August 31, 2006

‘Hanging On In Hopes Of Averting A Loss’ In California

The Pasadena Star reports from California. “When economists start talking about cycles, it’s a good bet they’re talking about a downturn. That was the message Michael Carney delivered Wednesday when the Real Estate Research Council of Southern California held its quarterly luncheon at Cal Poly Pomona.”

“There are strong signs of slowing in the residential market, particularly on the demand side. ‘There was a strong, unanticipated decline in demand in the second quarter of 2006,’ Carney said. ‘Home sales are way down, and although prices were still up, the rate of increase has fallen a lot.’”

“‘The level of inventory on the market right now is the highest it has been since 1990,’ Carney said. ‘Why is that? Why are we seeing such a big decline in demand?’”

“In San Diego County, which has 42 percent of the u nsold inventory in the Southland, 80 percent of the inventory is condominiums and attached units. Las Vegas, Miami and Chicago also are having trouble with unsold condos, Carney pointed out. ‘I believe we will see housing prices level off or possibly edge forward a little,’ he said. ‘Do I think they will actually collapse? Well, not anytime soon.’”

“Silicon Valley executives are more upbeat about the local economy than their peers elsewhere in the Bay Area. But they are slightly less eager to hire than they were three months ago, according to the quarterly survey by the Bay Area Council. And their mood, along with that of Bay Area executives generally, seems to have soured a bit.”

“‘We’re getting some mixed signals,’ said Steven Buster, CEO of the Mechanics Bank, based in Richmond, which participated in the study. Although many Bay Area businesses are making money and some are hiring, ‘the worry in our industry is mainly real estate,’ he said. ‘Foreclosures are at an all-time high right now.’”

The Tribune. “While flipping does not make up a significant part of the homes sold in San Luis Obispo County, those buyers who did try to make a quick buck ran into trouble. More than 68 percent of county homeowners who flipped their houses during the second quarter lost money, and the median loss was $15,900.”

“‘There’s been a significant pullback in activity by flippers,” said Mike Ela, former president of DataQuick. ‘Flippers are changing their quick-flip mentality. They may be hanging on a little longer in hopes of averting a loss.’”

The Record Net. “A new survey of ‘flipping’ indicates that the levels of investors in the local and California real estate markets have shriveled from a year ago. In the second quarter, 2 percent of the sales in San Joaquin County were of existing homes that had been owned for six months or less, down by almost two-thirds from 5.1 percent in the second quarter in 2005.”

“The county had enjoyed a surge in home valuations from 2000 through last fall, but the sales market turned soft beginning at that time, with home prices throughout much of the county sliding last month to the first year-to-year sales price decline seen in years. Real estate brokers and agents attribute this largely to a continuous month-to-month jump in the number of homes for sale in the county since last spring.”

“Chris Apostolopoulos, KB Home president of the Central Valley division, said investors have indeed dropped out of the area’s sales market, which is now in a cyclical ‘correction.’ But he thinks that’s a good thing.”

The Santa Cruz Sentinel. “Buy a house. Get a car, free. That’s the deal being offered by green developer Clarum Homes. ‘Some of the people who were buying had a hard time selling their current homes,’ said agent Dana Sales. ‘We’re trying to attract people with the ability to go ahead and make that purchase without that contingent sale.’”

“Linda Haines, associate broker in Watsonville, said there’s no question the real estate market has softened from a year ago. A report showed 50 percent more homes, 1,355, were on the market, than the previous year and the number of sales during the month plunged to the lowest level in more than a decade.”

“‘A year ago sellers didn’t have to do much. That time has since gone,’ Haines said.”

“A homeowner paying a mortgage in a house they’re living in generally has more breathing room than developers with construction loans to cover. ‘It’s a buyer’s market,’ Haines said. ‘But certainly there’s no need for sellers to panic.’”




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160 Comments »

Comment by Ben Jones
2006-08-31 14:09:43

‘Many of the approximately 2,750 La Costa and Encinitas homeowners who have been taxed $800 a year to pay for a new middle school and other construction projects are outraged that the San Dieguito Union High School District has all but abandoned plans to build the school.’

‘Residents say they bought their homes with the understanding that the school would be financed through the special tax district. Parent Laura Goodstein said she moved to La Costa Valley in part so her children could walk to school. ‘A Realtor told us it wasn’t going to be ready for our son, but it would be for our daughter. I think it’s misleading.’

‘It would be fiscally irresponsible to build a new school when in fact we still have room at two,’ said Steve Ma, associate superintendent of business services. Ma said the sign was placed on the site by the developer, not the district. School officials say the sharp spike in student growth in recent years has leveled off and district enrollment has stabilized. Two nearby middle schools in Encinitas can accommodate additional middle school students if needed, eliminating the need for a new school, the officials say.’

‘There it was misleading people,’ he said. ‘I know for a fact there were a number of builders and sales agents that had indicated to home buyers that a school would be built in two to three years, and they never came back and checked with the district and asked about our plans.’

Comment by ocrenter
2006-08-31 16:20:58

the situation up in north county, especially some of the less desirable places is beyond bad. San Marcos is looking at a year supply of homes for sale. and every builder is lowering prices.

I just found this example of 5 foreclosures in one housing development of 187 homes. There are only 4 sales in this tract to date, but one of them is a foreclosure sale. 4 other homes either just got auctioned or will be within the next 3-4 months. This tract may be looking at MORE foreclosures than regular sales this year!!!

Comment by GetStucco
2006-09-01 04:28:45

I can second that, on second-hand information. A fellow who works at my shop and who lives in Carlsbad claims prices there are down by 10% already. And I have mentioned here from time-to-time that, at least as of the last time I drove along Palomar Airport Road, there were huge expanses of freshly bulldozed land on the brink of conversion into McMansion tracts…

 
 
Comment by Sammy Schadenfreude
2006-09-01 03:08:20

Realtors lying to people? Say it isn’t so!

 
 
Comment by SLO_renter
2006-08-31 14:15:56

“While flipping does not make up a significant part of the homes sold in San Luis Obispo County. . . .”

I agree that flipping has not been big here as compared to other areas, but there are people who bought with the intention of sellling after a year or two, so the 6 month definition seems a little short to capture this element. Also, this article focuses on the small number of houses that have actually sold. I know of at least one property that was purchased a a year and a half ago; it has been on the market for a year now, and has not sold yet. Unfortunately for the owners, I do not think they can lower their asking price much, as they very much overpaid in the first place . . . .

Comment by sell high buy low in SLO
2006-08-31 14:56:57

I wholeheartedly concur with my esteemed colleague from beautiful SLO county. Flipping hasn’t been real big here in terms of Phoenix or Sacto style flipping also because we just don’t have that kind of inventory as far as big housing tracts sprawling off into nowhere (except maybe a little bit like that in Paso Robles).

We did get enough building activity, especially in the North County, however, with Centex and other homebuilders putting up tracts, to see a classic overbuilt situation develop. Just get off 101 at the Santa Barbara Road exit south of Atascadero, and go east a mile or so to El Camino. You will be at ground zero for a Centex development surrounded by two or three other significant developments (relatively speaking, significant for this area, of course). The intersection is loaded with signs. I keep meaning to take a picture of that intersection for Ben’s photo collection.

My daily amusement consists of regular visits to realtor.com to watch weekly price reductions in the asking prices of homes in certain price ranges and zip codes that I have been tracking all summer long. Not a week has gone by where I have been “disappointed”.

$400 to $600k in Templeton - inventory has doubled (13 to 26), and prices reduced at least 10% in no more than three months.

$700 to $850k in Atascadero - representative sample is a place that went FSBO at the beginning of summer for $819k, listed a few weeks later for $809k, and is now $719k.

And it is still August! And these are just the asking prices. That house for $719k, even if it were to sell next week, will end up with a real price that starts with a six. That will slap everyone in the neighborhood back to reality.

Tomorrow the real fun begins! September!

Comment by SLO_renter
2006-08-31 16:14:10

Yeah, isn’t all that construction a hoot? I keep looking at it and thinking about the ‘official’ line (we’re running out of housing) and laughing. And have you noticed that everything around here has balloons on it? It started with the (unsold) housing developments, then migrating to real estate offices (several new ones seems to have opened in San Luis proper in the past several weeks). This past weekend, I saw some local businesses trying to attract customers with balloons. Sure seems like not all is sunny in paradise . . . .

 
 
Comment by turnoutthelights
2006-08-31 15:13:16

The ’six-months-makes-a-flipper’ argument is crazy. The majority of flipowners plan on holding for 2 years (tax law). This in its own way tends to explain the Spring ‘05 runup in inventory given the high sales numbers in ‘03. The inventory numbers will plateau and rise for years to work this off. Maroons.

Comment by SLO_renter
2006-08-31 16:10:55

Good point re: tax laws and flipping.

Comment by togoplease
2006-08-31 17:23:53

uy a house. Get a car, free.

The free car becomes a gift and such is taxable by the IRS.
It may push you up in the brackets further draining your savings.

If this is overlooked the seller will get nailed and so will the buyer. I suspect the buyers will get shocked by the added 1099 they get this Jan-Feb….

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Comment by lmg
2006-09-01 04:26:07

Reminds me of that Oprah Winfrey stunt a few years ago, in which she gave each member of her studio audience a new Pontiac G-6 (~$29 K).

Turns out that each ‘winner’ had to cough up over $7K in taxes to keep the car.

http://money.cnn.com/2004/09/22/news/newsmakers/oprah_car_tax/?cnn=yes

 
 
 
Comment by WaitingInOC
2006-08-31 16:16:45

And, the fact that flippers can’t sell in 6 months anymore doesn’t mean that they aren’t still flippers, it just means that the market turned on them and they are stuck. A better metric (which doesn’t exist) would be houses that were listed for sale within 6 months, rather than houses sold within 6 months. To define a flipper you need look at intent, not whether they were able to accomplish the flip.

Comment by Neil
2006-08-31 17:04:54

This is the best point; if it takes 9 months to sell a flip, a 6 month definition of a flip makes no sense! My definition of a “flip” is any home put on the market within 30 months of purchase. If it sells at 48 months after purchase… tough, it is still a flip.

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Comment by AngelaintheIE
2006-08-31 19:08:43

A lot of flippers where also purchasing pre-construction which meant it could take longer than 6 months to complete (unless they flipped during construction). Great point.

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Comment by Backstage
2006-08-31 20:08:22

A flip is simply a home, never occupied by the owner, meant to be sold for the appreciation in price. There are lots of flavors of flips:

-pre-construction flip
-condo flip
-fix and flip
-lipstick on a pig flip

Any others?

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Comment by robert
2006-08-31 21:47:06

A flip is simply a home, never occupied by the owner, meant to be sold for the appreciation in price. There are lots of flavors of flips:

My first instinct, too, but because of crazy financing, some people who were actually quite poor “bought” houses and had to live in them for economic reasons, even though the plan was to sell them in a couple of months and Get Rich Quick.

I rememember, on a whim, looking at new construcion in central florida a few years back. Some of these ticky-tacky boxes has been bought and sold SEVERAL TIMES before construction was even complete. Needless to say, that’s not happening any more!

 
Comment by QueSeraSera
2006-09-01 03:40:28

There are lots of flavors of flips:

-pre-construction flip
-condo flip
-fix and flip
-lipstick on a pig flip

Any others?

Foreclosure flippers.

You can take an online course at the Fourclosure University or get their 4 ebooks for $47.

http://www.foreclosureuniversity.com/

Their link to “Get more foreclosure news” is a useful source of current articles on foreclosures.

 
 
Comment by GetStucco
2006-09-01 04:36:04

Right (about the intent to flip, not the accomplishment thereof). Generally only smart flippers are astute enough at this point to realize we were at the top of the mountain last summer, and have begun a long downhill slide which will result in negative returns to real estate ownership for upwards of a decade…

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Comment by DinOR
2006-08-31 18:45:12

turnoutthelights,

God love you sir! I’ve argued this until I’m blue in the face. Your observation regarding the sales spike in 2003 is spot on! I’ve had some folks pooh pooh this as a “non factor”. Non factor? You’re kidding right? I firmly believe that given the generousity of our relatively new tax law (1997) we would have had this exact same ponzi scheme had mortgage money been at 10 PERCENT! I am so not kidding. I appreciate all of the fine work that folks have done bringing us great data and yield curve graphs until we’re ready to puke! Really I do. The truth is; if people had to pay cap gains taxes on this every step of the way they would have thought twice about becoming damn gypsies every two years!

Comment by Arwen U.
2006-08-31 19:11:29

1997 Tax Law = Spark
Low Interest Rates = Tinder
Lax Lending = Gasoline

kaboom.

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Comment by DinOR
2006-08-31 19:45:47

LOL!

Kablammy!

 
 
Comment by Housing Wizard
2006-08-31 19:34:38

I also agree with you turnoutthelights . There are the 6 month flippers and there are the two year flippers .The 2003 buyers/flippers and the 2004 buyers/flippers as well as the 6 month flippers all decided to sell at the same time . At the same time affordability reached it’s max along with interest rates going up plus the adjustables resets adjusted . A perfect storm all converging at the same time that created a amazing inventory glut ,(along with the builders over-building ).
I’m sure everyone thought people would be staying in homes at least 5 to 10 years ,but no ,it was a 6 month or two year plan. That’s why the adjustable was so attractive to these borrowers who had no intentions of staying more than 2 years .
You see, most these people put their houses on the market before the news of the turn down became mainstream . Sure there is more inventory coming on now because of the
panic listings ,……….but .
I just agree that the tax exclusion might of been more of a factor than we have given it credit for.

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Comment by Pismobear
2006-08-31 18:59:37

Tomorrows Pismo Coast caravan notes: Buyer gets $2500 per mo for 6 mos; Cookies; Croisant sandwich; $50 gas; Breakfast burritos at both properties;More Croisant sandwiches;$50 credit at the Far Western;Breakfast and scratchers; Starbucks goodies. Let’s see, I’ll have a burrito, then some Starbucks, and finally at 12:30 when the caravan is over I’ll take a croisant sandwich to go. In order to get agents to show up in Pismo they have to feed or bribe the agents.I’m hoping when the bubble really breaks we’ll have barbque and tri-tips like ‘last time’ at the bottom of the bubble.

Comment by Housing Wizard
2006-08-31 19:50:18

Lol, at least we know agents aren’t going to be going hungry .

Comment by Pismobear
2006-08-31 20:17:24

You don’t have to be an agent. In fact, if you are a civilian walking in from the street, the agents there will kiss your feet and tuck a napkin in your lap. Hope she’s a hottie hehehehehehe.

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Comment by robert
2006-08-31 21:51:26

What a great idea for a Housing Bubble Blog get-together! We’ll all meet in Boise or Gilbert and go from development to development dining on the food they leave out!

(I have no shame! I regularly go for walks on Sundays in my neighborhood to go inside open houses and eat the realtors cookies.)

Comment by GetStucco
2006-09-01 04:40:59

Housing Bubble Blog locusts ravage free food offerings at tract house developments… That is quite an image there!

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Comment by GetStucco
2006-09-01 04:32:17

Anyone who drank the I/O ARM koolaide under the assumption that they would be able to either refinance or sell at a profit within five years is just as hosed as buyers who plan to flip within six months. Not having specifically checked, I would have to guess that SLO had a fairly high percentage of I/O ARM loans fund recent purchases?

 
 
Comment by Lander
2006-08-31 14:19:32

Sacramento v. San Diego graphs
Meet California’s New Canary in the Coal Mine.

Comment by Craven Moorehead
2006-08-31 14:31:37

On my way home tonight, I passed an open house. Thursday evening. 5pm. Only the Realty Clown’s giant SUV in the driveway (it had ReMax stickers on it). Middleton, Mass.

On Tuesday morning, on the way TO work, I saw another open house. I’ve never seen an open house at 7 AM during the workweek. Has anyone even ever heard of this?? That one was in Salem, Mass.

Yessir. Things are getting a bit strange around here. Desperation sets in…

Comment by sf jack
2006-08-31 14:43:48

Craven -

“Broker’s Tours” are Tuesday’s in SF (realistically open to anyone). I’ve started noticing signs for them “up” on Monday nights or on Tuesday mornings in my neighborhood.

I like to think of them as a… coming sign of something.

Comment by Mike in Pacific Beach
2006-08-31 21:25:30

here in Clairmont Mesa I see open houses at night every day of the week. What happened to weekend open houses. Absolutley no traffic either I might add. My S/O stopped in one just to use the bathroom! LOL

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Comment by Pat
2006-08-31 14:51:21

Yes, I’m seeing open houses on Tuesdays, with “delicious lunch and Rita’s Water Ice.”

Didn’t go. Preferred to have my regular ham sandwich, thank you.

 
Comment by MB Renter
2006-08-31 14:51:35

“I’ve never seen an open house at 7 AM during the workweek. Has anyone even ever heard of this?? ”

Around here, “Open Sunday” means “Give the broker a call 24/7 and they’ll be right out to the property to show it off to you.” The local agents are to the point where they’ll do anything for a sale.

 
Comment by Mike in MA
2006-08-31 17:33:24

I think I passed that same open house on the way home. River St, kind of a contemporary-split looking thing? Lots of houses for sale on that street — 2 houses up is a FSBO split just reduced to $499K. Good Luck with that. Also a little further is one that just recently changed realtors after being on the narket about 6 months. Changed to C21 Fine Homes and Estates, nah not too emotionally attached to their house.

Comment by Craven Moorehead
2006-09-01 06:34:31

Yup, that’s the place.

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Comment by sf jack
2006-08-31 14:45:45

And I highly recommend visiting Lander’s “New Canary in the Coal Mine”.

 
Comment by SLO_renter
2006-08-31 14:56:34

Great graphs!

 
Comment by lmg
2006-08-31 14:57:23

Well, you may be right about Sacramento taking over San Diego’s title as the “New Canary in the Coal Mine,” but as someone born and raised in San Diego I certainly resent it. Whatever happened to local pride!

I did spend some time in downtown San Diego at a scientific conference early in August, and was literally amazed at the huge condo ‘behemoths’ that had sprung up on Market Street. I could hardly see a reason for their existence, and they strongly reminded me of Egyptian pyramids (and about as useful).

It occurred to me, probably to others as well, that they’re trying to recreate Manhattan on San Diego bay. Only problem, is that there’s little or not infrastructure to support actual people who live downtown. Obviously, the concept of sending one’s children to school rings hollow..so they must be going for the investment flippers and empty-nesters.

One other point. One of my hallmarks of civilized living in downtown San Diego was a restaurant named “Fifth & Hawthorn”. It wasn’t anything particularly fancy, but there was always outstanding and inexpensive food. Typically, it received a lot of the theater trade over the weekends. I hadn’t been there for some time, and when we visited, it had been closed down for about a year. Seems that half the block had been leveled, in anticipation of a high-rise hotel (right in the middle of the landing path of Lindergh International Airport) that now looks like it will be never built.

Turns out that “Fifth & Hawthorn” has moved to the North Park redevelopment district (~8-10 miles due east), and is now lodged as the restaurant “Hawthorn” in a reconverted theater.

Downtown’s loss is North Park’s gain, but it’s the downtown condo dwellers who may be wondering why they are spending $500 K for a 1 bedroom condo for such meager downtown amenties.

Comment by Paul in Jax
2006-08-31 15:22:49

And, totally OT, but that story has a tragic ending. Hawthorn’s was owned by Floyd Landis’s father-in-law, David Witt, who decorated it with his son-in-law’s cycling memorabilia. Witt committed suicide shortly after Tour de France winner Landis was accused of illegal doping.

Comment by lmg
2006-08-31 18:26:58

Thanks for the update, despite this indeed being a tragic story. I met David while dining at Hawthorn’s in early August, and congratulated them on their successful move from the Hillcrest area.

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Comment by Recovering Homeowner
2006-08-31 15:56:48

I fear for the future of North Park - seems there is a lot of construction still going on over there with condos popping up all around the “Arts District.” It’s like “little downtown” in “midtown.”

 
 
Comment by GetStucco
2006-08-31 15:10:31

Is it better to lose 2% of $600K, or 4% of $300K?

Comment by robin
2006-08-31 18:52:16

Yes.

Comment by robin
2006-08-31 18:53:12

Loosely speaking - :)

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Comment by flatffplan
2006-09-01 03:07:15

can’t fit it on the album cover !
roflow

 
 
Comment by stanleyjohnson
2006-08-31 14:24:45

I believe we will see housing prices level off or possibly edge forward a little,’ he said. ‘Do I think they will actually collapse? Well, not anytime soon.’”

yeah, right.

Comment by turnoutthelights
2006-08-31 15:21:35

‘Well, not anytime soon.’
As in ‘definitely sometime later.’

 
Comment by Backstage
2006-08-31 16:32:28

Like not before dessert?

Comment by dvo
2006-08-31 23:28:11

“Like not before dessert?”

OutRAGEous. IrreSPONsible. That kind of hyperbole is just what’s driving this unfounded hysteria. Fundamentals are strong, interest rates are stabilizing.

Definitely no collapse through this weekend…

 
 
 
Comment by cayo_ron
2006-08-31 14:28:07

“Flippers are changing their quick-flip mentality. They may be hanging on a little longer in hopes of averting a loss.’”

And I’m going to drink a little more in hopes of averting a hangover.

Comment by lefantome
2006-08-31 15:58:13

“While flipping does not make up a significant part of the homes sold in San Luis Obispo County, those buyers who did try to make a quick buck ran into trouble. More than 68 percent of county homeowners who flipped their houses during the second quarter lost money, and the median loss was $15,900.”

What happened to everyone else’s value? Sounds like the market change has just affected the flippers. Whew, got a little nervous there ….. thought prices might be coming down.

 
Comment by foz
2006-08-31 17:53:12

that’s funny. I’m going to try that next time.

 
 
Comment by dwr
2006-08-31 14:38:09

More than 68 percent of county homeowners who flipped their houses during the second quarter lost money, and the median loss was $15,900, according to the real estate information Web site.

That loss only represents the difference between purchase and sale prices. Improvement costs are not factored in.

Comment by snake_eyes
2006-08-31 15:02:19

Neither are carrying costs, I bet.

2006-08-31 15:06:47

Cost of learning a life lesson and surviving: priceless.

2006-08-31 15:07:17

close bold

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Comment by dwr
2006-08-31 14:39:22

not to mention realtor costs.

Comment by Walker
2006-08-31 14:48:49

It is too early in this thread for an open bold tag. Why cannot Blogger fix this problem.

Comment by Ben Jones
2006-08-31 15:19:51

This isn’t a blogger site. When this happens, send me an email and I can fix it.

 
 
 
Comment by WingLee
2006-08-31 14:48:20

I live in OC and am a computer engineer, back to 1999-2000, most of engineers in our company are trading stock (you have to play and to make some extra $), and usually the more money you have the more $ you play. (Too bad, my wife lost 100K on this fantasy game).
However, the RE bubble is totally different story, most of engineers, I know of, with a lot of cash and good income stay away from RE. And the people with a little cash or no cash are playing now. For example, once I heard a few engineers who all just bought their houses in recent years are discussing the worst case scenarios. Therefore, I think they are quite aware of this is a gamble, but based on the risk and take, they think this is a good game to play, I think, the RE phenomenon is really in favor of people without savings.

Comment by txchick57
2006-08-31 15:57:17

Wing, you are about the first person I’ve seen who gets that. I felt the same way.

 
Comment by WaitingInOC
2006-08-31 16:12:56

Yep, it’s definitely good for those without assets as it allows them to basically get all of the upside reward (potential appreciation) with basically no downside risk of out-of pocket loss (I guess negative credit rating is about the only downside for them) because of non-recourse loans for owner-occupied property. And, what other speculative investment allows you to play with almost none of your own money at risk? And, since lenders relaxed lending standards, even those with poor credit could join in, thus encouraging those with poor credit to take the gamble since the only risk was having already poor credit get a little worse.

 
Comment by Backstage
2006-08-31 16:35:47

Well that view does not make this bubble look any stronger. If that is true, the level of folks who walk away is going to be much higher, evern from primary residence.

 
Comment by togoplease
2006-08-31 17:44:12

Like the ex-ceo, co-founder of Intel Andy Grove (engineer himself) wrote about… being paraniod is very common. You always hedge against unforseen events.

In Only the Paranoid Survive, Grove reveals his strategy of focusing on a new way of measuring the nightmare moment every leader dreads - when massive change occurs and a company must, virtually overnight, adapt or fall by the wayside. Grove calls such a moment a Strategic Inflection Point. When a Strategic Inflection Point hits, the ordinary rules of business go out the window.

http://www.intel.com/pressroom/kits/bios/grove/writings.htm

 
Comment by waiting_in_la
2006-08-31 18:31:41

Yes, I have noticed this behavior.

I have a computer engineering degree and work for a major visual effects studio in Hollywood. There are several different breeds of people in vfx, but lets seperate them into 2 camps : technical and non-technical. Let’s go further by making a grand assumption : the technical people went to college, and learned math.

Let’s just say the analytical minds at the company have steered clear of real estate, talk about what a huge disaster waiting to happen it is, while the majority of “artists” I know saw it as their can’t lose strategy to get rich.

Many of the people I work with many huge salaries and most I talked to went Interest Only. I have gotten into several discussions with people and they always laugh at me because I “don’t get it”. They offer all the classic arguments that we joke about here. When I discuss margins and the credit market, they gloss over and get this puzzled look on their face.

Anyways, I have noticed the divide that you speak of … one camp is scared to death, the other has all chips in.

Comment by Housing Wizard
2006-08-31 19:47:47

Also these artist/gambler types did not factor in that everyone had the same stupid plan regarding real estate investment . Buy on a low down adjustable …hold for two years ……sell for tax free gain …..do it again …than do it again ….greater fools will be there .

 
Comment by robert
2006-08-31 22:01:31

Anyways, I have noticed the divide that you speak of … one camp is scared to death, the other has all chips in.

Why be scared to death? If you have a fixed mortgage (or a paid off house) and can well afford your house payments, who cares what someone says your house is “worth?”. If the “value” of my house drops by 50%, how would I know? I’d keep living here!

Comment by Foose
2006-09-01 05:07:44

You missed the point. Most people in resent years could not afford a fixed morgage. So they jump into an ARM. Were you kidding?

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Comment by robert
2006-08-31 21:57:57

I live in OC and am a computer engineer, back to 1999-2000, most of engineers in our company are trading stock (you have to play and to make some extra $), and usually the more money you have the more $ you play. (Too bad, my wife lost 100K on this fantasy game).

Well, anyone who is an Engineer (in CA, as in most states, only licenced PEs can legally call themselves an “engineer”) certainly knows enough math not to be fooled by this silliness.

I remember in Silicon Valley after the “dot-com” crash. The Java and Web “programmers” lost their shirts, and jobs, because they put all their savings in “dotcom stocks.” Real “engineers” (Electrical, Mecahnical, Civil, etc,) generally kept their jobs AND their money!

 
 
Comment by MB Renter
2006-08-31 14:55:20

“‘I believe we will see housing prices level off or possibly edge forward a little,’ he said. ‘Do I think they will actually collapse? Well, not anytime soon.’”

Great prediction, jackass. Housing prices have already “levelled off”. This guy is sitting on the back row of the Big Thunder Railroad Train, while the people in the front seat are already screaming down the mountain.

Comment by LARenter
2006-08-31 15:11:20

“‘The level of inventory on the market right now is the highest it has been since 1990,’ Carney said. ‘Why is that? Why are we seeing such a big decline in demand?’”

Yeah, why is that Carney, and why do you think prices will edge forward a little? We are so close to getting past this statistical glitch with home prices and the sooner the better. As we get into the Fall each month will show YOY price declines then we won’t have to listen to the Carney’s of the world make stupid predictions. This is the last gasp of the “everything is OK” message.

Comment by Chrisusc
2006-08-31 16:47:45

The really fraudulent thing is that this is an expert in the R.E. field. But instead of speaking the truth, he is flat out lying about the situation. I would expect this from people in the private R.E. sector, but from a university representative who is supposedly doing research and informing the students and public.

About a month or so ago, I was incensed over the lying that was coming from local officials here in AZ. Cox Cable had an half hour survey on the economic outlook for 2007. A couple of the questions related to R.E.: do you think prices will go up, etc. But they also had the cheerleading mayors of both Phoenix and Tucson, along with the PHD head’s of both ASU and U of A’s R.E. schools. All of these people lied about the housing market and the imploding bubble. Then I later found out that the whole survey was sponsored (paid for) by the Phoenix Chamber of Commerce and was being presented in the coming Economic Outlook 2007 Dinner and Report. I guess anything to keep people consuming durable goods they dont need, cant afford; and buying homes to stick the junk into.

 
Comment by SFer
2006-08-31 16:58:46

Why the drop-off in demand? Because anyone who likes eating 3 meals a day is priced out of the market. Here in San Fran, anyone with common sense is sitting the market out and waiting. Lots of us sitting on sizable savings waiting for a correction. We habitually attend open houses for outrageously priced properties nobody can afford - it’s become known as “real estate porn” here in San Francisco because it’s like seeing something beautiful you can never have. Meanwhile, lots of property stagnant on the market with literally hundreds of new units getting built right now. At the same time, the city’s population is consistently DECREASING YOY. Can’t wait for the big ARM adjustments to hit in ‘07…..

Comment by togoplease
2006-08-31 17:48:09

Right move SFer…and very true. Not to mention YoY and new construction is sky rocketing… but they are not selling.

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Comment by Northeastener
2006-09-01 07:42:37

I don’t know anything about the SF real estate market, but I do have an observation:

“Lots of us sitting on sizable savings waiting for a correction”. Hedge funds and private investors are also supposedly raising money to buy real estate in the coming dip. If all this pent up demand is building, isn’t it safe to assume that the decline will not be a quick, precipitous drop but a much longer affair with many “sucker’s rallies” as prices hit levels that attract those dollars waiting on the sidelines.

Add to that concept the fact that all the weak hands (flippers/late to the party investors/Option ARM holders who can’t refi) are currently being forced, and that once this shake-out is complete, much of the liquidity of the real-estate market will disappear.

This is all a wild-ass-semi-educated guess, but I am starting to think that given the local nature of real estate and all this pent up demand for well priced properties, prices may not come down much at all unless it was an undesireable neighborhood before the bubble.

What’s the consensus here regarding price drops vs. pent-up demand for affordable housing/profitable entry points for investors?

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Comment by togoplease
2006-09-01 21:33:12

pent-up demand…
Anyone who wanted to buy and didnt understand exotic loans already did. There will be some not in the market of buying a home. What is left are those who understand the risks of current loans and dont believe paying these prices for the past 5 years based on fundemental valuations and common sense.

I dont think there will much of any demand until we see major corrections, from 25-50% depending on your local markets.

 
 
Comment by glorgau
2006-09-01 10:58:51

You said it, last year a co-worker and her “partner” bought a place in the city. They used an IO loan and tappped out their 401Ks to get in. Had to or else they “would be forever priced out”. After getting the mortgage, the woman started brown bagging it for lunch her money was so tight.

They’re going to be wage slaves for the next couple of decades.

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Comment by cayo_ron
2006-08-31 19:27:19

I’m sorry, but I can’t resist the name. Carney: “Step right up, get yer houses here, why you there, you look like a bright young man; try your luck here on this fun game. No money down. . .winner, winner, winner!

 
Comment by Mike in Pacific Beach
2006-08-31 21:34:37

With a name like Carney how can you NOT trust him?

“Step right up folks, its a game you can’t lose…”

 
 
 
Comment by crispy&cole
Comment by LARenter
2006-08-31 15:19:32

check out this one from foreclosures.com;

http://www.foreclosures.com/www/forecast/ff_aug06/default.asp?topic=nationwide

“A significant number in California is the increase in REO (bank owned) property to 2,257 in the second quarter from 1424 in Q1. This is most likely the result of lenders issuing zero down payment exotic adjustable rate mortgages. Rising rates are colliding with flat lined price appreciation in many major urban centers. In San Diego for example more than 50% of purchase money loans in 2004 and 2005 were made with these so-called “creative” loan products.

Now, some pretty startling numbers are starting come in. These loans were issued with very low start rates and added the difference between market rates and the “teaser” rate to the outstanding loan balance (a trick called negative amortization). The loans were also set up to reset to prevailing market rates in two to five years.”

Comment by GetStucco
2006-08-31 15:39:08

Is it better to throw away your money on rent, or use an Option ARM to accrue an ever-increasing debt balance on an overpriced home? Here is a sad tale which suggests that, at this point in housing market history, throwing away money on rent is preferable…
—————————————————————————
‘Gordon Burger is among the first wave of option ARM casualties. The 42-year-old police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that’s making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. It was an unbeatable opportunity, he thought. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years. Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. “The payment schedule looked like what we talked about, so I just started signing away,” says Burger. He didn’t read the fine print.

After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. “I’m not making any ground on this house; it’s a loss every month,” he says. He says he was told by his lender, Minneapolis-based Homecoming Financial, a unit of Residential Capital, the nation’s fifth-largest mortgage shop, that he’d have to pay more than $10,000 in prepayment penalties to refinance out of the loan. If he’s unhappy, he should take it up with his broker, the bank said. “They know they’re selling crap, and they’re doing it in a way that’s very deceiving,” he says. “Unfortunately, I got sucked into it.” In a written statement, Residential said it couldn’t comment on Burger’s loan but that “each mortgage is designed to meet the specific financial needs of a consumer.”‘

Comment by boogers from texas
2006-08-31 16:15:42

You know this bubble is of truly magnificent proportions when a POLICE OFFICER is living in a $500K home! Ten years ago 500K homes were affordable to senior corporate executives, established middle aged surgeons, and the like… what has the world come to??

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Comment by txchick57
2006-09-01 02:25:26

In October of 1999, I looked an architect designed house built to commercial standards with commercial building material, steel frame, energy efficient, etc. It was offered to me at 275K (the owner had paid over 500K to build it but it was extremely contemporary and would not sell in the area it was in after a year on the market). We had a liquid net worth at the time of over 9 million (having made a huge amount of money in the stock market the previous 3 years). I could not make myself pull the trigger, as much as I liked the place. I had visions of not being able to pay for it, losing all the money I had, worrying that I couldn’t sell it if I had to, etc. because I didn’t have a “job”. 275K. I didn’t think my financial situation was stable enough. And here we have a cop with a 500K house? I know I’m weird when it comes to money commitments but that just is from another planet.

 
 
Comment by Davey Jones
2006-08-31 17:09:39

Ugh, I can not say enough bad things about this particular lender. I got away from them a couple of years ago.

I’d send them a payment on the 1st of the month, they’d hold the check for 3 weeks then try to add late fees which I refused to pay. Then I sent them payments by certified mail, they tried that trick one more time and I nailed them over it. Then they tried to up my tax escrow - their calculated potential tax increase which never happened and which I refused to pay. When I left them they owed me, they’d miscalculated the taxes the year before!

Google them, there are some pretty bad comments re them.

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Comment by Skip
2006-08-31 17:33:31

After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. “I’m not making any ground on this house; it’s a loss every month,” he says

I have no sympathy for this guy. He knew what he was getting into, he was just hoping his house would appreciate and he would make a bundle. $1600/mnth on a $500K loan? Yeah, right.

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Comment by GetStucco
2006-08-31 18:57:34

Well, in just $500,000/$1600 = 312 payments (26 years), he could have paid off the entire loan balance, IF his interest rate had been 0%…

 
 
Comment by robert
2006-08-31 22:19:24


Gordon Burger is among the first wave of option ARM casualties. The 42-year-old police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that’s making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. It was an unbeatable opportunity, he thought. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years. Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. “The payment schedule looked like what we talked about, so I just started signing away,” says Burger. He didn’t read the fine print.

He had a 5.1% FIXED MORTGAGE and switched it to an OptionARM. And we’re supposed to feel sorry for him?

Certainly a Police Officer should have better judgement than this!

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Comment by House Inspector Clouseau
2006-09-01 04:13:41

You all fail to understand JUST HOW CONFUSING and MISREPRESENTED these option ARMs are.

There was a time when they were considered only for SAVVY investors. And there is a reason for this.

Say what you will, but Neg-Am and Option ARM loans are COMPLEX financial instruments. Here on this board we know all about them, because they were discussed ad nauseum. But 99% of Americans have NO IDEA what they are or how they work.

And I would guess a bunch of newbie mortgage brokers also don’t know how they work.

Thus, the people trust their “expert” mortgage broker who is likely misrepresenting the loan- either due to ignorance, or due to kickbacks.

I’ve said it once and I’ll say it again. It is the LENDING side of the equation that has doomed us. I don’t necessarily condemn Greenspan to death over the artificially low Fed Funds Rate that he held for too long. I condemn him to hell for the allowance of these toxic mortgages.

I condemn every banker who allowed these, every mortgage broker as well.

Is the borrower culpable as well? Sure. But I still think the large majority of people don’t understand these.

A cop switching from an 5.1% fixed to an Option ARM should be proof enough.

clouseau

 
 
Comment by CarrieAnn
2006-09-01 02:15:20

My heart dropped when I saw the policeman who left behind a 5.1% fixed to get into that option ARM. I guess even with that amazingly low rate he couldn’t afford the house and instead of getting out he dug a deeper hole.

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Comment by Sammy Schadenfreude
2006-09-01 03:18:54

Just what we need, more bitter, pissed-off policemen on the prowl. On the positive side, if you slip him a $20, he may let you go with a warning.

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Comment by GetStucco
2006-08-31 15:21:16

Option ARMs = home financing weapons of mass destruction
——————————————————————————
The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is “like the neutron bomb,” says George McCarthy, a housing economist at New York’s Ford Foundation. “It’s going to kill all the people but leave the houses standing.”

Comment by GetStucco
2006-08-31 15:23:41

They forgot to mention the kickback from the mortgage broker to the real estate agent who referred you to him, along with the suggestion to get a loan with the lowest possible monthly payment…

 
 
Comment by DAVID
2006-08-31 15:26:02

Nice article, I love the accounting rules on option ARMS, not very consevative at all. FASB needs to amend FAS 91 or something and consider the accrual neg am portion deferred over the life of the loan. The way the accounting rules are set now it creates a double bonus for the financial institution, one they get to issue a loan to some idiot who should not be getting that much cash and then they get to book phamtom revenue. FASB once again is too late.

Comment by DAVID
2006-08-31 15:35:21

Yes, I think the neg am portion should be looked at like loan origination fees and amortized over the life of the loan. The sucker I mean borrower adds the loan origination fees now to the life of the loan and since the sucker/borrower is basically borrowing interest payments by going neg am that portion then should be amortized over the life of the loan just like loan origination fees.

Comment by GetStucco
2006-08-31 15:41:39

Think of the increase in debt over the initial amount borrowed as a balloon payment which comes due upon foreclosure…

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Comment by DAVID
2006-08-31 15:51:43

The way the financial institution has to account for the neg am portion keeps things too simple and un-conservative. If they had to defer the neg am portion and amortize it over the life of the loan instead of recording it as revenue everytime the payment is due even though they do not get that much cash would create a headache when they package them up and sell them as securities. Probably never cared before like five years ago when only a very few of neg am loans were issued.

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Comment by Chrisusc
2006-08-31 16:55:26

Crispy, thanks for the link. I am going to send this to some people I know that are still thinking of buying. by the way, I always like how you ream r.e. trolls/people on Lasner’s phony blog.

Even though I am an accountant, it never occurred to me that the earnings are basically “cooked books” as per FASB they are booking deferred revenues. I always appreciate learning stuff on this blog. Thanks all.

 
Comment by togoplease
2006-08-31 17:40:30

Im accountant as well… another issue coming up is the lean reserves on the books. Due to SOX corporations can no longer stuff reserves for bad debt like they used to.

 
 
 
Comment by crispy&cole
2006-08-31 15:46:59

FASB is way too late on this! What an aboslute ticking time bomb. One of the banks listed generated 82% of profits from this crap. WOW. I hope Ben posts this expose as a new thread!

 
Comment by brianb
2006-08-31 17:35:08

The bank has to report it as revenue. They have offsetting borrowing costs that they incur on the loan. If they don’t book the additional amount OWED as income, then it’s a loser. The amount owed should be booked when it is incurred, or increased.

It’s possible they should have to book a healthy loan loss provision for the amounts they deem unable to collect.

But there’s nothing illogical about booking the increase against the loan costs for the bank. It’s not a “fee” so it wouldnt’ make sense to book it over the life of the loan.

Comment by crispy&cole
2006-08-31 18:40:49

The issue is collectibilty. When 20% of these loans are underwater (per the article) - was is the reality of collecting on this phantom income? Yes loan loss reserves should be elevated - but none of these banks are doing this.
I also think it is very misleading to record revenue when you know these loans have a much higher level of default from the outset. Ask Option One - unit of HR Block - they just had their stock taken to the cleaners for their option arm results. As socalmtgguys says - this is only begginning.

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Comment by Michael
2006-09-01 00:23:02

Well I think there is a lot of misconception about Option ARM on this blog. I am a mortgage broker but I shied away from this product. In general, only borrower with FICO score of 620 or above are eligible for this product with the exception of World Savings (equity driven instead of FICO driven). Maximum Loan to Value (LTV) is about 90% to the top tiered borrower. Loan reset every month with maximum increase after first year aniversary of 7.5% of minimum payment. Most loan recast (become pure adjustable) after 5 years or when total LTV is 110%. No where do it say if the lender will re-appraise house if prices dropped tremendously so I don’t know if they will do this. The ceiling on the loans are often 9~11%.

The really scary reset in my opinion are the 80/20 that are made to the 560~580 and some as low as the 525 FICO borrowers. These will see the highest increases depending on the original terms. Anywhere from minimum of 1.5% to 3% added to interest rate at the first reset (2~5 years). Each 6 months thereafter it is about 1.5% until the ceiling is reached (10~15%, Yikes!!!!). A majority of these borrowers will not be able to refinance because the price of the homes have not appreciated or have actually depreciated. They are the most screwed and will be the one that will stressed the system the most. Not a troll as I am trying to get out of the business myself and looking to do something else instead.

 
 
Comment by DAVID
2006-08-31 21:41:09

Booking revenue over longer periods of time or booking more expense by increasing doubtful accounts. Take your pick. The bank could identify borrowing costs associated with making neg am loans and recognize them using the interest method.

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Comment by DAVID
2006-08-31 21:45:59

Yes increasing doubtful accounts would be the way to go. First it does offset the phamtom revenue and also gives proper disclosure of what the bank is doing.

 
Comment by DAVID
2006-08-31 22:12:14

I cannot sleep until I blog about this. No I take that back increasing bad debt expense is too easy. Ok so the bank accrues the neg am portion to loans receivable not interest receivable. These neg ams can be more than one year so that means we got long term debt here not interest receivable. So I think the neg am portion needs to be amortized over the life of the loan and expense associated with that loan is effectively spread over the life of the loan using the interest method. Plus the bank should have to put a nice disclosure in the back of the statements describing their neg am loans, by way of a nice schedule showing what I just described. BEN PLEASE POST CRISPY’s ARTICLE WE NEED MORE DEBATE ON THIS ISSUE.

 
Comment by DAVID
2006-08-31 22:13:59

Oh by the way they charge interest expense on the neg am portion. Otherwise their effective yield gets out of whack.

 
 
 
 
Comment by bruin
2006-08-31 15:33:20

” The rest of the option ARMs remain on lenders’ books, where for now they’re generating huge phantom profits for some lenders. That’s because, according to generally accepted accounting principles, or GAAP, banks can count as revenue the highest amount of an option ARM payment — the so-called fully amortized amount — even when borrowers make only the minimum payment. In other words, banks can claim future revenue now, inflating earnings per share.”

Very interesting. This is going to end up worse than the S&L debacle.

 
Comment by P'cola Popper
2006-08-31 15:53:22

“More than a fifth of option ARM loans in 2004 and 2005 are upside down — meaning borrowers’ homes are worth less than their debt. If home prices fall 10%, that number would double. “The number of houses for sale is tripling in some markets, so people are not going to get out of their debt,” says the Ford Foundation’s McCarthy. “A lot are going to walk.”"

1/5 are already underwater and the RE market only recently stalled out. FBs are going to be going postal in a few more months. Unbelievable.

Great article.

Comment by crispy&cole
2006-08-31 15:57:01

This is actually very scary! tick tick tick….

 
 
Comment by P'cola Popper
2006-08-31 16:04:08

Something is seriously wrong when “deferred interest” or phantom income becomes material to a bank’s income statement. The article names a couple banks where “phantom income” is greater than 50% of reported net income. FDIC or not I wouldn’t put my money in any bank that had phantom profits. Looks like we might have an old fashion “run on the banks” to look forward to in 2007. Who the f is running the store?…

“Risks or not, the accounting treatment is boosting reported profits sharply. At Santa Monica (Calif.)-based FirstFed Financial Corp. (FED ), “deferred interest” — what an outsider might call phantom income — made up 67% of second-quarter pretax profits. FirstFed did not respond to requests for comment. At Oakland (Calif.)-based Golden West Financial Corp. (GDW ), which has been selling option ARMs for two decades, deferred interest made up about 59.6% of the bank’s earnings in the first half of 2006. “It’s not the loan that’s the problem,” says Herbert M. Sandler, CEO of World Savings Bank, parent of Golden West. “The problem is with the quality of the underwriting.”"

2006-08-31 19:19:04

Did someone just use “quality” and “underwriting” in the same sentence??

 
Comment by cayo_ron
2006-08-31 19:53:39

Geez, I have a CD at World Savings. Anyone know a good old-fashioned boring bank that doesn’t have such a large portfolio of questionable loans, and/or where I could research some more? Thanks.

Comment by Sunsetbeachguy
2006-08-31 20:33:28

Farmers and Merchants bank in Long Beach and surrounding towns.

Strongest and most conservative retail bank in CA.

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Comment by crispy&cole
2006-08-31 16:17:50

Check out the “Map of Misery”. LOL

 
Comment by togoplease
2006-08-31 17:55:23

Wow that was the first time I read BW actually comment on no doc loans, loose lending standards, penalties on refinance.
This is a big move for a business publication to come out like this.

 
Comment by Chip
2006-08-31 18:15:02

This article is a really thorough condemnation of Option ARMs. If all that regulators did was to make each lender give each borrower a copy of the article and require that borrower AND lender sign that they read it entirely and together, a lot of the demand would shrink, as would the basis for lawsuits.

What should have been required, and should now even if late, IMO, is a computer-generated form for closing that plainly shows the possible payments that can result during the entire period of an option ARM based on the amount being borrowed. Those numbers are calculable with absolute certainty on the day the mortgage closes: from mimimum payment with and without principal, to maximum payment, at max cap rate, resulting from both the worst chain of events and the simplest triggers for them, whether exceeding a valuation through principal-added, late payment or what else.

 
Comment by Jackie Childs
2006-08-31 19:07:00

Crispy, Thanks for that link. I learned something tonight. I had no idea that these lenders were so vicious. They are practically preying on these people. Not that some don’t know what they’re getting into. My guess is that a very small % truly understand what they are getting into. This article made my blood boil.

 
Comment by robert
2006-08-31 22:08:59

That BW article was great!

But my big fear is that I, as a taxpayer, will be forced to bail out these idiots. During the dot-com crash, Anna Eshoo proposed a law to give TAX BREAKS to dot-com speculators who attempted a complex transaction meant to lower the tax paid on stock options. (When the options became worthless, they still owed tax on the discount the day of the exercise–some who gambled and lost ended up with 6-figure tax bills they couldn’t pay.)

Now, I’m no fan of the AMT, but I refuse to BAIL OUT SPECULATORS. And believe me, legislators who don’t want to lose the “homeowner” vote, will attempt similar legislation to protect “flippers” from having to pay back their losses.

Comment by Northeastener
2006-09-01 08:19:50

I wouldn’t call trying to avoid/minimize the AMT as speculation. The debacle you speak of really hurt people who were not being greedy so much as they were trying to limit their tax exposure. Additionally, the whole idea of having to pay taxes on paper gains that could (and did) turn into real losses is crap. It is the worst abuse of taxation by the government that I can think of, especially when you consider middle income earners were getting wacked, not corporate execs…

It goes something like this: I have stock options from my company that are in the black. I purchase the stock at the grant price and instead of selling said stock imediately, I hold on to the stock until long term cap gains applies.

What actually happened to a number of “middle-income wage earners” is that they exercised and bought shares of stock through option grants. The IRS taxes you on the “paper profits” of the exercise immediately, i.e. if you bought your shares at the grant price of $10/sh and the market price for said share was $50/sh, the IRS said you owed taxes on the paper profit of $40/sh even though you never sold and locked in that profit.

Imagine getting a tax bill for $50,000 from the IRS on profits you never earned. The AMT was designed to catch a very few wealthy individuals who didn’t pay taxes. It was never designed to bankrupt the middle-class. I certainly don’t view fixing a broken system a “government bailout”. My two cents.

Comment by Northeastener
2006-09-01 08:27:31

I forgot to finish this scenario: So the IRS says you owe taxes on paper profits and have to pay, only the stock you bought at $10 is worth $2 when you get around to selling… you paid taxes to the IRS on $40/sh profit, but realized an $8/sh loss…

Please tell me how that is right and why the government shouldn’t have fixed the loophole that allowed this abuse.

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Comment by GetStucco
2006-08-31 15:03:33

“When economists start talking about cycles, it’s a good bet they’re talking about a downturn.”

Nah — It should be obvious that “bubble” was a descriptive leg for the boom phase, and “bust” will describe the crash, but both were part of the cycle.

 
Comment by GetStucco
2006-08-31 15:05:09

“‘There was a strong, unanticipated decline in demand in the second quarter of 2006,’ Carney said. ‘Home sales are way down, and although prices were still up, the rate of increase has fallen a lot.’”

It must be the little-known, little-researched housingbubbleblog effect that fooled these conventional academics…

 
Comment by need 2 leave ca
2006-08-31 15:09:12

“The Santa Cruz Sentinel. “Buy a house. Get a car, free. That’s the deal being offered by green developer Clarum Homes

Hey, Clarum. How about selling me a car, and throw in a house for free. Might get more takers. HA HA

 
Comment by sell high buy low in SLO
2006-08-31 15:11:20

it just occurred to me that what we need now are some willing knife catchers to go out and scoop up some of those “deals” that the RE agents are saying there are to be had. We need some new comps, even if they are only down 15% or so off the peaks, to blow out those stale comps that sellers are still basing their “wish prices” on.

This would also help greatly in those areas where the homebuilders are using incentives to move inventory. New comps, and more heat on appraisers to get things back to honest reality, will keep deals from closing that are relying upon incentives rather than honest price reductions.

Go knife catchers!

 
Comment by GetStucco
2006-08-31 15:13:51

“‘We’re getting some mixed signals,’ said Steven Buster, CEO of the Mechanics Bank, based in Richmond, which participated in the study. Although many Bay Area businesses are making money and some are hiring, ‘the worry in our industry is mainly real estate,’ he said. ‘Foreclosures are at an all-time high right now.’”

GDP figures and wage inflation are running above the Fed’s speed limit, and they are seeing foreclosures at an all time high? Ahem…

 
Comment by GetStucco
2006-08-31 15:15:53

“‘There’s been a significant pullback in activity by flippers,” said Mike Ela, former president of DataQuick. ‘Flippers are changing their quick-flip mentality. They may be hanging on a little longer in hopes of averting a loss.’”

Having your @$$ handed to you all covered with ketchup tends to lead to a change of mentality.

Comment by Mo Money
2006-08-31 17:47:30

“They may be hanging on a little longer in hopes of averting a loss.’”

Odd, one would think you’d bail quickly to avoid a bigger loss.

Comment by ric
2006-09-01 04:28:29

Denial ain’t just a river in egypt.

 
 
 
Comment by GetStucco
2006-08-31 15:17:59

“Chris Apostolopoulos, KB Home president of the Central Valley division, said investors have indeed dropped out of the area’s sales market, which is now in a cyclical ‘correction.’ But he thinks that’s a good thing.”

I bet many flippers are still lurking, waiting for the right time to sell. If they end up needing to sell because of negative cash flow and negative capital gains that won’t quit, then look out below…

Comment by turnoutthelights
2006-08-31 15:32:21

Indeed? They have ‘indeed’ dropped out of the sales market, and they are slowly beginning to drop into the selling market. Betcha ol’ Chris has a different ‘think’ about that one.

 
Comment by Chip
2006-08-31 18:19:11

I guess everyone just calls him “Chris.” For sure, after cocktails.

 
 
Comment by sfv_hopeful
2006-08-31 15:21:56

“‘The level of inventory on the market right now is the highest it has been since 1990,’ Carney said. ‘Why is that? Why are we seeing such a big decline in demand?’”

Oh God!?!?! Why me? WHY????? Reminds me of an ostrich who has his head in the sand asking…. Why? Why is it so dark in the middle of the afternoon?

 
Comment by GetStucco
2006-08-31 15:46:43

“In San Diego County, which has 42 percent of the unsold inventory in the Southland, 80 percent of the inventory is condominiums and attached units.”

80 percent of 42 percent = 0.8 X 42 = 33.6 percent (over one out of three) Southland homes in unsold inventory is a San Diego condo. No wonder Lew Breeze decided to take his Downtown San Diego Condo inventory off his web page…

 
Comment by need 2 leave ca
2006-08-31 15:56:29

Where is Gary, Leslie, and David when we need them? Heeey, Gary - what is in the bag now?

 
Comment by Larry Littlefield
2006-08-31 16:41:03

‘There it was misleading people,’ he said. ‘I know for a fact there were a number of builders and sales agents that had indicated to home buyers that a school would be built in two to three years, and they never came back and checked with the district and asked about our plans.’

Reminds me of what happened in SE Brooklyn, the only area without subways, 50 years ago. The plan was to have the 2/3 lines to the Junction extended down Flatbush or Nostrand Avenue to the Marine Park neighborhood. Realtors really pushed that point when the area was developed. But it never happened.

 
Comment by PS
2006-08-31 17:15:56

From the Pasadena Star article:

Regional economist John Husing, the featured speaker at the luncheon, said that a housing readjustment at the current time was actually good news.

Most people who fear a housing downturn look at the one that happened from 1991 to 1996, but Husing says conditions are very different.

“We lost 550,000 jobs here in Southern California when the Cold War ended,” he said. “Nothing like that is happening this time.”
——————————————————–
So tell me John, tell me exactly how many new jobs in California were created in the housing sector from realtors to lenders to builders to appraisers, et al. during the boom from 2001 - 2006? I got a 10 spot in my wallet that it’s in that same ballpark for 500K+.

Comment by JWM in SD
2006-08-31 17:27:01

Besides the job creation spawned by the RE Industrial complex in past several years, comparing this RE bust to that of the early 90’s is an apples to organges comparison anyway. There was not the pervasive level of exotic and the house price to income ratios were not as extreme either. It won’t take 500K aerospace jobs to for the bubble to pop…that will happen on it’s own for a number of reasons.

 
Comment by togoplease
2006-08-31 18:34:00

We ( in the Norther Cali) lost equal amount of jobs from 89-92.
Primarly due to declining heavy global competition from cheaper producers of Silicon Wafers and Equipment Makers themselves.
Many Computer (Box makers) and software makers also went under to shift in technology from mainframe to client server. These same competitve forces are still with us today. We compete with high tech companies from Europe, Canada, Asia, and from our nations cheaper states which are business friendly. Competition and deeper profit margins are still with us today.

 
 
Comment by ockurt
2006-08-31 17:40:21

Don’t know if this was posted already…it’s a couple of days old

New-home supply highest since 1990

The inventory of unsold new homes in Southern California soared to its highest level since 1990 by the end of the second quarter, according to a report that will be released today. But that trend doesn’t hold for Orange County.

At the end of June, there were 16,595 new houses and condominiums for sale from Santa Barbara County to San Diego County (excluding Imperial County), up 171 percent from the end of July 2005, according to a report that will be released by the Real Estate Research Council at California State Polytechnic University, Pomona.

In Orange County, there was a total of 770 new units for sale. That’s down from 1,510 in the first quarter.

Overall, Southern California’s facing the biggest supply overhang since 20,942 new homes languished on the market at the end of 1990, said Michael Carney, the council’s executive director.

The record inventory is 32,191 new properties in the middle of 1982.

Comment by Housing Wizard
2006-08-31 20:33:08

Yep , the 1979-1983 turndown was worst than the one in the mid 90’s. That market was dead ,and I mean dead ,(interest rates were between 14% and 18 % during that time ).Nobody knew if they would ever come down again . The banks did not want to make loans . I have said this before , the secondary market didn’t want to buy 30 year fixed notes . Around 1983 they came out with the new adjustable . At that time the banks felt if they had a 2% spread over what it cost them for money they wouldn’t take a bath if interest rates went higher . At the time ,alot of banks had alot of low rate 30year fixed notes on the books that were costing them because the rates they were paying on saving accounts and C.D.’s were much higher,(those were the days when banks held a high % of their loans or held them for longer periods than today .)
Those original adjustable loans back in the early 80″s were not bad loans .
But anyway ,when people say they thought the teaser rate would apply for 5 years I find this hard to believe . Why would a Lender give a way below market rate and loose money for 5 years . I suppose these borrowers thought they would hold the property for 5 years or less than cash out before the lender starts collecting the higher interest rate . It goes back to the old saying “if it’s to good to be true ,it’s not true “,or something like that .

 
 
Comment by waiting_in_la
2006-08-31 18:16:08

ladies and gentlemen, WELCOME to your soft landing!

… we landed in quicksand.

 
Comment by APPRAISERBOY
2006-08-31 18:28:24

A LITTLE OFF TOPIC. DOES ANYONE KNOW WHEN A HOUSE HAS TO STOP BEING MARKETED ON MLS AS NEW CONSTRUCTION. IF A HOUSE IS RELISTED AFTER ONE YEAR OF BEING BUILT, HOW IS THAT NEW CONSTRUCTION. THE FRAME AND EXTERIOR IS NOW ONE YEAR OLD. IF A 2006 CAR HASN’T SOLD THAT DOESN’T MAKE IT A NEW 2007 CAR.
I NOTICED SNOW ON THE GROUND IN ONE OF THE PHOTOS. ITS BEING MARKETED AS A NEW LISTING WITH 0 DAYS ON MARKET. I DID A PROPERTY HISTORY SEARCH AND THE HOUSE WAS ORIGINALLY LISTED IN 8/05 AND WAS ON THE MARKET FOR 170 DAYS . THE LISTING SHEET IS SAYING STILL TIME TO CHOOSE YOUR COLORS, BLAH, BLAH, BLAH. THIS AIN’T NO FLY BY NIGHT BROKER BUT COLDWELL BANKER. ISN’T THERE SOMETHING IN REALTOR ETHICS ABOUT MISLEADING ADS. IT NOW BEING OFFERED AT $899,000 AND WAS ORIGINALLY OFFERED FOR $979,000. ITS 4,000 SF HOME IN AFFLUENT TOWN WITH OVER 3 ACRES OF LAND.

 
Comment by APPRAISERBOY
2006-08-31 18:28:26

A LITTLE OFF TOPIC. DOES ANYONE KNOW WHEN A HOUSE HAS TO STOP BEING MARKETED ON MLS AS NEW CONSTRUCTION. IF A HOUSE IS RELISTED AFTER ONE YEAR OF BEING BUILT, HOW IS THAT NEW CONSTRUCTION. THE FRAME AND EXTERIOR IS NOW ONE YEAR OLD. IF A 2006 CAR HASN’T SOLD THAT DOESN’T MAKE IT A NEW 2007 CAR.
I NOTICED SNOW ON THE GROUND IN ONE OF THE PHOTOS. ITS BEING MARKETED AS A NEW LISTING WITH 0 DAYS ON MARKET. I DID A PROPERTY HISTORY SEARCH AND THE HOUSE WAS ORIGINALLY LISTED IN 8/05 AND WAS ON THE MARKET FOR 170 DAYS . THE LISTING SHEET IS SAYING STILL TIME TO CHOOSE YOUR COLORS, BLAH, BLAH, BLAH. THIS AIN’T NO FLY BY NIGHT BROKER BUT COLDWELL BANKER. ISN’T THERE SOMETHING IN REALTOR ETHICS ABOUT MISLEADING ADS. IT NOW BEING OFFERED AT $899,000 AND WAS ORIGINALLY OFFERED FOR $979,000. ITS 4,000 SF HOME IN AFFLUENT TOWN WITH OVER 3 ACRES OF LAND.

Comment by JWM in SD
2006-08-31 18:35:16

Might recommend that you not post in all caps…that’s considered yelling.

Comment by dvo
2006-08-31 23:31:03

ISAIDTHISCLUB’SPRETTYLOUD.

WHAT?

THISCLUB.IT’SPRETTYLOUD,HUH?

WHAT?

 
 
 
Comment by waiting_in_la
2006-08-31 18:39:09

How about a cinema-quality RE bubble documentary, told from the streets of SoCal. We could expose all of the fraud and take you into the inner circle of the realtors and lenders.

You know it’s going to happen sooner or later.

Comment by Mike/a.k.a.Sage
2006-09-01 00:03:41

Someone should be documenting this historic event. Who better than Hollywood types?

 
Comment by Mike/a.k.a.Sage
2006-09-01 00:06:31

Someone should be doing a video documentary of this historic event. The first one in history. Who better than Hollywood types in CA?

 
 
Comment by waiting_in_la
2006-08-31 18:41:25

How about a cinema-quality documentary on the RE bubble told from the streets of SoCal? We could follow sleezy RE agents and lenders, and expose all the tactics and fraud of the past few years.

You know it will happen sooner or later - why not before the bust?

Comment by oc-ed
2006-09-01 01:39:05

I know an Emmy winning documentary producer who was an RE Agent for a very short time. You may know more folks in the film industry. She just couldn’t do it. We could have undercover “buyers” wired to catch the spewage from the agents. Some footage of half million dollar POS in Watts and other lovely and charming neighborhoods, empty condo high rises at night and throw in the little old lady from Pasadena who was sold a neg am refi. If your serious, let’s talk. Ben has my email.

 
 
Comment by Eastofwest
2006-08-31 18:49:07

Jas Jain at financialsense.com during the week. He pointed out that by dollar value California RE is about 25% of the entire US total.

Comment by lmg
2006-08-31 21:15:32

Good to know that a collapse of the California RE would be just a local “phenomenon” that would have no effect on the national economy.

This must be so….I heard it on CNBC!

Comment by patricia
2006-09-01 10:24:04

SECRETARY OF HUD JUST SAID HOUSING WILL STILL BE STRONG IN 07, ON CNBC. EVEN THE HOST DIDN’T BELIEVE IT.

Comment by patricia
2006-09-01 10:25:14

sorry for caps, cat stepped on keyboard…

(Comments wont nest below this level)
 
 
 
 
Comment by Lander
2006-08-31 21:41:20

GetStucco: If you want to compare yoy dollar losses, Sacramento still comes up on top.

DQ dqnews stats:
San Diego: -$9,000
Sacramento: -$13,000

CAR stats
San Diego: -$4,050
Sacramento: -$9,220

DQ UT/Sacbee stats
San Diego: -$9,000
Sacramento: -$19,000

 
Comment by mikey
2006-09-01 06:28:48

You can almost hear the scurry of the little lemming feet running to the lifeboats followed by the screams, “Who TOOK all the Lifeboats ???? “

 
Comment by lainvestorgirl
2006-09-01 09:01:35

I haven’t read this thread, but just thought I’d mention something new I heard on the radio here. KB Homes is running a long ad for a 72 hour home sale, where they take you around to see their homes for sale in SB, Riverside, and all the other crap areas where new mcmansions can be found. I think they called it the 72 hour home hunt. It sounded pretty desperate.

 
Comment by Curtis G.
2006-09-01 11:18:55

I couldn’t help thinking of an exchange from “Raiders of the Lost Ark”:

Marion: Wait—I can be reasonable!
Toht: That time is past.

 
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