I feel too close to be losin' touch By givin' in, what am I givin' up Am I losin' way too much Hey California waiting Every little thing's gotta be just right
I wish I could be bullish on Irvine or Orange County real estate. I am bullish on the beaten down fringe markets like Riverside County or Las Vegas because prices are in line with incomes, and with low interest rates, the payment affordability is fantastic. When people go back to work in these areas, particularly in Las Vegas, prices will rebound. Orange County in general, and Irvine in particular, has not corrected enough for me to be bullish on pricing here. We are all still waiting.
In Friday's astute observations, I was asked about my predictions for the future. I replied:
With all the government manipulation and the cartel behavior of the lenders, it is really hard to tell when prices will reach a bottom. Much will depend on interest rates.
I suspect we will see a bottoming of payment affordability in 2011 with the combination of high inventory and low interest rates. As interest rates go back up, prices will continue to go down, but as inventory pressures abate, payment affordability may not be as good. I could easily see a scenario where the low interest rates make the median home affordable with a 25% DTI in 2011 and by 2013, the prices may actually be lower, but in order to purchase a median home, the median household income may require a 28% DTI.
Further, I think we will see affordability bottom at different times for different market strata. The low end will bottom first, and we are close to that now. The high end will bottom last as the gap between the low end and the high end recompresses to its historic relationship. The low end may bottom in 2011 while the high end may slowly deflate through 2014.
Sales Volume 20% below historic norms
A recent OC Register article noted that O.C. home sales hit 4-year high. That sounds great, but the very first item published in that article was the chart below showing sales are running 20% or more below historic norms of the last 22 years.
July 13th, 2010 -- posted by Jon Lansner
The article does provide some context for its occasionally bullish statistics.
June buying is 21.7% below the average sales activity of June from 1988 through 2009. (See chart above comparing sales activity of the most recent 12 months compared to their respective 1988-2009 monthly averages.)
In the 12 months ended in June, Orange County home sales totaled 32,813 – that is 26% below the average sale activity of 44,344 for a year from 1988 through 2009
... sales in 2010’s second quarter sales were 24% percent below the 1988-2009 average.
Those numbers are pathetic. Lenders are afraid to process too many foreclosures or complete too many short sales with those grim absorption numbers. There simply isn't enough buyer interest to absorb the distressed inventory, so lenders are preventing it from hitting the market.
Uncle Sam likely had a hand in this sales bump. House shoppers who entered escrow by April 30 were told they had to close the deal by June 30 to possibly collect up to an $8,000 federal tax credit. Just after the June 30 deadline — which spurred a deal-closing flurry — that deadline was extended by Congress to Sept. 30. (DETAILS HERE!)
“This is good news, even if part of it is due to stimulus programs such as tax credits and very low interest rates,” says Kerry Vandell, director of real estate studies at the Merage School of Business at UCI. “Consider how we all would feel if, after all the stimulus activity, sales and prices continued to drop. The fact that a broad array of economic indicators — including Wall Street hiring — is pointing toward recovery is a very good sign. However, in the end, recovery will not be complete until job growth in the private sector turns solidly and significantly positive. We are not there yet. However, I anticipate solid job recovery by year end.”
Do you get the feeling Dr. Vandell was reaching for something positive to say? Consider how we would all feel if... people in the industry told the truth! Why am I the only voice bothering to point out that not everything is perfect in the housing market? Sometimes I think these people forget that not everyone expects or wants house prices to rise at double-digit rates.
The tax credit program in combination with low interest rates and withheld inventory has provided a brief respite on the way to the bottom. Perhaps the tax credit made for a higher bottom by giving some false hope to those contemplating accelerated default. Perhaps it was a massive waste of taxpayer dollars subsidizing those who were going to buy anyway. It was likely a little of both.
And post tax break, there’s talk that the market is cooling …
Steve Thomas of Altera Real Estate calculates a “market time” benchmark tracking how many months it theoretically takes to sell all the inventory in the local MLS for-sale listings at the current pace of pending deals being made. By this Thomas logic, as of last Thursday, it would take 3.78 months for buyers to gobble up all homes for sale at the current pace. This is slower pace than the 3.37 months of inventory found two weeks earlier or 2.66 months of a year earlier. (See more of “‘Unrealistic’ sellers flood O.C. home market” by CLICKING HERE!)
Even Steve Thomas's unreliable, made-up numbers based on escrows rather than closed sales is showing undeniable weakness.
Holly Schwartz of Torelli Realty in Costa Mesa concurs, saying her firm sees a drop in activity as tax-break deadlines passed. “The first half of 2010 was strong; the tax credit incentive helped,” she said.
An honest view of what is happening in the market. I hope her broker doesn't get too angry with her for failing to shovel manure at the OC Register. Not to worry, the two interviewed from Seven Gables scooped the poop:
But Carolynn Santaniello of Seven Gables Real Estate hasn’t seen that much buyer drop-off: “I have seen a slowdown in the under $450,000 range since the tax credit expired. In the mid and upper range, I have not see as much as a drop in buyer demand. The first half of 2010 has been very busy and I don’t see an end in sight for me, personally. Serious buyers are still buying.”
Amanda Wernick of the Sandy DeAngelis Team at Seven Gables adds: “Post tax credit has not shown any loss of activity. We’re constantly speaking to possible new buyers, though sellers are re-evaluating their sales strategy.”
What does it mean to re-evaluate a sales strategy. Is that realtor talk for backing off their WTF asking prices?
While the affordable slice of the housing market enjoyed a sales boost from an expiring federal tax credit, Orange County’s beach communities had falling sales activity as the June 30 tax-break deadline arrived. (Then it was extended to Sept. 30.)
In June, DataQuick shows 553 homes sold in 17 Orange County beach cities ZIP codes — off 3% from May and just up 5% from a year ago. In May, beach homebuying was running 40% above a year ago. And, perhaps most stunning: News that owner of “Portabello” has cut the seaside, blufftop mansion’s asking price by $25 million!
Now in beach towns where the median selling price if $685,000 — up only 1.4% vs. a year ago — a tax break of up to $8,000 is no market mover. Still, in today’s climate, anything should help. But as beach sales fell 3% from May to June as the rest of the market saw sales rise by 7%.
Very little is selling in the beach towns because prices are way too high. Anything requiring financing in excess of the jumbo conforming limit of $729,750 is selling at an extremely slow pace. First, the cost of financing is considerably higher (5.5% instead of 4.5% at Wells Fargo), and second, now that people have to be qualified for these loans with their real incomes rather than the fantasies they were allowed to put on loan applications in the past, there are very few qualified buyers. With the huge default rates on over $1,000,000 loans, expect to see a great deal more inventory in the beach communities.
Irvine's Inventory hits 23 month high
We have been watching the inventory in Irvine rise steadily throughout 2010. From a low of 440 homes on 1/2/2010 to the current 794, the inventory has now entered a more normal range. If sales rates were near historic norms, the current level of inventory would pose no problems for absorption, but with buyer demand weak, the current level of inventory should blunt further price increases, and if this trend continues through the end of the prime homebuying season, we will begin to see price weakness this fall and winter despite lower rates. For now, it is still a seller's market, but the balance of power is shifting, and a few months from now, buyers may not need to be so aggressive to obtain properties.
It is typical for inventory to peak in July or August as new sellers quit entering the fray. Lenders may also pull back on new listings for fear of what it will do to the market. This fall and winter will be the first test of the strength of the lending cartel. If all the members of the cartel stop adding inventory, pricing may hold up during the off season; however, if some members of the cartel choose to keep the liquidation going at full speed, inventory will continue to climb, and prices should soften.
IMO, lenders would be foolish not to take advantage of very low interest rates and still inflated prices to offload some inventory. Those banks that choose to break from the cartel will be rewarded with higher prices whereas those that try to hold on will be stuck with increased REO inventory and the likelihood of lower prices next year.
Two failed loan modifications and over three years of squatting
The owners of today's featured property set a new standard for HELOC abuse and gaming the system.
Today's featured property was purchased on 9/15/1998 for $299,000. My property records show this was purchased with a $90,000 first mortgage and a $209,000 down payment; although, it is possible that my data source is not correct and missed the first mortgage.
On 12/15/1998 they obtained a $40,000 HELOC.
On 12/28/1999 they opened a $60,000 HELOC.
On 7/2/2001 they refinanced with a $200,000 first mortgage.
On 5/29/2003 they refinanced the first mortgage for $270,000.
On 9/19/2004 they needed more money so they refinanced yet again for $400,000.
On 1/27/2005 they went back one more time and obtained a $448,000 first mortgage.
Total mortgage equity withdrawal is $358,000.
Total squatting time is at least 40 months, although the borrowers may have made a few payments during the period from July 2007 through December 2008.
Foreclosure Record Recording Date: 05/20/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 02/19/2010 Document Type: Notice of Default
Foreclosure Record Recording Date: 06/29/2009 Document Type: Notice of Rescission
Foreclosure Record Recording Date: 12/10/2008 Document Type: Notice of Default
Foreclosure Record Recording Date: 07/25/2007 Document Type: Notice of Rescission
Foreclosure Record Recording Date: 06/13/2007 Document Type: Notice of Default
It is pretty obvious these borrowers cannot afford their home. Since they still had equity, the bank was willing to go above and beyond the call of duty to modify their loan over and over again. These borrowers crossed the invisible event horizon of the Ponzi limit during the refinance of 2004 or 2005. With the amend-pretend-extend dance on its third encore, these owners are facing the prospect of finally selling their home.
I imagine they are quite attached to the property. After providing several hundred thousand dollars of spending money and over three years with no housing costs, it will be quite an adjustment for them to rent a property that actually costs them money rather than gives it to them.
Home Purchase Price … $299,000 Home Purchase Date .... 9/15/1998
Net Gain (Loss) .......... $274,400 Percent Change .......... 91.8% Annual Appreciation … 6.1%
Cost of Ownership ------------------------------------------------- $610,000 .......... Asking Price $122,000 .......... 20% Down Conventional 4.59% ............... Mortgage Interest Rate $488,000 .......... 30-Year Mortgage $120,477 .......... Income Requirement
$2,499 .......... Monthly Mortgage Payment
$529 .......... Property Tax $0 .......... Special Taxes and Levies (Mello Roos) $51 .......... Homeowners Insurance $156 .......... Homeowners Association Fees ============================================ $3,234 .......... Monthly Cash Outlays
-$419 .......... Tax Savings (% of Interest and Property Tax) -$632 .......... Equity Hidden in Payment $209 .......... Lost Income to Down Payment (net of taxes) $76 .......... Maintenance and Replacement Reserves ============================================ $2,469 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $6,100 .......... Furnishing and Move In @1% $6,100 .......... Closing Costs @1% $4,880 ............ Interest Points @1% of Loan $122,000 .......... Down Payment ============================================ $139,080 .......... Total Cash Costs $37,800 ............ Emergency Cash Reserves ============================================ $176,880 .......... Total Savings Needed
Property Details for 59 DEL CAMBREA Irvine, CA 92606 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 full 1 part baths Home size: 1,350 sq ft ($452 / sq ft) Lot Size: 2,352 sq ft Year Built: 1994 Days on Market: 17 Listing Updated: 40371 MLS Number: S623648 Property Type: Single Family, Residential Community: Westpark Tract: Posi ------------------------------------------------------------------------------ Positano Plan A in a quiet inside tract location. Upgraded flooring,custom interior painting and low maintenance backyard. Main floor bedroom with full bath, direct access garage and high vaulted ceiling.Walk to Plaza Vista school, pools, parks and tennis courts. Must see.
Trustee Sale Hedge Fund
Pooled-investment funds have been on my mind lately, so when I saw the cartoon below, I thought it was particularly funny.
If anyone is interested in a bonk in the head and five minutes of memory loss, contact me at sales@idealhomebrokers.com.
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