John Burns, founder of John Burns Real Estate Consulting in Irvine …
Us: What’s your Orange County housing outlook for 2011 …
John: I think prices along the coast will fall because they have lagged the decline that occurred elsewhere, and I think home price reality will set in for most homeowners, who still believe their home is worth more than it is.
I like how John tells it like it is.
Otherwise, the government has become so involved in housing that we have become totally subject to their decisions, so projecting 2011 housing involves getting inside the heads of (Fed chair) Ben Bernanke, (Treasury secretary) Tim Geithner, (influential congressman) Barney Frank, new Federal Housing Finance Agency Commissioner Joseph Smith and 50 state Attorney Generals. Together, they are artificially holding down mortgage rates and down payment requirements, and intervening in foreclosure activities. The intervention will certainly continue in 2011.
Forecasting government policy in response to the housing and credit bubbles is difficult. I did not foresee the government takeover of the GSEs. I did not foresee the Federal Reserve buying mortgage-backed securities. I did foresee the endless bailouts and false hopes, but I did not foresee the government taking it quite so far with all the loan modification programs. Prices did not fall as much as I expected partly due to government intervention and partly due to lenders not foreclosing and releasing properties to the market -- something lenders are enabled to do by amend-extend-pretend and government policy.
Us: What will be the 2011 drivers of real estate change, good or bad? Why?
John: The good news is that we will have solid job growth, which will bring back some demand to the market. However, many delinquent mortgages need to be resolved, which will likely result in enough foreclosure activity to depress home prices.
In brief, that is exactly the dynamic we will face for the next three years. As the economy picks up and people go back to work, the housing market will not recover, and everyone will think it is some big mystery. In reality, the overhang of supply from distressed loans is going to hurt the market more than employment can help it. Without employment growth, the housing market has no chance of recovery, but even with good employment growth, there will be a protracted grinding slowness to the house price recovery.
Government-sponsored enterprises reform (Fannie Mae and Freddie Mac), which will drive mortgage qualification requirements, will be the biggest topic of the year. Geithner is issuing his reform recommendations in January, and the FHFA Commissioner is brand new, so nobody knows what they have in mind. My bet is that there is more talk than action, but mortgage qualification will tighten nonetheless.
You get fools like Lawrence Yun claiming qualifying for a mortgage is already too difficult when in reality, we are only returning to sane lending practices of a bygone era. Qualification standards will tighten because they have to. Far too many borrowers are already giving up on their mortgage payments. Only the best loan candidates should be extended credit if the market is ever going to stabilize and rid itself of the foreclosures.
Us: OK. We love numbers. How much — in percentage points — will the median selling price of an Orange County home change in the coming year. What’s one thing that might alter that prediction — up or down?
John:We estimate that the median price in 2011 will be $480,000, which is 7% below our 2010 estimate of $515,000. Keep in mind that the median home price used to be a good number because it represented a typical 3-bedroom, 2-bath home in a typical neighborhood. In the last few years, transaction volumes plummeted and affordable areas such as Santa Ana were over represented, so the county’s price correction was overstated (it was $476,000 in 2009), and now that overrepresentation is being reversed by a shift back to typical, higher-priced neighborhoods. The right way to look at most neighborhood home values is to assume we will bottom at values that were achieved in 2003.
What would have been a 2001 pricing bottom in 2011 is probably going to be pushed back to a 2003 price-point bottom in 2013.
Us: What’s your top worry about the real estate climate for 2011? Why?
John: We are concerned that the pool of renters who can come up with a down payment and qualify for a mortgage is very low, and the government is likely to raise down payment requirements while mortgage rates rise, so most of the entry-level demand will end up in the apartment market. Also, the government intervention is likely to end with rapidly rising mortgage rates, probably after 2011.
Tightening requirements and rising interest rates does not sound like a good environment for house price appreciation.
Us: What will be the real estate surprise we’ll be talking about a year from now? Why?
John: Consumer research will drive brand new home designs that will be wildly successful. Home builders are already talking about the because the success at Woodbury was the biggest home building story of 2010, locally and nationally. The Irvine Co., which sets home building trends nationally year in and year out, set the trend in 2010 when they reopened Woodbury after conducting significant consumer research, and then exceeded everyone’s wildest expectations by selling far more homes at higher prices than anyone imagined. We are gearing up. Mollie Carmichael, our principal who worked at Irvine Co. for 10 years, is very busy leading our consumer research practice. She just managed a consumer survey with 10,000 participants to get the big picture changes in home buyers, and is finding that developers and builders are finally doing real research to figure out what the consumer wants before committing to spend millions in construction costs based on a hunch.
John is happy to have the Irvine Company as a client. Good for him. They were one of the few developers doing anything over the last two years.
What John has predicted is an extension of a process already underway:
December 30th, 2010, 11:00 am -- posted by Jon Lansner
Sellers of pricier Orange County homes continue to feel stiff pricing pressures.
That’s from a slightly different view of the Orange County housing market from HousingTracker.net. It tracks trends in asking prices from brokers’ MLS system of homes for sale. In addition, HousingTracker breaks down its data into a pair of neat markers — the 25th and 7th percentiles that let us see how the market’s upper crust and more modest abodes are faring.
Orange County 25th Percentile, Median and 75th Percentile Home Price
From the December report we see …
At the 25th percentile — the median of the lower half of the price spectrum of local homes for sale, the selling price was $298,000. That is down 0.6% vs. the previous month, fourth consecutive dip. It’s also off 1% vs. a year ago, first such drop since November 2009. Over two years, there’s been an 0.1% increase in prices sought by sellers of more affordable local homes.
At the 75th percentile — the median of the upper half of the price spectrum of local homes for sale — price cuts were far steeper. December’s selling price was $648,250 — down 2.6% vs. the previous month, the 6th consecutive dip. Prcing is off 13.2% vs. a year ago, drop No. 9 in a row. Over two years, all told, there’s been an 13.4% decline in prices asked for higher-end housing.
This has narrowed the gap between these two price points. It was 118% this month vs. 122% in the previous month and 148% a year earlier. The gap peaked at 167% in June and July 2009.
The overall Orange County median listing price, by this math, was $423,722 – off 2.1% vs. the previous month and down 7.6% vs. a year ago. Over two years, there’s been a 4.6% decline in total.
Why are high end loan owners lowering their asking prices? Because they are too high! Incomes don't support high end pricing, so the prices have to come down to match the reality of what market participants make and what they can finance. It isn't more complicated than that. That is why the same high-end price drops can be seen in most California markets.
By Phillip Reese and Robert Lewis -- Published: Sunday, Jan. 2, 2011
Within the gates of the exclusive Los Lagos development in Granite Bay, home to business executives and real estate magnates, the postman delivers almost one fresh home loan default notice a month.
Mortgage defaults are not just a problem of the poor. Sacramento's wealthiest residents are defaulting on their recent home loans at least as often as everyone else – and in some posh enclaves, more, according to a Bee analysis of federal mortgage data and figures from Foreclosures.com.
Banks have filed about 550 default notices on local home loans of more than $1 million since 2007. The total value of those loans is roughly $750 million.
Estates on the west side of Folsom Lake form the epicenter of the trend. In this strip of Placer County, banks have filed four default notices for every 10 home loans of more than $1 million issued during 2006 and 2007.
Forty percent of loans over $1,000,000 from 2006 and 2007 have received a notice. That is an astonishing number. Forty percent? How is that market going to replace 40% of the homeowners at the high end without crushing prices?
"Everyone always has delusions of grandeur. At some point you have to accept this is what it is," said Folsom resident James Caramazza, who took a hit on his $1.4 million loan following a short sale.
One difference between the poor and the rich: Fewer expensive homes are actually going back to lenders. Instead, short sales abound; currently, there are 95 short sales priced over $600,000 in the region, according to MetroList MLS.
The amend-extend-pretend policy has created numerous mid to high end neighborhoods where many of the residents are squatters who continue to enjoy their entitlements. Whatever federal bailout moneys are used to cover these losses come right out of your wallet... Actually, since we are running huge budget deficits, the money is coming out of your children's wallets.
Banks are more likely to approve short sales on big loans because so much cash is at stake; because it's expensive to maintain a mansion; and because wealthy homeowners often have enough money to hire a real estate lawyer to negotiate, several local real estate experts said.
That is demonstrably not true. Have any of you noticed short sales going through at the high end? The main reason short sales are not effective with high end borrowers is because many of these people have other assets they are not willing to part with. A short sale generally requires the seller to prove they are broke. Although many do their best to hide their assets, lenders are not completely clueless when it comes to collections, so they demand endless paperwork in a cat-and-mouse game of hiding money.
Recent short sale attempts following mortgage defaults include radio personality Tom Sullivan and former Kings basketball stars Kevin Martin and Ron Artest. Martin and Artest could have covered their loans with a portion of their annual, multimillion salaries – a fact that angered some local residents.
"It's not fair and it's not right," said Madelyne Moreno, a Rio Linda resident struggling to get her bank to approve a short sale on a more modest loan. "They can turn around and get another home immediately."
But a lot of the region's largest defaults aren't strategic "walkaways." The recession has hit the wealthy hard, too, and many couldn't afford to keep making payments on their big houses.
The number of local households earning more than $1 million annually fell 20 percent from pre-recession 2006 to midrecession 2008, from 1,434 to 1,135, according to the latest figures from the Franchise Tax Board.
I have to wonder how accurate the bubble numbers were on incomes. How many people were counting the "income" from their home price appreciation, and how many believed their liar loan applications?
The housing market was largely behind the earlier wealth influx, and its transitory nature.
Many newly flush real estate developers and brokers bought huge homes in the boom and quickly lost them in the bust – like winning a cake in a raffle and then falling into it face first.
'I thought I was real smart'
Leonard Brand, a longtime Tahoe-area real estate agent, said his default wasn't strategic but stupid.
Brand owned his $3 million home in South Lake Tahoe free and clear in 2005 when he decided to take out nearly $1.7 million to invest.
"I thought I was real smart," Brand said.
Those investments tanked and Brand could no longer afford his loan payments.
That is perhaps the stupidest investment story of the housing bubble. He owned his home with no debt in 2005, a remarkable feat given the culture of the day, and he managed to borrow so much in the last couple of years of the bubble that he managed to lose it all.
So he enlisted a colleague in his office to work on a short sale, eventually reaching a bank vice president who approved a deal. The home sold for $1.4 million in April. Since then, Brand has managed to buy another home for $700,000 from someone he knew who helped with the financing.
Caramazza, whose family owned a development company felled by the market collapse, never even got to live in his swank Granite Bay home.
He and his wife took out a $1.4 million construction loan from Countrywide in May 2007 to build a house on 2.3 acres of land on Bella Terra Place in Granite Bay.
When the economy went south, Caramazza tried to sell his home in Folsom and move into the Granite Bay home.
The Folsom home, however, just sat on the market. So Caramazza tried to sell the Granite Bay home. He got some nibbles, but eventually dropped the price from $1.99 million to $1.59 million to $1.49 million.
Finally, he turned to a short sale and unloaded the Granite Bay home for $900,000, losing some equity. He also later sold his Folsom home and bought a smaller, 2,300-square-foot home, also in Folsom.
Caramazza and Brand are two of the dozens of real estate and investment professionals to default on large mortgage loans in the past few years, The Bee review found. The list is dotted with real estate agents, brokers, investment advisers, bankers and some high-profile developers.
People in real estate believed their own bullshit. Now they are paying the price.
Fewer houses priced in millions
During the housing boom, million-dollar home loans were a small, lucrative slice of the market.
In 2006 and 2007, banks approved about 1,400 home loans of $1 million or more in the four-county area, according to federal loan data. Since then, they've filed about 415 default notices on those loans, according to a Bee survey of listings from Foreclosures.com.
That's three default notices for every 10 big loans during that period, about even with the default rate for the rest of the region.
Today, with the market still depressed, there are far fewer houses selling for millions. Banks approved fewer than 150 home loans of $1 million or greater during 2009, an 80 percent drop from 2007.
So I ask you again, where is the money going to be coming from to support high end pricing? If the banks don't provide it, do you really believe there are enough foreign cash buyers to make up the difference?
Contributing to the malaise: tighter rules by lenders.
"You have to come up with a 30 to 35 percent down payment" to take out a jumbo loan, said Nick Sadek, a local real estate broker who specializes in high-end sales.
Sadek and others say homes that once sold for more than $1 million locally are now selling for at least 40 percent less. A large proportion of buyers these days, Sadek said, work in medicine, one of the few sectors still growing.
There's disagreement among real estate experts about how the sale of distressed mansions affects people trying to sell modest homes. Some called expensive homes a niche that operates in its own space. But Patrick Hake, a Placer County Remax Gold broker who sells a broad mix of homes, said everything's connected.
"If you have a home that used to be $1.5 million selling for $800,000, another home that used to be $800,000 will go for something less," Hake said.
It's called the substitution effect, and it is very real. One high priced homes start coming on the market, prices are going to melt down.
Whatever its impact and causes, the million-dollar-home crash is likely not over. During 2010, banks issued about three default notices on $1 million home loans each week, a trend that continued through December.
Warren Adams, a real estate broker who specializes in foreclosures, thinks banks are holding a "shadow inventory" of high-end homes because they don't want to flood the market.
"I've been surprised that I have not seen more of the high-end stuff," he said. "The banks are sitting on them. I keep saying that is going to be our next wave."
It will be the next wave. Or perhaps we could call it the next slow leak. If the cartel collapses, the slow leak could become a torrent, but there are few signs that the cartel is ready to capitulate yet.
$1,068,600 in mortgage equity withdrawal
The higher up the housing ladder people reached, the more free money they were rewarded with by bankers. Now that lenders know they are out millions of dollars, they are choosing not to foreclose on squatters like the owners of today's featured property. The rich take the money and squat too.
Foreclosure Record Recording Date: 08/06/2010 Document Type: Notice of Default
This house was purchased for $730,000 on 4/29/1999. The owners used a $583,900 first mortgage and a $146,100.
On 9/8/1999 they opened a HELOC for $50,000.
On 11/19/2002 they obtained a HELOC for $560,000.
On 11/28/2005 they got a new HELOC for $500,000.
On 5/3/2007 they refinanced with a $1,452,500 ARM and a $200,000 stand-alone second.
Total property debt is $1,652,500.
Total mortgage equity withdrawal is $1,068,600.
Total squatting time is 7 months so far.
Over $1,000,000 in mortgage equity withdrawal... That's a lot of money. Will someone buy this house and pay off this family's debts?
Home Purchase Price … $730,000 Home Purchase Date .... 4/29/1999
Net Gain (Loss) .......... $962,000 Percent Change .......... 131.8% Annual Appreciation … 7.8%
Cost of Ownership ------------------------------------------------- $1,800,000 .......... Asking Price $360,000 .......... 20% Down Conventional 5.07% ............... Mortgage Interest Rate $1,440,000 .......... 30-Year Mortgage $375,683 .......... Income Requirement
$7,792 .......... Monthly Mortgage Payment
$1560 .......... Property Tax $233 .......... Special Taxes and Levies (Mello Roos) $300 .......... Homeowners Insurance $165 .......... Homeowners Association Fees ============================================ $10,050 .......... Monthly Cash Outlays
-$1620 .......... Tax Savings (% of Interest and Property Tax) -$1708 .......... Equity Hidden in Payment $714 .......... Lost Income to Down Payment (net of taxes) $225 .......... Maintenance and Replacement Reserves ============================================ $7,662 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $18,000 .......... Furnishing and Move In @1% $18,000 .......... Closing Costs @1% $14,400 ............ Interest Points @1% of Loan $360,000 .......... Down Payment ============================================ $410,400 .......... Total Cash Costs $117,400 ............ Emergency Cash Reserves ============================================ $527,800 .......... Total Savings Needed
Property Details for 73 NEW DAWN Irvine, CA 92620 ------------------------------------------------------------------------------ Beds: 7 Baths: 6 full 1 part baths Home size: 5,100 sq ft ($353 / sq ft) Lot Size: 9,000 sq ft Year Built: 1999 Days on Market: 108 Listing Updated: 40543 MLS Number: S632757 Property Type: Single Family, Residential Community: Northwood Tract: Rose ------------------------------------------------------------------------------ ***TREMENDOUS OPPORTUNITY TO OWN A MINI-MANSION IN AWARD WINNING GATED ROSEGATE BY THE ORIGINAL TAYLOR WOODROW*** Up to 7 bedrooms, 6.5 baths with 4 car garage in almost 5,100 square feet. IMMACULATE UPAGREDS WITH MARBLE FLOORING, DESIGNER CARPET, GRANITE EVERYWHERE, TRAVERTINE SHOWERS, TWO GUEST SUITES DOWNSTAIRS, LESS THAN 1 MILE TO AWARD WINNING SCHOOLS, COMMUNITY POOLS, TENNIS, RECREATION AND SHOPPING.
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