Since I first estimated Shadow Inventory others have been trying to figure out how big the problem really is. Today’s featured property is an example of Shadow Inventory finally coming to light.
Irvine Home Address … 12 FOXHILL Irvine, CA 92604
Resale Home Price …… $594,900
{book1}
If you ever feel like something’s missing
Things you’ll never understand,
Little white shadows sparkle and glisten,
Part of a system, a plan
White Shadows — Coldplay
One of the carryovers of the Great Housing Bubble zeitgeist is the high level of suspicion about the people who are gaming the system to their advantage. The general public has little or no perception of the Titanic forces competing for their money, and discussions about sinister elements at the Federal Reserve sounds like conspiracy-theory nonsense to some.
Similarly, discussions of “Shadow Inventory” sound like the ravings of madmen. But those of us paying careful attention to the numbers know we have a problem. These ravings are the voice of reason staring at the chaotic struggle of greed and pointing out the economic ripples. These ripples are growing to a tsunami of foreclosed properties.
I am utterly astonished at the level of Government intervention, but we will see more. IMO, if you look far enough down the road, losses to the FHA — losses directly absorbed by the US Taxpayer — will finally call an end to government market props. Pressure is already building to increase downpayment requirements and eliminate tax subsidies. FHA is subprime, and everyone knows it. Will this batch walk away when they go underwater? Probably.
Shadow Inventory Revisited
In Shadow Inventory Orange County, I explored one method of calculating or estimating the number of
truly distressed property owners in Orange County. Since then, others
have written on the same subject including a new blog I am introducing today.
New Blog
I like to recognize excellence when I see it, and I found a new blog through Patrick.net called Finance my Money. The “About” doesn’t say much about the author, and the blog has only been around since August of 2009, but I found two excellent posts there:
California Notice of Defaults hit Record in 2009: Approximately 476,000 Notice of Defaults but Foreclosures Fell. HAMP Most Active in California. Approximately 5,900 Permanent HAMP Mods in California.
California Housing Inventory Mystery: 206,000 Homes on MLS but is the Real Inventory 412,000 or closer to 618,000?
The first post confirms, “California is at the center of the foreclosure wave. Of the 306,000
foreclosure filings in November 23 percent hit in California. You
cannot talk about housing distress without looking at the state of
California. The California housing market will be in a slump for many
years and there are a variety of reasons why California housing will see no recovery in 2010.
One of the most important leading indicators of housing distress is
notice of defaults. With so much talk about housing recovering the
data is showing that 2009 will set a record in terms of NODs filed in
California. 476,000 notice of defaults will be filed by the end of the
year setting a pace of over 1,300 NODs filed per day in 2009.”
In Shadow Inventory Orange County, I discussed that one method of leaving Shadow Inventory is by curing the loan, generally with a loan modification. Since loan modifications are billed as a housing market panacea, it is worth seeing how these programs have done:
Many have argued that HAMP will help many of these loans. California is the largest HAMP state:
Yet the above number is a misnomer. In fact, nationwide only a handful of modifications have become permanent:
Of the 759,000 HAMP trials started only 4 percent have become
permanent. This number is abysmal. In fact, if we take the 148,000
trial mods in California we can assume that only 5,920 have made it to
the permanent stage. We had 476,000 notice of defaults filed in 2009!
The HAMP is merely a delay of reality.
The cure rate was 6.6% back in September. It isn’t improving.
In defense of the HAMP program, the cure rates will get better because there are people who have made 1 or 2 months payments that will cure when they get to three months, so there is a lag in the reporting. The headlines will ignore the lag two months from now when the real cure rate is revealed.
For what it is worth, I guestimate cure rates will be between 10% and 15% as currently defined; however, there will be pressure to lower the bar. Did you notice three months is considered permanent? Three years maybe, but three months of consecutive payments doesn’t seem like much to ask. Despite how low this bar is, it could go lower. In fact, this program could fail to produce a single loan that survived to a market sale or payoff, and by their standards it would be a success.
We pick up the Shadow Inventory issue again in the second post:
So even though notice of defaults for 2009 are reaching the 475,000
mark actual defaults for the year are going at a pace of 230,000. In
other words, there is a major gap in the data. This isn’t because
loans are curing either. Recent cure rates are under 5% and for
California, they are even lower. So most of those 475,000 notice of
defaults are going to become additional inventory at some point. In
fact, how many of those 475,000 homes are even listed in the 206,000
current inventory? That is the major question and brings up the shadow
inventory trends.
A recent report from Amherst Mortgage Insight tackled this question:
There is another method of calculating shadow inventory. It’s out there, and the lenders don’t really want you to know it.
Irvine Home Address … 12 FOXHILL Irvine, CA 92604
Resale Home Price … $594,900 
Income Requirement ……. $123,320
Downpayment Needed … $118,980
20% Down Conventional
Home Purchase Price … $852,000
Home Purchase Date …. 10/17/2005
Net Gain (Loss) ………. $(292,794)
Percent Change ………. -30.2%
Annual Appreciation … -8.4%
Mortgage Interest Rate ………. 5.01%
Monthly Mortgage Payment … $2,558
Monthly Cash Outlays ………… $3,160
Monthly Cost of Ownership … $2,510
Property Details for 12 FOXHILL Irvine, CA 92604
Beds 4
Baths 2 full 1 part baths
Size 2,522 sq ft
($236 / sq ft)
Lot Size 5,400 sq ft
Year Built 1975
Days on Market 4
Listing Updated 12/10/2009
MLS Number F1827782
Property Type Single Family, Residential
Community El Camino Real
Tract Dc
According to the listing agent, this listing is a bank owned (foreclosed) property.
REO.CASH ONLY! Open bright & airy. Landscaped backyard. Close to parks, schools, malls and freeways. 4 Bed + 2.5 Baths.
This was a loan issued by Nationpoint; it didn’t perform very well. The owner of this property paid $852,000 on 10/17/2005. He used a $680,000 first mortgage, a $170,000 second mortgage, and a $2,000 downpayment. On 6/20/2006 he got $10,000 out of the property. About a year later, he stopped paying the mortgage.
Foreclosure Record
Recording Date: 03/05/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Foreclosure Record
Recording Date: 11/30/2007
Document Type: Notice of Default
Foreclosure Record
Recording Date: 11/30/2007
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 11/14/2007
Document Type: Notice of Default
This property was purchased on 7/15/2008 for $620,034 by DEUTSCHE BANK NATIONAL TRUST CO, ; FIRST FRANKLIN MORTGAGE LOAN TRUST 2006.
Shadow inventory coming to light?
There is not much chance of this property selling for asking price as comps are much higher. This property will be bid up well over asking — not because Fundamental Value says so — it is overpriced at listing price on that basis, but if you look at what buyers are able to finance today, comps for this house are much higher than $600,000.
This property is in Pending state, according to Redfin. Cash offer as well. Kudos to Benny boy for flying his helicopter.
As a side note, my money market account now sports a 0.08% return rate (and that percentage is not a typo). Great, just effing great.
Thank you Geithner and Benny boy for ruining America.
Interest rates are close to zero because we are in a deflationary period, due to the poor economy.
it’s easy to blame somebody but we didn’t get here overnight.
can’t wait for the “shadow inventory” day of reckoning
Love the blog, but I think the recovery in the O.C. housing market and elsewhere is for real. I do not think a tidal wave of shadow inventory foreclosures will ever materialize. Right now, housing supply in O.C. is at a four-year low. We see a similar situation in other post-bubble locations, such as Las Vegas, Sacramento, and Bakersfield. See http://wp.me/pEWUs-ch
Unless they bulldoze all the houses for those nonperforming loans or spread the sale out over an entire generation, I’m pretty sure you’re wrong about that.
Yep. We have houses full of non-performing borrowers, and we can’t have price recovery as long as that is the case.
IR,
If there are 476,000 NOD’s but only 148,000 HAMP trial/active/permanent mods, then only 31% of potential foreclosures are being delayed by the HAMP program. This means 69% are proceeding un-inhibited. Thus, personally I don’t expect the slow-release of the HAMP failures to have a large effect on the REO market. At most it takes what would have been a 2 year steady supply of distressed inventory and stretches it out to be a 3 year supply of distressed inventory.
Given the ridiculously extended timing of most REOs as it is, can we really discern the difference?
When the dust settles (as with any other government boondoggle), the facts of HAMPs massive failure will finally come to light – but it will be to late, and history will continue to repeat itself (ie, govnmt healthcare).
I worked FOR a large servicing company in home retention and felt good about helping some folks that needed it… Then HAMP came along, opened the floodgates, messed-up our previous good work, and I quit!
READ the articles from last week! Of the 96% that haven’t reached final mod: the vast majority fail to make the new lower trial period payments, or fail to validate income (or even submit the requested documents to do so).
One bank has agreed with the govnmt to do the following:
– Call the borrower 36 times
– Send 15 letters
– Visit the home at least twice, in person
Can you imagine being offered a huge payment reduction (FOR FREE), and the bank has to remind you 53 times to please send in your paperwork???
I wish they would all just foreclose and get it over with! Prices might settle at affordable levels, and we’d have a ‘normal’ free market again.
PS diffident topic (but all inter-related with the banks). Did you know the banks are borrowing money from the Fed at 0%, depositing it with the Treasury for 1% (free profit), yet my credit card rate just jumped to 27% (for no good reason). When do normal/hardworking people catch a break or bailout?
My prediction? The slobs gorging at the HAMP trough will all be offered stated/Nina mods soon, and then do-over trial plans if they fail to make the original no-doc payments… The govnmt is determined to make this a “success” at the expense of you and me (the honest, hardworking, taxpayer).
Thank you for observations.
I also think the government is determined to make this program a success even if it is a bad idea. I suspect they will do it by continually lowering the bar. First, they will remove the new income verification requirement because this will “qualify” a large number of borrowers (liars) for lower mortgage payments. Then the government will lower the threshold from 3 months of payments to 2 months or even one month to claim better success rates.
If the government really wanted to get the attention of borrowers, they would withhold the refunds of every taxpayer claiming a mortgage deduction who has not contacted their lender in the last year. I guarantee the callback rate would go from 50% to 100% overnight.
The problem is that people who were stupid with their mortgages vote, and there are a lot of them.
Personally, I think that, given the current circumstances, approving loan mods is frequently in the banks’ best interest, so the government programs really don’t matter much.
“If the government really wanted to get the attention of borrowers, they would withhold the refunds of every taxpayer claiming a mortgage deduction”
IR, I don’t understand this one, in order to claim a mortgage interest deduction, your servicer sends you a year end mortgage interest paid statement. How would they know you stoppped paying you loan midyear and why should the goverment care. If anything, the defaulting borrower should be 1099 for income on the unpaid loan balance at the time of foreclosure.
The government is telling lenders to go out and modify loans proactively, and over half the borrowers simply do not respond. That means at least 1/2 of the troubled borrowers are not going to get a loan modification because they would not engage in the process. If you forced every borrower to at least contact their lender, you eliminate half the problem — that is assuming you think they are really solving the problem.
My guess is that they do not dare to submit the documentation. When they were juiced-up liar loans to start with, putting it in writing and signed is a new risk for eventual fraud charges that they may hesitate to take. Less risk and easier to (eventually) get foreclosed, especially if they have no equity at to lose. Why take the risk of perjury on a federal form when you are going to default or be underwater for 10+ years?
Orange Renter- I agree. good info. It’s unbelievable that they are contacting them that many times. What’s even crazier is that solid borrowers and responsible people are paying for it. I have a client that just closed on a property and had nearly 50% down, 800 credit scores, solid income and employment and did not qualify with B of A because he had only 1 credit card! Yet B of A is probably calling people with 600 credit scores, poor income and employment, and offering them an artificially low rate with my client’s tax dollars!
Bank of America is completely FUBARed on many, many levels. It’s probably good for your client that they didn’t qualify with them.
I agree. My understanding is that B of A rejected the loan because of new fannie mae and freddie mac guidelines. When we are spending tax payer dollars to attempt to artificially inflate home prices and keep people in homes that can’t afford them and potentially keep people like this out of homes we are in trouble.
Clearly, he got a loan somewhere else (or how did he close?), so I would doubt that the Fannie and Freddie guidelines are the issue.
So true Shevy,
I see this all the time here in Jax Fla.. It seems in order to play in “Their game” you need to be in perpetual debt.. they really don’t want people who are debt free..
I did read them. Did you catch Diana Olick at CNBC’s sit down with BofA?
http://www.cnbc.com/id/34316590
“Mr. Schakett told me that of the 65 thousand trial modifications set to expire Dec. 31st with B of A, a full two thirds of the borrowers, while current on their payments, have not submitted the full documentation required to turn a trial mod permanent under the HAMP guidelines.
“We don’t really know the major reason why the customers are not returning the documentation,” Schakett claims. Well I can tell you why (and I’m sure he knows this too). The trial modification process only requires oral verification of income to begin, but to go permanent, you need to prove your income, submit your tax returns, and basically come clean with all your finances. I’m guessing a lot of folks who took out their initial loans with false or non-existent documentation, aren’t eager to let the government know that. ”
I’d go one step further than she does. If 2/3rds of the people who have been paying as much as 5 months (the paperwork allowance got extended to 5 months) have not put in their paperwork yet? I have a crazy idea, maybe they CAN afford the payments. Maybe the reason they can is because their verbal statement was a lower income than if they were to document it fully. Think about it. Who has an incentive to join HAMP? Borrowers who want to keep their homes but would like to pay less onerous amounts to do so. People who simply can’t afford it, what’s the point? So I suspect that at least part of the mods are liar loans in reverse. People who don’t want to be “unfairly” charged more for their home just because they make more money.
As far as I can tell, I’m the only person who’s even suggested this. But lie on the way up to get the home, lie on the way back down to make the payments cheaper. Just a different crowd of liars.
Yes, I imagine many are using Reverse Liar Loans.
We first started seeing this in 2008, but I imagine it is epidemic right now. If I were a homeowner, I would probably be seeing how I could game the system, why not?
I stand corrected. You did think of it first. But I think we are now seeing solid evidence that this is exactly what happened. Those who “can” pay, don’t want to pay 33% of GROSS income towards the house. That’s the only explanation I can come up with for such a large portion of the HAMP trials paying on time and yet not submitting the paperwork.
I wasn’t trying to compete on who was first; I wanted to show where some discussion has taken place on the subject. That was a good post back in the day.
When you look at the system, owners have nothing to lose by applying for a loan modification. If the lender approves it at a lower payment or interest rate — even if it is a lie — then the homeowner has come out ahead.
I wonder what happens to people who continue to make payments but never submit the paperwork? Does the modification become permanent anyway? Does the payment revert back to the old amount? The incentive to cheat is strong.
Oops that sounded combatitive but it wasn’t meant that way.
Sorry, tone doesn’t convey well in typing.
I don’t think it’s been truly decided yet what will happen to those who played down their income for the mods. Will the difference between the modified payment and the amount they “should” have been paying be counted as delinquent? Will they just be allowed to get away with it so long as some revenue stream keeps trickling in? In who’s best interest is it to crack-down on these folks? Not the government who wants stability above all else, not the servicer who just wants a payment stream, only the actual lender who should want to discourage cheating but who also has a stake in property values and avoiding foreclosure costs and losses….
Those are all good questions, and I doubt anyone has thought through all the answers. I suspect most people will game the system and see what they can get.
IrvineRenter –
There has to be some ’07 knife catchers trying to claw their way out by now.
I think we all realize that ’05 and ’06 buyers are completely hosed by this point. I would be highly interested in the profiles of more recent purchases.
Just doing some Zillow trolling in my neighborhood shows some ’07 buyers taking 100K losses and ’08 buyers taking 50K losses. I would imagine the same is holding true in your area.
1998 prices continue to look more and more realistic.
http://www.oftwominds.com/blogdec09/housing-decline-good12-09.html?
$2,000 down on a $852,000 house? What do you suppose the monthly mortgage payment was?
Assuming 6% realtor’s fees, the seller paid 51K. That’s 25x the amount of skin this buyer had in the game.
You have to assume 6% appreciation for this borrower to be able to pay off his debts. If you assume 0% growth, you’re insane to require less than 6% down.
So what kind of appreciation is the FHA assuming to continue backing mortgages when the owners have placed 3.5% down payments?
So what kind of appreciation is the FHA assuming to continue backing mortgages when the owners have placed 3.5% down payments?
This is going to be the next shoe to drop. It’s their last band-aid holding it all together.
Interest rates cannot go any lower.
It is all on the first time buyer now. Look for more gimmicks targeting the young and naive.
The real estate spinsters (agents) are still at it. I love how they are disguising 50% truth as good information. While the writer of the article makes some good points, to apply them to Orange County is more than a stretch. Look at the trash that a local real estate company that I will keep anonymous is sending out, this was sent to me by an IHB reader who gave me permission to share it;
“BusinessWeek Headline, December 8th:
“If You Don’t Buy a House Now, You’re Stupid or Broke”
This is NOT my headline! It’s an article in Business Week that you can read here:
http://www.businessweek.com/lifestyle/content/dec2009/bw2009127_753974.htm
In addition, I’ve attached a Market Trend graph of this past year’s OC housing market. You can see that as the year has progressed, the available inventory in OC has continued to decline, while sales have held steady. The result is that OC has trended toward becoming a Neutral market, rather than the Buyer’s market we experienced early in 2009. While there is still plenty of “shadow inventory” yet to hit the market, the demand from buyers should remain strong – especially as interest rates start to creep up, spurring even more activity. All indications are that prices bottomed around May and they have been relatively flat since mid ’09. Many experts see a slight increase in the median price increase for OC homes in 2010.
Please let me know your thoughts on this and as always, feel free to forward to anyone you know who may be interested in this information.
Have a Happy Holiday!”
I like that he mentions shadow inventory, I question why he does not elaborate on what will most likely really happen when interest rates rise, or when all of the Alt-A and ARM loans recast in 2010 and 2011. I am curious to see what IHB readers think about this.
The article is focused on how low interest rates are. He’s basically saying that interest rates are bound to rise, so even if housing prices drop some in the future, you will still pay less money if you buy now with a higher price at a lower interest rate.
This is a perfectly valid point. If you plan on paying cash for a house, waiting might make sense, if you believe prices will fall further. But if you plan on taking out a loan, buying now when interest rates are stupid low is the best plan.
I agree and it is a valid point for those that get 15 or 30 year fixed financing and plan to live in the property for 10 year+. However, another argument could be made that people are better off buying when rates are high and prices are low because they can always refinance into a lower rate but they can never change their principle balance.
Regardless, I agree, the article makes valid points, however, the use of it combined with the market trends data to imply that prices were at the cyclical “bottom” in May is a bit misleading and I interpreted it as “buy now or risk getting priced out,” which is a great way to create urgency but not the case. Even though I agree that May was a short term bottom artificially created through manipulated interest rates, demand, and supply, it was just that an artificially created manipulated bottom that will be difficult to sustain.
Despite the article having a valid point, which Larry has also made regarding low rates creating affordability, the use of it to imply that prices have reached a bottom in the long term cycle is misleading in my opinion.
If you know you will not need to move for a long time.
I want to buy, but the main reason is to be closer to work. What if something happens to the job in 2, 3, 5 years. Then I could be screwed.
In a normal market, you would take a haircut, not lose a boatload.
If you don’t think you will be in your current house for at least a decade or so, I recommend renting, especially in Irvine. Rents vs. total monthly costs of purchasers highly favor renters in Irvine, plus there are transaction costs (commissions, fees, etc.) when you buy and sell properties that don’t exist when you switch from one rental to another.
That is, buying in Irvine is probably a worse proposition than renting under most circumstances, unless you plan on living in the same place for a very long time. However, IMHO, buying now is probably the best time to buy-later purchases will probably be even worse financially-unless you are paying cash.
Now, things are different in different markets. In Riverside, buying now makes a lot of sense, even for a shorter period, because rents are much higher than total monthly costs of buying.
No one knows how long they will be at a job unless you’re a civil servant. Companies come and go. They have massive lay-off when doing poorly and went doing well. Lay-off after being purchased or after aquiring another company. they typical person moves once every 5 to 7 years. Job changes are even more offen today. I see very little fields that have the old employment for life.
All good points that definitely support renting over buying in many circumstances.
a better article to read is…
http://money.cnn.com/2009/12/08/real_estate/housing_outlook.fortune/index.htm
It is not written by an author who is directly tied into the business of selling/buying of homes. Nor it is really an opinion piece.
Santa Ana (national media’s way of saying Orange County) is expected to drop in price by 13.15%. #77 on there list.
But that 13% drop in prices is about the same as a rise in interest rates of 1%. That is, if prices fall by that much but interest rates rise by a point, you aren’t saving any money by waiting, assuming a 30-year fixed rate loan.
Your payment might be the same…but at least you can sleep at night knowing you aren’t taking on massive amounts of water 1 year after your purchase. 13% of your typical Irvine box valued at 650K = 85K…that’s not chump change!!!!
Also, if you postpone your home purchase you can save more for a downpayment. I currently rent cheap and am saving a boatload of money every year. If I jumped into the housing market today, my savings rate would take a huge hit having to service a massive mortgage, property taxes, HOA, insurance, maintainance and all the msc expensives involved with owning a house.
There are many more factors involved other than the payment being the same.
Yeah, but if you postpone your purchase, and are currently renting, you flush that year’s rent down the drain.
The number of factors here is very large, making the correct financial decision very complicated. Plus, there are non-financial factors at play as well.
if you postpone your purchase, and are currently renting, you flush that year’s rent down the drain.
What is the difference between renting space vs renting money for a space?
You are ridiculous.
really? Let’s assume a 500K home drops to 435K. And you buy with a 1% higher rate.
You pay roughly $800-1000 less in property taxes every year.
You get to deduct more of the interest payments since you’re paying more interest.
You don’t have to worry about being underwater.
When homes prices do appreciate in the years to come after this mess is over with you get to keep more tax free since assuming you lived in the home for longer than 2 years.
so instead of having to hav the be appraised at 530K to break even you can be at $461100.
Yeah you’re right geotpf. I should just jump in now because my payment will be about the same. Because at the end of the day that is all that matter right?
It is annoying just blindly argue a position without real clear thought and objectiveness.
the appraisal values are based on 6% commission for the realtards.
excuse my typos…typing while talking on the phone. Always a bad ideal.
Two words sum up the current market: FALSE BOTTOM
Everybody is assuming that prices will go down. What happens if prices go up, or are at least stable? I think making a prediction either way is difficult.
Now, I think it’s safe to say that interest rates are as low now as they can possibly be. Prices may go up or down a little, but probably not a lot either way any time soon. There is currently a good sized tax credit if you buy soon. Waiting will cause you to pay rent in the mean time.
Factor all those factors in, and it seems clear to me that now’s the time to buy-if you are going to buy at all (instead of renting forever).
Now, if you really think prices will drop 20%, 30%, 40%, 50% more, waiting would be logical. I think you are wrong on that, however.
Maybe the tax implications favor waiting in the specific scenerio I outlined. But then there’s the $8,500 tax credit and the rent you pay in the mean time which you haven’t factored in.
Therein lies the disagreement. I believe home values will fall over the next two years after the tax credit expires and as interests rise.
The current tax credit and the rent I pay is factored into my thinking. Everyone makes rent out to be some black hole for money. Like it is “money flushed down the toilet”.
I consider the excess property taxes, interest payments (none deducted amount), loan fees and every other cost involved in home ownership “money flushed down the toilet” if you buy at the wrong time.
Rent I pay is at this time less than what I would be paying if were to own the same home (MUCH, MCUH less than what I would be paying if I were to finance with FHA). This is the underlying problem with today’s market and one of many reasons I believe home prices will come down.
How many people out there can really afford to buy $1mil tract homes that Irvine seems to have so many of.
One thing I am curious about is how the homes in irvine (built with a month a two) will hold up over time. What are these homes/neighborhoods going to look like 20-30 years time? Most of the homes are built on the cheap and below the skin they are just not made for the long haul.
What happens if prices go up, or are at least stable?
Why should they remain stable? LOL!
Take away the low interest rates, tax credits, and tax-payer cosigning first time buyers, and what do you think is going to happen?
DUH! The whole thing is like Weekend At Bernie’s starring Uncle Sam.
Geotpf,
Have you been drinking today? I know some of the guys on the forum get after you at times, but you deserve it today.
Do you think renting is just shoveling money into the fireplace? People need to live somewhere and it is currently much cheaper to rent compared to buying in places like Irvine. What do you think paying mortgage interest, property taxes, HOA, insurance, maintenance is…it is money you never see again and will not increase your equity 1 penny (kind of like renting just at a much higher cost).
I personally think properties in Irvine or desirable parts of OC will decline another 15%. Thus, I will wait until all crap gets flushed out of the market. In the meantime, I rent very and am banking lots of money. I will not risk my hard earned money in this crazy market.
Have you been drinking today? I know some of the guys on the forum get after you at times, but you deserve it today.
You cannot reason with him. He spreads propaganda and misinformation. He obviously works for the Real Estate Industrial Complex (either a realtor, mortgage hustler, or maybe even for the Irvine Company).
I have said many times in this thread that renting makes more sense than buying (in Irvine) in most circumstances.
But if you are going to buy at all, now’s the time.
Renting > Buying now > Buying later
It’s better to buy a house at a lower cost and higher interest rate then to buy a house at a higher cost and lower interest rate.
This is more true if you have high savings.
Shevy,
This guy totally misses some fundamentals. Did you see the end of the article? That explains why he takes that position. What a bunch of crap
Marc Roth is the founder and president of Home Warranty of America, which touches just about every part of the real estate industry since it sells through builders, real estate agents, title companies, mortgage companies, and directly to consumers.
Is there any way to try and purchase properties that are part of the shadow inventory?
If not, does it really matter to the realtors that we know about it?
Or are you saying it just means there’s no rush to buy now if you don’t find exactly what you want because prices will be down for a long time?
The whole point of shadow inventory is that those properties aren’t currently for sale, but will be at some point.
Of course, there are multiple definitions of “shadow inventory”. The strictest definition is just bank owned properties that aren’t currently for sale. I personally suspect this is a very small amount, with most of those currently being prepped for sale or have legal reasons preventing their sale.
The more loose definition is every property that is behind on their payments. Not all of those will become bank owned. Some will get caught up (no sale), some will get loan mods (no sale), some will become successful short sales, some will be sold at auction, and some will, eventually, be sold as REOs.
No one can deny that there is a huge shadow inventory. It is also incorrect to hope or cling to a firm belief that this will result in a huge drop in Irvine prices…banks will take their time in releasing this inventory, expect the housing market to move sideways for a while. there might be some bargains but it is hopeless to link the two together and assume that one can snap a house like this for less than 500k in two years. It could happen if this were a free market…it isnt 🙂
Yes, I have a post coming out soon echoing what you wrote. The lenders will release the inventory over time and drag this out forever.
agreed. which is why I say there won’t be a tidal wave of foreclosures. Instead, I think they will drip out over the next several years (or maybe even longer).
Well this dripout over several years will hamper any chances of recovery. I still strongly believe that unemployment and NOD’s are not a joke. Those in NOD due to unemployment cannot continue to hunker down in their homes for long, banks may forestall the sales as well but at the end of the day those holding MBS/CDO’s will need to be serviced and thats when we may see Round 2 of panic. Until now folks shrugged off MBS/CDO’s on subprime issues, now you are staring at AAA rated high quality paper that is going to go sour, resulting in collapse in bond market, massive losses in money market accounts, etc.
In the “Grapes of Wrath” the land owners was destroying food so that prices would go up. The migrant workers from Oklahoma were constantly hungry, but were stopped from taking the unwanted food.
The housing debacle may have similarities to the example above. Banks will start kicking families out of homes even though it will sit empty for months or years.
“Grapes of Wrath” is an excellent novel. But the excess of destroying food/crops were federal govt programs and large agric. business practices to inflate the price of food at the expense of the people. The poor were pacified by govt. food give aways and “we feel your pain and care for you radio PR.” History repeats its self, but with slightly differ spin. It’s now a big power grab using carbon dioxide, housing and banking by way of the TV and internet.
IrvineRenter,
It’s called a cartel when companies are leading the way, but it’s called good public policy when the federal govt or FEDs lead the way.
“It’s called a cartel when companies are leading the way, but it’s called good public policy when the federal govt or FEDs lead the way.”
Very astute observation. It will be interesting to see how the bank cartels holding all our residential property are treated by the populace.
It is also incorrect to hope or cling to a firm belief that this will result in a huge drop in Irvine prices…banks will take their time in releasing this inventory, expect the housing market to move sideways for a while.
I don’t buy into these UFO theories about the banks holding back inventory to artificially keep prices high – it just does not wash with me.
I don’t think that these financial institutions are really that organized; they are just a bunch of hustlers.
I think that what is more likely is they are pretending to be solvent. If they just let everything go at firesale then they will no longer be able to pretend that the assets are worth what they have them valued at in their books.
Holding back inventory is not what is slowing things down. What is slowing everything down are the gimmicks being used by the government to snare first time buyers.
If FHA stopped co-signing loans for first timers, the bottom would fall out of Irvine’s market as there is no doubt in my mind that almost all of the buyers are move-ups based upon the large downpayments being seen in the numbers posted by IrvineRealtor.
Wait for FHA to blow up and then watch the trickle up.
Hi,
I am hearing that reality on the streets is that houses are being outbid on and that prices in OC will not fall anymore. yet on the internet and blogs we talk about prices to fall in 2010…who is right with govnmt intervention and people willing to buy houses especially the fence sitters like me who have been waiting for so long when do we cave in and buy…I dont want to loose money on the biggest purchase of my life and am comfortable renting but is reality on the streets worth taking into account? please help?
In 2007 and 2008, it was easy to give an unqualified answer to your query: don’t buy. Now that we have payment affordability, there are certain circumstances where you can buy, particularly if you will be a long-term homeowner.
Going forward the signals will be mixed, but the likelihood of sustained appreciation is low, and the likelihood of a slow continued decline in prices is high. The FED may have put a floor preventing a 30% drop in a year, but they probably can’t fight a 15% drop over 3 years.
Do not buy now because you are worried about being priced out. Prices will probably move lower, and affordability may get a little better if you wait. We will have more selection at better prices in 2010 and 2011.
I am hearing that reality on the streets is that houses are being outbid on and that prices in OC will not fall anymore
Be careful. These are the same people who were saying house prices don’t go down, soft landings, green shoots.
Don’t let them manipulate you. Verify their arithmetic – look at the numbers. No question that this is not over.
“But if you plan on taking out a loan, buying now when interest rates are stupid low is the best plan. ”
Please tell me what happens when I have to move in 5 or 10 years, when interest rates are higher. Are home prices going to magically stay inflated, even in a high rate environment? It’s so hard to tell with all the intervention, but I’m not betting on it.
Renting is SO much cheaper right now. A handful of friends (three to be exact) recently bought homes and they’re stretched to the limit with their finances. Their personal finances are extremely volatile; no money to eat out, not much for entertainment, scraping by on just enough to cover basic living expenses, yet 50%+ of their take home pay is going toward their housing expenses.
They went ‘all-in’ betting on the fact that they will keep their jobs and they will get pay raises in the next few years.
Renting is better than buying in many circumstances (in Irvine). But buying now is better than buying later in many circumstances.
“(1)Renting is better than buying in many circumstances (in Irvine).”
There are some properties, particularly at the low end, where this is true. Of course, these may not be a property desirable for long-term residence.
“(2) But buying now is better than buying later in many circumstances.”
I don’t think that is the case in many circumstances right now. Perhaps a 10+ year homeowner locking in a very low interest rate might get some benefit, but on an inflation adjusted basis I question whether or not there is any benefit to buying right now.
Yeah that original article writer treats the $30k in avoided interest over the course of the next 30 years as if it were equivalent to the risk of losing $30k if you have to sell in the next few years. Apparently he’s never heard of the time-value of money (or whatever that’s actually called).
There’s also a good chance that you might gain money. Future pricing is very unclear, IMHO. Prices might fall in future-but they are going up right now, albeit tentatively and after large falls.
But, again, I think if your job or life situation is even slightly unstable, renting is probably the best bet. Monthly rent (in Irvine) is less than monthly costs of ownership-not just on low end properties, but on high end ones as well. In fact, probably more so on high end properties. Rich people perfer to buy rather than rent, which means rent on high end properties tends to be a better deal than buying the same property, especially factoring in all costs.
Rich people perfer to buy rather than rent
Rich people don’t take out mortgages.
But they buy properties.
My point is that, on the medium to high end, the demand for rental properties is low and the demand for properties to purchase is high. How the properties are purchased is not material.
I saw this house on the 3rd day it was listed. The location is nice, the house overlooks a park. The bedrooms do not have any doors, The kitchen is gutted. the toilet is missing. The bathrooms are bad, i am guessing that someone needs to spend at least 25k to get it into a livable state. 3-4 families drove by while we were looking at this house. My assumption was that this house will go to an FCB in a day or so…so the myth of recession proof housing in Irvine perpetuates…
The banks will not flood the market with Shadow Inventory. They are not that stupid! The market you see today will continue for years until the Shadow Inventory is turned over. There is no pressure for banks to dump the Shadow Inventory. The gov likes having people putting their house payments into the consumer spending economy instead of paying rent or a mortgage. Don’t hold your breathe for a big surge in Shadow Inventory hitting the market until the gov annouces new banking legislation.
> The banks will not flood the market with Shadow Inventory.
Just means RE will be a non-performing asset for years, if not decades.
Most home owners I know still think their house is an “investment”, a goldmine to make them rich. Lots of amateur “investors” out there looking for investment properties.
Last thing I want to do is “invest” in an asset that just went through an historic bubble.
We’ll see who comes out on top in 10-20 years.
Don’t forget this quote:
“We currently live in an era where perception is king and reality is something you watch on TV.”
This is not a real Real Estate market.
Irvine Renter:
I think most of the stats on shadow inventory are open to question.
For instance, the above chart showing: REO listing 5603, Auction listing 7727 aren’t necessarily mutually exclusive; there could be significant overlap.
Same objection to the bar graph on your 12/9 blog. The same bar shows “option adjustable rate” and “Alt-A”. They appear as two distinct colors indicating mutual exclusivity. In fact, “Option..” is a type of loan and “Alt..” is a type of borrower. If borrower (Alt..) has the loan (Opt..) then classifying them separately doubles the height of the bar erroneously. (that particular bar graph has appeared in numerous articles; this blog is not alone).
I completely agree that there is a significant shadow inventory. I simply disagree with stats that mix apples and oranges (like those exemplified above) in an attempt to clarify the size of the inventory. No wonder there is so much disagreement.
Like any good mystery, the people with the data who could clear it up — the lenders — are not telling. One has to suspect they are not telling because they know how bad the problem is and telling the general public would not help their stock price any, so they keep quiet.
I don’t think the analysis on the other website is the best, and there are significant problems with the methodology.
Why should they start talking when they are having such a dandy of a time playing charades with the public, pretending to be solvent, etc.
Keeping all those Compton L.A bungalows on the books at 500K a pop keeps everybody happy and employed.
The 12 Months Of Default (Christmas Song)
https://www.youtube.com/watch?v=M_J7gXDr3GA&feature=player_embedded
I’m not sure why it has now become ‘common wisdom’ that the banks will not flood the market with their shadow inventory….. I think that there is a mistaken assumption that the entry into the marketplace of this inventory, while it may go up (or down) is relatively linear.
On the other hand, I think that a case can be made that there is a significant risk that this new inventory of foreclosed properties hitting the market is going to be less ‘linear’ in nature and more ‘first for the exits’.
For example, take a smaller (regional sized) bank or a typical hedge fund that holds a significant number of non-performing mortgages. If they predict a gentle, if not steady decline in the value of these assets for the next 18-24 months then there is a good reason to be the first one to unload them back onto the market and get today’s pricing. What is the benefit of waiting?
Institutions that are ‘first for the exit’ may start the depreciation ball rolling again – too much inventory for sale – but they won’t be affected by it as they’ve already sold out. In this scenario it’s those who are last to put their properties on the market are the ones who are going to suffer the most (hello BoA!).
What is not clearly understood is the political aspects of dumping all your foreclosed inventory now. It’s not too hard to imagine the threats, real or implied, by bank regulators to any institution that tries to expedite a clearing of their books.
What you are describing is the basic instability of a cartel. The lenders with the least exposure and the greatest balance sheet health should be first to the exits while there is still value to be had. The lenders with too much exposure or who are too weak to take the losses, those lenders will hold their depreciating assets and try to wait for a brighter tomorrow. The benefit of waiting is survival, nothing more.
You described a case in which the bank is dealing in real dollars. Don’t over think it. The bank accounting rules are now in favor for banks to hold onto non-performing assests. As long as this is the case, banks will not dump assest inventory. Its all about what then banks’ books look like, not how many dollars they actually have in the pocket. Refer back to my previous quote.
I’m not sure why it has now become ‘common wisdom’ that the banks will not flood the market with their shadow inventory
They can’t do it. They know that the actual value for most of their shadow inventory is probably half of what they are pretending it is worth on their balance sheets.
If they unload everything at real market value then are forced to admit that they are bankrupt. No fun for bankers!
They are going to unload them slowly while licking their wounds. They are running a nice shell game right now where they borrow money for nothing and invest for profit.
It’s a good thing that we have a central bank that has the power to create money out of thin air to allow them to do this.
Why do you all think that the banks hold all the mortgages? I think there are very few portfolio lenders out there anymore. My understanding is that the majority of mortgages were packaged and the bagholders are now the purchasers of these securities. There was a post on Ticker Forum about this a week or so ago although I can’t find it now. Foreclosed homes aren’t on the market because the MBS holders have already made their investment and they are stuck. They can’t sell their MBS without taking a huge loss and the servicers are in charge of the foreclosure decisions. The servicers have no incentive to foreclose as long as they are making bank on servicing fees and late fees. Foreclosures will start in earnest when the mortgage servicers can no longer make money on charging fees. And then the shit will hit the fan.
Wall Street is doing great.
Better than ever.
$450K is what this fox hole is worth.
With the government propping housing with your tax dollars who knows where this is headed. This game seems like the unmentionable scam company that told people to sell soap to your friends and family. Not a market economy any more. Good bye capitalism.
I think it’s worth $10,000,000.
pesos?
In good shape, it’s clear that it’s worth $750,000-$780,000.
Home Value Estimates for 12 FOXHILL
Low Estimate High
Zillow $646,850 $761,000 $814,270
Eppraisal $666,112 $783,662 $901,211
Cyberhomes $686,931 $763,257 $877,745
Range: $654,000 – $920,000
Average: $298/Sq. Ft.
This home at $298/Sq. Ft.: $751,909
From the words “cash only”, and what mike in irvine said a few posts above, it’s probably worth almost exactly $594,900 list price, considering that it’s apparently in very poor condition inside.
Just because you would only pay $450,000 doesn’t mean somebody else isn’t willing to pay much more.
Just because you would only pay $450,000 doesn’t mean somebody else isn’t willing to pay much more.
Don’t worry – once FHA pops and there are no more subprime lenders to Goose the first time buyers to enable your foolish buyers to “pay much more” – it will no longer be an issue.
I expect no significant price drops until FHA fails. It is more than obvious that the current prices are being artificially maintained at the entry level. It’s not going to last.
Shadow Shadow inventory – the people who are currently thinking, “why the hell am I still paying if nobody else is?”
I did some calculations and my result was: A LOT.
Matt,
this wins my vote for “post of the day”.
LOL
That rumbling you hear is all these properties coming down the pipeline. It is unstoppable, as the free market always is. There are not enough resources to counter free market forces seeking balance.
Any resources used in this manner are completely wasted.
Has anyone reconciled/verified the IHB ForeclosureRadar data? There are formatting issues once in a while but it seems OK unless I’ve misinterpreted the output. A quick perusal of OC cities shows:
City PreFore Auction Bank TotDistrsd RedfinMLS
RedfFore
ANA 731 1,118 219 2,068 643 69
AV 172 172 42 386 220 15
CDC 52 49 8 109 131 6
CDM 19 26 6 51 357 3
CM 182 239 45 466 218 13
DP 103 107 22 232 318 11
FUL 316 389 74 779 317 25
FV 93 117 19 229 89 9
GG 399 590 101 1,090 280 19
HB 332 353 82 767 505 23
IRV 381 436 57 874 540 18
LB 53 73 15 141 365 5
LF 177 201 50 428 146 12
LH 113 148 33 294 172 6
LN 213 255 61 529 295 19
LR 94 90 21 205 90 6
LW 33 9 13 55 376 10
MV 394 444 77 915 290 15
NB 156 149 33 338 848 14
NC 30 42 7 79 133 2
PLA 111 115 31 257 112 8
RSM 188 204 53 445 134 6
SA 753 1,314 273 2,340 598 44
SC 201 237 55 493 400 19
SJC 124 157 13 294 187 15
TUS 208 221 42 471 174 11
YL 164 203 49 416 238 13
Total 5792 7458 1501 14751 8176 416
TotalFR Auc/Bank 8959
Some of these look, um, distressing but you can draw your own conclusions. You can probably fill in the run rate pretty quick too.
*Typically* you would pay less in interest than you would on rent, HOWEVER when you factor in property taxes, HOA fees, and Mello Roos things change dramatically.
Suppose you finance $450K to purchase a home/condo:
5% of $450K is $22,500 (approx interest payment in year one)
1.5% of $450K is $6,750 (property tax/mello roos)
HOA fees of $250 * 12 months = $3,000
So right there you’re looking at approximately $32,350 in ‘lost’ expenses; i.e. not contributing to any increased equity. Now there’s some benefit at tax time since a big chunk of that can be written off (that’s still much higher than the standard deduction), however it’s still ‘money down the drain’ just like rent payments.
The big question is, can you find a $450K house/condo to rent for less than $2700 a month ($32,250/12 months)?
As time goes by the amount of annual interest paid will certainly decrease and provide some advantage over renting, so this scenario *may* favor buying in the LONG term (10+ years).