‘The Calm Before The Storm’ In California
A report from the LA Times. “Mortgage fraud continues to escalate in Southern California, FBI figures show, raising concerns of increased defaults and foreclosures as the housing market cools down. The FBI and industry experts say the trend reflects growing deceit by average borrowers who overstated their income, exaggerated their assets or hid their debts simply to qualify for a mortgage in the region’s sky-high housing market.”
“‘There’s more of the little guy running around — people committing fraud for housing,’ said Ronda Heilig, the bureau’s mortgage fraud program manager. A seven-county region from Orange County to San Luis Obispo County has seen a fourfold increase in suspicious loan activity since 2003.”
“With prices flattening out or declining, those without sufficient equity could be forced to sell for a loss or even default on payments. That could accelerate any downturn in the market by swamping it with foreclosed and bargain-priced properties. ‘This is the calm before the storm,’ said Steve Smith, a Redlands appraiser.”
“One lender recently compared 100 stated-income loans with the borrowers’ tax returns and found that only 10 of the borrowers were telling the truth about their wages, according to a data firm. Sixty of the borrowers had exaggerated their incomes by more than 50%, according to the institute.”
“In what might be a sign of trouble ahead, the HUD’s Office of Inspector General said that it had audited 41 loans that had gone into default. All of the loans had been made by National City Corp., one of the biggest lenders in the country, and had been insured by HUD”
“In 20 of the loans, or just about half, the inspector general found ‘errors and documentation omissions clearly contrary to prudent lending practices.’ On one loan, for example, the borrower’s previous address turned out to be nonexistent.”
“On another, the borrower submitted two bank statements. The first month’s closing balance didn’t match the second month’s opening balance, an indication that the documents might have been faked. A third borrower overstated his income, a fourth his assets.”
From the Daily Democrat. “An increase in housing options and steady home prices have caused the tables to turn in the real estate industry. After nearly a decade of booming home prices and fast selling times in Yolo County, the market has quickly slowed down.”
“‘In terms of the market, we peaked in fall of 2005,’ said (broker) Don Sharp in Woodland. ‘Looking back it continued to escalate and escalate. But then prices started to suffer in 2006.’”
“Sharp said currently, there are 356 houses available in Woodland, that’s more than three times the amount in 2004. Furthermore, the availability has caused builders and home owners to compete for buyers, which means better deals for those looking to buy.”
“BG Tacket, a Woodland home seller, put his home up for sale earlier this month and since then has had a few people inquiring about it. He’s not worried about the market because he priced his home competitively and feels it has enough character to stand out.”
“‘The market’s back to normal and everyone is freaking out about it,’ he said.’ He said some of the biggest reasons why some houses aren’t selling is because there’s nothing in the house that stands out and its over priced. ‘People are over-pricing to pay for the high Realtor commissions,’ he said.”
The Tracy Press. “For the first time in 15 years, the price of a home in Tracy fell from one year to the next. And with ‘For Sale’ signs spinging up all over the valley, buyers are feeling the market shift in their favor.” “September figures show the median price for a single-family home in Tracy during the last six months has retreated from $546,000 to $538,000, and at least one real estate professional thinks prices could drop even further.”
“‘The last time this happened was in the early 1990s, right after the 1989 San Francisco earthquake,’ said said Larry Rumbeck, president of the Central Valley Association of Realtors. ‘We’re a bit late with the drop.’”
“He said sellers today are being more realistic with asking prices, while investors have left the market altogether.”
“Rumbeck said factors such as lower gas prices and market-savvy buyers have conspired to limit Central Valley home sellers’ tendency to inflate prices. ‘Negative press about housing prices, along with the fact that buyers are much more educated today, have contributed to a bubble burst,’ he said.”
“Today, many buyers are sitting back and holding on a month or two before purchasing a home, Rumbeck said. They’ve got a lot of options. The MLS shows there are 745 homes on the Tracy market, along with 259 foreclosures in the works and 113 repossessions. The glut has forced many homeowners wanting to sell to put their homes on the rental market and wait out the lull.”
“Rents for a single-family house in Tracy are down far below $1,500, said (property manager) Barbara Johnson in Tracy, and renters paying that much right now opt to stay in the Bay Area and avoid the expense and time of a commute.”
“‘Prices were inflated drastically,’ Rumbeck said. ‘A house in Turlock that went for $180,000 in 2001 went for $380,000 in 2005.’”
“‘People are over-pricing to pay for the high Realtor commissions,’ he said.”
Bull. People are over-pricing because they haven’t saved a nickel for the past 20 years.
They are overpricing because they feel entitled to get last years price.
Yeah, I found that comment by “BG Tacket” pretty novel as well.
Pricing in the commission? An extra 6%? Me thinks BG’s in for a big surprise in that he seems to have it “all figured out”…..(he’s probably STARTED his price without that HUGE extra 6%!)
Dear Mr. homeowner: House prices are not overpriced by 6% because of sales commissions, they are overpriced by around 50% because of greed and a the sense of entitlement.
I think what we find news coming out of the mortgage business that will shock even us.
I’ve said it time and time again. We really have no idea just how much fraud has occurred nor how badly that will hit the lenders, MBS investors, and economy as a whole. I think “bad” but it’s probably “worse.”
It’s only money. The gubmint will make lots and lots more.
Well, I’m relieved to know that HUD insures some of these loans. Can anyone explain that one?
I meant that sarcastically, of course.
I think as this unwinds certain groups of people are going to be surprised to see how much of their pension money is tied up in mortgages and mortgage-derivative products, just as people were surprised during the dot-com bust to learn that their supposedly safe 401-K mutual funds were hammered.
We all know a pension crisis is looming - the Great Housing Crash of ‘07 may be the prelude that leads us right into the main act.
But why worry? Life is about competitive advantage and being of a perverse nature I have tended to do better than most during the hard times and worse than most during the boom times.
As Dylan brilliantly wrote, “We’re sittin’ here stranded all doin’ our best to deny it.”
- The Tracy Press. “For the first time in 15 years, the price of a home in Tracy fell from one year to the next. And with ‘For Sale’ signs spinging up all over the valley, buyers are feeling the market shift in their favor.” “September figures show the median price for a single-family home in Tracy during the last six months has retreated from $546,000 to $538,000, and at least one real estate professional thinks prices could drop even further.”
I did the custom cabinets for a house in Zuma that was listed at
$9.4 million … It closed escrow around $10.3 million. When this house value combines with other sales the prices continue to look strong. WRONG! It’s one house in a special area with its own private beach carrying the value of 50 more weak sales.
Anyone else wondering if that that $10.3 price was mtg fraud in action? If you’re going to defraud lenders, it probably would be easier and require fewer transactions if you did it at the high end of the market. Push the price up almost $1mil, cash back at closing, buyer disappears without ever making a payment…
Jon
Do lenders lend $10+ million dollars? I thought that the mansions purchased by the ulra-rich were almost always done so in cash or with much collateral, if there was a loan (i.e., Wacko-Jacko’s rights to the Beatles collections).
It is a long way down from $538,000 to what a home in Tracy is really worth, IMO.
That’s OK, we have all the time in the world to wait. That $180,000 house that went to $380,000 in four years will be back to $225,000 in another fifteen years. There’s no instant gratification here in the housing crash. Hell, you could take a six month vacation and then come back and it would still be continuing its stately downward slide.
Fifteen years? Who can wait 15 years to buy a house? By that time, your kids are already moved out and in college.
Fifteen years!? That’s one helluva time-line you’ve got worked out there.
I highly doubt anybody is waiting 15 years for sane prices to appear.
“‘Prices were inflated drastically,’ Rumbeck said. ‘A house in Turlock that went for $180,000 in 2001 went for $380,000 in 2005.’”
Toast. In 2001, that was a tough price in an area with 45K household income. That 200K inflation is pure easy money and speculation. Without that air, the deflation cycle is getting increasing harsh.
‘The Calm Before The Storm’ In California”
The calm before the perfect storm, I fear. When California takes a dump the lid will be blown off the whole lending SCAM.
This is why I expect the disinformation campaign to continue at full tilt, and behind-the-scenes intervention from the likes of FNM to keep the SCAM from collapsing.
If you think the msm will broadcast any of this mess as it actually is, you are surely mistaken. Don’t hold your breath. The msm is owned, lock stock and barrel, 100% by the wealthiest people in the world. Less than 1% of the population. They keep the masses hypnotized, for their gain only.
The CALM before the storm? It is anything but Calm in the Cal real estate market. Sellers in SD are freaking out, dropping their drawers, and ready to take the high hard one from inmate Bubba.
Not only are there NO offers, there are no lookers.
My colleague at work just confided in me today that he cannot make next month’s payment. He is doing the math already on how long it will take to recoup any loss on a short sale or foreclosure/bankruptcy (recoup, as in, the net “savings” on renting instead of making mortgage payments in the coming years). I asked, as gingerly as possible, why he chose an adjustable instead of fixed two years ago. He said exactly what you all would expect: couldn’t afford fixed. Also, he said he did the “stated” route as well. 100 financing, of course.
Monthly bleed has gone from low 3,000’s to 4,700.
Only one earner in the home. Takes home around 5k/month.
Ouch!
You can’t jump off a cliff and not hit the ground - its the law of gravity. Sure, there is a brief period of floating before impact, but the longer the float time the higher the velocity and the more violent the impact. The housing market must respond to the simple laws of economics. Its nothing personal against anyone, its simply an immutable fact. The denial part is amusing, but obviously fruitless….
the longer the float time the higher the velocity
Only to a point—called “terminal velocity”—and that will not apply here.
“…growing deceit by average borrowers who overstated their income, exaggerated their assets or hid their debts simply to qualify for a mortgage…”
NO! I dont don’t believe it! People wouldn’t do that!
That wouldn’t make sense! That would be irrational!
It’s not the borrowers fault. They are simply copying what the government does. Overstates income, understates debts, ignores future liabilities. Monkey see, monkey do.
Based on “Real Men of Genius”
Mr. Overextended Homebuyer
http://tinyurl.com/ga2tm
Hillarious!
Just hung up the phone with a client/renter who received a Notice of Default addressed to his landlord. Renter did some investigating and discovered that the landlord had recently purchased 4 SFRs with -0- down, 100% financing but had not made any of the payments on any of the houses. Of course landlord was still collecting rent. The music has officially stopped. . .
Wow, that’s a new, creative twist on mtg fraud. Collecting rents, this guy is cash-flow _positive_ on properties that would otherwise be cash-flow negative! Right up until the music stops and they are all foreclosed on, of course.
That is the scam that the Realtor in SD was running until he beat up the Fox news reporter investigating him.
There is going to have to be a special draft to get the manpower together to sort this mess out.
One of my first jobs at a Big Six firm in Houston after graduation was sorting out a bankrupt HB. It was one of those “special projects” in litigation support that the accounting firms were turning to at the time. Everyone called it the “Lit Pit”. It ate up a ton of staff. Luckily I was only in that mess for about two weeks before a proper audit job came online. That type of work is hell on earth!
Yeah fraud auditing can go on forever, I have been on a few of those. I think we are going to hear the call for CPA’s who will travel to go on fraud audits all over the Country. Plus all the new regulatory implementation that will be needed once Congress reacts. I think the mortgage fraud scandal that is brewing will make Enron look like a walk in the park.
Your tenant/client might as well stop paying rent.
Excellent video!
Mike in pacific beach are you an electrician? I used to work with an electrician named mike from pb who would be a likely candidate for this blog.
This video is purdy good!
I also watched part 1 and 2 of this series, but part 3 (Overextended Homebuyer) is the best. (You can actually see an improvement in entertaining value as you progress from 1 through 3.)
So good. I will share this with my fellow renters.
Is there any chance of a rush to the exits by lenders? I suppose they can review their loans essentially call it due? (Is this only if there is fraud?)
What, exactly, could they call? If your theory is that someone used fraud and deception to get a loan for which they are otherwise unqualified, then they do not have the assets and income to support the loan. Hence, what good would it do to call the loan? Add inventory to the flooded REO department? Cause more foreclosures?
“Rents for a single-family house in Tracy are down far below $1,500, said (property manager) Barbara Johnson in Tracy, and renters paying that much right now opt to stay in the Bay Area and avoid the expense and time of a commute.”
“‘Prices were inflated drastically,’ Rumbeck said. ‘A house in Turlock that went for $180,000 in 2001 went for $380,000 in 2005.’”
It’s the same thing here in Lodi, in the central Ca. Low median incomes; sfr’s renting for below $1500; 3/1.5 bungalows that sold for $140k in 2001′ now overinflated to $350k+…
Anyone with the ability to do basic math can see where this is headed.
DOC
Doc, You are right. I have to laugh at everyone who thinks rents are going UP, because no one can buy a house today. The FACT is we are OVERBUILT in housing. Yes folks, TOO MANY HOUSES. All these unsold flipper owned homes will soon be going into the rental pool, along with thousands of condos “reconverting” to apartments.
It happened in 1990-94. Rents dropped so far that whole apartment projects went red, as vacancies rose and rents dropped. Lots of foreclosures. And home prices will drop even further, as rents drop below any supportable investor value.
I track all the lisitngs of homes in my area of Cali. An example of one home that has been on the market for 6 months.
Initial list price 830K
reduced to 796K after three months
reduced to 750k after 5 months
reduced yesterday to 699K
..and still overpriced.
Dude, they said “state my income”, like, you know, state how much I would like to make, right? So I stated loud and clear. What’s up!
Are we supposed to round UP to the nearest $100,000?
insured by HUD urbin debelupmint ,yo
more big gov
Does that really make sense as criticism? As government programs go HUD is extremely small and has pretty strong focus on making housing units available. Making a persuasive argument that programs like Section 8 are giveaways with little benefit is not trivial or they would have been hammered away long ago.
“…growing deceit by average borrowers who overstated their income, exaggerated their assets or hid their debts simply to qualify for a mortgage…”
What kills me the most about this is that a lot of these ‘average borrowers’ are probably very unsophisticated people who were cajoled and duped by mortgage brokers that poo-poo’ed the whole notion of having to have the right income to qualify. “The house price will only go up, everyone is doing it, don’t worry!”
I know that it doesn’t excuse anyone from doing something illegal but where was the oversight of the brokers when money was rolling in hand over fist? It would have taken any regulatory agency (or how about management at a place like Countrywide or Ameriquest?) about 2 minutes to pull a random no-doc, nothing down application out of a pile and be able to verify those people couldn’t ever qualify based on income or assets.
I suspect these “average borrowers” were a lot more sophisticated than you think–heard from friends how easy to get a loan, skip making payments and live free until foreclosure, or use the “cash back at closing” to skip town and identities…Greed has that affect on a lot of “average folks”. There may be lots of collusion between average folks, mortgage brokers and appraisers, but there are no innocent lost lambs in this hustle.
How true. With all the non-skilled/skilled jobs gone oversea, Joe have no choice but to lie, cheat, steal.
Maybe lie, cheat and steal to eat, but not to gamble in RE.
Easy to blame crime on economics. Crime was very low during the depression. People would not excuse it as easily as today.
I guess I’m thinking back to an article I read somewhere over a year ago. People in the most depressed parts of LA who had never owned in their lives were now getting mortgages for homes in the nastiest neighbourhoods.
You can’t tell me those people had a clue what they were signing, they were probably just happy to have a home. But watch them get prosecuted. They’ll be the easy pickings for the big bad federal agencies who want to say they’re now doing something about the ‘fraud’.
Come’on you can’t really be serious with those remarks can you. One thing I have learned over the years from owning quite a few ghetto palaces is that judging someones intelligence by where they live is a bad idea. That kind of arrogance has cost me a few bucks.
Nothing like having a young crack dealer 10 yrs your junior handing you your ass in court and then laughing about it afterwards.
I concur wholeheartedly.
Never underestimate the ability of the supposedly down and out to become the in and around.
All of us, even the ones that dribble, have the ability to talk to attorneys.
Even the ones that dribble.
Wow CanuckinTX I have read another one of your posts in the past and they is a problem with your ability to reason. You need to get some help. You are definately not in tune with what we are talking about here.
Last time you were “LOVVVVVVING” it that the person that bought your house/condo in Vansouver is now upside down even though they were not trying to flip it and screw someone else. You have some very bizzare thoughts and reasoning as evidenced by your posts.
I’m definitely in tune with what this board is talking about and ‘they is no problem’ with my reasoning.
I’m sure you didn’t read my reply to the last attack on my posting that you made, but just because I don’t believe every person that got one of these exotic financing deals was a sophisiticated borrower (I’m sure in the ghetto they’re really all as smart as you make them out to be!) doesn’t mean I can’t make a point.
I suppose for narrow minded twits like you unless every post says the same thing and makes the same point over and over ad naseum on every post in this blog your tiny brain just can’t reason with it.
If I were homeless, I would do this. It’s so easy.
If I were homeless, I would do this. It’s so easy.
Sorry it’s been down.
I think you missed the thread on the homeless man with 5 mortgages totalling over a mil.
We’ve yet to see a dog with six mortgages though…
I suspect these “average borrowers” were a lot more sophisticated than you think–heard from friends how easy to get a loan, skip making payments and live free until foreclosure, or use the “cash back at closing” to skip town and identities…Greed has that affect on a lot of “average folks”. There may be lots of collusion between average folks, mortgage brokers and appraisers, but there are no innocent lost lambs in this hustle. ”
This is the perfect solution for homeless people. No one ever has to be homeless again.
I have a neighbor that when he moved (late 05) in I was thinking “how in the hell did he afford to move in?” Turns out he stopped paying his mortgage in May and is still living in it awaiting foreclosure. He also bought a new truck a month or so ago. He has moved his family to Central America and I believe he is planning on driving across the border with his new truck here in a few weeks!!! No extradition with the cou ntry!!!
If he thinks he is driving straight through to Central America in a new truck, he is in for a big surprise. Somewhere along the way, (south of the border), law enforcement is going to find some plausible excuse to steal it. That is to say, if the narco trafficers don’t beat the police to it. He is not gonna get to Central America in this new truck.
Oh I don’t know about that. If he has registration and insurance in order and is comfortable with the local customs, I think he can make it without so many problems. Also depends upon if you’re talking Guatemala (2 crossings) or Panama (6 crossings). I’ve driven into Mexico and wouldn’t be afraid to go farther if I had a good reason. A few well-placed pesos (quetzales, colones, etc.) can solve most problems.
Assuming that this person is Guatemalan, if he can get his paid pickup all the way into guatemala(very difficult mountainous terrain along the Mexican-guat border), he has it made. He could keep that truck or sell it down there. There is great demand for pickups, especially rugged 4×4’s, due to the badly rutted guatemalan roads. And the dollar is worth 6-8 times more in queztels(guat currency). He could sell the pickup and live handsomely from the profits. Or he could recross back into the uSA with new fake identity, S.S., green card and escape the IRS 1099.
Problem is Mexican/Guatemalan curruption of the police, feds, border guards all along the 3000+ journey thru 2-4 border crossings. Lots of cash , jewelry, consumer electronics to grease the crossings.
You know, a freaking CAB DRIVER in Manhattan once told me that ethical people are the ones that do the right thing even when no one is looking, or when everyone else is doing the wrong thing. At the time, he was referring to people who’d come over to my neighborhood to get drunk and pee in the tree boxes.
As far as I’m concerned, these idiot mortgage fraudsters deserve what they get. Telling the powers that be that you’re not guilty because you “didn’t know mortgage fraud was wrong” because “everyone is doing it” only works in Steve Martin sketches.
“Two simple words in the English language: ‘I forgot.’”
No… it’s actually three words…
“I don’t recall.” : )
Another anecdote from the front lines of Southern California that touches on all aspects of this RE debacle. The wife’s friend, a stay-at-home Mom, left her hubby, the mortgage broker, about 6 months ago. The last few years they were flying high, expensive cars, trips, 6 carat diamond, 100k upgrade to their million dollar home, etc. After he cheated, she got her attorney to kick him out and made him keep paying ALL the bills until he provides a FULL accounting of his mortgage business. Until then, he is precluded from attempting to sell the house.
Now she is getting “late notices” every other day that the bills aren’t being paid, electricity will be turned off, etc, and he is CRYING, BEGGING her to let him sell the house, as each month that passes the home loses more value and his mortgage business has tanked. She says “NOPE!” Meanwhile he won’t produce any income docs, and I wonder why??? Could there be fraud in them there records? To top it off, they are “UPSIDE DOWN” on the home now since he got her to sign over all the equity to buy the building his business is in. Now he can’t sell that empty POS either. Next step is likely foreclosure and BK for these once happy souls who profited on the backs of all these morons that are now defaulting themselves, etc. Poetic justice.
Just part of the cycle.
Bad business decision-making.
Bad personal decision-making.
Ugly and many more to come. Not really happy about it other than I have recognized it and prepared myself to avoid that particular form of ugliness.
I can’t say I am “happy” about it either, that would be a little sadistic, but I cry no tears for these people. They get what they deserve basically, for being so greedy, not planning for a rainy day, and always throwing it in people’s faces when they were doing well. After the first couple of rented limos with this guy, I decided I couldn’t afford that lifestyle anymore and we had to stop going out as couples. I don’t really know the guy, just the wife’s know each other. Now the wife is asking me how much a Honda Civic costs, sad…….
Who does the wife think she’s getting the better of through her stubbornness? I’m sure she was part of the problem anyway. As soon as the money came in probably not a penny saw the bank, but that 6 carat ring on her finger was damn sure important!
What a sad story. I’ve seen this before. Time for a mediator…she’s in just as much financial ruin as is her “husband”…His debt is her debt, no?
Don’t know about you guys, but I can’t wait for the new season of ‘The Real Housewives of Orange County’.
I like the new title, too.
I’ve heard they’re going to call it:
‘The Homeless, Divorced Housewives of Orange County, who now live in Riverside’.
Should get some ratings, that new show!
The Homeless, Divorced Housewives of Orange County, who now live in Riverside’.
All the MSM pundits have been crowing about how WOMEN have been the majority of RE purchasers during the last 4 years.
hehehe…Certainly validated by all the single women’s names appearing in various newspaper foreclosure judgement notices.
sounds like a typical SCal/LA couple caught up in the LA high-flying lifestyle all financed thru stripping RE equity from their “miilion dollar” over priced McMansion.
Sounds like a Greek tragedy.
I was told i could overstate my income because they werent making any more land. Not only that, how else can i pay for granite countertops?
don’t forget the koi pond
Ben, I would post this:
Housing Headed to the Woodshed
By Doug Kass
Street Insight Contributor
9/29/2006 10:14 AM EDT
URL: http://www.thestreet.com/newsanalysis/investing/10311968.html
Editor’s note: This column by Doug Kass is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight on Sept. 28 at 8:29 a.m. EDT. To sign up for Street Insight, where you can read Kass’ commentary in real time, please click here.
“We do expect an adjustment in home prices to last several months, as we work through a buildup in the inventory of homes on the market. …This is the price correction we’ve been expecting — with sales stabilizing, we should go back to positive price growth early next year.”
– David Lereah, economist, National Association of Realtors
The New York Times, September 2006
Wrong!
Lereah, whom I debated on CNBC’s “Town Hall Special: The Real Estate Boom,” in April 2005, is a very nice man and a capable economist. I recently had a most pleasant conversation with him at CNBC studios two months ago prior to a CNBC Survival special on housing hosted by Bill Griffeth.
Lereah is also the author of the book Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investment Will Climb Through The End of the Decade — And How to Profit From Them.
Not the most timely publication, Lereah’s book was published within four months of the statistical peak in housing activity and prices in 2005. In fact, the paperback version came out in February 2006, when the down cycle was beginning to escalate.
I am in no way trying to embarrass Lereah. I am just stating the facts and my opinions, like I try to do when I admit my (many) views and mistakes on Street Insight. Don’t think for a minute that the National Association of Realtors’ Lereah was expecting a price correction last year, as stated in this month’s New York Times interview above.
Back in April 2005 (on the CNBC special), Lereah and the managements of Hovnavian (HOV) , Prudential Realty and LendingTree were fully convinced (you might say glib) that the housing market was destined for a long boom. They saw a new paradigm of uninterrupted, noncyclical growth. One month later, Lereah was quoted as saying, “We simply don’t have enough homes on the market to meet demand.”
That was then, and it doesn’t pay to dwell on the past. So let’s look into the future. Unfortunately, many within the homebuilding business continue to talk their book despite clear trends that do not support their bullish view.
Forgive my preoccupation with the housing markets, but it has had a disproportionate role in economic growth since 2000 (and maybe before). This merits a continued discussion as to the possible slope of the decline, and the nature of the inevitable recovery. The housing cycle, among other variables, is a key influence on aggregate economic activity.
I expect a hard landing, and I have roughly quantified my expectations as to when the housing market will bottom (2009). It is folly to think that an unprecedented rise in home prices (in real and nominal terms) will be over in relatively short order. Yet this has been suggested by Lereah and others.
Housing cycles are long, and they play out over many years. We have learned that the peaks are surprisingly high and the up cycles unexpectedly long. Unfortunately, so too are the depth and duration of the down cycles.
Days/months inventory have only begun to rise as the glut of homes will be exacerbated by continued overbuilding, disposition of land, and the selloff of homes by flippers. And, as discussed previously, the consumer enters the current downturn in a weak position. Consumers are highly leveraged after the overconsumption binge of the last decade and after massive cashouts of home equity.
Consider the dramatic sale of D.R. Horton (DHI) homes in the Daytona Beach market in Florida. Please note the message at the bottom of this advertisement: “Realtors Warmly Welcomed!” That’s never a good sign.
These discounts include up to $90,000 a unit or as much as 30% (plus a free washer/dryer and refrigerator). This is not unusual: Most homebuilders have offered large price discounts and/or large incentives (vacations, car leases, reduced mortgage rates, etc.) for several months.
For a moment, let’s suppose that you were a flipper in the Daytona Beach D.R. Horton community who owned and speculated on a few homes without the intention of moving in. You just took a 30% haircut on your inventory, not to mention carrying costs of a mortgage, real estate taxes and expenses to keep up the property (landscaping, utilities, etc.).
And when the unit is finally sold, you have to pay a real estate agent a 6% commission. That speculator likely put up less than 20% up front (probably far less), and is now out, by my calculation about 50%. But making the situation worse is this: Who wants to buy a used home when you can get a new one like one in the advertisement above?
The ramifications of an extended housing downturn are broad — far broader than many realize. For example, the apartment REITS, a sector I am short, argue that there has been no new construction, so supply/demand favors an escalation in rents. But just wait until speculators, unable to sell their condominiums and homes, resort to renting the units.
Or consider the implications for building materials companies like Eagle Materials (EXP) , which warned on Tuesday. What about the sale of pickup trucks, which are often used on the construction trade? What does an extended downturn portend for carpet, gypsum, lumber and appliance manufacturers? Or for subprime and some prime lenders? And what do you suppose happens to the plethora of real estate agents and mortgage brokers? (Do they become daytraders again?)
You get the point: The housing decline is just beginning to be felt. The fixed-income market recognizes this. But for now, equity market participants don’t. Common sense has taken a sabbatical.
Don’t believe the housing soft-landing advocates, and do recognize the broad economic impact that a protracted downturn will have on our economy.
The worst is yet to come.
What about the sale of pickup trucks, which are often used on the construction trade?
The WSJ (IIRC) did a little article that pickup truck sales are a good forward indicator for the economy. Why? When the construction is greaing up workers know if they own their own tools they’ll make more money. So they go out and buy a big truck as a large toolbox. As soon as they wonder if they’ll have a month’s work… they don’t buy said big truck. They keep mooching rides from a friend and defer buying all of the tools.
This downturn will only start to gain momentum until 2Q2007. Then price declines will be huge, layoffs common, etc. This will get ugly and fast.
Neil
Mr. DiaLereah’s new book, I’ve heard, will focus on the benefits of owning such elaborate vehicles as The Escalade, The Hummer, and The Yukon.
Pre-sales begin next month.
I posted this before but this story is ohh soo typical…
greedy bastard loan officers.. I would be hiding my Identity also.
http://cbs5.com/video/?id=16607@kpix.dayport.com
What the old line? ‘Luck happens when opportunity meets preparation.’ How about ‘fraud happens when opportunity meets greed’.
We’re still in that part of the cartoon where the coyote has run off the cliff but he’s still running in mid-air; we aren’t really falling yet. Item: KB Homes is advertising homes in the Sacramento area based on initial monthly payment only. The actual price of the house is in fine print. Terms: 10-year interest-only mortgage, with the first five years fixed, with the first year artificially reduced through “buydown” payment by KB. Want a $599,000 house in Woodland? It’s only $1,490 a month!!! This is running in mid-air stuff. The real collapse hasn’t even started.
> Want a $599,000 house in Woodland? It’s only $1,490 a month!!!
Actually, the payment isn’t too far out of line for Woodland. It’s the overall price of $599K.
Hi Doug!
What’s the frequency Kenneth?
Where are your commas, people?
“Hi, Doug.” “What’s the frequency, Kenneth?”
These tools are useful. Please take advantage of them.
The things that pushed home prices too far:
1. Stated income loans. Everyone who uses one of these overstates their income, and as shown in the survey, often by 50%+.
2. 100% financing. Should be for only the best credit, high residual income, long-term job stability (but these people usually have a downpayment saved….)
3. The appraisal process. Allowing brokers to control this process is a big problem that will become apparent soon. There are other proven processses with built-in controls, used by a small number of banks…and their low delinquency rates are the proof.
4. Option ARMS. Payments that are half of a normal P&I payment allowed people to qualify for twice the house. The rates on these are very high, and the negative amortization eats up equity fast.
Combine several of these on the same loan and you have the current situation. And I have not even mentioned the Home Equity Extraction Loans. People that shouldn’t even have a credit card are given big lines to use for any purpose.
If you had a central agency that ordered the appraisals which assigned appraisal orders by locational competency, then the appraiser would not be pressured from all angles to commit fraud… That will never happen because the banking lobby is far to strong… How about we go back to the originator/lender being forced to buy back the bad loans.. Then they would what them done right..
At the bank where I am employed, the loan officers do not order the appraisals and cannot contact the appraiser. Appraisals are ordered/assigned by a central department. The appraisers on the approved list/panel are monitored regularly for quality by the bank department consisting of experienced appraiser managers. Appraisers meeting quality standards are given regular consistent assignments and are very happy with the arrangement. They get market fees and are paid directly from the bank. Many appraisers attempt to get on the panel, but very few new ones are approved.
Sounds like the ideal bank. You must be the exception that proves the rule.
This is how FHA appraisals were done until the mid 1990’s. FHA has an appraiser panel in each area, and appraisers were assigned to loans by FHA randomly as applications came in. Congress forced them to change it.
Yep , that how I remember it being done. What about how a number of banks did the appraisal by computer without any on-site inspection .
Silicon Valley prices are definitely softening. (We’ll update the numbers again tomorrow.) Feel free to drop by & see for yourself:
Santa Clara County:
http://www.viewfromsiliconvalley.com/id125.html
San Mateo County:
http://www.viewfromsiliconvalley.com/id157.html
Santa Cruz County:
http://www.viewfromsiliconvalley.com/id156.html
Our most-recent, “The Last 30 days,” is at:
http://www.viewfromsiliconvalley.com/id264.html
-and-
“Al RE is local,” for real-world examples, is at:
http://www.viewfromsiliconvalley.com/id265.html
Thanks!
Noticed that the older the listing, the higher the initial price - and then the long chase down. The newer listings are comparable to the older’s re-price - then they start sliding. Currently, only the 2005 stars-and-glory prices are backing off. But no real serios drops.
“My forecast is for the current housing decline, which is several months along, to become the worst housing bear market in modern history, just as the lending abuse was the most insane in modern history.”
Read here……..
http://www.freemarketnews.com/Analysis/65/6073/hat.asp?wid=65&nid=6073
This is in Orange County, CA.
in feb 06 a house on his street sold for 650k.
in may he purchases a house listed on that st at 675k. He offers listing price w/ 10k cash back. So his loan is 685k. I am not sure if did a 30 yr fixed, IO, or neg am loan. I doubt it’s a neg am loan b/c you can’t do a 100% loan and neg am as well.
Last month a home on the street sold for 640k.
Currently there are 2 homes on that street listed for 619k.
So I figure w/ a 4% commission and he decides to sell his house in the coming months he’ll be upside down by 100k.
OUCHHHHHHHHHHH!!!!
“and at least one real estate professional thinks prices could drop even further”
I always get a kick of the word “professional” when applied to RE agents. These are people who DID NOT go to college (in general) and ended up in various “sales jobs” of which RE is e pluribus unum.
The word “professional” is diminished significantly in the same sentence with anything having to do with RE.
Professionals are people who spent at least 4 years in college, graduated with a degree, and have successfully been employed in their field of endeavor (e.g. doctors, chemists, physicists, engineers, etc.).
When one calls a high school graduate “soccer mom” who dabbles in RE on the side after taking a 4 week course, a “professional”, it is akin to equating the president of the United States to a chimp.
So what would you call the engineers, doctors, chemists, physicists, MBA’s and Lawyers that have left their respective industries after years of being screwed by Corporate america and decided to partcipate in the real estate industry. I know quite a few of each of the aforementioned and would love to be able to tell them they are no longer considered professional at our next Happy Hour.
If I quit being a doctor to become an auto mechanic, am I still a “professional?” Probably not. RE is one of those fields on the cusp. There are some true professionals (with the requisite experience, ethics, etc) but as of late I see nothing but uneducated “losers” jumping in (some of whom can’t even speak English or spell correctly). If the industry wants to make it that easy to join the fray, the industry’s reputation will suffer accordingly. Say what you want about doctors and lawyers, but they have to graduate with a BA/BS and MD/JD, and pass rigorous boards/bar exams to get where they are. RE agents are mostly fly by night “salespeople.” Some states still require lawyers to handle all RE transactions, which is a point rarely brought up here, and maybe part of the reason CA is in this mess (because they don’t require that).
It’s not corporate America screwing people, esp middle class workers. It’s the governments. With a nearly 15% payroll tax - that’s only federal - forget all the other high costs mandated by gov. Of course jobs are going to India, Mexico, China…
Ummmm In short, I don’t agree with that. BTW FYI the gov’t is not shipping the jobs to India, Mexico or China making it easier to do yes actually doing it no.
Wasn’t New Jersey outsourcing some of its government call centers to India a while back?
you’re probably right, Corporate America is probably not screwing the middle class, because there is no such thing anymore as Corporate America. The multinational, publicly- traded companies have thugs from every corner of the world sticking it to the working classes.
and that 15% payroll tax you mention? what was it 20 years ago? oh yeah - 15%.
They are laughing all the way to the bank. So far.
“Professional” can be determined by explicit and implicit means — by either societal/educational standards [explicit] and by the way specific individuals conduct themselves [implicit].
‘“Today, many buyers are sitting back and holding on a month or two before purchasing a home,” Rumbeck said.’
Not me. I’m holding back at least 5 years.
I wouldn’t wait too long. I truly feel this is a window of opportunity. I suspect prices will firm up and possibly rise in the spring. The reason I feel this way is the Government will once again bail out the banks, this time in the form of low interest rates. Mortgage rates will once again be in the 5% range. With low rates and property already marked down 10%-20% below last years highs things will heat up again. I don’t think we will see nutty price gains like in the past, but gains in the 3% a year range are quite possible. I am looking at this from a Californians viewpoint where we have a lot of foriegn buyers in the market and a pretty healthy economy at the moment.
How so?? I am sick of this waiting game and the chickens have to come home to roost sometime! Our government doesn’t control interest rates remember Greenspan’s conumdrum?? People in California live with their heads up their as*es!
Well, it is a free country and you can do what you think best. But not everyone HAS to sell at any price. Many people here just took their homes off the market when they didn’t sell at thier asking price, implying they are not desperate to sell, but were just testing the waters. Real estate can be a lot like the stock market, in that it is easy to get whipsawed when things are volatile. The FED does indeed control interest rates, as most loans are tied to indexes that are set by the FED, particularley the prime lending rate.
But having been all around this country, I like it it here just fine. Today I will have a nice lunch and glass of local wine with my wife at a great little restaurant overlooking the beach where it will be about 72 degrees, PRICELESS my friend 
I am not, nor claim to be an economist, but I know lower interest rates always stimulate buying, wether it be autos, homes or stocks. As far as Califonians having their heads up their asses, you could be right about that
“I know lower interest rates always stimulate buying, wether it be autos, homes or stocks.”
You’ve got to be kidding. Ever heard of US 1930s, Japan 1990s? Interest rates have a natural floor of zero. This is why deflation is so dangerous, because even a zero interest rate is a positive real interest rate. During periods of economic downturn there is a POSITIVE not an inverse correlation between low interest rates and low growth. Growth is about credit expansion which is about consumer and business optimism. Low interest rates can not overcome negative sentiment.
You’re living in la-la land in more ways than one. California and Florida do have a natural demand, but that demand (esp. in Calif.) was already reflected in pre-bubble prices. CA is going down, baby! BTW, you can have your 72 degrees and wine and never being able to wear shorts comfortably in the morning or evening - I lived briefly in SD and 90% of the time was wishing it was just a tad warmer.
What you are implying is a depression economy I assume ?
Do you really believe that is going to happen ? And when ?
With an inverted yield curve as we have now, I think a recession is possible, but depression, no.
Again, not being an economist, I cannot argue the merits of good deflation vs. bad deflation , is it a recession or just stagflation, I will leave that for the people with the degrees. However, I do recommend a book that the average man on the street can read and understand.
It is called “Deflation” by Dr. A.Gary Shilling. It explains why it is coming, whether it is good or bad and how it will affect investments. This guy called the beginning of the bond bull market back in the late 80’s and helped me personally by investing in zero coupon treasurys.
At the moment, employment is high here in California and things are humming along pretty well. Anyone who wants to work can find a job. I have seen things turn on a dime though, the recession of 1991 comes to mind.
But depression ? I respectfully disagree with you on that one. At least in the near future.
I just feel if rates drop just a bit more, a lot of folks on the buying fence might decide a low rate may be more important than waiting for the last 10k or so drop in sales price.
San Diego is nice, but I agree, a bit too cool and windy at times. I have three kids, one lives in NYC, one in Missoula,MT. and one in Seattle. Nice places to VISIT only
Bill - My main disagreement was on “the low interest rates are always associated with” comment, and I can see from your response that you are thoughtful and magnanimous.
But. . . we don’t need a depression to drive down house prices considerably, and I didn’t predict one, although I think one is certainly possible in the not-too-distant future. But It won’t be a depression causing home prices to fall - it will be home prices falling which will cause unemployment and a debt and pension crisis which could lead to a depression.
Plus, any serious recession is going to feel like and be called a depression since we haven’t experienced a serious downturn in 25 years. 1991 and 2000 were just blips.
Follow-up: I agree Shilling has been pretty astute over the years. A bit of a bear tilt, but not a table-pounding perma-bear like Schiff, and a guy who doesn’t follow the crowd and often sees things before others.
You can really stretch your duration out and get some huge capital gains when you are buying zero-coupon treasuries when rates are high. I was working on the Street then and I remember people saying we would never see rates below 10% again in our lifetime, and it was hard to disagree. Buying zeroes in the early 80s was a huge homerun.
Paul- I am happy to find someone here familiar with Dr.Shilling and I agree he is a bit of a bear, but at least an optimistic one. I was self employed at the time and traded them within my SEP IRA so no tax consequences until I retire, then I will share it with my partner Uncle Sam
A lot of people thought, myself included, that 30yr fixed rates would be over 7% by now. If that were the case, home prices would be even lower and a sales would be practically non-exsistent I believe. I could be way off, but I think the rates will be just low enough to enable those who truly have to sell, to do so , IF they are realistic in their asking price. True, the housing slow down will cause some unemployment, but I do not think it is that large a part of the economy to cripple it, just slow it down some. Please do not take this as a racist comment, it isn’t, but most construction workers are from Mexico and other parts of Latin America, huge amounts of their pay was sent to their home countries. But I do agree, material suppliers, furniture stores and people involved in the selling and finance of homes are already looking for other jobs. But something will come along and get things kick-started again like the internet and .com companies did in the 90’s.
That is why I told Bill, if he finds a good buy with a low interest rate to go for it. I don’t think he would be looking at much of a downside, especially with Uncle Sam picking up a good chunk of the interest and tax expense every year. Plus if he plans to stay a long time and looks at it as his home, not so much an investment, it will be a good thing. But, it is Bill’s call and I wish him the best either way.
I guess only time will tell how things shake-out, I suspect we will have a pretty good idea in the spring, as buyers are mostly waiting and many sellers will test the market again at that time.
It has been been great debating with you and Bill. You both have made excellent points are gentlemen.
Bill, I stand by 5 years. Unless, as some astute RE investors on this blog point out, it gets to the point where renting out a house is more profitable than sitting on it and paying mortgage. And I’m talking coastal California, San Francisco to San Diego. For the Central Valley, forget it. The home prices peaked in December ‘05 and I figure it will be 15 years before they break even, if they are lucky.
Why don’t you just skip all pretense and change your blogname to “FallingKnifeCatcher”?
Seriously now, no amount of rate reductions can save RE. First, lower FED rates would result in higher mortgage rates as bondholder’s price in expectations of higher inflation. Second, once the psychology of deflating home values is set, no amount of rate tinkering will change it.
Ahem, “…bondholders…”.
I myself am not in the market to buy at this time. I bought a new home four years ago and I rent out my old home which I purchased in 1989. The old one I own free and clear and it covers the payment on my new one. I could get a bit more rent for the old home, but the couple that rent it have 4 small kids and are good folks, so I am ok with it as-is.
Buying a home now to rent out is not feasable in my area, but I think it is a good time to buy a principal residence. I don’t see much more of a drop and interest rates are still low historically. Lots of sellers willing to bend over backwards to do the deal, could be a whole different story next year, I don’t know , all I can see is what things look like now.
Nice to be a boomer isn’t it?? Us Gen-xer’s are trying just to get by! All I want is to own a home someday! Quaint idea… Buy a house to actually live in! Bill.. Keep in mind with the new guidelines issued Friday and the online IRS tax reporting coming on Monday the “free money” field is going to be a changing….
larenter- Yes, I think the new guidelines will help to keep home prices more in line with the usual 3% or so a year gain. When we bought our first home in 1970 banks required the payment could not exceed 28% of your gross monthly earnings and everything had to be proved, there were no low doc or “stated income” loans. It was a lot harder for a young family to buy a house then. looking back, I think it was a blessing in disguise. Nobody I knew bought a house they truly couldn’t afford, the bank wouldn’t let you. Tax brackets were higher than today and there were no 401k’s or IRA’s to shelter money or borrow from.
I understand the problem younger people have trying to buy a home, especially in Califonia. My daughter has been an RN for two years. Her and her husband are buying a starter home now and just barely able to do so, even with two high incomes.
If you move to an area where homes are cheap, you pretty much have to bring the money with you as there are no high paying jobs close, kind of a catch 22.
But honestly, I really wouldn’t wait for prices to be 40% or 50% lower than last years highs, it just isn’t going to happen and you will miss a good opportunity in the next 6 months. Do it if you can, you won’t be sorry. So what if it goes 10% lower after you buy it ? Unless you are going to flip it, what does it matter ? Do you buy a stock with the expectation that it will never pull back 10 or 20% before it reaches a new high years later ? Don’t forget, Uncle Sam is going to help pay for the home with nice tax breaks, depending on your tax bracket, you will get a 15% to 35% gift every year on your interest and tax payments. Renting may be cheaper now, but in the long run, you will be better off owning for a lot of reasons that have nothing to do with house values. But that is another subject. Hey, remember the Nike slogan ? Just do it !