A billion here a billion there, and before you know it, the market losses add up to a lot of money.

Irvine Home Address … 2305 APRICOT Dr 2305 Irvine, CA 92618

Resale Home Price …… $244,900

Dad believed what Maggie said

Get a mortgage buy a home

So dad took out a great big loan

For a while there we were chuffed

Now the market has collapsed

And we're absolutely stuffed

Our house, in the middle of a slump

Our house, no one wants to buy this dump

Dad is desperate to sell

But now our homes worth even less

Than a pension from Maxwell

Our living room's a mess

Full of magistrates and bailiffs

Trying to repossess

Our house, in the middle of the boom

Our house, it was worth a small fortune

Our house, left us in a dreadful state

Our house, why the hell'd we decorate

We really caught a cold

Nowhere we can go to now

All the council houses have been sold

Our dads taken some stick

He's still voting Tory though

By God he must be thick

Our house, didn't work out like we planned

Our house, prices dropped by fifty grand

Our house, threw us out and changed the locks

Our house, it is now a cardboard box

Spitting Images — Our House

The headline about cratering home values is catchy, but what are we really talking about here? The underlying value of houses hasn't changed much, but the trading price of properties went way up and now way back down in a classic asset price bubble. The $1.7 trillion dollars in "value" was imaginary. If we had never had a housing bubble, we would not have had a crash, and nobody would believe in their own minds that they "lost" so much value in their property.

For the people who did not abuse their HELOC, buy at the peak with a toxic mortgage, or lose their job during the recession — let's hope this is still the majority — those people did not "lose" anything other than their imaginary wealth. For those that made the mistakes of the bubble and those who were swept up in the recession in the bubble's wake, those people lost their houses. Losing imaginary wealth is not as painful as losing the family home.

Zillow: Home values crater by $1.7 trillion in 2010

by KERRY CURRY — Thursday, December 9th, 2010, 10:19 am

U.S. homes are expected to lose more than $1.7 trillion in value this year, 63% more than the estimated $1 trillion lost in 2009, according to Zillow.

The decline brings the total value lost since the market peaked in June 2006 to $9 trillion. By comparison, from 2001 to the end of September 2010, the war in Iraq has cost $750.8 billion, according to a September report by the Congressional Research Service.

The second half of the year was more punishing on values. From January to June, the housing market lost $680 billion. From June to December, Zillow projects residential home value losses will top $1 trillion.

Less than one-fourth, or 31, of the 129 markets tracked by Zillow showed gains in total home values during 2010. Among those were the Boston metropolitan statistical area which gained $10.8 billion in value, and the San Diego MSA, which gained $10.2 billion.

“Government interventions like the homebuyer tax credit helped buoy the market during the second half of 2009 and the first half of 2010, but we saw a renewed downturn in the last half of this year. It's a testament to the nearly irresistible force of the overall market correction that government incentives can only temporarily hold back the tide, and that the market will ultimately find its natural equilibrium of supply and demand,” said Zillow Chief Economist Dr. Stan Humphries. (Click to expand.)

When we bounced off the false bottom in 2009, the market gained strength through the expiration of the government tax credits. The second half of 2010 saw house prices roll over and begin another leg down. The downtrend is expected to continue throughout 2011.

Fitch sees 10% drop in home prices in 2011, negative outlook for MBS

by JASON PHILYAW — Thursday, December 9th, 2010, 12:37 pm

Fitch Ratings expects another 10% decline in home prices in 2011, as the supply of distressed properties continues to weigh down the housing market.

Accordingly, analysts maintained the agency's negative outlook for the residential mortgage-backed securities space and said 53% of all investment-grade RMBS rated by Fitch have a negative outlook. The number of downgrades will once again outpace upgrades in RMBS, but not as severely as the past few years, according to analysts.

Fitch said the robo-signing debacle plaguing loan servicers, loan buyback pressures hitting mortgage lenders and a handful of other macroeconomic issues cause analysts to "remain cautious" regarding a sustainable stabilization for the market.

"Key factors that will continue to weight on performance include negative equity for recent vintage collateral, lower loan modification volume, and slightly higher loss severities," analysts said.

Fitch also said the market for commercial mortgage-backed securities should improve next year, as property market fundamentals have turned the corner. Still loan performance within the CMBS space will begin to diverge from the fundamentals next year because of asset-specific tenant rollover and high leverage, according to analysts.

Analysts said vacancies have peaked in many of the largest metropolitan areas of the country while rents have reached bottom indicating some stabilization. But the lack of construction financing over the past three years skews those gains, meaning "it will be some time before income growth is seen."

We discussed the market's fate in High prices, low demand, and large supply means lower prices ahead. Lower prices is the consensus opinion among economists outside of the NAr.

No money in. Much money out.

Many Ponzi borrowers simply ripped off the banks. Of course, lenders asked for this treatment when they gave people property with no money down and then gave them the appreciation as the values increased. It is difficult to resist the offer when lenders are willing to give you property and lots of money if you keep it.

The owner of todays featured property probably didn't set out to game the system. In fact, she probably still believes there is nothing wrong with what she did or what the bank did, particularly since the rest of us are picking up the tab. There is no reason to believe she will not do this again if given the chance.

• This property was purchased on 5/11/2001 for $174,400. The owner used a $165,850 first mortgage, a $8,550 second mortgage, and a $0 down payment. Basically, she was given a free house by the bank.
• Since the free house was not good enough, she then refinanced with a $207,200 first mortgage on 9/24/2003.
• On 6/11/2004 she refinanced again with a $244,600 first mortgage.
• On 11/24/2004 she refinanced with a $323,200 first mortgage.
• On 11/8/2005 she obtained a $30,500 HELOC.
• On 10/27/2006 she obtained another $30,500 HELOC.
• On 7/3/2007 she refinanced with a $373,000 first mortgage.
• On 2/14/2008 she got a stand-alone second for $10,000.
• Total property debt is $383,000.
• Total mortgage equity withdrawal is $208,600.
• She quit paying in early 2009, and she got to squat for about 18 months before the bank finally took the property back.

Foreclosure Record

Recording Date: 08/19/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/18/2009

Document Type: Notice of Default

BTW, you know your house is a glorified apartment when there is a number on your front door….

Irvine Home Address … 2305 APRICOT Dr 2305 Irvine, CA 92618

Resale Home Price … $244,900

Home Purchase Price … $174,400

Home Purchase Date …. 5/11/2001

Net Gain (Loss) ………. $55,806

Percent Change ………. 32.0%

Annual Appreciation … 3.5%

Cost of Ownership

————————————————-

$244,900 ………. Asking Price

$8,572 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$236,329 ………. 30-Year Mortgage

$49,048 ………. Income Requirement

$1,227 ………. Monthly Mortgage Payment

$212 ………. Property Tax

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

$41 ………. Homeowners Insurance

$372 ………. Homeowners Association Fees

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

$1,852 ………. Monthly Cash Outlays

-$114 ………. Tax Savings (% of Interest and Property Tax)

-$300 ………. Equity Hidden in Payment

$15 ………. Lost Income to Down Payment (net of taxes)

$31 ………. Maintenance and Replacement Reserves

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

$1,485 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,449 ………. Furnishing and Move In @1%

$2,449 ………. Closing Costs @1%

$2,363 ………… Interest Points @1% of Loan

$8,572 ………. Down Payment

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

$15,833 ………. Total Cash Costs

$22,700 ………… Emergency Cash Reserves

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

$38,533 ………. Total Savings Needed

Property Details for 2305 APRICOT Dr 2305 Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 910 sq ft

($269 / sq ft)

Lot Size: n/a

Year Built: 1979

Days on Market: 26

Listing Updated: 40491

MLS Number: S638534

Property Type: Condominium, Residential

Community: Orangetree

Tract: Sc

——————————————————————————

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

Great Value! Top Floor Unit. Spacious Condo two private balconies. Plenty of natural light. Enjoy high ceilings & fireplace In Living Room. Nicely sized bedrooms. Enjoy reading on your private balcony of your master bedroom. Master has Mirrored Closets & Double Sinks. Formal Dining Room & Breakfast Bar Living Room. Inside Laundry Area. Extra storage in balcony closet. Must See!

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Spain managed to inflate a nastier housing bubble than the US did. Now Spain is showing US banks how to keep a housing bubble inflated… For now.

Irvine Home Address … 184 ALMADOR Irvine, CA 92614

Resale Home Price …… $399,000

I was a player when I was little

But now I'm bigger, I'm bigger

A heart breaker when I was little

But I'm bigger {I'm bigger}, I'm bigger

And all the haters, I swear

They look so small from up here

Cause we're bigger, our love's bigger

I'm bigger and your bigger

Justin Bieber — Bigger

In the United States, we inflated a massive housing bubble. In Spain, its even bigger. Everything we did, they did with gusto. Their solutions for the problem have been similarly extreme.

For as bad as our problems are here in the United States, we did not create a housing bubble as bad as Spain's. How Spain deals with this issue is instructional for our handling here in the United States.

Bankers used loans to inflated house prices, and now that prices are crashing, the debt greatly exceeds the value of the real estate used to secure it.

Bankers believe they can re-inflate the housing bubble and push home values back above the level of debt. That isn't going to happen. The mis-allocation of resources caused by the bubble, the resulting unemployment in the aftermath, and the fact that the level of debt isn't supportable by incomes are forces that will put more inventory on the market preventing house prices from rising until the debt is purged.

Here in America, we have embarked on a policy of amend-extend-pretend. Government regulators are looking the other way while bankers wankers live in a fantasy world where borrowers who couldn't afford the debt when it was issued suddenly go back to work and can afford to diligently pay off the loans bankers foolishly underwrote.

Prices will continue to crash in Spain just as they will continue lower here.

The Inevitability of a Spanish Property Crash

By Tom Harris — 8 Dec 2010

The Inevitability of a Spanish Property Crash, article supplied by Fairhomes (Gibraltar) Limited

Despite the best efforts of the European Financial Stability Facility it was evident that even before the ink had dried on the Irish bail-out agreement that the contagion could not be contained.

Immediately nervous investors began looking to other Eurozone countries, such as Belgium, Italy, Portugal and especially Spain fearing the same issues that dragged Ireland down will resurface elsewhere. After all it was not the state’s inability to borrow (Ireland is well funded until well into 2011) but the inability of Irish banks to refinance their borrowing in the wholesale markets that triggered the bail out.

But could Spain’s banks face a similar problem?

At present the response from Spain seems to be bullish with the country’s Economics Minister, Elena Salgado telling CNN that the eurozone’s fourth biggest economy has “absolutely no need” for an Irish style rescue. This was then followed by the extremely brave statement of Snr Zapatero that speculators betting short against Spain would “lose their shirt” and that the government is already doing enough to avert a debt crisis.

Politicians and bankers lie in their public statements whenever they fear the market's reaction.

[youtube]KIgGix2jmSw[/youtube]

Whilst this may seem like an admirable attempt to re-assure and calm the markets it ignores the hard facts that underlie the current situation. Barclays Capital reckons that combined, the Spanish sovereign and Spanish banks need to raise €73bn in the first four months of 2011, some half of it in April 2011 alone.

These figures in isolation don’t seem to point to bail-out territory but when you take into account the fact that Spanish bond yields are at their highest in 8 years it’s clear that more than words are required to attract investors. The speed of the increase in yields from 4% to 5.2% in a month is a dramatic shift for bond markets which usually move in small doses. It means Spain’s bonds are slumping in value and holders are dumping them as they’re worried they won’t get all their money back.

So what is it that is spooking these investors? The country has made big efforts to scale back spending by central government and the national debt this year will be 60% of GDP – not great but not as bad as Ireland’s near 100%. But as Victor Mallet points out in the FT there’s a lack of clarity about the figures as despite the “strict limits” the debts of the country’s 17 autonomous regions (104.8 bn euros) account for over half of the public sector deficit which makes it much more difficult for the central government to impose reforms. “Spanish sovereign risk is increasingly at the sub-national level” says Nicholas Spiro of Spiro Sovereign Strategy and several regions including Catalonia and Madrid have such financial difficulties that a recovery seems unlikely given the economic stagnation and sluggish growth forecast for Spain.

It’s also in the regions where the problems for the banking systems lie. Spain experienced a huge property bubble, accompanied by a huge rise in private sector debt, and fell into recession when that bubble burst. But whilst the larger national banks such as Santander were well capitalised (and even in a position to acquire troubled foreign firms), in the regions the cajas (regional savings banks) have accumulated vast exposure to the construction and development sector. When the big two banks (BBVA and Santander) put the brakes on in 2006-07, the cajas continued lending more keenly, tapping wholesale debt markets to fund themselves. That alone makes them higher risk. But the savings banks also supplied about half of the €318 billion borrowed by Spain’s property developers. These loans now represent about a fifth of the cajas’ assets, according to Santiago López Díaz, an analyst at Credit Suisse. They are deteriorating fast.

We witnessed a similar phenomenon here in the United States. The primary lenders for acquisition, development, and construction loans were smaller regional banks. I sat in on a meeting in 2009 with representatives of one Midwestern bank that had more than 20 land projects in Southern California. I guess the returns were good when the developers thought it was in their best interest to continue to make payments. Once the land market imploded, land assets declined about 80% in value, and these smaller regional banks ended up with much REO.

So now the cajas are undoubtedly facing the grimmest outlook for sometime in what is already an extremely volatile situation. The results of the stress tests earlier in 2010 were supposed to have calmed fears but investigation revealed that much of the supposed liquidity in the regional banks was due simply to the over-valuation of much of their repossessed housing stock. A recent survey by the Economist estimated that Spanish property is still over-valued by 47.6% which suggests that a painful correction is on the way.

We have the same accounting slight-of-hand here in the US. We allow bankers to use bullish market assumptions concerning the underlying real estate to project loan loss reserves and unrealistically low levels. Banks Refuse to Recognize HELOC and Second Mortgage Losses. "Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans." Realistically, lenders will lose most of the money they have tied up in these bad loans. That isn't how it is reflected on their balance sheets.

Indeed events of the last few days have only made this more likely. New accounting rules by the Bank of Spain will force lenders to dump depreciating assets, according to Bloomberg News. Under the changes, banks must now make provision for bad loans after just 12 months rather than the current 72 months, which will provide a strong incentive for lenders to sell properties quicker. The rules also force banks to value properties more realistically, which gives them a further incentive to sell.

Interesting that Spanish bank regulators are making the banks recognize their losses whereas here in the United States, regulators are doing everything to prevent banks from recognizing their losses.

Pisos Embargados de Bancos estimates that there are around 100,000 bank owned properties currently on the market but they estimate that this figure will rise to 300,000 next year.

Obviously this change in provisions has been designed to force banks to raise capital through sales of their property assets which would also provide a boost to domestic demand. The hope being that this income will negate the need for extensive bail-outs. However the release of this vast stock of property onto the market will drive prices down sharply and Fernando Rodriguez from Madrid-based property adviser RR de Acuna & Ass predicts a further 20% fall next year.

The danger here is that the property stock valuation is the only thing that gives the balance sheets of the cajas any respectability. Decrease these assets by 20% and many will be looking extremely vulnerable – and with no chance of borrowing on a nervous bond market the only solution will be to seek European aid.

The central bankers for the Euro aren't giving Spanish banks 0% loans like our Federal Reserve is favoring our banks. IMO, that is a good thing. Spain will see a dramatic house price crash, but then the economy will recover and the mis-allocated capital is released from real estate and allowed to be put to use in more productive assets.

Until now the response from the banks has been distinctly Canute-like, vaingloriously attempting to turn back the tide of falling prices by using their market power to artificially inflate prices.

The method which the banks use to have higher than open market price accepted as the appraisal benchmark for valuations of their property assets, starts with how the banks dispose of the homes they are currently repossessing. The banks are using subsidised mortgages which typically also include 100% mortgages, non-payment windows, extended terms (even up to 50 years) and interest free options to attract buyers.

Perhaps we should bring back 100% financing, Option ARMs, stated-income loans, ninja loans, interest-only loans, and the whole variety of really stupid lending ideas thoroughly discredited during the housing bubble. We get close to that with FHA loans, but we haven't resorted to the recklessness of the Spanish banks.

These mortgage deals are being granted at a subsidised interest rate totally at odds with market rates being offered for deposits. Typically, these subsidised mortgage rates are offered at just 0.3-0.5% over Euribor, whilst deposit rates offered by the same financial institutions are currently around 4%.

How do you sustain that policy without going broke?

The purpose of these subsidised mortgages is to encourage the purchase of bank repossessed homes at valuations that are higher than current open market prices. Indeed they are available only in conjunction with repossessed homes held by the bank offering the mortgage, whereas privately sold homes in the open market must apply through the usual channels for normal mortgage deals, which are typically 65% of value, 25 years and normal market interest rates.

Anecdotal examples show properties with a subsidised mortgage are between 25-40% above the open market price.

We tried that on a smaller scale when the Federal Reserve began buying mortgage-backed securities to drive down interest rates. The main reason interest rates have gotten so low is because lenders would far rather refinance their bad debt at very low interest rates that they would like to take a write down of original capital. Spain takes this idea to its extreme.

In October 2010 in El Rosario, Marbella, a 2000m2, frontline golf villa was sold by CAM Bank which had an asking price on their website of 1.3 million euro but were, in reality, looking for offers of 750,000 euros – however the final sales price was 601,000 euros – a difference of 54%. Another example in Santa Maria Village, Elviria was advertised by a bank at 269,500 euros but sold at 188,400 euros – a difference of 31.1%.

In effect the valuations of the bank’s property assets are supported by the banks own sales data of their repossessed homes, which are artificially inflated prices by the provision of subsidised mortgages. The result is a self perpetuating cycle where property values are kept high which in turn supports the bank’s approach to provisions against non-performing loans being required only at a low level.

We are doing the same here. Low interest rates supports bloated mortgages which in turn supports higher home prices than a natural market would support.

But with 1.4 million homes to sell this response looks remarkably inadequate, indeed many investors point to this practice as being one of the main reasons it’s impossible to judge the real price of property in Spain today – as it over-inflates the official figures so the real price of Spanish property is never reliably reported.

2011 may be the year we finally find out.

We may find out here what prices are supposed to be in 2011. The Federal Reserve is no longer buying mortgage debt and the government tax subsidies have expired. The government is no longer directly supporting house prices; although, it can be argued that the explicit backing of mortgage debt through the FHA and the GSEs is a market support. With the props removed, the market will wend its way toward a natural equilibrium. Most likely that means falling prices in 2011.

No equity left behind

Since the banks were giving out free money, most homeowners (at least the ones who have tried to sell houses in Irvine since 2006) took the free money as it became available and spent it. Their goal seemed to be to make sure no equity was left behind.

• Today's featured property was purchased for $363,000 on 3/13/2003. The owner used a $286,000 first mortgage and a $77,000 down payment.
• On 6/7/2004 he obtained a stand-alone second for $90,000 and withdrew his down payment plus another $13,000.
• On 9/20/2004 he refinanced with a $384,000 first mortgage.
• On 8/30/2006 he obtained a $10,000 HELOC.
• On 10/17/2006 he got a $24,900 HELOC.
• On 1/8/2007 he refinanced with a $455,000 Option ARM first mortgage.
• Total mortgage equity withdrawal is $169,000 plus negative amortization.
• He quit paying early in 2010.

Foreclosure Record

Recording Date: 08/20/2010

Document Type: Notice of Default

Irvine Home Address … 184 ALMADOR Irvine, CA 92614

Resale Home Price … $399,000

Home Purchase Price … $363,000

Home Purchase Date …. 3/13/2003

Net Gain (Loss) ………. $12,060

Percent Change ………. 3.3%

Annual Appreciation … 1.2%

Cost of Ownership

————————————————-

$399,000 ………. Asking Price

$13,965 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$385,035 ………. 30-Year Mortgage

$79,911 ………. Income Requirement

$1,999 ………. Monthly Mortgage Payment

$346 ………. Property Tax

$50 ………. Special Taxes and Levies (Mello Roos)

$67 ………. Homeowners Insurance

$280 ………. Homeowners Association Fees

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

$2,742 ………. Monthly Cash Outlays

-$325 ………. Tax Savings (% of Interest and Property Tax)

-$488 ………. Equity Hidden in Payment

$25 ………. Lost Income to Down Payment (net of taxes)

$50 ………. Maintenance and Replacement Reserves

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

$2,003 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,990 ………. Furnishing and Move In @1%

$3,990 ………. Closing Costs @1%

$3,850 ………… Interest Points @1% of Loan

$13,965 ………. Down Payment

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

$25,795 ………. Total Cash Costs

$30,700 ………… Emergency Cash Reserves

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

$56,495 ………. Total Savings Needed

Property Details for 184 ALMADOR Irvine, CA 92614

——————————————————————————

Beds: 2

Baths: 2 full 1 part baths

Home size: 1,307 sq ft

($305 / sq ft)

Lot Size: n/a

Year Built: 1989

Days on Market: 19

Listing Updated: 40512

MLS Number: S639158

Property Type: Condominium, Residential

Community: Westpark

Tract: Lp

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Elegant Westpark home with prime private location featuring two master suites, two and one-half baths, two-car attached garage with built-in storage cabinets, and spacious yard! Fabulous floor plan with soaring vaulted ceilings, cozy fireplace, and convenient inside laundry. Highly upgraded kitchen includes stainless steel dishwasher and oven/range, built-in microwave, and dry-foods pantry. Upgrades include custom tile floors, custom paint, and custom window treatments. Dual master suites each with their own master bath. Enjoy Las Palmas resort style amenities and Irvine Schools!

Mortgage rates have been heading higher for the last month. Have we reached the bottom of rates for this cycle?

Irvine Home Address … 37 WEEPINGWOOD Irvine, CA 92614

Resale Home Price …… $475,000

All the way up

All the way down

Never look back

It's time to breakout

I want it my way

That's right

It's a temporary life

It's a ride

That takes you all the way up

All the way down

Never look back it's time to breakout

Emily Osmet — All The Way Up

A couple of weeks ago, I noted that Bond Market Selloff Makes Mortgage Rates Rise. Many expected the knee-jerk market reaction to be reversed and the downward trend in interest rates to resume. It doesn't appear to be working out that way. Have interest rates bottomed for this cycle?

Zillow: 30-year mortgage rates hit five-month high

Christine Ricciardi — Tuesday, December 7th, 2010, 3:30 pm

The 30-year, fixed-rate mortgage spiked to the highest point in five months, up 20 basis points to 4.5% from the week prior, according to the Zillow Mortgage Marketplace weekly update. This is the second consecutive week the rate increased.

Zillow said the current 15-year, fixed-average rate is 3.89% and the rate for a 5-1 adjustable-rate mortgage is 3.1%. That type of mortgage maintains a steady rate for five years and then is adjusted annually thereafter.

Regionally, 30-year rates vary, but the majority of states witnessed a dramatic inflation. Massachusetts' average rate spiked to 4.61% from 4.3% prior. Rates in California also increased substantially to 4.47% from 4.32% the previous week, while New York's rate increased to 4.53% from 4.31%, and Texas saw its average rate rise to 4.44% from 4.24%.

The current rate in Washington increased week-over-week to 4.5% from 4.24%, as did Illinois' rate, up to 4.4% from 4.23%. Rates in Florida are up close to the national average at 4.48% from 4.33%, and rates in Pensylvania rose to 4.43%.

Colorado's average rate for a 30-year FRM decreased one basis point to 4.47%.

Zillow bases its averages on real-time mortgage quotes from lenders registered with the company. The national average comes from thousands of daily quotes by anonymous borrowers through the Seattle-based company's website.

Write to Christine Ricciardi.

About a month ago, I wrote Low Interest Rates Will Not Create Demand. Each week as I write posts, I check the current interest rate to calculate the total cost of ownership. If you look back through the archives, you can see what the bankrate.com published interest rate was for that week. A month ago it was 4.29%. The low was 4.21%. Last Friday, the rate was 4.71%. That represents a 12% increase in borrowing costs in a little over a month. Since the mortgage payment is by far the biggest cost of ownership, rising interest rates take their toll on afffordability. That will also put pressure on prices.

Don't worry because…

Mortgage Rates Are All in Your Head

By: Diana Olick — Monday, 6 Dec 2010

It's like home buyers today are suffering from post-traumatic stress disorder.

The housing crash, foreclosure crisis and banking scandals have all combined to make buyers more sensitive than ever before.

That's why the slightest fluctuation in mortgage interest rates have huge emotional power today.

That and the fact that realtors will use low interest rates as a scare tactic. From Urgency Versus Reality: realtors Win, Buyers Lose:

realtor Reason Du Jour

The marketing presentation I attended had many examples of how to manipulate the current situation to create urgency when none exists. One of these pertains to the inevitability of rising interest rates, and it goes something like this:

If a buyer is looking at a $400,000 home, very low interest rates make the payment affordable, but when interest rates go up, it will be harder and harder to finance that $400,000 home. In fact, if interest rates go up a full point, a buyer might lose as much as $100,000 in buying power; therefore, you should buy before interest rates go up.

Hmmm… I nearly raised my hand to ask a follow up question but then I contemplated who my audience was and what they understand about real estate markets and finance, I decided against it. I ask the question here:

OK, if I buy today, the buyer who wants to purchase the house from me in the future when I am ready to move may not be able to borrow as much money. Won't that make my house harder to sell, and might I have to lower the price — a great deal — like the $100,000 mentioned in the example? Isn't the fact that my take-out buyer is going to be much less leveraged working against me?

We all know the answer to those questions (Your Buyer’s Loan Terms), and that was when I had an epiphany: the realtor mind is unconcerned with reality, it is only concerned with urgency, and if urgency conflicts with reality, urgency wins, and buyers lose. Buyers are supposed to believe the realtor cares and that they are looking out for the buyer's best interest; beliefs wholly incompatible with a realtor Mind®™ that places urgency over honesty.

Back to the article.

"I think some people get a little fearful of what the higher payment might mean to them but they don’t' realize how minimal the difference might be," notes Eric Gates, President of Apex Home Loans in Rockville, MD.

In fact, Gates did a little math for me on the change in your monthly payment at different interest rates, if you buy a $200,000 home (just above the national median) with 20 percent down.

• 4.25%: $787.10
• 4.5%: $810.70
• 4.75%: $834.64
• 5.0%: $858.91

"Keep in mind that difference is mainly interest which is tax deductible. So, someone paying an extra $24 a month in interest who is in a 25% tax bracket is really only paying an extra $18 a month after the tax write off of the extra interest," Gates adds. Yes, cutting the mortgage interest deduction is currently being debated as a deficit-reducer, but the proposal is to reduce the cap from $1 million to $500,000, so it's not going to affect the buyers I'm using as an example here.

The fact is that we're talking less than $100 a month, for a full percentage point increase.

Wait just a minute. Early in 2009, I explored the impact of rising interest rates in 4.5% Mortgage Interest Rates?

Since most people finance to the maximum allowed by a lender to get the most expensive home they can acquire, the it doesn't matter if the payment differential is small, any change is going to impact the total amount of the loan. That is what impacts house prices.

As has been pointed out in the comments, the impact of rising interest rates will be felt most where affordability is a problem. Right now in Las Vegas, the low end is trading 30% to 50% below rental parity. If interest rates go up, current price levels are still very affordable. People do not need to reach for the starts to buy what they can rent. The same is true in areas that did not bubble and continue to enjoy relative affordability.

Contrast that to Orange County were the fringe of the market were prices are estaablished is pushed to the maximum limit of income affordability. In that circumstance, rising interest rates will reduce loan balances, and the weight of inventory will cause prices to fall to the new lower limit of affordability.

Obviously big cities or in-demand housing markets, where home prices are far higher than the national average, will see bigger jumps in their monthly payments, but if they're able to afford the higher priced home, the change in monthly payment would likely be comparable in its impact on their overall budget.

The problem is that people in high prices areas like Orange County cannot afford the higher priced home. They never could.

So why, then, do mortgage purchase applications fall every time rates go up slightly and the opposite when they go down??

The answer is that it is largely emotional. Home buyers seem to ignore what they can afford and focus instead on what they think they somehow deserve in today's badly beaten market.

"Instead of focusing on what's my payment going to be, they see that their friend got 4.25 and they want that same rate and 4.5 isn't 4.25 and they think 'that's not good enough'," says Gates, who has seen that happen more than once. Fear of unemployment also looms large, so buyers are much more careful with monthly payment calculations, even trying to make sure that if they are out of work temporarily they can still make the payments and not go into default.

People should not be focused on what their payment is going to be. That is part of what got us into this mess. Option ARMs made sky-high prices affordabie on a payment basis. Albeit temporarily.

So what do you think? Have we seen the bottom of the mortgage interest rate cycle, or will we see under 4% mortgage interest rates?

Take the free money. What could go wrong?

Borrowers took the free money offered to them by banks for the appreciation of thier house. Many thought, "what could go wrong?" Real estate always goes up, right? Who is to blame for borrower stupidity?

Many who want to see the banks come to ruin are portraying the borrowers as hapless victims of predatory lending. This assertion is only half true. Lenders did indeed induce borrowers to take on excessive debts. Lenders did not do this to profit from the foreclosure — those have been big losers — but to profit from the origination fees. The idea that borrowers are somehow blameless in this matter is the part that irritates me.

Borrowers knew it was a loan. They knew they were borrowing hundreds of thousands of dollars they would need to pay back. Many of them believed the house would pay it — or more accurately stated, the future buyer of thier house would pay it. But whatever foolish beliefs borrowers had, they were still responsible for taking out the loans. They borrowed all the equity from their houses and spent it. When people make such a foolish mistake, the consequences are foreclosure and bankruptcy. Life goes on.

The owners of today's featured property bought back in 1992. After 18 years of loan ownership, they lost their house in foreclosure due to their excessive borrowing. Do you think they will learn their lesson, or will they blame the banksters or the housing market gods? Human nature being what it is, some will take responsibility for their actions, but most will play the victim and blame someone else.

• This property was purchased on 5/29/1992 for $207,000. The owners mortgage information is not available, but it was likely a $165,600 first mortgage and a $41,400 down payment.
• On 10/15/1998 they took out a stand-alone second for $37,500.
• On 3/1/2002 they refinanced with a $252,000 first mortgage.
• On 7/1/2004 they refinanced with a $315,000 first mortgage.
• On 7/14/2006 they refinanced with a $400,000 first mortgage.
• On 11/13/2007 they refinanced with a $429,000 Option ARM.
• Total mortgage equity withdrawal is $263,400.
• Total squatting time was about 19 months.

  

Foreclosure Record

Recording Date: 11/13/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 06/25/2009

Document Type: Notice of Default

The property was purchased at auction on 10/29/2010 for $390,000. The flipper wasted little time getting the property on the market.

Irvine Home Address … 37 WEEPINGWOOD Irvine, CA 92614

Resale Home Price … $475,000

Home Purchase Price … $207,000

Home Purchase Date …. 5/29/1992

Net Gain (Loss) ………. $239,500

Percent Change ………. 115.7%

Annual Appreciation … 4.5%

Cost of Ownership

————————————————-

$475,000 ………. Asking Price

$16,625 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$458,375 ………. 30-Year Mortgage

$95,132 ………. Income Requirement

$2,380 ………. Monthly Mortgage Payment

$412 ………. Property Tax

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

$79 ………. Homeowners Insurance

$305 ………. Homeowners Association Fees

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

$3,176 ………. Monthly Cash Outlays

-$387 ………. Tax Savings (% of Interest and Property Tax)

-$581 ………. Equity Hidden in Payment

$30 ………. Lost Income to Down Payment (net of taxes)

$59 ………. Maintenance and Replacement Reserves

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

$2,297 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,750 ………. Furnishing and Move In @1%

$4,750 ………. Closing Costs @1%

$4,584 ………… Interest Points @1% of Loan

$16,625 ………. Down Payment

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

$30,709 ………. Total Cash Costs

$35,200 ………… Emergency Cash Reserves

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

$65,909 ………. Total Savings Needed

Property Details for 37 WEEPINGWOOD Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,585 sq ft

($300 / sq ft)

Lot Size: n/a

Year Built: 1981

Days on Market: 22

Listing Updated: 40511

MLS Number: S638763

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Pw

——————————————————————————

Complete Turnkey Property!!! Charming And Private End Unit With 3 Bedrooms, 2 1/2 Bathrooms, New Carpet And Paint, Granite Countertops, Hardwood Floors And A Serene Back Patio Setting.

The government doesn't need to subsidize cashflow investors. It simply needs to get out of their way.

Irvine Home Address … 77 ALBERTI AISLE 339 Irvine, CA 92614

Resale Home Price …… $269,000

How can you stand there and deny it

after all we have been through

How can you stand there and deny it

and make a fool out of you

Collapsing like houses of cards

and landing on splinters and glass

Wish I could fake it like you do

wish i could fake it just like you

How can you stand there and deny it

How can you stand there and deny it

Trust me now

Zeromancer — House of Cards

In its obsession with home ownership, the government has been ignoring the one group most needed to stabilize housing prices: cashflow investors. Several weeks ago, I asked the question Should Government Mortgage Subsidies Be Offered to Cashflow Investors? Most readers said no. Personally, I would like to see the government get entirely out of the housing market, but as long as they are determined to support prices, perhaps they should look for policies that will be more effective.

As Shadow Inventory Grows, Time for More Subsidy?

By: Diana Olick — Monday, 22 Nov 2010

As of the end of August, there were 2.1 million properties either in the foreclosure process or headed for foreclosure, according to CoreLogic.

It's come to be known as the "shadow inventory," because it will be coming to market soon, but it's not listed yet.

To put that in perspective, there are about 4.2 million properties (existing homes and new construction) currently, visibly on the market now. So add 50 percent more, and there's your true inventory.

Rather than look at the absolute numbers, we like to look at months supply, which is how many months, at the current sales pace, it would take to sell all these homes. Add the shadow and the visible supply, and figure it into the sales pace in August, and you're looking at a 23-month supply. Nearly two years. Six months worth of supply is generally considered "normal."

"The weak demand for housing is significantly increasing the risk of further price declines in the housing market," notes Mark Fleming, chief economist at CoreLogic.

Inventory is the key to predicting the future of home sales and prices. I've said this over and over. We know that there are investors out there looking to get into the market, and that's a good thing, especially since investors are almost exclusively all-cash these days. But there aren't enough investors to soak it all up, so we have to look to the demand side for regular, organic buyers.

Fannie Mae is doing everything it can to bring in these buyers, introducing a pilot program in Orlando, FL, Detroit, Mi and San Diego, CA that will allow real estate agents to submit offers online for foreclosed properties Fannie now owns and then track them through the sale. Fannie and Freddie are both taking back more and more properties, as their sales of said properties are actually declining slightly.

Other than that, government appears to be largely out of the housing subsidy business.

I've never been a fan of government getting too far into housing, because it inevitably results in doom and gloom when the subsidy expires.

The best solution does not require a subsidy. Merely eliminate the limit on the number of mortgages a cashflow investor may have, and count 75% of the rental income toward the payment. Eliminating the limit on the number of mortgages costs no money, and it allows those investors with expertise in obtaining and managing properties the ability to acquire more. My counting a portion of the rental income toward qualification, wherever the prices are low enough for cashflow investors to make a profit will quickly get bid up to the limit of available financing.

None of this costs the government anything, and the demand it creates is not artificial based on a financial subsidy that inflates prices. The GSEs are merely eliminating an artifical barrier they created. This demand would seek out the most downtrodden markets and put a floor beneath prices in those areas. Very little of that money would flow into inflated markets like Orange County because so few properties meet the criteria.

But here's the conundrum: Even as new loan delinquencies improve, they are improving slowly and are still far too elevated for comfort. On top of that, loan modifications are failing at an alarmingly high rate, which means ever more borrowers will go straight to foreclosure. Foreclosure inventories are still rising, as banks re-file and ramp up the process, which again means more inventory coming to market.

Perhaps it's time to look at a new government incentive, this time for those previously dreaded real estate investors. More to come…

Real Estate Investors Are Not the Enemy

By: Diana Olick — Friday, 3 Dec 2010

They have surpassed lawyers and repo-men as the most vilified professionals on the planet.

Thanks to the unprecedented real estate crash, "investors" are now the bad guys. During the housing boom, they canoodled with lenders to lever themselves to the hilt, and consequently fueled home prices to levels so unsustainable that the market came crashing down.

There is a major distinction that must be made here. The people who were buying real estate during the bubble were not investors, they were speculators betting on appreciation. Buy-and-hold investors are buying for the cashflow offered by the property. Appreciation does not figure in to their thinking, other than perhaps to acknowledge that appreciation will keep pace with inflation so their original capital is protected.

People who speculate in real estate to capture appreciation are fools. Occasionally this group gets lucky if they manage to time their purchase and subsequent sale well, but few accomplish this task. Many profited greatly from the housing bubble by appreciation, but that was only because banks allowed them to convert artificial appreciation to cash through mortgage equity withdrawal. That won't be happening again any time soon.

Never does the President, the Treasury secretary, or the HUD secretary announce a new element to the Administration's multi-billion dollar housing bailout, without making clear that investors need not apply.

Get over it. That's all I, and plenty of qualified real estate investors, have to say. That was then; this is now, and real estate investors may be our only ticket out of the housing crisis.

"If you want to stabilize the housing market, you have to encourage investors," says hedge fund manager Aaron Edelheit. "The quicker you can end the foreclosures and the short sales, the quicker you're going to have a turnaround in the economy and the housing market."

That isn't really true. The quicker we push through the foreclosure and short sales, the quicker we will have an improved economy, but "ending" foreclosures and short sales requires faster processing. Most loan owners interpret "ending" as terminating the process prior to foreclosure. That isn't helpful because the onerous debt remains.

Edelheit has invested over $10 million in foreclosed homes. He's not looking to flip them for a profit; he's in this for the long-term gain. He doesn't buy up bulk condos, as many institutional investors are now doing, and which he admits is much easier. He buys single family homes with the sole intention of renting them out to families. No, he's not a do-gooder. He's making around an 8 percent profit after expenses.

Eight percent capitialization rates on properties in Las Vegas are quite common. Eight percent can also be readily found in beaten down markets like California's central valley, Riverside county, and suburban Phoenix, Arizona.

Think of it this way. At the height of the housing boom, the home ownership rate was at 69 percent. It's now down to 66.9 percent and dropping. Historically it's around 62-64 percent.

"You have five to seven percent of the nation who needs a place to live, and they would prefer single family homes," notes Edelheit.

Today's jobs report proves that this is going to be a slow economic recovery, which means the pool of potential home buyers will remain small for quite some time. We have already seen apartment rents rise on higher demand. This in the face of a serious oversupply of homes for sale and a shadow inventory of, by some estimates, up to 7 million foreclosed properties.

"There aren't the natural buyers to buy these excess homes, but there are the families to live in them, so if you had long term capital to incentivize investors like me, we would go in, buy homes, fix them up and rent them to families," says Edelheit.

I totally agree.

But there's the problem.

Gun-shy banks and government-owned Fannie Mae and Freddie Mac are being very stingy with credit to investors, capping them at very few loans. Fannie Mae allows ten loans to each individual investor, but investors tell me it's more like four when you talk to the banks. A Fannie Mae spokesperson adds, "Lenders may have their own overlays or added fees."

They've thrown the baby out with the bathwater. I'm not suggesting we return to the heady days of lending to any Joe with a pen to sign on the dotted line. I am suggesting we stop demonizing investors and instead offer low-cost credit to those with worthy balance sheets who are willing to put significant down payments on the properties. And yes, underwrite them conscientiously. It may be our best exit from a too-slow recovery.

Investors like Edelheit are waiting in the wings. "I think that if the government were to encourage investors, they would swoop in and buy homes, and you'd very quickly not have an excess amount of housing."

I find it interesting that the few good ideas for stabilizing the housing market are universally reviled, and the many bad ideas are lionized and implemented only to fail dismally.

If there were no limit to the number of loans the GSE would insure for each investor, and if they counted 75% of the rental income toward qualification for the loan, I would buy hundreds of properties in Las Vegas, and so would many other investors. The foreclosures would be readily mopped up at prices dictated by stable loan terms. The crisis would be resolved as quickly as the foreclosures could be processed. As it stands, prices in Las Vegas are well below cashflow levels, and investors can't buy them quickly enough to absorb the supply. Anyone in government who believes owner-occupants are going to clean up this mess is delusional.

The apartment that pays you rent

Before I studied what was really going on in the housing bubble, I never understood why people would pay ridiculous prices to own a near model match for the apartment I was renting. Now I see that the people in these glorified apartments weren't making payments, they were being paid by the banks to live there. The owners of todays featured property took out more in mortgage equity withdrawal than I paid in rent during the housing bubble. In fact, they took out enough to make their payments plus have enough spending money left over to exceed my rent. If I had only known….

• This property was purchased on 7/22/1992 for $133,000. The owners original mortgage information is not known, but it was likely a $106,400 first mortgage and a $26,600 down payment.
• On 8/24/2001 they refinanced with a $143,250 first mortgage and extracted their down payment plus $10,250.
• On 11/13/2003 the refinanced with a $195,000 first mortgage.
• On 3/16/2006 they refinanced with a $311,000 first mortgage. After 14 years of ownership, they nearly tripled their mortgage.
• The defaulted in mid 2009 and squatted for about a year.

Foreclosure Record

Recording Date: 01/26/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/07/2009

Document Type: Notice of Default

In the five-year period from 2001-2006, this couple took out an average of $33,550 per year out of their one-bedroom apartment home. That averages to $2,795 per month. What were you paying in rent then?

Irvine Home Address … 77 ALBERTI AISLE 339 Irvine, CA 92614

Resale Home Price … $269,000

Home Purchase Price … $133,000

Home Purchase Date …. 7/22/1992

Net Gain (Loss) ………. $119,860

Percent Change ………. 90.1%

Annual Appreciation … 3.8%

Cost of Ownership

————————————————-

$269,000 ………. Asking Price

$9,415 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$259,585 ………. 30-Year Mortgage

$53,875 ………. Income Requirement

$1,348 ………. Monthly Mortgage Payment

$233 ………. Property Tax

$50 ………. Special Taxes and Levies (Mello Roos)

$45 ………. Homeowners Insurance

$235 ………. Homeowners Association Fees

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

$1,911 ………. Monthly Cash Outlays

-$125 ………. Tax Savings (% of Interest and Property Tax)

-$329 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$34 ………. Maintenance and Replacement Reserves

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

$1,657 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,690 ………. Furnishing and Move In @1%

$2,690 ………. Closing Costs @1%

$2,596 ………… Interest Points @1% of Loan

$9,415 ………. Down Payment

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

$17,391 ………. Total Cash Costs

$25,400 ………… Emergency Cash Reserves

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

$42,791 ………. Total Savings Needed

Property Details for 77 ALBERTI AISLE 339 Irvine, CA 92614

——————————————————————————

Beds: 1

Baths: 1 bath

Home size: n/a

n/a

Year Built: 1989

Days on Market: 0032

Listing Updated: 40514

MLS Number: S637599

Property Type: Condominium, Townhouse, Residential

Community: Westpark

Tract: Othr

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

——————————————————————————

Property is ready for move in , This is a great 1 Bedroom 1 Bath plus loft upstairs that can be used as a 2nd bedroom. Unit is on the 2nd floor with washer and dryer area. Property is close to freeways and shopping center and schools and parks. This unit is minutes away from downtown Irvine. Property just rehabbed with new paint, flooring, and recessed lighting and all new appliances in the kitchen.

This unit is minutes away from downtown Irvine? Where is downtown Irvine? Main and Jamboree? The Spectrum? Michelson and Von Karman?