Another turning point A fork stuck in the road Time grabs you by the wrist directs you where to go. So make the best of this test and don't ask why. It's not a question But a lesson learned in time.
It's something unpredictable but in the end it's right. I hope you had the time of your life.
I originally projected that house prices would fall more and that they would bottom in 2011. With the government manipulation of mortgage rates and the plethora of incentives, it doesn't appear that prices will fall as much as I thought. It has also likely delayed the bottom until 2012 or even later depending on interest rates. However, timing the bottom tick isn't necessary to find compelling reasons to buy property. If prices move lower in 2011 and interest rates remain low, payment affordability will make houses cost less than competing rentals. For those who plan to own for the long term and who are willing to become landlords if they need to move, 2011's lower prices may provide conditions that warrant buying rather than remaining a renter.
House prices will continue to drop through the rest of the year and will begin 2011 lower than they were in 2009, according to a webinar hosted by Scott Sambucci, vice president of data analytics for Altos Research.
The culprit behind the forecast is the weight of the shadow inventory of homes yet to hit the market. But, Sambucci said, anyone who generalizes the size and length of time it takes to clear the shadow inventory will be wrong.
“The recovery period is dependent on inventory,” Sambucci said. “But different markets move differently. It’s important to get local.”
Other firms have released estimates of the national shadow inventory and the general time it could take to clear it.
I have noted a more concerted effort among clueless realtors to dismiss the idea of shadow inventory. Some of this is due to a misunderstanding of exactly what shadow inventory is. Shadow inventory is composed of delinquent loanowners -- those home-occupying squatters who are not paying their mortgage -- that have not yet been served a notice by their lender to begin foreclosure proceedings. Since cure rates are so low, these represent a shadow inventory because these properties don't show up in foreclosure lists yet almost all of these people will end up as distressed sales, either by short sale or foreclosure. I have to wonder if some of these local realtors think Morgan Stanley, Standard & Poors, Barclays Capital, and numerous other market watchers are simply making this stuff up.
I agree with the statement above that anyone who generalizes the time it takes to clear this market will be wrong -- they will all be too optimistic. It will take much longer than any of these parties estimate. Have you seen anyone be overly pessimistic about the problems in housing to date?
Barclays Capital reported that it could peak at 4.7m in the summer of 2010. The research firm, Capital Economics, said the shadow inventory could reach 5.5m by the end of 2011.
According to Altos Research, the 20-city composite price index, which measures home prices on a rolling 90-day scale, bottomed in 2009 because of the shadow inventory, whatever the estimate.
That is the same point I have made over and over again. We are experiencing a false bottom because banks stopped foreclosing on people. These foreclosures are distressed inventory that must come to the market and be cleared. Perhaps delaying the clearing process and trickling them over time is in their best interest, assuming the cartel can maintain some pricing support. No matter the reason, it is likely that prices will fall again once this inventory is pushed through the system.
It rose to a peak in July 2009 and fell to where it is now in July 2010 (see graph below). Sambucci said it should drop below the 2009 bottom and start at a new low in 2011 before rising back up to the same levels seen in 2010.
But that was a general forecast, and specific markets behave differently. Recovery times can even differ at the ZIP code level within metropolitan statistical areas (MSAs). His example was Sacramento, thought to be one of the MSAs worst hit by the subprime mortgage crisis. Sambucci took a closer look.
Altos looked at three areas within the Sacramento MSA: Carmichael, Rancho Cordova, and Davis. In Carmichael (the black line in the graph below), prices actually increased at the end of 2008 while prices in Davis (brown line) dropped slightly to peak later at the end of 2009. Rancho Cordova (green line) prices ended 2008 at its bottom and has slowly climbed since.
Going forward, the recovery times have shifted. Prices in Carmichael plummeted in the fall of 2009 and began its recovery there. Prices in Davis are still falling and have dropped below its two neighbors. The key, Sambucci said is for analysts to find those inflection points when inventory and pricing levels change and begin to trend. From these points, inventories will continue in whatever direction they're pointing, whether it be moving up or moving down.
“The shadow inventory in each market,” he said, “has momentum.”
The lending cartel will have varying degrees of success in different markets. In markets where there are smaller number of delinquent borrowers relative to the number of homes, there will be less pressure on pricing, and the cartel may hold together. However, in areas with large numbers of foreclosures and delinquent borrowers, there will be a stronger incentive for the cartel members to cheat and liquidate their properties into what little demand remains.
Fiserv, financial services technology provider, found that national average house prices rose 2% in Q110 from a year before, but predicted a drop in prices is coming.
The overall increase — the first yearly gain since 2006 — is driven by a few local markets, and prices look to continue to fall overall in the year to come.
Fiserv projects that single-family house prices are likely to fall another 4.9% over the next 12 months as tight economic circumstances continue. Continued high unemployment and a large number of distressed properties remaining in markets like Florida, Arizona and Nevada are weighing on the housing market.
Steep house price declines are anticipated to continue in hardest-hit markets. For example, average prices in Nevada, Arizona and Florida are expected to fall 11.1%, 10.8% and 8.8%, respectively, from Q110 to Q111.
“The stabilization of residential real estate markets will take many years as buyers and sellers try to find price levels that clear large inventories of vacant homes from the market,” said Fiserv chief economist David Stiff. “Consequently, we expect to see prices bounce up and down around their lows for the next two to three years, especially in markets that experienced the largest home prices bubbles.”
I don't know why California wasn't on this list giving how massive the housing bubble was here.
Stiff added: “This will result in alternating bouts of optimism and pessimism regarding the housing market recovery, similar to what we have seen for the economy as a whole. This will make it difficult to know exactly when the housing market has reached its bottom.”
The projections are based on the Fiserv Case-Shiller Indexes, which found that single-family house prices rose an average 2% in Q110 over the previous-year quarter. It marked the first yearly gain since 2006.
Strong price increases in markets like the San Francisco Bay Area and Washington DC drove the overall increase. On a local basis, however, prices were down in 303 of the 384 metro areas studied for the index.
The largest yearly gains in house prices occurred in lower-priced segments of metro markets — which Fiserv said indicated the recent rebound in prices can be traced to the first-time homebuyer tax credit’s effect on demand.
“Although part of the rebound in the less expensive market segment is due to improving affordability, it is likely the rising sales volumes and prices of low-priced homes were mostly due to the tax credit,” Stiff said. “When the tax credit expires, sales activity for low-priced homes will drop causing a moderate decline in overall home prices.”
The latest Standard & Poor’s (S&P)/Case-Shiller House Price Index (HPI) found that house prices in 20 major metropolitan areas rose 1.3% in May from April and 4.6% from a year earlier.
I suppose you could call the government efforts to stimulate market demand a limited success. It put in a false bottom and stopped the freefall of prices nationwide. Perhaps by stopping the momentum of the price declines it gave both buyers and lenders confidence to re-enter the market. Of course, with the widespread declines that will follow now that these stimuli are gone, those people who optimistically bought "the bottom" with the government props will see values drop below their entry point, and they too will feel trapped for several years. Let's hope they are saving money versus a rental.
The time to buy is coming
My writing has been labeled as doom and gloom by my detractors who think I only write about the negative to sensationalize and draw readers. The fact is that I merely call them as I see them. For the realtors whose livelihood depends on creating false urgency in buyers, my message has not been well received. Obviously, I couldn't care less.
Despite my pessimism about future pricing, we are approaching a time when buying may be the right choice for many people. At the end of last year, I made a list of caveats as to why people may not want to buy now. It included the following: " it is a good time to buy when it is cheaper to own than to rent, and it is during a period of no direct government manipulation through tax credits, mortgage interest rate manipulation, and so on."
In many areas even in Orange County, you can find nice single-family detached homes for less than rental parity. California still maintains a credit, but the federal government's tax credits incentive has expired, and the Federal Reserve's program of buying down interest rates is over. In short, the primary conditions I mentioned to hold off buying have been met.
The remaining reasons to consider renting over buying is the presence of shadow inventory and historically low interest rates. However, there is no way of knowing how long these conditions will persist. Interest rates will likely go back up soon, and that will contribute to pricing pressure as we will have a first-time buyer dominated market for the foreseeable future. Interest rates will have a major impact on future resale value, and it likely won't be positive. How long will you wait for interest rates to rise in order to lower pricing? It may take a while. Also, shadow inventory will be with us for a very long time. Are you willing to wait another four or five years for that to clear? I don't know if I am that patient, and being someone who isn't buying for appreciation, I don't need to be.
To me, the housing bubble was easy to spot for one simple reason: you couldn't rent out a house for enough to cover the cost of ownership with stable financing. There was no viable plan B. Once prices drop to rental parity, that is no longer true. If you bought a home today at or below rental parity, and you had to move 3 years from now, you probably couldn't sell it for a profit, but you could always rent it out and not lose any money. That is a viable plan B. Being a landlord isn't for everyone, but it does provide an avenue of escape for those who have to move when their properties are worth less than they paid.
If prices take another leg down this fall and winter -- an outcome that seems more and more likely -- and if interest rates remain low, we will start to see many properties trading at or below rental parity in Irvine. I will still tell people not to buy because they worry about being priced out or because they think they can make money on resale because neither of those outcomes will happen. However, for those who plan to stay for the long term who wouldn't mind being a landlord if they needed to move, payment affordability has value. I have advised people to Use FHA Financing because Loan Assumption is the Appreciation of the Twenty-Teens.
For those who have been reading this blog for almost four years and waited patiently for a cautious green light, your time may soon be at hand. I won't be calling a bottom. I will merely be reporting on conditions as they are and warning people of the risks they face just as I always have. As affordability improves, the risks lessen, and the premium for ownership changes to a premium for renting -- which is where it should be. Once it starts costing me significantly more each month to rent than to own, don't expect me to stay a renter very long. We aren't there yet, but we may be soon enough.
How to lose money flipping in Irvine
I was asked recently if I had seen any losing property flips purchased at trustee sale. I had not. However, I knew that despite the discount at auction, if a bidder does not accurately estimate the resale value, losing is a very real possibility. So I set out to find a loser in Irvine. I only had to look at the North Korea towers to find one. What a surprise.
These condos are purely a cash market. I don't know this for certain, but I doubt there are any lenders willing to give a loan in there. The HOA delinquency rate must be very high, so the GSEs would touch this place. And since cashflow values to investors is around $225,000, there isn't much reason for a cash buyer to pick up these units. Of course that doesn't stop the occasional foolish speculator from trying. Based on my previous posts on this property, it isn't a stretch for me to say that I would not have purchased a flip in this tower.
The original owner paid $759,000 for this black hole on 3/27/2006. He used a $607,200 first mortgage, a $151,800 HELOC, and a $0 down payment. It is possible that he put money down and didn't use the HELOC, but what would you guess he did?
The NOD was filed in January which means he was delinquent by September 2009, but you have to think he was delinquent much earlier than that and was part of shadow inventory. Do you think he continued to make payments on the mortgages and his HOA dues when it was obvious his speculative flip he bought with no money down was not working out? I rather doubt he made any payments since 2008, but I have no way to know.
In any case, a flipper bought this beauty at auction on 5/21/2010 for $300,469. I don't know if he incurred any sales expenses or if he had to pay much in back taxes, but you have to guess his cost is closer to $315,000. With his current $274,900 asking price, he is certainly going to lose money -- probably a lot of it.
Home Purchase Price … $300,469 Home Purchase Date .... 5/21/2010
Net Gain (Loss) .......... $(42,063) Percent Change .......... -14.0% Annual Appreciation … -35.1%
Cost of Ownership ------------------------------------------------- $274,900 .......... Asking Price $9,622 .......... 3.5% Down FHA Financing 4.60% ............... Mortgage Interest Rate $265,279 .......... 30-Year Mortgage $54,357 .......... Income Requirement
$1,360 .......... Monthly Mortgage Payment
$238 .......... Property Tax $0 .......... Special Taxes and Levies (Mello Roos) $23 .......... Homeowners Insurance $998 .......... Homeowners Association Fees ============================================ $2,619 .......... Monthly Cash Outlays
-$126 .......... Tax Savings (% of Interest and Property Tax) -$343 .......... Equity Hidden in Payment $17 .......... Lost Income to Down Payment (net of taxes) $34 .......... Maintenance and Replacement Reserves ============================================ $2,201 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $2,749 .......... Furnishing and Move In @1% $2,749 .......... Closing Costs @1% $2,653 ............ Interest Points @1% of Loan $9,622 .......... Down Payment ============================================ $17,772 .......... Total Cash Costs $33,700 ............ Emergency Cash Reserves ============================================ $51,472 .......... Total Savings Needed
Property Details for 3131 MICHELSON Dr #306 Irvine, CA 92612 ------------------------------------------------------------------------------ Beds: 2 Baths: 2 baths Home size: 1,292 sq ft ($213 / sq ft) Lot Size: n/a Year Built: 2006 Days on Market: 57 Listing Updated: 40380 MLS Number: S619614 Property Type: Condominium, Residential Community: Airport Area Tract: Marq ------------------------------------------------------------------------------ HIGH TECH GLASS AND CONCRETE TOWER IN THE MIDDLE OF THE BUSINESS DISTRICT IN IRVINE, WALKING DISTANCE TO SHOPS IN RESTAURANTS; GREAT LIFESTYLE: FULL TIME CONCIERGE, FITNESS CENTER, POOL, JACCUZZI AND SAUNA. THE ULTIMATE IN CITY LIVING! CORNER END UNIT AT GROUND LEVEL ON GREENWAY WITH VIEW OF CITY. LUXURIOUS CONDO: HIGH CEILINGS, PANORAMIC WINDOWS, FIREPLACE, GOURMET KITCHEN WITH EUROPEAN CABINETS, GRANITE COUNTERTOPS, STAINTLESS STEEL APPLIANCES, CHERRY HARDWOOD FLOORS IN LIVING SPACE, INSIDE LAUNDRY WITH WASHER AND DRYER INCLUDED. READY TO MOVE IN.
STAINTLESS? ALL CAPS
Questions of the day:
Will you wait until interst rates have risen to historic norms and shadow inventory has cleared to buy a home?
Is payment affordability using stable financing good enough even though prices may decline further?
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