The current rally is being supported by buyers (often foreign) with large downpayments. Both the rally and the foreign investment were foreseen by Rich Toscano at Piggington.com and Voice of San Diego.
Asking Price: $515,000
Address: 8 Orangetip Irvine, CA 92604
Maybe someday (denial and hope)
Saved by zero (0% interest at the FED)
I’ll be more together (not in default)
Stretched by fewer (debt service payments)
Thoughts that leave me (where did the money go?)
Chasing after (bubble after bubble)
My dreams disown me (unlimited wealth and spending)
Loaded with danger (foreclosure and bankruptcy)
Maybe I’ll win (real estate always goes up)
Saved by Zero (the FED created a bottom)
Holding onto (kool aid intoxication)
Words that teach me (read the IHB)
I will conquer (knowledge is power)
Space around me (property in Irvine)
Maybe I’ll win (real estate always goes up)
Saved by Zero (the FED created a bottom)
Maybe I’ll win (real estate always goes up)
Saved by Zero (the FED created a bottom)
Saved by Zero — The FIXX
I have the greatest respect for Rich Toscano at Piggington.com and Voice of San Diego. When I wrote my first post, I am IrvineRenter (Inventory Cholesterol), I posted links to the foundational work he did in laying out the case for a housing bubble: Evidence of a California Housing Bubble, and Risks of a Serious Home Price Decline. These are great primer’s on the bubble written back in November of 2005.
I have been noticing a great deal of bullishness during this spring rally, and I was planning a post to put things in perspective, but Rich beat me to it. His analysis was so well done, that I want to acknowledge it here and add my own comments.
Perspective on the Home Price Rally
I noted earlier in the week (and incessantly before that) that home
prices have a seasonal tendency to rise in the spring and summer even
during the midst of a multi-year price decline.
That sounds like a good enough excuse to make a chart.
Below
you will find a look at San Diego home prices, as measured by the
Case-Shiller index, from 1990 through 1996. These years encompassed the
entirety of the five-or-so year home price decline visited upon San
Diego after the late-1980s housing bubble.
As you can see, the Case-Shiller index measured a rise in aggregate San
Diego home prices for every single year of the long price decline.
(Although 1993 just squeaked in there with a one-month, .1 percent
increase).
I’ll bet that during each of those spring rallies, a
lot of people became filled with hope the housing bust was finally
over. But through five of these head-fakes, it wasn’t.
Here for comparison is a look at the current housing downturn:
After an anemic spring bounce in 2006, the Case-Shiller index fell
unceasingly through 2007 and 2008, only to finally register an uptick
again earlier this year. The lack of spring-summer rallies is a
testament to the brutality of this housing crash.
The next graph overlays the two housing crashes in order to compared duration and magnitude:
The price decline this time around has been substantially larger — an outcome that was unsurprising based on the comparatively vast overvaluation of homes coming into the 2005 bubble peak. But while it may feel to
some like this price decline has gone on forever, it has not yet
endured nearly as long as the 1990s version.
Whether it
eventually does so remains to be seen. Either way, the first graph
should make it clear that a spring-summer home price rally should not
be taken as evidence that the housing bust has come to an end.
— RICH TOSCANO
If there is one thing you need to take away from the analysis, it is this: housing prices often move against the prevailing downtrend for spring rallies. It doesn’t mean the trend has reversed direction.
You can make the argument that the early 90s was different or that San Diego is not Irvine, but there are more similarities than there are differences. It is very unlikely that we are at a bottom. It is more likely that we will continue to see declines for another two or three years followed by tepid appreciation. For a durable bottom, we need rising employment, an expanding economy, stability at the low end of the market, stable financing, and a host of other conditions we do not currently enjoy. This isn’t over yet.
While we are talking about Rich Toscano, I want to call attention to an old article of his that addresses our other buying phenomenon here in Irvine: foreign cash buyers. Rich wrote a piece called Dumb Money, to describe how foreign buyers end up being the knife catchers.
One argument I hear a lot is that foreign demand for local real
estate has grown substantially in recent years, and that such foreign
demand will be supportive of prices in the future.
Unfortunately, this argument puts the cart squarely in front of the
horse. Investors from other countries are well known to be the very
last participants to arrive at the scene of a financial bubble. They
are the last to hear about all the riches to be made, the last to buy
in, and the last to realize that the party is over.
The
chart to the right provides an example from the history of bubbles
past. The blue line represents the price of the Nasdaq Composite Index
during its late-1990s flight to the heavens, along with the very
beginning of its eventual journey back to earth. The red line denotes
the dollar amount of U.S. stock purchases made by foreign investors.
It
can easily be seen that foreign buyers chased the U.S. tech stock
bubble all the way to the tippy top, and that they lagged prices the
entire way. The final onslaught of foreign cash did not even hit our
shores until after the Nasdaq had begun to decline from its final peak.
Far
from being a positive fundamental, a sudden excess of foreign
participation in an asset market is indicative of ill-informed
speculative money at work. When the foreigners really start piling on,
it’s always a good sign that the end of the bubble is nigh.
— RICH TOSCANO
The activity of foreign buyers with cash is not new or surprising. Rich wrote about what we are seeing today back in December of 2006. This activity will go on until the cash is spent, then prices will resume their decline.
Asking Price: $515,000
Income Requirement: $128,750
Downpayment Needed: $103,000
Purchase Price: $699,000
Purchase Date: 4/25/2006
Address: 8 Orangetip Irvine, CA 92604
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,815 |
| $/Sq. Ft.: | $284 |
| Lot Size: | 2,525
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Other |
| Stories: | 2 |
| Year Built: | 2005 |
| Community: | El Camino Real |
| County: | Orange |
| MLS#: | P698434 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
MOVE IN READY BEAUTIFUL 3 BED 2.5 BATH HOME NEAR IRVINE HIGHSCHOOL***NOT A SHORT SALE OR REO***NO MELLO ROOS***LOW TAX RATE***LOW
MONTHLY HOA OF $185.00 INCLUDES 2 POOLS, 2 TENNIS COURTS AND CLUB
HOUSE. BEAUTIFULLY UPGRADED WITH GRANITE COUNTER TOPS, WOOD FLOORS,
STAINLESS STEEL APPLIANCES AND RAISED PANEL CUSTOM CABINETRY…MASTER
SUITE HAS DOUBLE SINKS, JACUZZI TUP AND WALK IN CLOSET…FORMAL AND
CASUAL DINING AND CHECK OUT THE BONUST LOFT / OFFICE!!! VACANT READY TO
MOVE IN…BRING YOUR FUSSIEST BUYER…
- All CAPS
- *** multiple asterisks ***
- multiple exclamation points!!!
- Pergraniteel
This property was purchased on 4/25/2006 for $699,000. The owner used a $572,587 first mortgage, a $143,147 HELOC and a -$16,734 downpayment. Apparently, he was approved for cash-out at the closing (he probably was not immediately funded). With no skin in the game, he decided to give up:
Foreclosure Record
Recording Date: 05/26/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000263486
Foreclosure Record
Recording Date: 02/20/2009
Document Type: Notice of Default
Document #: 2009000076573
If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $214,900.
Asking Price: $525,000
Income Requirement: $131,250
Downpayment Needed: $105,000
Purchase Price: $470,000
Purchase Date: 4/16/2004
Address: 11 Butterfly Irvine, CA 92604
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,707 |
| $/Sq. Ft.: | $308 |
| Lot Size: | 2,720
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Other |
| Stories: | 2 |
| View: | Park or Green Belt |
| Year Built: | 1977 |
| Community: | El Camino Real |
| County: | Orange |
| MLS#: | P697906 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
location of Irvine Groves. Romantic patio & atrium (very private).
Great for entertaining. Granite counter top in kitchen. Ceiling fans
throughout + A/C. Tile floors downstairs, carpet upstairs. Built-in
closet organizers. Recessed lights. Custom interior paint. This model
has one of the most private courtyards in the development. Walking
distance to shopping & restaurants.
The realtor did not write “light and bright,” but she can ditch the exclamation points, and perhaps some of the sentence fragments.
This property was a pure speculative venture.
- The owner paid $470,000 on 4/16/2004 and used a $376,000 first mortgage, a $94,000 second mortgage, and a $0 downpayment.
- On 6/16/2005 he refinanced with a $496,000 first mortgage, a $27,000 second, and a $27,000 HELOC.
- On 12/22/2005 he increased the HELOC to $57,000.
- Total property debt is $580,000.
- Total mortgage equity withdrawal is $110,000.
If this sells for its asking price, and if a 6% commission is paid, the property will turn a profit, but the lender will be out $86,500. I bet they wish they didn’t give this speculator that $110,000 they are about to lose….
I’m wondering what the prosecution of some of the mortgage mod scams, and warnings to hundreds of other firms will do. Their disinformation might have been changing the expectations of people who are underwater. It might have led them to believe they had a higher chance of a mod, or that the payments would be lower, than reality.
If so, that means more people who were staying in their homes will choose to stop paying or hoping. Some will just move out before the default or trustee’s sale notices. Others will wait to be tossed out, perhaps paying off their other debts with a year of free rent.
Given the large percent of people underwater, it doesn’t require a much larger portion of people giving up to swell the ranks of foreclosures.
Interesting.
It says “not a shortsale or REO” in the first description.
Is this just another example of realtor dishonesty?
I sure hope that Irvine gets more than it’s fair share of FCBs as I’d much rather have a place I don’t really want to live soak up the people I don’t want to live around.
Not a shortsale or reo anymore…taken off of redfin.
I don’t know how the realtor can make the claim this is not a short sale or REO. Unless the owner is willing to write a check for $214,000, this is going to be a short sale. Based on when the Notice of Trustee Sale was recorded, this should have been REO in June. The fact that we are into August and this is not REO yet speaks to the debate we were having yesterday on shadow inventory.
Even if he did arrange a loan mod, it would still be a short sale. I really don’t understand that comment in the listing. Maybe the realtor simply screwed up or was lied to by the owner and that’s why the listing was pulled.
One annoying thing I’ve seen, with this listing amoungst others, is that Redfin no longer tracks inactive listings in the main Orange County MLS (SoCalMLS) that were taken down within the past month or so. Out in Riverside, (MRMLS), they still do, so I suspect SoCalMLS had a rule change preventing Redfin from doing so. Makes it hard to track a property’s history.
You are probably right about the reason that important information is being withheld from the public. It is that behavior that makes the organization disliked. The NAR and all local associations gain their power from information so transparency is not good for them. We are in the information age, and data transparency is what makes our markets efficient. Through hiding information and manipulating statistics, the NAR can motivate buyers, which is the only thing they care about.
I love redfin’s note feature. In the couple zip codes I’m looking I get an update email every morning. For the new properties, or the change of price places, I copy/paste the new price into the note field.
Then if/when it sells, I can go back and look at what price they were asking.
Also of note, I have notes on 500+ homes. The inactive list is ~370. HALF of those inactive homes were actually sold. I think theres a LOT more people wanting to sell but not getting the price/offers they want, and eventually they just pull the home.
Could the bank already own it? Deed in lieu?
Then it would be an REO, so nope.
Or, here’s another possibility I don’t really like.
Maybe the realtor isn’t lying. Maybe he/she asked the homeowner and believed whatever they said.
For any of the realtors on the board, what kind of due diligence do you do on a listing? Check to see that the person who claims to own it really owns it (especially joint owners, various permutations of married/divorced)? Whether there is a notice of default or notice of sale? Title search?
The only way that that first property isn’t a short sale is if they bring cash to the table, and lots of it ($214,900).
As for it being foreclosed, when is the trustee auction scheduled? If he got the notice of trustee sale back in May, you would think it would have happened by now. Maybe it did and this is actually an REO.
8 Orangetip was bought by an investor at the trustees auction on 8/4/09 for $434,100. Not too bad of a profit if it sells for the list price.
12 Butterfly doesn’t appear to be in default. Although I question the total debt, since I think that there is only a $57k HELOC second, and the other liens probably just never got properly reconveyed. Who knows if the HELOC is maxed or not, but usually they are.
The first one is described as a single family home, but the photo shows two garages. So not really an SFR, or what?
Sure look like duplexes to me.
I think they’re just really close together – gives arm’s length transaction new meaning.
His and hers garages, well separated?
Maybe a brilliant idea for marital peace!
Welcome back to y2k.
More evidence that the economy is back to y2k. The new economic paradigm. The US consumer represents about 2/3 of the economy.
http://www.bloomberg.com/apps/news?pid=20601039&sid=a04oVutXQybk
“Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.”
Perhaps a reason banks would obscure the levels of REO inventory, or hold off on taking ownership. If you can book a non-paying loan at full value, but need to take a hit once you foreclose, what’s the rush?
That is why there has been a fierce debate over mark-to-market accounting. If banks were to suddenly move to mark-to-market accounting, most would be revealed as bankrupt. However, this would free up all those assets held in limbo by lenders because there would be no incentive to keep it on the books. A non-performing loan on their books that they are unwilling to turn into a foreclosure will sit there indefinitely.
If the property that is collateral to the non-performing loan is being used, at least some societal benefit accrues, but that doesn’t help the bank. If the property is not being used, it is a complete waste of societal resources — no benefit to the bank nor to an end user.
The bank takes a cash-flow hit because it is an asset that is not generating any cash, but the liability (deposit) on the other side costs something. But, with interest rates so low (0.1% @ RF for normal deposit accts) it takes a long time to accumulate losses.
Consider a bank with two 5% fixed mortgages, and one non-performing. If they can access capital at no cost and get an effective 2.5% yield, they’re ok. Now if their cost of capital is 6%, they can have both loans being paid-in-full and still lose money. Higher rates will not only hurt housing prices, but has the potential to cripple banks with large books of frm’s.
Towards your power-poker post, put the bank in TIC’s position. Why wouldn’t they hold inventory to avoid furthering the decrease in price of their inventory? It is somewhat a game of chicken because the banks that unload fastest will get the most for their reo and the banks that wait won’t have a chair to sit in.
“Why wouldn’t they hold inventory to avoid furthering the decrease in price of their inventory?”
Because their holding of the inventory does nothing to stop the decrease in prices. One of the nice things about markets is that unless one seller has an overwhelming share, individual sellers don’t have any control over price.
The Irvine Company does not have enough market power to prevent prices from continuing to fall, unless they collude with a large enough portion of home sellers throughout Southern California (which is of course logistically impossible).
No individual bank has enough market power to prevent prices from continuing to fall, unless they collude with other banks. I doubt the kind of large-scale collusion necessary for this is happening. Rather banks are choosing to hold back partly for accounting reasons discussed above, and partly because they are dumb enough to think prices are going to rebound for reasons that have nothing to do with their own actions.
The government had to create the appearance that the big banks were solvent in order to prevent another depression. The banks were key. The removal of mark-to-market was key. So far they’ve a good job in propping up the Dow and S&P 500 about 50% from the lows. I’m surprised and impressed. However, I wonder how long this illusion can continue.
Also, despite the government’s efforts to reestablish Ponzi scheme spending, they haven’t convinced the consumer to spend beyond his or her means, and they haven’t stopped the loss of jobs. This tells me that something much larger than the govt’s ability to manipulate is in-play.
Isn’t that like keeping two sets of books which is illegal? I know it is only illegal if the government says it is so and the changes in mark to market seems like they allow two sets of books to be kept for banks. One set is the books you show to the public and to investors and the other (black book) is the one which holds all the dirty little secrets.
All the info is in the same book, just where it’s presented.
Soemtimes it’s OK to value a loan at an above-market price. Say I got a 100% financing loan in ’04 for a home I paid $500k for. Neighborhood comps are now at $400k. If BoA had to sell my loan it might only go for $400k, so they’d want to keep it at their hold-to-maturity value of $500k. Any loan or security of a 05-07 vintage would have much worse numbers.
Once someone misses a payment (maybe 2 or 3) their loan should be revalued using probability of default and an estimate of recovery, with the prob. of default being non-zero, and the recovery < last sale price.
That is the rub-do the banks have to revalue a loan once it’s in default, or only after they’ve foreclosed? It should be the first, but if it’s the second, that could explain that pattern of banks all but refusing to foreclose on a lot of people.
Interesting thought. Is the bottleneck in our foreclosure system at some point in the process due to arcane accounting rules? I suspect it is. The lenders are taking loans and properties up to the brink of recording a loss and stopping.
The only way to stop this is to make them record a lower loan value at the time of default. Once they enter the process, they can halt the process and keep properties in limbo where the payments are not coming in, but the loan is still supposedly worth full value. So now we have thousands of properties held in limbo due to accounting rules.
change the rules. Here’s why: I was talking with a buddy (who I consider a stand up guy) who bought a Stanton condo at the peak with shitty financing. He stopped paying 8 months ago (still has the capacity to pay but has elected to save). The banks are looking to mod his payment and he still is giving the bank a big middle finger. I have heard 2 others thinking about doing the same thing in the last 2 weeks.
JACUZZI TUP… THE BONUST
$525K X .06= $31,500/2= $15,750
for seller representation of this quality.
Well folks that’s what I make in 2 or 3 months working full-time teaching gangbabngers in East L.A.
With a Master’s.
When this economy and society crash and burn remember this little demonstration of how producers and others got treated these days-
Not bitter but not bitte either-
LOL
Word.
Then again…you capitalized the first two letters in your name, started a sentence with a preposition, misspelled gangbangers and forgot a few periods and a comma.
Juts teezin ;^)
Bust me a check for $15K and I’ll make sure I do it right
The DA in DAve on the other hand is intentional and serves to distinguish my unfailingly witty, informative and profound posts from those of my many admirers and imitators. Not to mention the clones-
*Where’s AZphxDave these days by the way?*
Still not quite at my forecast of 60% of CA homes being underwater at the trough, but getting close.
http://www.housingwire.com/2009/08/13/firstam-sees-one-in-three-mortgages-underwater-in-q209/
“The top five states in terms of a proportion of underwater borrowers included Nevada with 66% in negative equity and Arizona with 51% negative equity. Florida followed with 49% underwater while Michigan and California rounded out the top five with 48% and 42% respectively.”
We have to add the percentage of foreclosed loans to those currently underwater to see how bad it is. I project over 2 million foreclosures and short sales between 2007 and 2012. On net, CA residential real estate will be underwater, and that’s if you include homes with no mortgages.
“On net, CA residential real estate will be underwater, and that’s if you include homes with no mortgages.”
OMG! That would be really bad. At the very bottom, it will look very bleak because no recent purchasers will have any equity. The only thing that might not make it be that bad is if most underwater homeowners default. If people severely underwater give up in large numbers, there will be fewer with negative equity to offset the cash owners. Your statistic might not prove to be true, but the crushing results will be the same.
That article does contain a misleading statement ““Given that negative equity did not increase this quarter and home prices declines are moderating or flattening,” Fleming adds, “we may be at the peak of the negative equity cycle.”
Well, the portion of existing loans with negative equity may have flattened, but that is partly due to removing many negative equity loans from the dataset due to foreclosures and short sales.
There are several ways to get rid of negative equity, including: rising prices, amortizing loans, sellers paying shortfall at closing, short sale, and foreclosure. Once home prices stabilize (in 2011 or later), the percentage of underwater loans will keep dropping, primarily because of short sales and foreclosures.
What about all the option-ARMs still out there that are being paid, yet negatively amortizing?
Talk about a double whammy!
FYI, many, many properties are being unloaded, not by banks but by the government. Google all the county websites and you will see all the auctions that are taking place all over the country. Properties are going for give away prices in some of the undesirable areas, MI, Ohio, etc. Lake County, northern ca is having an auction in about a week or two. Unbelievable prices.
We need to spread that word that homes in Irvine should not be over $300/sf. In year 2000, before the bubble homes in Irvine were priced about $185/sf. If this is inflated by 4% CPI, the current price per SF should be around $250/sf. SPREAD THE WORD!! These gullible and ignorant buyers that are paying over $350/sf are plain dumb. SPREAD THE WORD!!
Foreign cash will no last long this time to prop up US asset market. We are in synchronized global recession. Sources for FCB probably fall in two categories:
(1) foreign savings or profits made from credit bubble era looking for new investment channels; (2) liquidity pumped in by many government in some countries ended up getting recycled into equity and RE markets both locally and abroad. The first source is quite limited and can only provide nominal support for markets. The second one is more substantial but is not sustainable from a policy standpoint. Unless US RE market can quickly turn around to produce tangible returns for foreign investors (which is highly unlikely), new investors/buyers will stop coming.