Is the housing market ready to survive without government props and supports? We are about to find out.
Irvine Home Address … 2 SANTA LUZIA AISLE Irvine, CA 92606
Resale Home Price …… $699,000
{book1}
Don't you know me I'm the boy next door
The one you find so easy to ignore
Is that what I was fighting for?
Walking on a thin line
Straight off the front line
Labeled as freaks loose on the streets of the city
Walking on a thin line
Angry all the time
Take a look at my face, see what it's doing to me
Huey Lewis and the News — Walking on a Thin Line
To all of you who served in the armed forces: thank you. Your sacrifice does not go unnoticed.
I hope everyone is enjoying this Memorial Day holiday.
And now, back to real estate…
The bust's second act
May 25th 2010, 15:12 by R.A. | WASHINGTON
FOR a brief moment last fall, it looked as though the American housing sector might not be the persistent economic drag economists had feared. Home prices and sales leveled off and began climbing. Construction did the same. In the third and fourth quarter of last year, residential investment was a minor but positive contributor to American output growth. Buoyed by a generous homebuyer tax credit and mortgage rates held down by Federal Reserve purchases, housing markets seem poised for stability, if not a new boom in activity.
But the good times haven't lasted. Construction and builder confidence have weakened once again. The latest data on existing home sales show a spike in activity and the best April performance since 2006. But this was almost certainly due to the looming end of the federal tax credit. Sales also rose and spiked before and immediately after the previous deadline, last fall, only to decline again through the winter. More worrying still, the previous spike in sales coincided with a decline in housing inventory. This time, inventories have risen dramatically. Even as the end of government incentive programmes lead buyers to exit the market, the number of homes for sale will have grown significantly.
And so it's not surprising that prices have also been falling again. According to the Federal Housing Finance Agency, home prices declined 1.9% from the fourth quarter of 2009 to the first quarter of 2010. Prices were up 0.3% in March, according to the FHFA data, but the general trend is not encouraging. The latest Case-Shiller home price figures are similarly disappointing. Both of the Case-Shiller national indexes had declined for six consecutive months, through March. Only two of the individual markets, San Diego and San Francisco, saw a rise in home values in the first quarter. Total declines from last fall's price peak haven't been catastrophic. But they are troubling. Nearly a quarter of all mortgage borrowers remain underwater on their home loans. In the first quarter, the share of prime loans that were delinquent or in foreclosure rose sharply. That's bad for housing inventory, bad for home prices, and bad for the residential investment outlook.
These trends are the more worrisome given the end of the homebuyer tax credit and of Fed purchases of mortgage-backed securities. Just this week, the head of the Federal Housing Administration declared that, "This is a market purely on life support, sustained by the federal government…having FHA do this much volume is a sign of a very sick system.” The federal government may come to regret its decision to focus on measures aimed at encouraging sales, rather than on efforts to deal with negative homeowner equity. The latter issue has made for a steady-stream of foreclosed-upon housing inventory, too substantial to be absorbed by new buyers. And so with government measures winding down, the housing bust is free to carry on as before.
It is unlikely (though not impossible) that prices will plummet once more; price declines are likely to be small relative to those experienced in 2008 and 2009. But small declines are enough to do damage. Four years after the housing boom reached its apex and the bust began, and end to the mess remains just out of reach.
Delaying the decline
If justice delayed is justice denied, what is a market bust delayed? For as ominous as the signs are for our market, prices locally will likely continue to rise for the near term. Lenders have constricted inventory by failing to approve short sales and failing to foreclose on delinqent borrowers. With interest rates below 5% again, payment affordability is good. Until more product is released to the market or interest rates go up, prices will hold steady or rise. Unless lenders consider squatting a permanent solution to the problem, this product will come to the market, and it will impact pricing. it is only a matter of time.
Auction with equity
Today's featured property is a rarity in the trustee sale market since the crash: and equity owner who did not sell prior to auction.
The property was purchased on 4/15/2003 for $490,000. The owner used a $392,000 first mortgage and a $98,000 down payment. On 1/13/2005 he opened a $100,000 HELOC, but there is no indication that he used it. Then he defaulted:
Foreclosure Record
Recording Date: 05/26/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 02/18/2009
Document Type: Notice of Default
I looks like they gave him about nine months after the NOT was filed before they actually went to auction. It isn't known why the owner did not sell and obtain his equity during that time.
The opening bid at auction was about $416,833.94. It was quickly bid up to $596,000. It is being flipped for a quick profit.
Irvine Home Address … 2 SANTA LUZIA AISLE Irvine, CA 92606 
Resale Home Price … $699,000
Home Purchase Price … $596,000
Home Purchase Date …. 3/16/2010
Net Gain (Loss) ………. $61,060
Percent Change ………. 17.3%
Annual Appreciation … 65.5%
Cost of Ownership
————————————————-
$699,000 ………. Asking Price
$139,800 ………. 20% Down Conventional
4.87% …………… Mortgage Interest Rate
$559,200 ………. 30-Year Mortgage
$142,600 ………. Income Requirement
$2,958 ………. Monthly Mortgage Payment
$606 ………. Property Tax
$225 ………. Special Taxes and Levies (Mello Roos)
$58 ………. Homeowners Insurance
$151 ………. Homeowners Association Fees
============================================
$3,998 ………. Monthly Cash Outlays
-$719 ………. Tax Savings (% of Interest and Property Tax)
-$688 ………. Equity Hidden in Payment
$262 ………. Lost Income to Down Payment (net of taxes)
$87 ………. Maintenance and Replacement Reserves
============================================
$2,940 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,990 ………. Furnishing and Move In @1%
$6,990 ………. Closing Costs @1%
$5,592 ………… Interest Points @1% of Loan
$139,800 ………. Down Payment
============================================
$159,372 ………. Total Cash Costs
$45,000 ………… Emergency Cash Reserves
============================================
$204,372 ………. Total Savings Needed
Property Details for 2 SANTA LUZIA AISLE Irvine, CA 92606
——————————————————————————
Beds: 3
Baths: 2 full 1 part baths
Home size: 1,678 sq ft
($417 / sq ft)
Lot Size: 3,161 sq ft
Year Built: 1996
Days on Market: 40
Listing Updated: 40289
MLS Number: S614144
Property Type: Single Family, Residential
Community: Westpark
Tract: Rave
——————————————————————————
Gorgeous Home in Westpark. Upgraded Marble in entrance. Walking distance to school & park. Custom Window Covering. Mirrored walk-in closet door. Cathedral-vaulted ceilings. New Paint. Move-in ready.
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I will not be participating in the comments today. It is my tenth wedding anniversary, and I will be be spending the day out with my family.
Ten years in, and I love my wife more than the day we were married. I am looking forward to the next ten and many more.
Happy Anniversary, IR.
In 1995 this home sold for $240K. That was a huge premium to surrounding areas. In 1995 you could buy a much bigger house with a real yard in surrounding areas. The Irvine premium is not new but it has gotten stronger.
I’d be curious to see how this one plays-out. Most homes you profile (even some that appear as WTF pricing) are in the LOW 300’s per sq ft.
At $320/sq ft, this investor stands to lose a lot of money!
Will they really get over $400/sqft???
That’s what the comps say, 4 hundred a square foot is the market value. I still don’t understand why someone would buy this as opposed to an extremely nice house with a nice yard only 10 miles away. That’s the Irvine premium.
“Is the housing market ready to survive without government props and supports? We are about to find out.”
The government has stopped some support of housing, but the fed holding rates at 0% and the unlimited support of Fannie, Freddy and FHA are still big props to the market.
We are still quite some way from housing standing on its own.
I suspect the owner giot sick or divorced and their life fell apart.
people heavily depressed lose the will to fight
Congratulations, Mr and Mrs IR
as for this place, while PR may claim that this is “rental equivalent”, I doubt that you could get $3000/month for this 3/2.5, even with the “Irvine premium”.
$2250? $2400?
either way, this isn’t a “forever house”, but a starter.
I agree maybe $2500 a month, though it appears the immediate are is renting for $2500-2800 for this sq. footage. This immediate area seems to have a premium 10% greater than the typical Irvine premium.
Congratulations IR!
IR, I will respectfully dispute you on one major point.
The housing & credit rampage of the 00s was NOT caused by an unregulated free market. This particular meme is clouding our thinking and setting us up for the next financial debacle.
The insanity of the past 15 years, with the total collapse of lending standards and crazed speculation, was the result of government-driven economic and social engineering. Were it not for the alphabet soup of socialized housing programs like FHA and the “private” agencies like Freddie, Fannie, and Ginnie, which have always had the implicit backing of the taxpayers, lenders would have pulled in their horns around 2000 or so, when it became obvious that things were getting a little out of hand as evidenced by price hikes that were divorced from underlying fundamentals.
There is nothing “free market” about deregulating a particular industry while offering it unlimited government assistance if things go bad. A truly free market means NO government involvement whatsoever. No FHA, no Fannie, no Freddie, no Ginnie, and no Federal Reserve to push interest rates down in spite of increased lending risk. And it means NO bailouts ever. You live and die by your own judgment. You keep your profits and you eat your losses.
We had to know what we were setting ourselves up for with the S&L bailouts of the 80s. But the real signal to go insane was the Long Term Capital bailout, after years of warning regarding the amplification of risk inherent in the exotic new derivative products that began to be used in the 90s. Yes, in the early 90s, everything was in place. When LTC was bailed, it became very clear that our politicians would do whatever was necessary to prop up an increasingly corrupt and over-leveraged financial system, to foster the illusion of growth, when the only real economic growth we’ve had in this country since 1980 is in debt. Then, after 2000 and the collapse of the high-tech stocks, our leaders were committed to doing whatever was necessary to keep the money moving, and decided that the best way to promote growth was through asset inflation and debt creation. This was done deliberately and knowingly, in spite of warnings from Paul Volcker, among other prominent financial leaders, that the risk in the system was growing.
We have not had free market capitalism since around 1900, and every government intervention since has skewed markets in such a manner as to require more government intervention to correct problems caused by the previous one.
Freedom and responsibility walk hand in hand. This debacle could have been prevented simply by letting the failures happen early on, and by letting the major financial players know that there would be no succor for them from the taxpayers if their bets failed them. Financial concerns do not take risks they know they’ll have to eat. We assured them that they would not suffer for their insanity and malfeasance. What our political leaders did was not create a truly free market, but the equivalent of handing your kid with ADD and hyperactivity an American Express with an unlimited line of credit and telling him you’ll pay the bill but that you trust him to do the right thing. Go ahead and play, we told everyone, someone else will pay.
What did we expect to happen? And how can we say we had a truly free market when the taxpayers at large are enslaved to pay for mistakes they had no part in? Far from being a free market, the housing and credit markets of the past two decades are a wonderful example of the evil wrought by politicians purchased by the financial interests.
“Were it not for the alphabet soup of socialized housing programs like FHA and the “private” agencies like Freddie, Fannie, and Ginnie, which have always had the implicit backing of the taxpayers, lenders would have pulled in their horns around 2000 or so, when it became obvious that things were getting a little out of hand as evidenced by price hikes that were divorced from underlying fundamentals.”
Freddie and Fannie were late to the game. They didn’t create the financial crisis, but they participated in it. It’s sophistry to suggest they were the major factor.
“And it means NO bailouts ever.”
This potential threat to the future of an institution isn’t persuasive to the individuals who can become fabulously wealthy by running it into the ground. Seriously, the threat is less than meaningless.
“This debacle could have been prevented simply by letting the failures happen early on, and by letting the major financial players know that there would be no succor for them from the taxpayers if their bets failed them.”
I’m not sure how we could have helped the failures to happen any earlier. Banking crises and failures occur on their own time. As it happened, the interconnected nature of banking and the staggeringly huge unregulated derivatives market threatened to turn one large failure into a world-wide calamity. You can make an argument for different government action, but there’s simply no argument to be made for the government to do nothing in the face of a failure of the interconnected banking system.
This potential threat to the future of an institution isn’t persuasive to the individuals who can become fabulously wealthy by running it into the ground. Seriously, the threat is less than meaningless.
This may be true, but when a company is run into the ground; the individuals have to find a job doing something else. Your assumption is that companies can keep running themselves into the ground and a new company will hire all the people who ran it into the ground. Nonsense. Only the govt can perpetuate a system such as this.
“This may be true, but when a company is run into the ground; the individuals have to find a job doing something else.”
Depends upon when you get out and how high up the food chain you are. The people who got out in time and were high enough don’t have to work for the rest of their lives.
Another way of looking at it is the BP gulf disaster. The continuous efforts of corporations to increase their profits almost always comes into conflict with the risk management strategies of the company. Human behavior tends to disregard risks which have not occurred in recent memory, so barring external regulation or control, companies will tend to keep reducing the effectiveness of their own risk management policies. BP did this by bypassing safe operating procedures in the interest of advancing their schedule (see the 60 Minutes and Wall Street Journal reports on this). The banks did this by handing out ever more risky loans. In both cases, there were people within the organization warning against ignoring safety and risk management protocols. But, these warnings were ignored for the sake of increasing profits.
People do stupid things. Corporations do stupid things. And the people who run corporations are only focused on the short term prospects of their company, because that’s what the shareholders want them to do — to prop up the stock price in the short term.
Does the BP CEO regret creating a corporate culture which encouraged people to bypass important safety protocols? Probably now he does. After the damage has been done.
Here’s Krugman’s latest piece on why the housing crisis was not caused by government interference in the lending business (I wish he would go into more detail):
http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/
I am in your camp. I don’t think many remember LTCM, but Wall Street does. I sent the message: roll the dice, if you get snake eyes, the government has your back, if you win big, you keep the stack of chips.
Looking at the bonuses on today’s Wall Street, I am not sure things have changed much.
LL,
Well written. Welfare for the industrialist-banksters have been going too long. It’s a win-win for them and a partial win/loss – definate loss for the wage earners. The current system is definately not free market — a hybrid of capitalism and communism/socialism. Capitalism to remove the wealth from America, while socializing the loss to America.
AMEN LL.
from the main article above: “With interest rates below 5% again, payment affordability is good.”
I simply do not see this. I’m currently renting a 3BR SFR in Woodbridge. My monthly housing payment would nearly double, yes DOUBLE!, if I were to use an FHA loan to buy the house that I’m currently renting, even with loan rates at 5%.
Even after accounting for the tax advantages of owning and ignoring maintenance costs, it would cost me an additional $1,700/mo to own this place vs. renting.
-Darth
IR – do you think a lender would move to foreclose quicker on a property with equity, or one deep underwater? I think owners with equity can work out a mortgage mod to get right, but mods just don’t work for deep underwater borrowers. From the point of working through the weakest positions, you pick the furthest underwater. BUT, those are the loans the bank will take the worst loss on. This auction they may have booked a profit!
Foreclosure a rent-free approach?
[“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”]
Why did they lend to this guy to buy rental properties? Did his rental properties’ loans have non-owner occupant riders?
Congrats on the 10 yrs. You must have gotten married the same week we did. Our 20th was just celebrated. Yes, it is possible. Hard to believe as it’s been a mere twinkling of an eye since we got hitched.
Remember: Marriage isn’t a word, it’s a sentence.
🙂
My .02c
Soylent Green Is People.
I really like your blog and would like to subscribe to it.
But I don’t want to subscribe in a way that it goes to my email. I would think most people’s desire is to pare down the amount of email they get, not needlessly increase it.
But what I’d like to do is subscribe in my reader, but it seems to me you don’t allow that. If you do, my bad, if you don’t, if others are like me, you’re losing a lot of subscribers. You have a good blog.