding Fathers… put certain restrictions on… the right to vote… you had to be a property owner. And that makes a lot of sense.”

Beyond the inflammatory nature of that remark it is also completely thoughtless.

First, what exactly is a property owner? As I noted in Money Rentership: Housing and the New American Dream, the founding fathers didn't have encumbrances on their land. If you worked the land, it was yours. Once a property is encumbered with a mortgage, the person on title isn't really an owner any longer in many ways that matter.

Second, if we are excluding renters, do we also exclude loan owners with no equity? The don't really own anything despite being on title. Are we limiting the right to vote to only those landowners who have fee-simple title with no encumbrances?

What stops someone from forming a corporation, buying property in that corporation, and selling shares to anyone who wanted to vote? If you owned shares in the corporation, you owned land.

Here’s the full quote, from Tea Party Nation Radio:

“The Founding Fathers originally said, they put certain restrictions on who gets the right to vote. It wasn’t you were just a citizen and you got to vote. Some of the restrictions, you know, you obviously would not think about today. But one of those was you had to be a property owner. And that makes a lot of sense, because if you’re a property owner you actually have a vested stake in the community. If you’re not a property owner, you know, I’m sorry but property owners have a little bit more of a vested interest in the community than non-property owners.”

Republicans have always had a fondness for the past. But, do we really want to jump right back to the Middle Ages?

The notion that only owners can have a vested interest in the community is nonsense. Many renters don't bother to get involved, and many homeowners don't either. Many renters do take an active role in the communities in which they live. Ownership does not define belonging.

The HELOC was too much debt

Yesterday i wrote about the need for a home equity lockbox. Today is another example of Ponzi owners who consistently used their house as an ATM only to lose it in foreclosure.

• This property was purchased on 2/20/2003 for $695,000. The owners used a $556,000 first mortgage and a $139,000 down payment.
• On 2/6/2003 they refinanced with a $550,000 first mortgage, and repeated this refinancing three times over the next 6 months moving from lender to lender.
• On 4/9/2004 they refinanced with a $556,000 first mortgage.
• On 6/21/2004 they opened a $120,000 HELOC.
• On 8/23/2004 they obtained a $199,500 HELOC.
• On 12/14/2004 they refinanced with a $750,000 first mortgage.
• On 1/6/2005 they obtained a stand-alone second for $28,518.
• On 1/18/2005 they got a HELOC for $120,000.
• On 6/7/2005 they obtained a $200,000 HELOC.
• On 1/23/2006 they obtained a $257,000 HELOC.
• Total property debt is $1,007,000.
• Total mortgage equity withdrawal is $457,000 including their down payment.
• They quit paying the first mortgage sometime last year.

Foreclosure Record

Recording Date: 01/26/2011

Document Type: Notice of Default

One of these days, I will run out of HELOC abuse posts. We haven't had any mortgage equity withdrawal for the last several years, so eventually, I should run out of Ponzis.

Irvine Home Address … 15 PONTE Irvine, CA 92606

Resale Home Price … $1,075,000

Home Purchase Price … $695,000

Home Purchase Date …. 9/27/02

Net Gain (Loss) ………. $315,500

Percent Change ………. 45.4%

Annual Appreciation … 5.2%

Cost of Ownership

————————————————-

$1,075,000 ………. Asking Price

$215,000 ………. 20% Down Conventional

4.88% …………… Mortgage Interest Rate

$860,000 ………. 30-Year Mortgage

$219,558 ………. Income Requirement

$4,554 ………. Monthly Mortgage Payment

$932 ………. Property Tax

$240 ………. Special Taxes and Levies (Mello Roos)

$179 ………. Homeowners Insurance

$47 ………. Homeowners Association Fees

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

$5,952 ………. Monthly Cash Outlays

-$1240 ………. Tax Savings (% of Interest and Property Tax)

-$1056 ………. Equity Hidden in Payment

$404 ………. Lost Income to Down Payment (net of taxes)

$134 ………. Maintenance and Replacement Reserves

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

$4,193 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$10,750 ………. Furnishing and Move In @1%

$10,750 ………. Closing Costs @1%

$8,600 ………… Interest Points @1% of Loan

$215,000 ………. Down Payment

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

$245,100 ………. Total Cash Costs

$59,900 ………… Emergency Cash Reserves

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

$305,000 ………. Total Savings Needed

Property Details for 15 PONTE Irvine, CA 92606

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 3000

$358/SF

Lot Size: 5,435 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Mediterranean

Year Built: 1997

Community: Westpark

County: Orange

MLS#: S648056

Source: SoCalMLS

Status: Backup Offers Accepted

On Redfin: 14 days

——————————————————————————

Trieste Plan A in a quiet cul de sac location. Upgraded marble, maple wood and cherry wood laminate flooring all thru out. Remodeled bathrooms with granite/marble/mosaic tiles and walk-in closet. Maple kitchen cabinets w/ granite counter/island/full backsplash and breakfast nook. French doors, high cathedral ceiling, inside laundry and full size driveway. Main floor suite w/ one bedroom, full bath and retreat/den. Large backyard w/ covered patio, brick planters and hardscaped front yard w/ Palm trees. Upstairs loft area and bonus room. Walk to Plaza Vista school, pools, tennis and parks.

Thank you for reading the Irvine Housing Blog.

Astutely observing the housing market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Housing market instability is rooted in people's ability to raid their home equity and spend it. Curtail mortgage equity withdrawal, and home prices stabilize.

Irvine Home Address … 28 VALLEY Vw 22 Irvine, CA 92612

Resale Home Price …… $689,000

You know I'm in demand

You see I'm in demand

You need me in demand

Texas — In Demand

Lenders enabled the housing bubble, but people needed a reason to provide the demand to pay stupid prices to inflate a housing bubble. As I documented, the Desire for Mortgage Equity Withdrawal Inflated the Housing Bubble.

In order for home price appreciation to motivate people to pay stupid prices and inflate housing bubbles, they need a way to access this appreciation. The more immediate and plentiful this access to money, the more motivated buyers are to borrow and cash out. Mortgage equity withdrawal is the doorway to appreciation; it makes houses very desirable and very valuable.

Texas shows the way

To test this premise, we need to find a market with limited access to mortgage equity withdrawal and compare the home prices there to a market like California's where there are no restrictions at all. There is such a place: Texas.

I know Texas. I spent two and one-half years living in College Station studying real estate. Texas, along with California, was a big player in the Savings and Loan disaster. They inflated a commercial real estate bubble of epic standards, and even its residential real estate was volatile during that period. Texans are certainly not immune to the temptation to take free money from lenders. However, the delivery mechanism of the Savings and Loan disaster was through commercial lending whereas the delivery mechanism during the Great Housing Bubble was residential lending. Texas has different laws governing residential lending, and these laws prevented a housing bubble there.

I go on to discuss an article by Alyssa Katz, The Lone Star Secret. In the article, she discusses the situation in Texas:

A cash-out refinance is a mortgage taken out for a higher balance than the one on an existing loan, net of fees. Across the nation, cash-outs became ubiquitous during the mortgage boom, as skyrocketing house prices made it possible for homeowners, even those with bad credit, to use their home equity like an ATM. But not in Texas. There, cash-outs and home-equity loans can’t total more than 80 percent of a home’s appraised value. There’s a 12-day cooling-off period after an application, during which the borrower can pull out. And when a borrower refinances a mortgage, it’s illegal to get even $1 back. Texas really means it: All these protections, and more, are in the state constitution. The Texas restrictions on mortgage borrowing date back to the first days of statehood in 1845, when the constitution banned home loans entirely.

“Delinquency and foreclosure rates are significantly lower in Texas,” boasts Scott Norman, the president of the Texas Mortgage Bankers Association. “The 80 percent loan-to-value limit—that’s the catalyst for a lot of this.”

That's were the lockbox comes in. If a house is supposed to represent financial security, it should be a place of money storage, not an endless ATM machine spitting out spending money. The Texas experience shows that if you deny people access to this money, the housing market is more stable, and everyone has tangible ownership in their property with real equity. That is the real American dream.

Regulators Push 20% Down Payments on Homes

By VICTORIA MCGRANE And NICK TIMIRAOS — MARCH 2, 2011

Banking regulators are pushing for mortgage-lending rules that require homeowners to make minimum 20% down payments on loans classified as lower-risk, according to people familiar with the matter.

The proposal is being floated as a way to rewrite the rules for mortgage lending to prevent a rerun of the housing bubble and financial crisis that resulted from years of easy credit. The Dodd-Frank financial overhaul law enacted last year enabled regulators to define a so-called gold-standard residential mortgage that would be exempt from costly new rules.

At least three agencies—the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—back a proposal to require home buyers to put down at least 20% of the sales price in order to obtain one of these “qualified residential mortgages.” One proposal would also require borrowers to maintain a 75% loan-to-value ratio for refinances, and a 70% loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.

Those are great proposals. If lending is encouraged under those terms, I am all for it.

Mortgage-finance giants Fannie Mae and Freddie Mac would also be exempt from the rules while they remain in conservatorship, according to these people. The U.S. took over the firms in 2008, and the Obama administration has proposed eventually winding them down.

The behind-the-scenes debate over the proposal could have far-reaching implications for how Americans finance loans, because it addresses how much equity new borrowers should have in their homes.

The advantage of owning a home was the amortizing mortgage was a forced savings account, and inflation provided some additional return. Once we gave unfettered access to home equity, these features of home ownership no longer applied. As many Ponzis have proven, even after more than 20 years of ownership, a loan owner can lose their home to foreclosure.

It is unclear whether the proposal will garner support among other regulators and be acceptable to the White House and Congress. Altogether, six federal agencies—the three supporting the proposal plus the Department of Housing and Urban Development, the Federal Housing Finance Agency and the Securities and Exchange Commission—must sign off on the proposal before it is released for public comment. It could not be determined Tuesday whether all the agencies would support the 20% down-payment standard.

At a congressional hearing Tuesday, HUD Secretary Shaun Donovan said no deal has been reached yet, and that any plan could instead spell out options.

At a separate hearing Tuesday, Treasury Secretary Timothy Geithner said, “We've got to be careful that we get it right.” He added, “I'm not sure how much longer it's going to take, but it's going to take a bit longer than we initially expected.”

Meanwhile, some lawmakers expressed concerns that the new rules might make it too hard for homeowners to qualify for less risky, and less costly, loans.

In other words, we are worried that if risk is properly priced, people who are not qualified for home ownership may not be given a loan on which they will likely default.

Sen. Kay Hagan (D., N.C.) told Federal Reserve Chairman Ben Bernanke that several lawmakers “are really concerned about not making it so restrictive that we can't have as many well-qualified loans as possible.”

The proposal was crafted in response to a provision in Dodd-Frank that aimed to improve mortgage-lending standards. Loans that don't meet the standards for “qualified residential mortgages” and are sold to investors as securities will be subject to a “risk retention” rule, which could raise borrowing costs for homeowners.

The risk-retention rule requires banks to keep 5% of the value of all mortgages they securitize on their books. During the housing boom, many lenders passed on all of their mortgages, and all of the risk, to investors. It was designed to force lenders to have “skin in the game” when selling groups of mortgages packaged as securities.

Critics of the risk-retention rule said it could raise costs for traditionally safer lending products such as long-term, fixed-rate loans with full income documentation. A coalition of consumer advocacy groups and the real-estate industry have warned that defining the rule too narrowly could raise borrowing costs for millions of creditworthy borrowers.

Regulators must issue a rule defining “qualified residential mortgages” by April, and had initially planned to publish a draft proposal late last year. But the process has been delayed by a disagreement about whether to include in the rule national standards for loan servicers, such as how to modify loans for troubled borrowers. The new proposal reflects a compromise among the regulators to include some standards for how and when banks modify loans.

Write to Nick Timiraos at nick.timiraos@wsj.com

If the housing market returns to 20% down except for FHA or VA buyers subject to strict underwriting guidelines, the housing market would enjoy relative stability. Perhaps you can't roll back the clock to the 1960s, but removing mortgage equity withdrawal from the equation would return houses to their basic function of providing shelter, and we could go back to less expensive housing for everyone.

If they're giving away free money….

So many people took their equity and spent it just because they could. If you believe house prices are going up forever, why not? It really is free money. Unfortunately, like most things in life that sound too good to be true, the money isn't really free. It's debt.

The owner of today's featured property paid $600,000 for this condo glorified apartment back on 2/20/2003. At the time they used a $480,000 first mortgage and a $120,000 down payment.

On 4/14/2006 he refinanced with a $617,500 first mortgage and withdrew his down payment and an additional $17,500.

That last refinance is exactly the kind of transaction I believe should simply be prohibited.

If this guy had not borrowed and spent his home, (1) he would likely still be making payments on the $480,000 mortgage, (2) this house wouldn't be for sale, and (3) neither would the millions like it where the borrowers are underwater due to their reckless mortgage equity withdrawal.

Foreclosure Record

Recording Date: 04/07/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/04/2009

Document Type: Notice of Default

Texas's real estate market did not bubble, and although there has been some weakness due to the economy, their housing market held up well because they didn't have the cash out refinancing like we did here in California.

Irvine Home Address … 28 VALLEY Vw 22 Irvine, CA 92612

Resale Home Price … $689,000

Home Purchase Price … $600,000

Home Purchase Date …. 2/20/03

Net Gain (Loss) ………. $47,660

Percent Change ………. 7.9%

Annual Appreciation … 1.7%

Cost of Ownership

————————————————-

$689,000 ………. Asking Price

$137,800 ………. 20% Down Conventional

4.25% …………… Mortgage Interest Rate

$551,200 ………. 30-Year Mortgage

$130,737 ………. Income Requirement

$2,712 ………. Monthly Mortgage Payment

$597 ………. Property Tax

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

$115 ………. Homeowners Insurance

$450 ………. Homeowners Association Fees

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

$3,874 ………. Monthly Cash Outlays

-$446 ………. Tax Savings (% of Interest and Property Tax)

-$759 ………. Equity Hidden in Payment

$211 ………. Lost Income to Down Payment (net of taxes)

$86 ………. Maintenance and Replacement Reserves

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

$2,965 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,890 ………. Furnishing and Move In @1%

$6,890 ………. Closing Costs @1%

$5,512 ………… Interest Points @1% of Loan

$137,800 ………. Down Payment

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

$157,092 ………. Total Cash Costs

$45,400 ………… Emergency Cash Reserves

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

$202,492 ………. Total Savings Needed

Property Details for 28 VALLEY Vw 22 Irvine, CA 92612

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 3022

$228/SF

Lot Size: –

Property Type: Residential, Condominium

Style: 3+ Levels, Other

View: City Lights, City, Hills, Mountain, Park/Green Belt, Tree Top, Trees/Woods, Yes

Year Built: 1978

Community: Turtle Rock

County: Orange

MLS#: S625023

Source: SoCalMLS

Status: Active

——————————————————————————

MAJOR PRICE REDUCTION. THOUSANDS BELOW APPRAISED VALUE. This turtle Rock home is highly upgraded and remodeled throughout. Including high-end Hardwood floors, wooden staircase railings, Wood floors in the kitchen, tile counter tops, and see-through glass kitchen cabinets. Master Bedroom has a walk-in closet and a large balcony with a view of the city. get a beautiful city lights view along with the Disneyland fireworks, on clear nights. French Doors lead to the living room balcony and Patio. The Patio is a Green Paradise with Custom Tile flooring and enclosed by Glass and an outdoor Firepit so you can enjoy the peace and quiet except for the sound of the birds and rustling trees. Two of the smaller bedrooms have been turned into one large bedroom. The storage in the garage has been turned into a Relaxation/Meditation room. This Quality in the upgrades of this home truly excels over your typical Turtle Rock Vista home. quick escrow needed approved short sale. this is a DEAL. don't miss it

Will the housing market bottom in Irvine in 2011? What about nationally? Today's post is a review of the current conditions favoring a housing market bottom this year.

Irvine Home Address … 25 RIDGEVIEW Irvine, CA 92603

Resale Home Price …… $3,999,000

Little darling

It's been a long, cold, lonely winter

Little darling

It feels like years since it's been here

Here comes the sun

Here comes the sun, and I say

It's alright

The Beatles — Here Comes the Sun

Are we at the dawn of a new bull market in residential real estate? Is the bottom close at hand? The double dip recently became official, both nationally and in Irvine (see below), so perhaps it is premature to call the bottom just yet. The current trend is decidedly down. The price plot intersects the bottom right corner of the two-year chart reflecting the worst possible market condition.

It always looks very dark at the bottom, and after a little more weakness, we should see the seasonal pattern take over and the first of many seasonal rallies will mark the bottoming of prices in the $300/SF to $360SF range over the next three years, perhaps five. This next bottom may not be our last. If interest rates remain low while jobs and incomes recover, prices may bottom this spring. However, if interest rates begin a multi-year or multi-decade climb, higher financing costs will be a constant market headwind.

As for the Irvine housing market, in my Predictions for 2011, I stated the following:

Basically, my outlook for 2011 is unchanged from 2010. (1) Inventory will go up. (2) Properties selling at or below rental parity will be the norm. (3) Sales volumes will increase. (4) Prices in Irvine will fall 2% to 5% in 2011.

Whatever the result, the leg down in pricing from the double-dip will be the last move down in this market cycle. The housing market will bottom at different times in different market tiers. I think the biggest discounts will be at the high end going forward. The lowest tier of the housing market may have already hit bottom. If not, it will bottom first. With low end support producing the first wave of move-up equity buyers, the slow grinding declines of higher price points can finally cease, perhaps in 2014. During the next three years, expect a range-bound housing market with a slightly lower bias.

Why 2011 May Be the End of the Housing Crash

FEBRUARY 27, 2011 — By SIMON CONSTABLE

There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop.

We might have good news? The bad news could stop? There is a man who is hedging his predictions before he even makes them.

Either way, it will be welcome relief for current homeowners as well as for potential real-estate investors. Reasons to be optimistic have been sadly lacking since the housing bubble burst in 2006.

It may be a welcome relief to some, but higher house prices are not a relief to future buyers. I guess they don't count.

For sure, last week we learned the widely watched S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline. The index tracks 20 major markets.

But that figure belies real reasons to be optimistic, according to some experts. If they are right, it might make sense to jump into real estate. The trick is avoiding getting burned again, and it doesn't necessarily mean owning a home.

First, let's recap the economic signs a bottom is close.

Houses Are a Good Deal

Housing is the most affordable it has been in decades, according to analysts at Moody's Analytics. They don't just look at house prices. They also look at incomes.

Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. Prices usually average close to two years' pay, although that varies nationally.

When a market is at the bottom, despair is widespread. The homebuilders show this classic signal. They rate affordability an A+ while volumes and inventory earn Fs. Builder sentiment indicators are at historic lows. That is the dynamic at the market bottom.

At the peak, midway through the last decade, a home in Los Angeles cost the equivalent of 4.5 years' pay. The average price has since fallen to just over two years' income now. That's well below its pre-bubble average of 2.6 years. This means average Los Angeles homes are cheaper in “real terms” than they were typically during the period 1989 through 2003.

The opposite is true around the Washington beltway, where it will take 26 months of pay to buy a home, versus the historical norm of 22 months.

The opposite is true here in Irvine as well, but affordability is improving as evidenced by the daily posts where nicer and nicer properties are starting to appear at rental parity.

In the end, it will be affordability that will drive people to buy homes.

“Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own,” says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.

I have stated repeatedly for four years that a bottom is formed when it is cheaper to own than to rent. Once that condition is in place, then supply and demand issues predominate. For instance, affordability is not the problem in Las Vegas. Prices are 30% to 40% below their historic relationship between the cost of rental and the cost of ownership, yet there is little chance of appreciation until the overhang of supply is processed.

It is definitely bullish. But what about timing?

“Housing prices will probably bottom in 2011,” says Scott Simon, a managing director at money-management firm Pimco in Newport Beach, Calif. He foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.

Mr. Simon says prices might dip another 5%. Still, in the scheme of things, that's small. Consider this: In some markets, home prices have fallen by half or more since 2006.

For instance, in once-hot Miami you can snap up an average house for under $166,000, according to recent data from the National Association of Realtors. That's down from $371,000 in 2006. Another 5% drop would take it to $158,000.

Many of the properties I look at each day in Las Vegas have already declined 70% from the peak. Another 5% is a rounding error compared to the decline that already occurred. If the property is being purchased at a significant discount to rental parity, any temporary declines in value can be partially offset by the monthly savings.

Properties locally will likely decline another 5%, but this too is not so significant as to be a major reason for worry. The slow decline followed by a tepid rally will leave most buyers over the next few years unable to sell without losing money — which is a good reason not to buy.

With no savings over renting, there is no compelling reason to buy; however, with the likelihood of another 30% decline being remote, unlike four years ago, there is no compelling reason to rent either.

Investors Stepping Up

Here's another sign the market is nearing a bottom: Investors have started to buy up houses and condos, in some instances paying entirely in cash. That's a far cry from the heady bubble days when borrowed money seemed the key to riches. The bubble-era speculators who got burned tended to buy at the peak and borrowed heavily to do so. When the crash came, they quickly saw their wealth erased.

Take Miami again. Last year, more than half of all transactions were made entirely in cash, according to a recent report in The Wall Street Journal. That compares with 13% of deals in the last quarter of 2006, the height of the bubble. Similarly, in Phoenix 42% of sales in 2010 went to all-cash buyers, up threefold since 2008.

Cash buyers are required to take up the slack in areas where the indigenous population cannot qualify for loans. Sales volumes remain so low partly because unemployment is high, but partly because so many in the buyer pool now have bad credit and are unable to buy.

It's a sign that these investors are betting on a rebound. Investors buying at current prices are looking for deals, or so-called bottom fishing. They typically like to pay entirely in cash (or with a relatively small loan) to speed up transactions. That can be vital for an investor wishing to lock in a deal fast.

If this is a turn in the market, then it might make sense to go out and buy a home. But, warns Pimco's Mr. Simon, “buy in areas you really know.”

Plan to Stay Put

Buy and hold. While the good news is that the worst of the housing crash might be over, the bad news is that the fast gains of the glory days of 2005 and 2006 won't be back any time soon. So to cover the costs of buying and selling, and what could be a prolonged recovery, plan to own for more than 10 years, explains Jack Ablin, chief investment officer at Chicago-based Harris Bank.

Over the next several years, we will see many bear rally buyers price their homes at 6% more than they paid and pray that a greater fool comes along. It will be a property profile you will tire of seeing.

The plethora of semi-discretionary sellers holding out for purchase price plus commissions will create the downward stickiness usually associated with real estate markets. It will create an environment of low sales rates for many years to come as buyers cannot afford to pay the prices sellers require to sell.

The level of debt distress will be less in this new housing market. Many will still maximize their debts to play the Ponzi scheme, but they will be doing so with stable amortizing mortgages, hopefully with fixed rates.

Sellers have a high discretionary price because they don't want to take a loss. Therefore, transaction volume depends on how much demand can be generated at preset price points. If many people go back to work and earn large wages, then transaction volumes will pick up as buyers can meet the high asking prices. However, if unemployment lingers and wage growth is tepid, real estate prices and transaction volumes will remain depressed, and the market will take years to clear out.

Perhaps they will come up with some innovative loan programs….

Also remember that borrowing money to buy a house can still be risky. If you pay for a $100,000 property with $20,000 cash and borrow the rest, a dip in the value of $20,000 would leave you with zero equity. On top of that, you'd have to pay to maintain and repair the property, something not necessary when renting.

The flip-side of that transaction is to wait and save 20% and buy when prices are cheaper. That's what I told everyone to do four years ago. Now, I don't think prices will drop far enough to worry about or to wait for. Although, I don't think they will roaring upward any time soon either.

Home Buying Without a House

There are other ways to benefit from a real-estate rebound than directly buying a house. Such investments include stocks, mutual funds or exchange-traded funds. Unlike homes, which typically cost tens of thousands of dollars, these financial investments can be made in smaller amounts and typically are easy to sell.

Weiss Research's Mr. Larson says although new homes are oversupplied, home builders might benefit from a rebound as the situation rights itself.

Rather than pick individual stocks, he says, it probably makes sense for small investors to pick broader investments that hold many different stocks. In particular, he points to the SPDR S&P Homebuilders ETF (XHB), which tracks a basket of home-builder stocks.

Mr. Larson also highlights specialized mutual funds such as the Fidelity Select Construction & Housing fund (FSHOX), which tracks home builders as well as home-improvement retailers like Home Depot and Lowes that would also likely benefit from a housing recovery.

With homebuilding activity at historic lows, buying ETFs that will benefit from increased residential investment is a good value play depending on your timeframe.

Now, how about that elusive market bottom….

Peak Ponzi, big loss

Today's featured property was originally purchased on 12/22/2006 for $3,953,500. The owner used a $2,912,449 Option ARM!

Now think about this: they aren't giving out $2,912,449 Option ARM loans anymore. The number of people who are willing and able to qualify to take on that kind of debt are few and far between. That's why the high end pricing must come down.

The owner also used a $250,000 HELOC and put down $791,051. That's a lot of money to walk away from.

Foreclosure Record

Recording Date: 06/05/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/27/2008

Document Type: Notice of Default

The bank took this property back on 1/22/2009 for $3,206,666 where it remained in shadow inventory — you know, that inventory everyone denies is there. Now it is for sale, and the bank honestly believes they will get peak pricing. Perhaps they will underwrite a new option ARM with a 1% teaser rate? It's the only way they will get their price.

Irvine Home Address … 25 RIDGEVIEW Irvine, CA 92603

Resale Home Price … $3,999,000

Home Purchase Price … $3,206,000

Home Purchase Date …. 1/22/09

Net Gain (Loss) ………. $553,060

Percent Change ………. 17.3%

Annual Appreciation … 10.2%

Cost of Ownership

————————————————-

$3,999,000 ………. Asking Price

$799,800 ………. 20% Down Conventional

4.25% …………… Mortgage Interest Rate

$3,199,200 ………. 30-Year Mortgage

$758,803 ………. Income Requirement

$15,738 ………. Monthly Mortgage Payment

$3466 ………. Property Tax

$585 ………. Special Taxes and Levies (Mello Roos)

$667 ………. Homeowners Insurance

$495 ………. Homeowners Association Fees

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

$20,950 ………. Monthly Cash Outlays

-$1962 ………. Tax Savings (% of Interest and Property Tax)

-$4408 ………. Equity Hidden in Payment

$1222 ………. Lost Income to Down Payment (net of taxes)

$500 ………. Maintenance and Replacement Reserves

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

$16,303 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$39,990 ………. Furnishing and Move In @1%

$39,990 ………. Closing Costs @1%

$31,992 ………… Interest Points @1% of Loan

$799,800 ………. Down Payment

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

$911,772 ………. Total Cash Costs

$249,900 ………… Emergency Cash Reserves

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

$1,161,672 ………. Total Savings Needed

Property Details for 25 RIDGEVIEW Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 6

Sq. Ft.: 6055

$660/SF

Lot Size: 0.53 Acres

Property Type: Residential, Single Family

Style: Two Level, Mediterranean

View: Bay, City Lights, City, Coastline, Mountain, Ocean, Panoramic

Year Built: 2006

Community: Turtle Ridge

County: Orange

MLS#: S526948

Source: SoCalMLS

Status: Active

——————————————————————————

At the very top of Turte Ridge, this is the ONLY Plan 3 that's hit the market and worth the wait. Highly sought after, this property is the largest of the LACima plan homes, with over 6,055 of living space on a huge lot at over 23,000 square feet at the end of a very quiet cul-de-sac. Absolutely no view obstructions. You can see all the way from the ocean to the Saddleback mountains with no roofs! Upgrades throughout the interior including faux wall painting, additional fireplaces and highly upgraded bathrooms. Wait till you see the view from the master bedroom!! This home is priced to sell.