What do you think was the biggest real estate story of 2009?

Irvine Home Address … 240 LEMON Grv Irvine, CA 92618
Resale Home Price …… $274,900

{book1}

Should auld acquaintance be forgot,
and never brought to mind?
Should auld acquaintance be forgot
and days of auld lang syne?

For auld lang syne, my dear,
For auld lang syne,
We’ll take a cup o’ kindness yet
For auld lang syne

Auld Lang Syne — Robert Burns

Since today is the final day of 2009, and the final day of this decade, I want to examine the biggest residential real estate news stories of 2009, and recap the biggest news story of the decade, the Great Housing Bubble.

Prices Didn’t Go Down (much)

Depending on where you were, prices began to stabilize in 2009, and the mainstream media saturated us with bottom calling. Don’t be confused, the decline in house values continues despite spin. Ordinarily, I would be celebrating market stabilization (contrary to popular belief, I am not a permabear). However, the more interesting stories of 2009 relate to the reasons prices did not go down in 2009 – they should have — and they would have if not for the other major news items.

Shadow Inventory Builds

Shadow Inventory is a problem that stems from the solutions to the core problem of the housing bubble; overpriced homes and the oversized debt that inflated home values. The mountain of Ponzi debt and a deteriorating economy puts borrowers in circumstances where they default, and with government encouragement, including various Bailouts and False Hopes, the defaulting borrowers stay in their houses rent-free until lenders improve their capital ratios, thus helping politicians avoid soup lines and Obamavilles. The solution to the default problem is amend, extend and pretend; the result of the solution to the default problem is Shadow Inventory.

The major story of 2009 is the deferral of all real estate market problems through the creation of Shadow Inventory. Policy makers had many options, and they chose the most politically expedient; they deferred dealing with the reality of defaults by pandering to false hopes, manipulating financial markets, and creating a massive overhang of eventually-to-be-for-sale homes.

In Shadow Inventory Orange County, I defined Shadow Inventory; (it) is the total of Preforeclosure Inventory, REO and some other sources.
Preforeclosure Inventory includes all mortgages currently 60 days or
more behind on their payments that are likely to become foreclosures
but not yet REO.” Currently, this Foreclosure backlog is estimated at 1.7M, and the problem is getting worse since Serious U.S. mortgage delinquencies up 20 percent. This is important because a glut of shadow properties could hurt housing prices.

Borrowers are defaulting in large numbers

I don’t think anyone denies that California notices of default hit record. The default rate was 10.7% in September, but it is projected to hit 14% by the end of the year, and foreclosures for “seriously delinquent loans” topped 1 million in Q3. There is no way, short of ignoring data, to think we do not have a shadow nventory problem because homedebtors are making their payments. The only question is what to do about it. The current solution is to attempt loan modification programs… endlessly….

Loan Modification Programs Fail

In SI OC, I noted, “Despite rumors to the contrary, loan modification programs have been completely ineffective. Very few people actually get the modifications, and most of those people re-default and end up in foreclosure anyway. If these programs were effective, it would show up in high cure rates; 6.6% is not very high.” Results have not improved much for loan modification programs as borrowers with modified loans are falling into trouble. It is so bad that the Treasury Needs a Plan B for Mortgages. If you want the real scoop, someone can explain The Real Reason Mortgage Modifications Fail.

Lenders Are Foreclosing… slowly

With the plethora of moratoria winding down, foreclosures fall, but banks bracing for next big wave. Since it is obvious foreclosures have not kept pace with defaults, at some point, foreclosure rates will increase; Los Angeles-area foreclosure rate increases in October.

The Federal Reserve Buys Agency Paper

The Federal Reserve actually began buying agency debt in late 2008, Fed Buys $5 Billion in Agency Debt, but the program did not take over the mortgage market until mid 2009, and just recently, Treasury has uncapped the support for Fannie and Freddie for the next three years. Of course, the problem with this is that Fannie Mae Losses May Exceed $200Bn.

Without this support according to Geithner: “none … would have survived”. He is wrong, of course, as the only real losers would have been lenders, investors and the people who inflicted this terror upon us, but selling fear has enabled him to secure billions of dollars in aid and direct government bailouts. Not a bad deal — for the bankers.

Payment Affordability Hits Bottom

As I wrote in Low-End Payment Affordability, I believe the cost of ownership on a monthly payment basis has hit bottom for low end properties in Irvine, and in many of the subprime dominated markets like Riverside County. Although I believe prices will fall further, mostly due to inventory issues, payment affordability will get worse as higher interest rates make for smaller loan balances.

Fixed-Rate Mortgage Rates Hit Bottom

Ben Bernanke may have his shortcomings as a central banker, but if his actions speak for his perception of the direction of interest rates, then fixed interest rates have bottomed because Ben Bernanke refinanced his ARM to a fixed-rate mortgage. Why would our central banker convert to fixed if he knows the FED, the organization he runs, is going to push interest rates lower? He wouldn’t. Ben Bernanke himself has called the bottom in fixed-rate interest financing. Others have speculated that the Fed will hike all interest rates — in 2011. I have no idea.

Projected slowly declining prices with overhanging fears of larger drop

No sources with any credibility are predicting price increases for 2010 because California house values are likely to be down in 2010. It isn’t rocket science; Many counties in California are still overpriced. Massively overpriced, and because prices are too high, and financing is getting ever tighter, prices will go down.

If the government manipulations are successful, we will see the path of “ice” in my illustration above. People who think we will see 2006 prices by 2013 are delusional. IMO, it is unlikely prices will move higher, particularly in the face of rising interest rates. At any point, we could be facing the “fire” scenario because our house prices are inflated by every historical measure — other than payment affordability. Are you comfortable buying the “ice” scenario?

Should you buy or shouldn’t you buy? That is the question.

When I first wrote about when to buy, my simple rule was to buy
when it was less expensive to own than to rent. This is a good rule,
but when payment affordability is artificially manipulated by FED
policy, the rule needed a caveat; so now I say it is a good time to buy
when it is cheaper to own than to rent, and it is during a period of no
direct government manipulation through tax credits, mortgage interest
rate manipulation, and so on. Until these government props are removed,
and until some time has passed to see the impact foreclosures will have
on inventory, I don’t feel comfortable saying it is a “good” time to
buy in Irvine. The good news is we are approaching the time when the conditions are right.

I would say it is a good time for certain families who are (1) able
to take advantage of tax incentives, (2) they know they are going to
live in the house for a decade or more, and (3) they are paying a price
where a fixed-rate mortgage makes the cost of ownership lower than the
cost of rental. As long as the stars and the moon align, then it is a
“good” time to buy.

As time goes on, The categories of circumstances where buying now is
wise will expand. For now, it is confined to the circumstances I
outline above.

{book4}

Every Sunday for the next 21 weeks, I will repost The Great Housing Bubble in its entirety. I find that the email and post versions are more informative than the book in some ways. The end notes, which few ever read in a book, are at the end of each post. A wealth of information and research is contained in the end notes. Also, the shorter format is more easily digested giving time to review the ideas presented. I hope you enjoy your review of the Great Housing Bubble.

The complete text of The Great Housing Bubble is spread out over 21
blog posts. Every word of it is there, including the end notes with
extra information.

Welcome to The Great Housing Bubble

What Is a Bubble?

Conservative House Financing – Part 1

Conservative House Financing – Part 2

Conservative House Financing – Part 3

Fundamental Valuation of Houses – Part 1

Fundamental Valuation of Houses – Part 2

Valuation of Lots and Raw Land

The Credit Bubble – Part 1

The Credit Bubble – Part 2

The Housing Bubble – Part 1

The Housing Bubble – Part 2

The Housing Bubble – Part 3

Bubble Market Psychology – Part 1

Bubble Market Psychology – Part 2

Bubble Market Psychology – Part 3

Future House Prices – Part 1

Future House Prices – Part 2

Future House Prices – Part 3

Buying and Selling During a Decline

Preventing the Next Housing Bubble – Part 1

Preventing the Next Housing Bubble – Part 2

Irvine Home Address … 240 LEMON Grv Irvine, CA 92618

Resale Home Price … $274,900

Income Requirement ……. $58,617
Downpayment Needed … $9,622
3.5% Down FHA Financing

Home Purchase Price … $140,000
Home Purchase Date …. 4/30/1992

Net Gain (Loss) ………. $118,406
Percent Change ………. 96.4%
Annual Appreciation … 3.8%

Mortgage Interest Rate ………. 5.26%
Monthly Mortgage Payment … $1,467
Monthly Cash Outlays ………… $1,960
Monthly Cost of Ownership … $1,590

Property Details for 240 LEMON Grv Irvine, CA 92618

Beds 2
Baths 1 full 1 part baths
Size 1,051 sq ft
($262 / sq ft)
Lot Size n/a
Year Built 1983
Days on Market 3
Listing Updated 12/26/2009
MLS Number S599740
Property Type Condominium, Residential
Community Orangetree
Tract Vl

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

Two bedroom, 2 bath, lower level condo with covered carport. Ceramic tile flooring in living room, dining room, kitchen and hallway. Unit has very private enclosed brick patio area. Good location in complex. Close Spectrum with its shops, theatres, restaurants and specialty shops. Also close to frewways 5 and 405.