In an effort to stop the double dip from getting worse, lenders are slowing foreclosure activity nationwide. Their efforts will delay the market bottom and extend squatting benefits.

Irvine Home Address … 219 TALL OAK Irvine, CA 92603

Resale Home Price …… $550,525

Now if you're feelin' kinda low 'bout the dues you've been paying

Future's coming much too slow

And you wanna run but somehow you just keep on stayin'

Can't decide on which way to go

I understand about indecision

But I don't care if I get behind

People livin' in competition

All I want is to have my peace of mind.

Boston — Peace of Mind

Do you ever find yourself getting impatient with the way lenders have dragged out the housing crash? I do. It isn't merely that I want to see lower house prices as those are prevalent across most of the country. I want to see the economic wounds heal. That isn't going to happen until lenders foreclose on all the delinquent mortgage squatters and resell the resulting REO.

While we wait for lenders to do what needs to be done, the homebuilding industry remains in the doldrums, lending remains at anemic levels, and overall economic activity is feeble. None of that will change until our zombie banks are put out of their misery and recapitalized. In the meantime, lenders are slowing foreclosures and dragging out the economic morass. Academics in the United States used to criticize Japan for the way they dealt with this same problem in the 1990s. We are going down the same path.

U.S. Foreclosure Activity Falls to 44-Month Lows in July; Artificially Slowed by Banks

Posted by Michael Gerrity 08/11/11 8:00 AM EST

According to RealtyTrac's U.S. Foreclosure Market Report for July 2011, foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 212,764 U.S. properties in July, a 4 percent decrease from June and a 35 percent decrease from July 2010. The report also shows one in every 611 U.S. housing units with a foreclosure filing during the month of July.

Foreclosures are essential to the economic recovery. There is little debate that the housing market will not clear and house prices will not enjoy sustained appreciation until the foreclosure backlog is cleared out. As long as shadow inventory or REO inventory is present, lenders will sell into any rally thus stopping it cold.

The fact that lenders are slowing the rate of foreclosure simply means the bottom is being pushed back further in time. Also, since the delinquency rate is still very high, a slowdown in foreclosure rates means more and more people are squatting for longer periods of time.

“July foreclosure activity dropped 35 percent from a year ago, marking the 10th straight month of year-over-year decreases in foreclosure activity and the lowest monthly total since November 2007,” said James J. Saccacio, chief executive officer of RealtyTrac.

“This string of decreases was initially triggered by the robo-signing controversy back in October 2010, which forced lenders to substantially slow the pace of foreclosing, but the downward trend in foreclosure activity has now taken on a life of its own.

This should be no surprise to IHB readers. I have long contended that robo-signer was merely a ruse, the excuse-of-the-day, to delay foreclosures and avoid writing down more bad loans. Lenders will continue this behavior as long as they believe there is no buyer demand to sell into. Eventually, lenders will realize the buyer demand they are waiting for will never materialize. When they do, they will capitulate and sell for whatever they can get.

It appears that the foreclosure processing delays, combined with the smorgasbord of national and state-level foreclosure prevention efforts — including loan modifications, lender-borrower mediations and mortgage payment assistance for the unemployed —may be allowing more distressed homeowners to stave off foreclosure.

No, it is allowing more delinquent mortgage squatters to stay in homes that should be resold to those who are willing and able to pay for them.

“Unfortunately, the falloff in foreclosures is not based on a robust recovery in the housing market but on short-term interventions and delays that will extend the current housing market woes into 2012 and beyond,” Saccacio continued.

Yes, the slowdown in foreclosure activity will delay the bottom and allow more squatting.

“A stabilizing economy and improving job market are the long-term keys to a housing market recovery.”

Persistent unemployment is an ongoing drain to the economy and to the housing market.

Foreclosure Activity by Type

Default notices (NOD, LIS) were filed for the first time on a total of 59,516 U.S. properties in July, a 7 percent decrease from the previous month and a 39 percent decrease from July 2010. July's default notice total was 58 percent below the monthly peak of 142,064 default notices in April 2009.

Foreclosure auctions (NTS, NFS) were scheduled for 85,419 U.S. properties in July, a decrease of 5 percent from June and a decrease of 37 percent from July 2010. July's foreclosure auction total hit a 36-month low and was 46 percent below the monthly peak of 158,105 scheduled auctions in March 2010.

Lenders repossessed a total of 67,829 properties (REO) in July, a 1 percent decrease from the previous month and a 27 percent decrease from July 2010. The July REO total was 34 percent below the monthly peak of 102,134 bank repossessions in September 2010.

As i noted in a previous post, the dramatic declines are almost exclusively in judicial foreclosure states.

Nevada, California, Arizona post top state foreclosure rates

Nevada posted the nation's highest state foreclosure rate for the 55th straight month in July, with one in every 115 housing units receiving a foreclosure filing during the month. A total of 9,930 Nevada properties had a foreclosure filing in July, a 1 percent decrease from the previous month and a 28 percent decrease from July 2010.

Nevada also boasts one of the largest action postponement and cancelation percentages of any state. Locally, about 87% of auctions are delayed or canceled, but in Nevada the number is closer to 95%. It's a classic example of kicking the can down the road.

Despite a 16 percent year-over-year decrease in foreclosure activity, California registered the nation's second highest state foreclosure rate in July, with one in every 239 housing units with a foreclosure filing during the month.

With one in every 273 housing units with a foreclosure filing, Arizona posted the nation's third highest state foreclosure rate, after holding the No. 2 spot for seven straight months ending in June. A 39 percent month-over-month drop in REO activity pulled Arizona's total foreclosure activity in July down 25 percent from the previous month and down 38 percent from July 2010.

Other states with foreclosure rates ranking among the top 10 were Georgia, Utah, Florida, Michigan, Idaho, Illinois and Wisconsin.

10 states account for more than 70 percent of U.S. total

10 states accounted for 73 percent of U.S. foreclosure activity in July, led by California, where 56,193 properties had a foreclosure filing during the month — up 4 percent from the previous month but still down 16 percent from July 2010. Initial default notices in California were down 6 percent from the previous month, but REOs increased on a month-over-month basis for the second straight month and scheduled auctions were up 11 percent from the previous month. …

Foreclosure activity spikes in some hard-hit cities

Las Vegas continued to post the nation's highest foreclosure rate among metropolitan areas with a population of 200,000 or more, with one in every 99 housing units with a foreclosure filing in July.

But spiking foreclosure activity in some of the other cities with foreclosure rates in the top 20 narrowed the gap between those cities and Las Vegas. Seven of the cities in the top 10 and 14 of the cities in the top 20 posted monthly increases in foreclosure activity.

Foreclosure activity in the Stockton, California metro area increased 57 percent from June to July, giving it the nation's second highest metro foreclosure rate — one in every 124 housing units with a foreclosure filing during the month. Stockton foreclosure activity in July was still down 7 percent from July 2010.

With one in every 140 housing units with a foreclosure filing, the Vallejo-Fairfield, Calif., metro area posted the nation's fourth highest metro foreclosure rate in July thanks in part to a 33 percent month-over-month increase in foreclosure activity.

Foreclosure activity increased 83 percent on a month-over-month basis in the Naples-Marco Island, Fla., metro area, which posted the nation's 15th highest metro foreclosure rage, and foreclosure activity was up 60 percent on a month-over-month basis in the Ocala, Fla., metro area, which posted the nation's 17th highest metro foreclosure rate.

I find it interesting that lenders are continuing to push through foreclosures at a high rate in the hardest hit areas. To me this is a clear sign of capitulation. In Las Vegas, they have given up on trying to support prices. They are selling for whatever they can get for their properties — which isn't very much.

In over their heads from the start

There were a whole group of borrowers during the housing bubble who bought houses they had no business being in. Many imported down payments from a previous bubble property sale, and many used 100% financing. Most of these borrowers could never afford the property with the sane underwriting standards we require today.

• The previous owners of today's featured REO paid $627,000 on 9/15/2004. They used a $500,000 first mortgage and a $127,000 down payment.
• A scant four months later, they refinanced with a $510,000 Option ARM and obtained a $197,000 HELOC.
• If they maxed out the HELOC, they regained their down payment plus obtained $80,000 in HELOC booty.
• The stopped paying in August of 2008 at the latest and managed to squat for over two and one half years.

Foreclosure Record

Recording Date: 05/06/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/12/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/09/2008

Document Type: Notice of Default

The bank owns this property now, the former owners lost their down payment (or HELOCed and spent it) and now their credit is trashed.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 219 TALL OAK Irvine, CA 92603

Resale House Price …… $550,525

Beds: 3

Baths: 3

Sq. Ft.: 1600

$344/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Contemporary

View: City Lights, Hills, Mountain, Peek-A-Boo, Yes

Year Built: 2004

Community: Quail Hill

County: Orange

MLS#: S664118

Source: SoCalMLS

On Redfin: 56 days

——————————————————————————

HUGE REDUCTION! Excellent corner location across from the park and pool. Vantage point views – panoramic of city lights and mountains. Modern style Tri Level with 3 bedrooms (one lower level and two on third level) with 3.5 baths. Each bedroom has access to full bath, while guests have access to 1/2 bath on main floor (2nd). Balcony with BBQ gas line, large wrap around side yard for entertaining. Walking distance to Alderwood Basics Plus school and Association Amenities – Pools, gym, parks, etc.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $550,525

House Purchase Price … $627,000

House Purchase Date …. 9/15/2004

Net Gain (Loss) ………. ($109,507)

Percent Change ………. -17.5%

Annual Appreciation … -1.9%

Cost of Home Ownership

————————————————-

$550,525 ………. Asking Price

$110,105 ………. 20% Down Conventional

4.19% …………… Mortgage Interest Rate

$440,420 ………. 30-Year Mortgage

$120,515 ………. Income Requirement

$2,151 ………. Monthly Mortgage Payment

$477 ………. Property Tax (@1.04%)

$183 ………. Special Taxes and Levies (Mello Roos)

$115 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$187 ………. Homeowners Association Fees

============================================

$3,113 ………. Monthly Cash Outlays

-$353 ………. Tax Savings (% of Interest and Property Tax)

-$613 ………. Equity Hidden in Payment (Amortization)

$165 ………. Lost Income to Down Payment (net of taxes)

$89 ………. Maintenance and Replacement Reserves

============================================

$2,401 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,505 ………. Furnishing and Move In @1%

$5,505 ………. Closing Costs @1%

$4,404 ………… Interest Points @1% of Loan

$110,105 ………. Down Payment

============================================

$125,520 ………. Total Cash Costs

$36,800 ………… Emergency Cash Reserves

============================================

$162,320 ………. Total Savings Needed

——————————————————————————————————————————————————-

Most major lenders stopped processing on loans over the conforming limit intended for sale to the GSEs. In July, both sales and prices declined statewide. Is there a connection?

Irvine Home Address … 3742 CLAREMONT Irvine, CA 92614

Resale Home Price …… $659,500

There was no help, no help from you (Thunder)

Sound of the drums

Beatin' in my heart

The thunder of guns!

Tore me apart

You've been – thunderstruck!

Rode down the highway

Broke the limit, we hit the ton

AC/DC — Thunderstruck

The heartbeats of sellers are racing a little faster. Prices are falling and sellers are becoming more motivated to sell before prices fall further. The high end of the market has been thunderstruck. The conforming limit broke, and the market is hit by a ton of inventory. The high end collapse has finally begun.

New lower conforming loan limit impact on Irvine, CA

Posted on August 17, 2011 by globaldecision

The above chart shows the distribution of home prices for all sales under $2M in Irvine, CA from 1/1/2010 through 7/31/2011. Irvine, CA is an expensive sub-market of an expensive region (Southern California). As a result, it is likely to feel any impact from lower conforming home limits more than most other places.

Based on the chart above, it's hard to argue that tighter loan standards and more expensive debt will not impact the upper third of the Irvine home market. Just wait until the increase in the conforming limit enacted in 2008 is completely removed and every loan over $417,000 is subject to jumbo financing. That will impact over half of the Irvine market.

With that in mind, we’ve identified two potential price ranges that could be most impacted by the new limits. The green band represents homes that have selling prices where a 3.5% down payment represents a loan between the old limit ($729,000) and the new limit ($625,000). These properties represent 13.0% of all home sales in Irvine, CA.

For the sake of clarity, this is not to say that 13% of sales used FHA financing. But this is the price range were FHA financing will no longer be bidding on properties. Fewer bidders make for less buyer competition and lower prices.

For the taxpayer’s sake, let’s hope that not many of the buyers in this price range are using only a 3.5% down payment. Those buyers are likely to be underwater soon as we predict continued downward drift in higher end home values in Southern California. These buyers represent one end of the spectrum.

FHA buyers in this price range are candidates for strategic default. They will almost certainly submerge beneath their debts, and they may not breathe the air of equity for many years.

realtors have been creating a false sense of urgency with these buyers cajoling them into buying by stoking fears of being priced out. I pity those who fall for that bullshit. Any of those buyers will be priced-in for years trapped in their homes as prices fall to the new equilibrium of affordability.

On another point (but not the end, which would be “all cash” buyers) of the spectrum, we have buyers who put down 20%. At current Irvine, CA valuations, this is a substantial down-payment of around $170,000. For this level of royalty, we’ve used a purple band in the chart above. Using a 20% downpayment, 8.4% of sales in Irvine, CA would be impacted by the gap between the old and new conforming loan limits.

The purple band is the market segment most at risk. The buyer pool in this segment is very thin, and the supply is very large.

These are estimates — buyers in the green and purple bands have a few options. In order of long-term common sense for the buyer they are:

1. Pay less. Leverage seller fear that the loan limits really will reduce demand and correspondingly demand a lower price.

For sellers who are not delusional, the reality of the situation should increase their motivation. Sellers have stoked fears in buyers for years with nonsense like “buy now or be priced out forever.” The reality today is sellers are facing lower future prices. If they don't sell today, it will be several years before they can obtain today's prices again.

2. (tie) Put more down. Buy down the loan amount so that it becomes conforming.

3. (tie) Delay the purchase. The price-lowering impact from this change will be slight, but will occur over time. With an ongoing slow economy and prices above rental parity, there are no upward drivers for Irvine, CA home values.

4. Use “creative” financing. Pay the asking price but increase your monthly carrying cost for the term of the debt obligation.

I never advise anyone to use any form of creative financing. It is an option one should never consider.

Even though the higher limits don’t go into full effect until 1 Oct 2011, the delays involved in funding a loan will require that banks and brokers use the new limits as soon as possible.

I have heard reports from buyers that B of A and Wells Fargo have already stopped underwriting loans above $625,000 except as jumbo loans. It is likely the dramatic drop in sales in July was exacerbated by this fact.

Mitigating factor: long-term rates, paradoxically, plunged after the US downgrade. One can argue that it makes little sense that a downgraded asset class would be seen as safer after the downgrade, but that’s what Mr Market has said. Because rates are so low, investors will likely be interested in more non-comforming loans as the government makes its slow but necessary disengagement from being the mortgage underwriter of last resort.

The transition to a private loan market will be accomplished in stages. The first step is to lower the conforming limit. This will happen in stages until it is back to $417,000 locally.

Southern California home sales and prices fall again in July

August 15, 2011

Home sales in Southern California fell to their lowest level for a July in four years — though the decline from a year earlier was the smallest in 13 months. The median price was down 4% to $283,000.

This is July. House prices and sales typically do not decline in July. What is going to happen this fall in winter if we are seeing declining sales and prices in July?

The drop in sales from June was more pronounced, especially for houses that cost more than $500,000,

I believe this is directly related to the change in the conforming limit. High end sales were weak before because (1) prices are too high relative to incomes, (2) asking prices have been declining as a sign of seller capitulation, and (3) an abundance of high-end inventory greatly exceeds the depth of the buyer pool.

In reality, what is prices as high-end homes here in Orange County are not really high end. Many houses in many neighborhoods were elevated to high-end price levels from the foolishness of the bubble, and prices are yet to fully deflate. The market for high-end houses only appears weak because so many houses are delusionally priced as if they are high end when they really aren't. The correction in pricing is one of seller's perceptions. The market will force reality on the delusional masses in time.

as the job market sputtered, economic uncertainty intensified and some potential homebuyers got cold feet, real estate information service Dataquick said.

A total of 18,090 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in July. That was down 11.9% from 20,532 in June and down 4.5% from 18,946 in July 2010, according to San Diego-based DataQuick.

Those are very bad numbers. The declines this fall and winter should be substantial, particularly at the high end.

“The latest sales figures look a bit worse than they really are, given this July was a fairly short month, but they still suggest some potential homebuyers got spooked,” said John Walsh, DataQuick president. “Reports on the economy became increasingly downbeat and, no doubt, some people fretted over the possibility the country would default on its obligations.”

July was a fairly short month? Last I checked the calendar, July still had 31 days. WTF is he talking about? John Walsh's consistent market cheerleading has all but eliminated his credibility as a market commenter. He has embraced his role as a realtor shill.

Some wise renters likely did chose to sit on the sidelines, but the drop in sales is more likely a reflection of the fact that the buyer pool is diminished, and prices are too high relative to incomes in most of Coastal Southern California.

Prices also continued to slide. The median, the point at which half the homes sold for more and half for less, has declined year-over-year for the past five months. It has been unchanged or lower than a year earlier each month since last December, when it posted a 0.3% annual increase.

Take a look at the bar graph above again. The first and second quarters of the year are the two which historically post the largest gains in prices, yet prices have declined steadily during that time. There are no signs sales or prices will pick up during the fall and winter when they usually decline.

“If there’s a shred of good news in the data it’s that last month’s sales weren’t much worse than a year earlier,” Walsh said. “For the first time in many months, we get an apples-to-apples comparison to year-ago sales, given that in July 2010 the market lost its crutch — federal homebuyer tax credits.”

Yes, we have our first apples-to-apples comparison, and according to Dataquick's data, sales were down 4.5% from last July's weak numbers and prices are also lower. Most market analysts noted the figures for June and July 2010 were very low because the summer demand was pulled forward to April and June 2010 due to the tax credits. Therefore, we are below what was already and artificially low number. That can't be good.

Ponzi borrower gets over two years of squatting

Today's featured property falls in the no-man's land above the new conforming limit. FHA buyers can no longer afford this property with 3.5% down.

The former owner managed to quadruple their mortgage, then they got to squat for over two years when they couldn't make the payments. Rather than selling the house for a half-million dollar gain and walking way with a sizable check, they endured a foreclosure, they are flat broke, and their credit is trashed.

• This property was purchased on 2/20/1987 for $170,000. The owners original mortgage information is not available, but it's safe to say it was less than $170,000. In all likelihood, they put 20% down back in 1987.
• On 10/1/1999, they refinanced with a $292,000 first mortgage. They had already gone Ponzi with over $122,000 in mortgage equity withdrawal.
• On 3/30/2001 they refinanced again with a $340,000 first mortgage.
• On 3/15/2002 they obtained a $75,000 stand-alone second mortgage.
• On 3/17/2003 — do you see a yearly pattern here? — they refinanced with a $448,000 first mortgage.
• On 1/26/2004 they got a $520,000 first mortgage.
• On 2/25/2005 they were approved for a $130,000 HELOC.
• On 5/14/2007 they obtained a $554,000 first mortgage and a $240,700 HELOC.
• Assuming they maxed out the HELOC, total mortgage debt was $794,700.
• Total mortgage equity withdrawal was $624,700.
• Assuming the NOD followed after 90 days of delinquency, total squatting time was at least 27 months.

Foreclosure Record

Recording Date: 04/22/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/06/2009

Document Type: Notice of Default

The bank finally took this one back on 5/25/2011 for $492,109. They dropped their opening bid to find a third-party, but nobody stepped up to buy the place. The lender must really believe they have a gem as they are pricing it about 30% higher than they paid at auction. If they get anywhere near their asking price, the flippers missed a good deal. Given the plethora of negatives with this property, I doubt they get over $600,000.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 3742 CLAREMONT Irvine, CA 92614

Resale House Price …… $659,500

Beds: 5

Baths: 4

Sq. Ft.: 2754

$239/SF

Property Type: Residential, Single Family

Style: Two Level, Other

Year Built: 1970

Community: Westpark

County: Orange

MLS#: S660785

Source: SoCalMLS

Status: Active

On Redfin: 82 days

——————————————————————————

This Two Story Home Features Five Bedrooms and Four Baths, No Mello Roos, Low HOA Dues And An Association Pool And Spa, Tennis Courts And Clubhouse.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $659,500

House Purchase Price … $492,109

House Purchase Date …. 5/25/2011

Net Gain (Loss) ………. $127,821

Percent Change ………. 26.0%

Annual Appreciation … 123.0%

Cost of Home Ownership

————————————————-

$659,500 ………. Asking Price

$131,900 ………. 20% Down Conventional

4.19% …………… Mortgage Interest Rate

$527,600 ………. 30-Year Mortgage

$129,520 ………. Income Requirement

$2,577 ………. Monthly Mortgage Payment

$572 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$137 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$60 ………. Homeowners Association Fees

============================================

$3,346 ………. Monthly Cash Outlays

-$422 ………. Tax Savings (% of Interest and Property Tax)

-$735 ………. Equity Hidden in Payment (Amortization)

$197 ………. Lost Income to Down Payment (net of taxes)

$102 ………. Maintenance and Replacement Reserves

============================================

$2,488 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,595 ………. Furnishing and Move In @1%

$6,595 ………. Closing Costs @1%

$5,276 ………… Interest Points @1% of Loan

$131,900 ………. Down Payment

============================================

$150,366 ………. Total Cash Costs

$38,100 ………… Emergency Cash Reserves

============================================

$188,466 ………. Total Savings Needed

——————————————————————————————————————————————————-

First-time homebuyer’s presentation 6:30 Wednesday, August 24, 2011

Everyone is invited to our first-time homebuyer presentation. Put it on your calender for Wednesday evening. I look forward to seeing you there.

Many people speculated on appreciation in the housing bubble without considering the possibility that real estate does not always go up. Now they are stuck with a black hole on their family's balance sheet. What should they do?

Irvine Home Address … 43 BOWER TREE Irvine, CA 92603

Resale Home Price …… $369,000

Everybody's bitching

'cause they can't get enough

And it's hard to hold on

When there's no one to lean on

Bon Jovi — Keep the Faith

Real estate investors during the housing bubble put their money to work on faith. There is no logical reason to believe house prices only go up. In fact, there have been two prior periods in California's recent history where house prices did, in fact, go down. However, with kool aid intoxication, otherwise known as faith-based investing, reality is ignored.

If you truly believe house prices only go up, no price is too high, and you don't have to worry about a backup plan if house prices don't go up. There is only one viable backup plan when a speculative play on appreciation does not pan out: renting the property until you get out at breakeven.

For some people, this was as far as they took their analysis. A glib idea of renting it out gave them all the assurance they needed to pull the trigger on a foolish deal. If they had stopped to do the math, they would have quickly realized rents would only cover a portion of their monthly cost of ownership. A wise person would have recognized this risk and passed on the speculative bet. Investors during the housing bubble were not very wise.

I have read many accounts where everyone claims a collective ignorance. “Nobody could have seen the crash coming” or some other such nonsense. Any investor who bothered to consider their plan B would have quickly realized the risk of an extended period of negative cashflow was an unacceptable risk. Prices didn't have to crash to make this risk a pocketbook-burning reality. Even a flattening of prices for an extended period would have been a problem.

The people who ignored this risk and bought properties are now bagholders. They own property consuming their income and providing no benefit to them whatsoever. Many still cling to their denial and hope for rapid appreciation to bail them out, but many others capitulate to the market and sell. As they sell they keep prices from rising and discourage others. One by one, each market participant moves from denial to acceptance and capitulates by selling at a loss.

When to cry ‘uncle’ on an investment property

August 16th, 2011, 6:00 am — posted by Marilyn Kalfus, real estate reporter

Christine Donovan, a Realtor and attorney who does the weekly “Huntington Beach real estate minute” on listings, homes in escrow and sales, offers some advice in her blog about when to unload real estate bought as an investment that’s failed to pay off.

She writes:

“Have you been watching the value of your investment property go down and wondering what you should do about it?

“It likely depends on what your goals are. If you have lost value, are living in the home, can afford the payments, and it meets your needs, you’re one of the lucky ones, and you should probably just stay where you are. Perhaps when you’re ready for your next home, your home will have regained some of the lost value.

Or perhaps you are just a fool in denial.

“If on the other hand, your investment property is underperforming, perhaps you need to look at it carefully. For instance, let’s look at the following scenario.

“You have equity in your home …

• But, it’s $250,000 less than it was in 2006.
• You put money down on the home, and you’ve made payments for several years.
• You feel that selling it would result in a loss.
• It’s a rental, and you’re losing $600/month after your mortgage payment.

This is the folly of negative cashflow investment. Nobody should ever be in this circumstance. Nobody who follows my advice ever will be. I advise owner occupants not to pay more than rental parity for the same reason. Negative cashflow is a black hole on your balance sheet sucking the money out of your family never to be returned.

“At this point in time, you may want to do a few things:

Actually, you only need to do one thing: sell. Any rationalization you come up with is foolish denial.

1. Review rental rates and see if you can increase rates to limit the loss or make the property cashflow
2. Sit down with your accountant and see if you need the loss for income purposes.
3. If you don’t need the loss and still can’t make it cashflow, it might be time to consider selling the property and reinvesting in a better performing one.
4. Some people don’t want to “give up” and think that holding it might make more sense.
5. But, if you’re losing $7,200 per year, you need to gain that amount in equity plus the amount that you lost when the market values fell, especially if you bought it for less than current market value.

I doubt many investors can review the rental comps and find they are under the market by $600 a month or more. Nice idea, but not very practical.

This woman claims to be a financial advisor, yet she perpetuates the myth that anyone should take a loss for tax reasons. Perhaps tax implications may favor taking the loss this year or next, but waiting several months or years will usually make for larger losses as the negative cashflow eats you up.

The people who doesn't want to “give up” are the ones still in denial. Holding a negatively cashflowing investment never makes sense. Her final point is a good one. For an negative-cashflow investment to make sense, the appreciation must compensate for the negative cashflow. If you examined such an investment's internal rate of return, it would be horrendous because the ongoing negative cashflow compounds against you. It isn't just the lost money, it is the lost opportunity cost on the lost money that really hurts.

“So, when is it time to cry “uncle” on your home? When the loss on your investment property just doesn’t make sense any more.

Anyone in a negative cashflow investment should dump it as soon as possible. It was a bad idea when it was purchased, and holding it makes it even worse.

Follow Huntington Homes and other real estate stories on Twitter @mkalfus

This is really about investor psychology. Many, many speculators in Orange County are sitting on negatively cashflowing investments waiting for the magic appreciation fairies to wave a wand and make them whole again. It isn't going to happen.

So how do you recognize capitulation when you see it? From the comments on the OC Register post:

InTheSameboat says:

August 17, 2011 at 2:13 pm

Sounds like the situation my wife and I are in. Bought a condo in 2006 at the price peak (sigh). Lived in it for 2.5 years then started renting it out while renting out a bigger place for ourselves and new baby hey not so bad right? 2.5 years later and the loan modification (discount) expired when you add up the taxes, insurance, hoa. It looses 400 a month. $800 a year for the corporation to lease it under of course. Pay for those taxes filed separely of course. Like a lot of young couples on the move fast and making decisions fast we never really factored in all the costs to rent it out in a professional manner. Now with a second child on the way its more like good grief as long as we have a mortgage on this condo we don’t live in and loose so much money on we will never be able to buy a home for 25 years unless we drop it.

So we cried uncle, after 6 months of thinking about it and stubbornly thinking “just keep it” we just couldn’t shake the feeling that rents are going to go up, but only a little bit. The value will go up, but only a little bit. You can call it a recession, and recession part 2 but I think this is the new norm. The painfull and humbling decision was made to short sell it.

With noteable employers leaving the state its going to slow down the recovery and price increases we all prayed for the last few years. Jobs came back and values went up… just not around here. Accepting this reality strenghtened this decision and suppresed the remorse feeling.

I would like to know more about this (if you lived in it 2 years of the past 5 you won’t have to pay capital gain taxes) Our CPA told us otherwise, he said we would have to move back in for 6 months and then sell it to avoid the heavy taxes. Other than that we’ll just have to eat it.

That is capitulation.

The games listing agents play

Three days ago, this property was for sale for $769,000. Today it is being offered for $369,000. So what's up with that?

So what is the real asking price? Who knows.

The buyers paid $590,000 a few weeks ago. It looks like they are hoping to flip it. Since they were the most aggressive bidders in the market, it doesn't seem likely this marketing ploy to create a bidding war to get someone to pay more is going to materialize.

The listing agents are hoping that a hoard of clueless FCBs will bid the price up well beyond what was just paid so everyone can make a quick buck. If there is an auction, you can be sure most of the bidders are shills used to create a false sense of competition. If people are that stupid, more power to these guys. Personally, I find this kind of cheesy, shill-dominated, fake auction a form of real estate sales on par with used car salesmen. Their listings pollute the MLS.

The initial asking price was WTF crazy, and now the price reduction is equally stupid. It probably triggered many searches and ended up in the email inboxes of many market watchers. Perhaps some of them will show up to the auction to see if they can be duped.

If you attend, see if you can pick out the shills and the patsies. And remember, if you can't identify the patsy, it is probably you.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 43 BOWER TREE Irvine, CA 92603

Resale House Price …… $769,000

Beds: 3

Baths: 2

Sq. Ft.: 1500

$513/SF

Property Type: Residential, Single Family

Style: Two Level, Other

Year Built: 2003

Community: Turtle Ridge

County: Orange

MLS#: P792545

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

THIS BEAUTIFUL HOME IS WELL LAID OUT AND VERY SPACIOUS IN THE PRESTIGOUS TURTLE RIDGE COMMUNITY. .. .THIS IS A MUST SEE HOME. .. OFFER FORMS WILL BE ON SITE AND WILL BE ACCEPTED ONE DAY ONLY. .. THIS SATURDAY, AUGUST 20TH!! FROM 11AM-4PM. .. RAIN OR SHINE. .. HOME WILL BE SOLD TO THE BEST BUYER/OFFER WHO PLACES A BID/OFFER ON THAT DAY ONLY. .. THE LIST PRICE IS THE RESERVE OR MINIMUM BID SUBJECT TO THE SELLERS ACCEPTANCE. PLEASE CALL YOUR AGENT IF YOU HAVE ANY QUESTIONS. AUCTION SALE . .. NOT A SHORT SALE, REO OR DISTRESSED PROPERTY.

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Proprietary IHB commentary and analysis

PRESTIGOUS? NOT A SHORT SALE, REO OR DISTRESSED PROPERTY… just a delusional seller.

Resale Home Price …… $769,000

House Purchase Price … $590,000

House Purchase Date …. 8/8/2011

Net Gain (Loss) ………. $132,860

Percent Change ………. 22.5%

Annual Appreciation … 364.1%

Cost of Home Ownership

————————————————-

$769,000 ………. Asking Price

$153,800 ………. 20% Down Conventional

4.19% …………… Mortgage Interest Rate

$615,200 ………. 30-Year Mortgage

$164,923 ………. Income Requirement

$3,005 ………. Monthly Mortgage Payment

$666 ………. Property Tax (@1.04%)

$250 ………. Special Taxes and Levies (Mello Roos)

$160 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$179 ………. Homeowners Association Fees

============================================

$4,261 ………. Monthly Cash Outlays

-$704 ………. Tax Savings (% of Interest and Property Tax)

-$857 ………. Equity Hidden in Payment (Amortization)

$230 ………. Lost Income to Down Payment (net of taxes)

$116 ………. Maintenance and Replacement Reserves

============================================

$3,046 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,690 ………. Furnishing and Move In @1%

$7,690 ………. Closing Costs @1%

$6,152 ………… Interest Points @1% of Loan

$153,800 ………. Down Payment

============================================

$175,332 ………. Total Cash Costs

$46,600 ………… Emergency Cash Reserves

============================================

$221,932 ………. Total Savings Needed

——————————————————————————————————————————————————-

Money seeking returns in real estate is flowing into apartment development. The financial assumptions may not be realistic, and the money flows portend of another real estate bubble.

Irvine Home Address … 38 REMINGTON #31 Irvine, CA 92620

Resale Home Price …… $309,900

It's not as if you didn't get the warning

You got the transcripts and recordings

History has a way of signing us up in the morning

But you're a late starter make it easy to ignore it

Later not recall it – yo

You had unfettered access to the facts

But the fact is your back was turned to the atlas

Nothing like not being in the crash test

To help you make your mind up

2020 — The Herd

There is an old saying in investments: the herd is always wrong. This is only partially true. The herd is wrong about 80% of the time, and for a short time, the movement of the heard makes it right. However, once the herd has taken a position and nobody is left to buy, the herd realizes their mistake and panics to get out causing epic financial disasters.

The latest movement of the herd is into apartment development. As the only asset class related to real estate that makes sense for institutional investors, it stands to reason that some capital flows are warranted. However, in our era of cheap money, more than a little capital is flowing into apartment development.

Cheap money and the flow of capital

The federal reserve is attempting to flood the economy with cheap money. The problem with this approach is that the few good investment alternatives available receive an inordinate amount of capital inflows which causes prices to bubble. This was the consistent criticism of Alan Greenspan, and the same is true of Ben Bernanke. Both of them are bubble boys.

The asset class to receive an over-abundance of capital is apartments. Capital managers have put a small box around class A apartments and said they are acceptable investments. As a result, the capital inflows are keeping apartment cap rates south of 5.5%. Many deals being underwritten today have low cap rates, aggressive assumptions on rent growth, and ridiculous assumptions on the cap rates future buyers will be willing to pay — and capital managers are funding these deals.

This flow of capital is causing apartment development in class A markets — whether they need apartments or not. This supply being added will prevent the rental increases the proformas all rely on. Further, in today's risk adverse environment, 5.5% cap rates sound great, but ten years from now when apartment REITs want to unload these investments at 4% cap rates, buyers will be less risk adverse, and they likely will have better use for the funds than paying a huge premium for a 4% cap rate apartment complex.

The bottom line is apartment deals being underwritten today will not perform as expected. They will not achieve the rent growth, and they will not obtain the resale price at liquidation. It's a bubble. It will likely inflate for another two or three years, then the REITs will watch for the next several years while these investments underperform. Ultimately, they will liquidate for a loss.

So much for being risk adverse.

Analyst: Rents to rise 4.5% for years

June 20th, 2011, 12:00 am — posted by Jon Lansner

The folks at John Burns Real Estate Consulting in Irvine have some bad news for renters: The landlord has pricing power!

“We believe the apartment business is set to explode, with steadily rising rents and occupancy that will justify new construction.”

I also believe the apartment business is set to explode. There will be a boom in construction because dumb money is forcing it to happen. The steadily risiing rents will not materialize at the stellar rates they are hoping for, primarily due to the new supply which will come to the market.

JBREC’s forecast shows rents growing 4.5% annually on average through 2015. The report notes that “Wall Street and pension fund consensus, at least for apartments in good locations in coastal cities, seems to be that 25%-plus rent growth over the next three years can easily occur.”

The pension fund herd is all moving in the same direction. That spells disaster for whatever asset class they are piling into.

Why are landlords in a good spot? Growing household formation and homeownership skittishness. Your landlord’s best new customer will be “young adults, who have either moved back in with their parents or taken on roommates.” Also, weak jobs. “The uncertain environment is enough to convince consumers that renting is safer than taking on a mortgage.”

Weak jobs is a plus for apartments? That is pretty stupid. Rents are directly tied to incomes. Without both job growth and wage growth, rents aren't going anywhere.

Caveats … or why JBREC sees some hope for renters – and homeownership:

Affordability Favors Homeownership: From a mortgage payment to income standpoint, for-sale housing has not been this inexpensive in at least 30 years. We calculate an own vs. rent premium across all metropolitan areas, and in many areas, it is considerably cheaper to own a home than to rent an apartment. …

That is true. However, in our market, it is still cheaper to rent than to own.

Not Smart to Rent Forever: Increasing rents will provide the motivation renters will need to explore owning. As rents start to grow, more renters will consider buying. Most people realize that paying rent all your life is probably not a great retirement decision unless you are a fantastic saver. … Construction Will Increase: Development money is flowing steadily into apartments. One of our favorite land brokers in Tampa, Bruce Erhardt, told us that there are at least eight apartment development sites in escrow right now! … Renters Have a Limit: Several of our apartment clients feel that they are already near the limit of what their tenants can afford. Renters are a clever, creative bunch who won’t take huge rent increases easily.

Rents will start rising from where they are today, but unless incomes go up, rental rate increases will be muted.

Apartments Shine as Beacon of Hope

By Hessam Nadji — August 3, 2011

The nation’s apartment market continues to beat expectations as it speeds along to a full-scale recovery. Vacancy rates peaked in early 2010 at 8 percent and have since dropped to a healthy 5.9%. Effective rental rates have been moving upward for a year-and-a-half now, by 2.5% per year on average, and picking up pace to the 4% to5% range this year. Select markets are registering high single-digit rent growth.

The outlook is quite positive. Tenant demand appears likely to continue to swell, driven by a still-recovering economy, unbundling of households that doubled up during the Great Recession, continued weakness in the for-sale housing market and movement of the relatively large Generation Y (those born between 1983 and 1992) into their peak renter-household-formation years of their 20s and early 30s.

He is overlooking the fact that a weak housing market is direct competition to rentals. As rental rates go up, the rent versus own calculation begins to favor owning, and rental demand will diminish as people chose to buy.

While the number of planned projects is picking up, and the risk of overbuilding by 2013 is increasing in certain pockets, overall construction activity remains very restrained. These factors strongly suggest that vacancy rates will soon fall into the 5% range nationwide, and into the low single-digits in a number of high-beta areas (MSAs, primarily in the Sun Belt and in the West, with above average job growth and net absorption during recovery years) and in a number of supply-constrained areas, primarily coastal MSAs. As it does, rent growth will likely escalate sharply.

This is the kind of delusional nonsense asset managers are listening to. This guy writes a good narrative on why rents should to up, but it is fiction. We will not see above-average job growth for several years, and rents in coastal MSAs will not rise dramatically because they are already astronomically high.

How long will the up market last? Probably through at least 2014 or 2015. It will take at least that long for construction completions to pick up enough to cause vacancy to climb significantly once again. Also, while at some point there likely will be some shift back toward home ownership as consumer confidence in the for-sale market improves, that probably won’t happen to the degree that significantly impacts the apartment market for at least another three to four years. In the meantime, these should be great years for apartment investors.

As i stated earlier, apartment REITs will watch the values of their holdings underperform in the last several years of their ownership. Overbuilding and a renewed enthusiasm for owning will limit demand and prevent large increases in rents.

The investment community already has already anticipated this. The total dollar volume of apartment sales priced at $1 million or greater climbed by an exceptional 77% in 2010 over 2009, albeit from a depressed level in 2009. During the first half of 2011 apartment sales volume reached $25 billion, a 67% jump over the first half of 2010. The average price per unit climbed by 16% in 2010 and by an additional 7% so far in 2011. Median cap rates across the United States have dropped from 7.5% in 2009 to 6.8% as of mid-year 2011, which masks the dramatic drop in cap rates among top-tier assets in primary markets. Prices for large, Class A apartment complexes have come back first, with appreciation starting in late 2009. Class A cap rates in primary markets have re-compressed by 150 bps to 200 bps since the market bottom with many reporting 4% to 4.5% averages, and some below 4%. Given the extraordinary levels of capital looking to enter the sector, the razor-thin cap rate to interest rate spread in upper tiers of the market place, is causing a capital migration to Class B and secondary markets. Value-add, a shunned strategy viewed as too risky just 12 months ago, has reemerged as a viable alternative, even for some institutional investors.

Asset mangers are clueless herd-following sheeple just like residential loan owners. They are overpaying for apartments in anticipation of the greater fool to come along. This is a bubble in the making.

Price support in the future will come from significantly above-inflation rent growth and low vacancies.

LOL! Yeah, right.

In addition, the spread between average, overall cap rates and underlying mortgage rates is near record highs, providing exceptional opportunities for apartment investors.

While many investors are concerned about future funding from the GSEs and their eventual restructuring, the biggest risk to this forecast is the economy.

No, the biggest risk is that asset managers wake up from their delusions and realizes they are a foolish herd being led to slaughter.

This is because other sources of financing are rapidly entering the multifamily market led by life insurance companies and healthy commercial banks. Although the recent boom in rental demand appears to defy weak employment, the tie between apartment absorption and job creation is still significant. Approximately 78% of the jobs added in the last 12 months went to young adults between the ages of 20 years old and 34 years old. While the release of pent up-demand and reversal in home ownership are important drivers, jobs still matter the most.

We have a persistent problem with unemployment. Without great job growth, the dreams of apartment investors will not come to pass.

Even modest job growth should continue to support base line demand for apartments but should the unlikely scenario of an economic contraction materialize, apartment occupancy gains will lose steam, at lease temporarily. The other risk is the lack of economic recovery in the tertiary markets. While the capital migration will bring more capital to secondary markets, and secondary submarket within major metros, true tertiary locations will continue to lag for some time.

Hessam Nadji is managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Contact him at hessam.nadji@marcusmillichap.com.

Stay away from apartment REITs as long-term investments. Perhaps in three to five years, this will be an asset class to short as the bubble becomes obvious.

Flip that REO

Flipping is easy when prices are going up 10% or more a year. No matter how incompetent the flipper, time and appreciation will bail them out. In a flat or declining market, flipping is much more difficult.

This property was taken back by the bank at auction on 4/13/2011 for $256,950. It was sold to the flippers for $236,500. The flippers went and borrowed $285,000 from a private investment group who funded the improvements and basically took all the profit from the deal. The flippers have to net more than $285,000 to make any money. If they get their full asking price and pay a 6% commission, they stand to make about $15,000. If they have to come down on the price, they won't make anything.

The previous HELOC abusing Ponzi

The interesting sub-plot to this property is with the woman who owned it previously.

• This property was purchased as the last bubble was deflating on 1/23/1992. The the original mortgage data is not available, but based on later loans, it is likely this was a 20% down loan. The purchase price was $151,000. The first mortgage was likely $120,800 and the down payment was likely $30,200.
• On 5/31/2000 (the date I was married), the owner refinanced with a $140,000 first mortgage.
• On 6/6/2002 she refinanced with a $147,000 first mortgage.
• On 12/4/2002 she refinanced with a $185,250 first mortgage.
• On 6/11/2004 she obtained a $125,000 HELOC.
• On 4/12/2005 she refinanced the first mortgage with a $316,500 Option ARM.
• After five years on the Option ARM, she likely hit their recast and couldn't afford the payments.

Foreclosure Record

Recording Date: 12/13/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/22/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/13/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 04/13/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/12/2010

Document Type: Notice of Default

This woman was one of thousands of Irvine residents who spent themselves out of house and home.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 38 REMINGTON #31 Irvine, CA 92620

Resale House Price …… $309,900

Beds: 2

Baths: 2

Sq. Ft.: 1016

$305/SF

Property Type: Residential, Condominium

Style: One Level, Traditional

View: Faces South

Year Built: 1986

Community: Northwood

County: Orange

MLS#: S669573

Source: SoCalMLS

On Redfin: 2 days

——————————————————————————

This Remodeled Single Story Lower end unit has 2 Master bedrooms each with their own full bathroom and all on one level. This is off the main road with a large patio for BBQ's or for the kids to play. Also inludes an Inside Laundry area. Granite Kitchen and bathroom counter tops. Seperate Dining area. Walk in Closet with direct patio access from one of the bedrooms. Unit has a Shared 1 car Garage. Garage is number 31. Plenty of additional parking in the complex. Very Clean and a great location in this complex. Standard Sale.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $309,900

House Purchase Price … $236,500

House Purchase Date …. 6/28/2011

Net Gain (Loss) ………. $54,806

Percent Change ………. 23.2%

Annual Appreciation … 173.7%

Cost of Home Ownership

————————————————-

$309,900 ………. Asking Price

$10,847 ………. 3.5% Down FHA Financing

4.19% …………… Mortgage Interest Rate

$299,054 ………. 30-Year Mortgage

$92,428 ………. Income Requirement

$1,461 ………. Monthly Mortgage Payment

$269 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$65 ………. Homeowners Insurance (@ 0.25%)

$344 ………. Private Mortgage Insurance

$250 ………. Homeowners Association Fees

============================================

$2,388 ………. Monthly Cash Outlays

-$230 ………. Tax Savings (% of Interest and Property Tax)

-$416 ………. Equity Hidden in Payment (Amortization)

$16 ………. Lost Income to Down Payment (net of taxes)

$59 ………. Maintenance and Replacement Reserves

============================================

$1,816 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,099 ………. Furnishing and Move In @1%

$3,099 ………. Closing Costs @1%

$2,991 ………… Interest Points @1% of Loan

$10,847 ………. Down Payment

============================================

$20,035 ………. Total Cash Costs

$27,800 ………… Emergency Cash Reserves

============================================

$47,835 ………. Total Savings Needed

——————————————————————————————————————————————————-