The second leg down in the deflation of the housing bubble is hitting markets previously thought to be immune from price declines. Affordability is improving for ordinary families as prices fall.
As the deflation of the housing bubble has proceeded, each state, region, town and neighborhood that once thought they were immune to the laws of supply and demand have succumbed to the Ponzi lending virus. Prices didn't become inflated by strong demand from cash-rich foreigners or ordinary borrowers using sound lending programs. Prices in every market needed to correct back to levels sustainable by incomes. Some markets like Las Vegas took the shortest route -- straight down. Markets like coastal California have been enjoying a slow downward glide punctuated by turbulence from the occasional REO going for 45% off.
Before the housing bubble is resolved all markets will tumble, its only a matter of when and how much. The bubble will deflate until local incomes support prices. If the tumble is too great, strategic default pushes prices well below fundamental valuations.
If the tumble is a mere stumble, the market slowly drops on a low-volume slide where only the most motivated buyers prevail.
Perhaps Irvine wage growth will continue to outpace California, the US, and internationally. If that happens, house prices here will appreciate at a pace greater than inflation and buyers here will get to enjoy the HELOC riches that accompanies wage growth and house price appreciation. It pays to buy where high wage earners want to congregate. It also pays to buy in areas coveted by savers.
Of course, if the gravy train of high wage growth and HELOC-producing appreciation could be endangered by a any of a number of factors. We have a dysfunctional California government and regulatory system. We are pressured by wage arbitrage from overseas. Existing high home prices make it difficult to attract workers.
Irvine will always command a premium in Orange County, but how much of a premium can OC or California expect to sustain against the rest of the nation or the world?
SEATTLE — Few believed the housing market here would ever collapse. Now they wonder if it will ever stop slumping.
The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.
In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.
The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.
“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ ” said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”
Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall. Mr. Humphries estimates the rest of the country will drop a further 5 and 7 percent as last year’s tax credits for home buyers continue to wear off.
“We went into 2010 feeling gangbusters, thanks to Uncle Sam,” Mr. Humphries said. “We ended it feeling penniless, with home values tanking.”
The market entered the year in denial fostered by a doomed bear rally. The market ended the year facing the reality of the painful decline it thought it had avoided. The market is moving from denial, through fear, and into acceptance.
The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been. The slump began when the low-quality loans that drove the latter stage of the boom began to go bad, but the resulting recession greatly enlarged the crisis. Many people could not get a mortgage, and others simply gave up the hunt.
Now, though the overall economy seems to be mending, housing remains stubbornly weak. That presents a vexing problem for the Obama administration, which has introduced several initiatives intended to help homeowners, with mixed success.
Mixed success? Which program specifically had any success whatsoever?
CoreLogic, a data firm, said last week that American home prices fell 5.5 percent in 2010, back to the recession low of March 2009. New home sales are scraping along the bottom. Mortgage applications are near a 15-year low, boding ill for the rest of the winter.
It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable. In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.
Two local economists were quoted all but guaranteeing that Seattle was immune “if history is any indication.” A risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.
If history is any indication, there are always a fool who makes a statement saying their market is "immune" because it is "different." Or is it that markets have reached a permanently high plateau?
These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off.
Those who must sell close their eyes and hope for the best. Those who hope to buy see lower prices but often have lighter wallets, removing any sense of urgency.
Those that have no hope simply walk away and never look back.
Arne Klubberud and Melissa Lee-Klubberud paid $358,000 for a new, 960-square-foot townhouse on trendy Capitol Hill a few weeks after that Seattle Times article was published. Now, with one child and with hopes for more, they need more space. They just put the townhouse on the market for $300,000.
“Obviously, this is not the ideal situation,” said Ms. Lee-Klubberud, a 32-year-old lawyer. They are hoping to take advantage of the sour market to buy at a good price, but first, they must sell for an amount that is acceptable. “Everyone has their limits,” she said. “We have ours.”
On a dark, dank Sunday, a handful of people came to look at the three-level unit. One of them was Katherine Davis, who had just sold her house in the far eastern suburbs. It took 14 months, during which she had to drop the price several times. The equity she had accumulated over the decades disappeared quickly.
Perhaps the equity bestowed on her by the housing bubble disappeared quickly, but if she owned for decades and paid down her mortgage, she will still end up with the equity she would have had if there were no housing bubble. What she is really letting go of is her imaginings of riches not to be.
“At first, I thought it would be nice to come out of this with $200,000, but I adjusted my expectations,” Ms. Davis said. She ended up with less than half of that. Her goal is to buy a small place in the city, but not yet. “Selfishly, I’m hoping the market continues to drop,” she said.
Increasing numbers of sellers are simply surrendering.
This is market capitulation. I know I have used the psychology chart often lately, but these man-on-the-street stories illustrate these stages, and now that several markets are reaching capitulation and despair, these stories put real-life examples behind the abstract concepts.
Put yourself in the shoes of these borrowers as you read their stories. The circumstances they face and the emotions they feel about those circumstances are the essence of capitulation and despair.
Megan and Ryan Dortch tried to sell their one-bedroom Eastlake condo for $325,000 two years ago. They rejected an offer of $295,000 as inadequate. A year later, they relisted it for $289,000, then $279,000, which was less than they paid. Without a sale at that price, they could not afford to buy a place big enough for them and their new baby.
They have given up on real estate. They are renting out their old apartment at a small loss every month, and living in a rented house. “I don’t expect the market to get better,” said Ms. Dortch, 31, a customer service consultant.
Neither does Gene Burrus, another frustrated seller who became a landlord. “Rent is so cheap it doesn’t make sense to buy now,” he said. He might reconsider if 10 or 15 percent more comes out of the market.
Take a deeper look at Mr. Burrus's despondency. He needs house prices to go up, but he also recognizes that buying makes no sense. House prices will not be going up because there won't be stampedes of buyers and loose credit. He is wise enough to recognize that the herd reacting to the same information also recognizes it is a poor time to buy putting him on the wrong side of the trade. He is screwed, and he knows it. The moment he realized it was capitulation. Now he is feeling despair.
But whenever the market finally does pick up, all those accidental landlords will want to unload, putting another burden on the market. “So many sellers are waiting in the shadows,” said Redfin’s chief executive, Glenn Kelman. “The inventory is going to expand and expand and expand. I don’t see any basis for significant price increases.”
While almost every economist is expecting another round of price declines for the next few months, many see a leveling off in the second half of the year. Fiserv, the company that produces the monthly Case-Shiller Home Price Indexes, analyzed prices in 375 communities. About three-quarters of them will be stable by December, Fiserv calculates.
“We’re at a period near the bottom but with more volatility than we normally see at this point,” said David Stiff, Fiserv’s chief economist. “This sort of double dip is unprecedented for housing.”
Maybe that is why belief in a bottom is as elusive now as fears of a top were in 2006.
“We would love to have a house,” said Dan Cunningham, a 41-year-old renter. “I have more than enough for a down payment. I’m preapproved for a loan. But I have to have confidence it’s not going to lose another 20 percent.” He plans to wait until he sees prices rising before making any offers.
If Dan lives in an inflated market like ours, his caution is warranted. Although I don't expect a 20% drop here, our prices are inflated, and a decline in prices at the mid to high end is ongoing.
If Dan lives in a deflated subprime-dominated market, then his caution is not warranted unless he is buying an above-median priced house. If Dan is looking at a $150,000 property in Phoenix, he doesn't have much to worry about.
It doesn't take hundreds of thousands of dollars in HELOC abuse to make a borrower insolvent. Sometimes only a modest increase in debt can be too much if someone becomes unemployed.
The owner of today's featured property bought back in 1999 for $375,000. His mortgage information is not available. He made a number of small refinances, and on 1/9/2007 he refinanced with a $372,000 ARM. His mortgage debt doesn't exceed his original purchase price, an accomplishment from what I observe. He quit paying in late 2008, and he is still there.
Foreclosure Record Recording Date: 04/28/2009 Document Type: Notice of Rescission
Foreclosure Record Recording Date: 03/25/2009 Document Type: Notice of Default
It shouldn't be surprising that houses like this one populate shadow inventory. Banks book missed interest payments as income. They would prefer the borrower actually repay, but from an accounting standpoint, they treat it the same, if they can assume 100% recovery at foreclosure.
On properties like this one that have 40% equity or more, they will allow this debtor to be delinquent forever. The debtor is basically cannibalizing their own equity. With no payment at all, the compounding interest and penalties are like an Option ARM on steroids consuming about 1.5% of equity per month. This guy has been delinquent about 25 months, so that 40% equity is nearly gone.
Home Purchase Price … $375,000 Home Purchase Date .... 8/13/1999
Net Gain (Loss) .......... $320,506 Percent Change .......... 85.5% Annual Appreciation … 5.8%
Cost of Ownership ------------------------------------------------- $739,900 .......... Asking Price $147,980 .......... 20% Down Conventional 4.99% ............... Mortgage Interest Rate $591,920 .......... 30-Year Mortgage $153,029 .......... Income Requirement
$3,174 .......... Monthly Mortgage Payment
$641 .......... Property Tax $0 .......... Special Taxes and Levies (Mello Roos) $123 .......... Homeowners Insurance $0 .......... Homeowners Association Fees ============================================ $3,939 .......... Monthly Cash Outlays
-$776 .......... Tax Savings (% of Interest and Property Tax) -$713 .......... Equity Hidden in Payment $287 .......... Lost Income to Down Payment (net of taxes) $92 .......... Maintenance and Replacement Reserves ============================================ $2,830 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $7,399 .......... Furnishing and Move In @1% $7,399 .......... Closing Costs @1% $5,919 ............ Interest Points @1% of Loan $147,980 .......... Down Payment ============================================ $168,697 .......... Total Cash Costs $43,300 ............ Emergency Cash Reserves ============================================ $211,997 .......... Total Savings Needed
Property Details for 49 CARVER Irvine, CA 92620 ------------------------------------------------------------------------------ Beds: 4 Baths: 3 Sq. Ft.: 2438 $303/SF Lot Size: 5,115 Sq. Ft. Property Type: Residential, Single Family Style: Two Level, Cape Cod Year Built: 1980 Community: Northwood County: Orange MLS#: S646433 Source: SoCalMLS Status: Backup Offers Accepted On Redfin: 7 days ------------------------------------------------------------------------------ Great opportunity in the village of Northwood. Corner lot with great curb appeal. Freshly painted inside and out. Newer roof, brand new A/C and heating, new carpet and more. Desirable floorplan with open floorplan. Four bedrooms upstairs and large bonus. Master with walk-in closet and spacious master bath. Three car garages and large private yard. No assoc. dues and no mello-roos. Steps from park, and mintues from schools, shopping and freeways. Priced to sell.
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