Bear rally buyers are in denial. When selling their homes, they consistently price over the market and far higher than bubble era buyers who have capitulated.
Why bother? it's gonna hurt me It's gonna kill when you desert me This happened to me twice before It won't happen to me anymore
Weezer -- Why Bother
Home prices in California are notoriously volatile. Stoked by their realtor's advice and enabled by foolish lenders, buyers get motivated by greed and fear to bid prices up to the stratosphere. When the inevitable crash occurs, everyone is surprised. Many people believe trees really can grow to the sky.
The psychological stages of loss are the same for all bubble buyers. Most people buy because they believe prices are going up. This was particularly true for bubble buyers, but bear rally buyers from 2009 fell victim to the same faulty thinking.
The buyers from 2004-2006 have already gone through denial and fear, and most have capitulated and either let the property go to foreclosure or sold short. Bear rally buyers are still in the initial stages. They believe they bought at the bottom, so the are still in the denial stage we watched most bubble buyers go through in 2007. The most obvious indicator of denial is the initial asking price of a bear rally knife catcher. According to a study by Zillow, buyers from the bear rally consistently overprice their properties.
Imagine two identical houses built in the same year in the same neighborhood. House A was last purchased in 2006 and House B in 2008. House A is listed at its estimated fair market value of $300,000. Although it would be logical to assume that House B would list with a similar asking price, new research shows that it would, in fact, list at $350,000 on average, a $50k premium! Why the 16 percent price difference?
Because bear rally buyers are still in denial. It's the only explanation which is consistent with what we know about human behavior.
An analysis of seller behavior reveals that homeowners who bought after the peak of the national market in June 2006 dramatically over-price their homes relative to its estimated market value. In a separate survey fielded by Zillow, 17 percent of sellers who purchased post-bubble claim that their primary factor in pricing their house is their original purchase price. This compares with 9 percent who bought during the run-up to the bubble and 4 percent who bought before that.
It's human nature to price a property at break even and see what happens. Just like winning the lottery, a wouldbe seller might get lucky and find a foolish buyer who is willing to overpay.
In the chart below, the blue line is showing the difference between the current list price and the estimated market value of the home with the year the house was last sold running along the X axis. The green line represents the difference between the current list price and the prior purchase price. Notice in the green line that current sellers that purchased their home since 2009 have been pricing their house at 10% higher than what they purchased it for just 1-2 years ago. This is in spite of the fact that over the last two years the national real estate market has depreciated by 10 percent. This difference is represented in the blue line which shows that sellers who bought during this period are pricing around 20% above market rate. Not only are these sellers ignoring the losses they have taken since purchase, but they’re trying to claw back all of their closing costs too it seems!
Obviously the idea that your largest asset has been devalued significantly is difficult to accept, however, people who bought in the run-up to the bubble are seemingly more willing to confront this reality than those who purchased after the peak.
The further along the seller is in the process of accepting their loss, the more likely they are to price their property to sell. Selling for whatever one can get is the essence of capitulation.
In fact, relative to sellers who purchased their home before 2002, those who bought while the bubble was expanding rapidly are comparatively underpriced. When first placed on the market, the typical house is priced at roughly 10 percent above its estimated market value, but sellers from 2006 touch as low as 6.4 percent. Looking at sellers who bought on either side of the market peak nationally reveals stark differences between these two groups. Sellers who bought in January 2006 overprice their home by only 8 percent, while those who bought in January 2009 overprice by 22 percent.
Many keystrokes have been devoted to the downward stickiness of prices. Fortunately, the bear rally buyers bought closer to the bottom than to the top, and most of them used conservative conventional financing because it was the only financing available at the time. These people will still be trapped in their homes for years, but they should be able to afford the payments.
Sellers who bought post-bubble seem to think that since their home purchase occurred after the peak of the market, and thus home values were already significantly discounted relative to the peak, the seller escaped the worst of the bubble. The problem is that “The Bubble” didn’t pop so much as steadily deflate for the better part of 5 years now, and current home values now represent what they were worth in 2003.
Said differently, assuming your market followed the national trend, unless you bought your house before 2003, you should be selling it at a loss now. The closer to 2006-2007 you bought, the bigger that loss should be.
This fact is why I felt such a sense of urgency to write for the IHB. I started in February of 2007 and tried to warn everyone that the market was on the edge of a major fall. Those who listened to me are not trapped in an underwater home right now. Those who didn't....
We know there are a million numbers to keep in your head when looking at a potential property, and that by no means does every property purchased in 2008-2010 is dramatically overpriced. However, I humbly suggest that when looking at properties, you keep one more very important, and very simple, statistic in mind: Previous Year of Purchase.
Methodology:
Zillow’s analysis was done by taking one million currently for sale homes with prior sale data since 1999 and looking at the difference between the current list price and the previous sale price. We then compared the change in the Zillow Home Value Index of that property’s zip code from when it was previously sold to now. These data were grouped by month and the median value, as well as the median difference between the two metrics, was then calculated. The resulting graph and data as well as the survey information yielded the above conclusions
The takeaway from this article is when negotiating to buy a house as we enter this bottoming phase, be wary of bear rally sellers. They will not be as motivated, so they will be less likely to lower price to make a deal happen. It's the bubble buyers who have capitulated that you should be looking for.
An Irvine bear rally buyer-seller
Portola Springs has become the forgotten village. Built at the peak, all homeowners there have properties worth less than they paid, and the Irvine Company seems in no hurry to build this community out. The seller of today's featured property paid $1,362,500 on 11/14/2008, and now he believes the property has appreciated 15%. Since this property has actually declined in value, this asking price is consistent with the Zillow study referenced above which noted sellers who bought since 2006 tend to overprice their homes by 22%.
------------------------------------------------------------------------------------------------------------------------------------------ This property is available for sale via the MLS. Please contact Shevy Akason, #01836707 949.769.1599 sales@idealhomebrokers.com
Beds: 3 Baths: 4 Sq. Ft.: 3577 $433/SF Property Type: Residential, Single Family Style: Two Level, Tuscan View: Catalina, Coastline Year Built: 2008 Community: Portola Springs County: Orange MLS#: S664038 Source: SoCalMLS On Redfin: 67 days ------------------------------------------------------------------------------ Modern Luxury and Prime Location with Panoramic Views. Irvine's prestigious Portola Springs absolute best lot. Unique 180 degree views to the coast and Catalina. Set up as 3 bedroom but can easily be made 4 or 5 bedroom. 3577 sq ft of feature-laden luxury in this 3 year old extensively upgraded home. Six figures in upgrades put into the house. Knotted wood floor, downstairs resort-like master suite with room-sized closet. Laundry rooms upstairs and down. Huge kitchen/family area, relaxing atrium, security system, cat 5 wiring with 7 outlets. Teen/Bonus room upstairs with 2 bedrooms and bathrooms. Kitchen has large range, built-in fridge and a huge island for entertaining. Energy-efficient lights. Back yard has amazing panoramic views impossible to match in the area. Built in Bar-B-Q, and elec retractable awning for hot summer days. This really is luxury with prime location. Superb Irvine School District. Community Jnr Olympic pool, 18 N'hood parks, Basketball Ct, community cntr. ------------------------------------------------------------------------------------------------------------------------------------------- Proprietary IHB commentary and analysis
Resale Home Price ...... $1,550,000 House Purchase Price … $1,362,500 House Purchase Date .... 11/14/2008
Net Gain (Loss) .......... $94,500 Percent Change .......... 6.9% Annual Appreciation … 4.6%
Cost of Home Ownership ------------------------------------------------- $1,550,000 .......... Asking Price $310,000 .......... 20% Down Conventional 4.19% ............... Mortgage Interest Rate $1,240,000 .......... 30-Year Mortgage $322,135 .......... Income Requirement
-$1354 .......... Tax Savings (% of Interest and Property Tax) -$1727 .......... Equity Hidden in Payment (Amortization) $463 .......... Lost Income to Down Payment (net of taxes) $214 .......... Maintenance and Replacement Reserves ============================================ $5,918 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $15,500 .......... Furnishing and Move In @1% $15,500 .......... Closing Costs @1% $12,400 ............ Interest Points @1% of Loan $310,000 .......... Down Payment ============================================ $353,400 .......... Total Cash Costs $90,700 ............ Emergency Cash Reserves ============================================ $444,100 .......... Total Savings Needed -------------------------------------------------------------------------------------------------------------------------------------------------------
Labor Day Weekend In Vintage Vegas will really be rocking! 3 Different venues on Maryland Parkway. 3 days of non stop music.
Huntridge Circle Park To Host The Friday and Saturday evening events of the Maryland Parkway Music Festival
We’re especially pleased that the newly re-opened HUNTRIDGE CIRCLE PARK will have it’s first major event in the last six years. Having served on the original re-design committee 10 years ago, and as a leading proponent of getting Circle Park re-opened during the last 5 years, I’m happy to see it used for a major event.
For 60 plus years, Circle Park was a meeting place for all the now Historic Neighborhoods that surround the park. Hopefully this will generate renewed interest and lots of future events and programs.
The Sam Ash Music parking lot at Karen and Maryland Parkway will host the Saturday afternoon line-up.
UNLV will host the Sunday line-up from Noon to 9 PM, at Harmon Avenue and Maryland Parkway.
Over the past thirty years, homeownership has represented a sure path to personal wealth Homeowners watched the value of their properties rise seemingly with no end in sight
Washington is recycling a dumb idea from 2008 to reduce the interest rate on underwater loan owners. It's an expensive plan that rewards imprudent borrowing.
everybody in town was nowhere to be seen so I parked near a house that was marked thirteen I went up to the door, but there was no one there
I had an eerie feeling in my very bones and soon it started to rain, and there was no way out
maybe this was a bad idea oh no maybe this was a bad idea oh no
Lemon Demon -- Bad Idea
Government intervention in financial markets is typically a bad idea. The usual result is to shift the consequences (losses) from those who deserve to bear the brunt of their mistakes -- in this case lenders and borrowers -- on to those who don't deserve to pay a price -- in this case renters and ordinary taxpayers. What compelling reason is there to force renters who did not participate in the bubble mania to pay the bills?
The people who benefit from this ripoff will justify their actions by claiming it was necessary to save the broader economy. We need stimulus, right? Perhaps we do, but creating stimulus by giving money to the least deserving isn't my idea of good public policy.
By SHAILA DEWAN and LOUISE STORY Published: August 24, 2011
The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing.
The proposed plan will only help the most indebted (least prudent) borrowers. It wil stimulate the economy, but it will be very costly.
One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.
A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere.
This would be a good thing for the economy; however, the same result happens if the house is foreclosed on and resold at a lower price to a less indebted borrower. In fact, since the debt is even lower, the economic stimulus is much greater. The government solution helps banks keep their bad debts alive.
But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.
You think? The cost of this proposal is absorbed entirely by investors in the GSEs which is mostly the US government. This is a tax subsidy to irresponsible loan owners intended to benefit banks who are even less deserving of assistance. That meets my definition of a lose-lose transaction.
Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along — the administration requested ideas for execution from the private sector earlier this month.
The REO rental program is an even worse idea. It delays clearing the market, and makes the government one of the biggest landlords in the country. Government owned housing is typically among the worst managed in the country, and the large projects they already mismanage are easier to manage than hundreds of thousands of individual homes. There is no reason to believe the government could manage this portfolio successfully.
But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year.
That $85 billion in savings they are touting will be added to the billions of losses the government has already covered since taking over the GSEs. This is not a low-cost program. That $85 billion in revenue would have helped offset losses at the GSEs. Instead it will go to benefit banks and loan owners. That isn't the way I want my tax dollars squandered.
Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.
Exactly how a refinancing plan might work is still under discussion. It is unclear, for example, whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it. Federal officials have consistently overestimated the number of households that would be helped by their various housing assistance programs.
Why would we give this benefit to delinquent mortgage squatters? I find the idea outrageous.
A working group of housing experts across several federal agencies could recommend one or both proposals, or come up with new ones. Or it might decide to do nothing.
We can only hope they decide to do nothing as they did in 2008.
Investors may suspect a plan is in the works. Fannie and Freddie mortgage bonds had been trading well above their face value because so few people were refinancing, keeping returns on the bonds high. But those bond prices dropped sharply this week.
Nobody wants to be left holding the bag.
Administration discussions about housing proposals have taken on added urgency this summer because the housing market is continuing to deteriorate. On Wednesday, the government said that prices of homes with government-backed mortgages fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009. More than one in five homeowners with mortgages owe more than their homes are worth. Some analysts are now predicting waves of foreclosures and a continuing slide in home prices.
Strategic default will be an epidemic caused by the double dip. The 2009 rally gave false hope to many debtors, but as denial turns to acceptance as prices continue to fall, loan owners will give up and walk away from their mortgages. Strategic default has become common and accepted in 2011, and now with more reason to strategically default, many more borrowers will chose to do so.
There is not much time to help the market before the 2012 election, and given Congressional resistance to other types of stimulus, housing may be the only economic fix in reach. Federal programs to assist homeowners have been regarded as ineffective so far, and they are complex.
“We are looking at trying to encourage more participation in all of the programs, including those that help with refinancing,” said Phyllis Caldwell, who oversees housing policy at the Treasury Department.
I am afraid the desire to do something prior to the elections will prompt some stupid actions by the Obama administration. Fortunately, anything requiring congressional approval will be a non-starter.
Some economists say that with housing prices and interest rates at affordable levels, only fear is keeping consumers out of the market. Frank E. Nothaft, the chief economist at Freddie Mac, said the federal action could instill confidence.
“It almost seems to me you want to have some type of announcement or policy, program or something from the federal government that provides that clear signal that we are here supporting the housing market and this is indeed a good time to really consider buying,” Mr. Nothaft said.
The chief economist of Freddie Mac has revealed himself a fool. The government does not need to send a clear signal they are supporting the housing market. Any such signal will be recognized by intellegent buyers as a red flag indicating it's a poor time to buy.
Buyers will ask questions. Why does the market need supporting? What happens when the supports are removed? We just went through this in 2010 with the tax subsidies, and when the supports were removed, prices fell again. Why would the next support efforts be any different? Mr. Nothaft has clearly not carefully considered what would happen if his proposals were implemented.
The refinancing idea has been around since at least 2008, but proponents say the recent drop in interest rates to below 4 percent may breathe new life into the plan.
“This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing,” said Christopher J. Mayer, an economist at the Columbia Business School.
Another economist has revealed himself a fool. If the program is going to save $85 billion dollars, and if the government is directly backing the entity absorbing these losses, that will directly increase the deficit. There is no free lunch.
“So I think this is low-hanging fruit.” Mr. Mayer and a colleague, Glenn Hubbard, who was chairman of the Council of Economic Advisers under President George W. Bush, proposed an early version of the plan.
The idea is appealing because it would not necessarily require Congressional action. It also would not tap any of the $45.6 billion in Troubled Asset Relief Funds that was set aside to help struggling homeowners. Only $22.9 billion of that pool has been spent or pledged so far, and fewer than 1.7 million loans have been modified under federal programs. But Andrea Risotto, a Treasury spokeswoman, said whatever was left would be used to reduce the federal deficit.
This proposal is appealing to the administration because they know it would never get through congress. Further, they get to bury the cost in the black hole of losses at the GSEs. When the GSE bailouts get larger, they will feign surprise and blame it on something other than this stupid policy which exacerbated the losses.
A mass refinancing plan would spread the benefits of the Federal Reserve’s most important economic policy response, low interest rates, to more people. As of July, an estimated $2.4 trillion in mortgages backed by Fannie and Freddie carried interest rates of 4.5 percent or higher.
The two prevailing ideas, lowering rates on mortgages and converting houses owned by government entities like Freddie and Fannie into rentals and other uses, have somewhat different pockets of support. Investment firms would like to participate in the rental program, especially if the government lends them money to participate.
If the government is going to give out cheap debt to finance private-sector firms to take over their rentals, I want in. The idea sounds like a crony capitalist handout to me.
For the most part, banks prefer the refinancing plan.
No kidding? Banks get to keep bad debts alive and delay the inevitable write downs. Of course they want that.
There are many high-ranking proponents of the refinancing plan. Joseph Tracy, a senior adviser to the chairman of the New York Federal Reserve, has circulated a presentation in support of the plan. And Richard B. Berner, who recently joined the Treasury Department as counselor to Secretary Timothy F. Geithner, argued in favor of a blanket refinancing in his previous job as chief United States economist for Morgan Stanley. The proponents say the plan carries little risk because the mortgages are already guaranteed by Fannie Mae and Freddie Mac.
Little risk? It will directly add to the losses at the GSEs. I suppose there is little risk as risk implies uncertainty about the future. This program will certainly produce large losses at the GSEs. It don't think that semantic difference is what they were trying to sell to policymakers.
They also say it makes those loans less likely to go into default and ultimately foreclosure.
But the plan has some drawbacks. Some officials fear that promoting mass refinancings today could spook investors and make borrowing more expensive, for both homeowners and the federal government, in the future.
I don't know if that concern is legitimate. It reads like the reporters failed to identify the real objections: (1) increasing the GSE losses and the federal deficit and (2) rewarding the least prudent borrowers in the borrower pool, so they came up with some objection to make their reporting seem balanced.
The government has already encouraged some refinancing through the Federal Housing Administration and through Fannie and Freddie, but participation is limited. For example, the Home Affordable Refinance Program excludes homeowners who owe more than 125 percent of the value of their house. To spur more refinancing, the government may decide to encourage Fannie and Freddie to lift such restrictions.
But government officials cautioned that Fannie and Freddie do not do the administration’s bidding, even though they are essentially owned by taxpayers.
This is nonsense. The GSEs are under direct control of the federal government. They are allowed to maintain the illusion of independence so if they have to do something unpopular, politicians can blame the GSEs and deflect blame from themselves.
Edward J. DeMarco, who oversees the companies as acting director of the Federal Housing Finance Agency, has voiced concerns about any plan that might cost the companies money, according to the two people briefed on the discussions. “F.H.F.A. remains open to all ideas that provide needed assistance to borrowers” while minimizing the cost to taxpayers, Mr. DeMarco said in a written statement.
A broader criticism of a refinancing expansion is that it would not do enough to address the two main drivers of foreclosures: homes worth less than their mortgages, and a sudden loss of income, like unemployment. American homeowners currently owe some $700 billion more than their homes are worth.
That criticism is wrong on many levels. First, the basic premise that foreclosures should be reduced is wrong. Foreclosure are key to the financial recovery. If policymakers continue to define the problem incorrectly, they will continue to come up with solutions to the wrong problem which will inevitably create other problems.
Second, the implication is that prices must increase in order to "solve" the underwater borrower problem and government policy should be focused on that result. This is also wrong. Prices should be allowed to find their natural equilibrium at affordable levels. A stable housing market requires manageable debts requiring a reasonable percentage of a borrowers income. If borrowers become over-extended loan owners who can't sustain ownership, the market is not stable.
The winner, the loser, and the bagholder
Today's featured property was purchased in 2003 and sold in 2006. The owner who had the property for two and a half years during the bubble rally was a big winner. The peak buyer who bought in 2006 was a big loser, and the bank who financed the 2006 purchase ended up the bagholder.
This property was purchased on 9/26/2003 for $350,000. It was then sold on 3/23/2006 for $588,000. Two and a half years ownership provided a $238,000 profit. The bubble was very rewarding for those who sold at the peak -- assuming they didn't plow that money into an even more expensive loser.
The owner who paid $588,000 used a $529,000 first mortgage and a $59,000 down payment. That money is now gone along with her good credit. Perhaps the more than two years of squatting provided some recoup of her loss.
Foreclosure Record Recording Date: 10/12/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 09/04/2009 Document Type: Notice of Sale
Foreclosure Record Recording Date: 05/11/2009 Document Type: Notice of Default
Let's see what lessons borrowers learned here. First, the owner for 2003 to 2006 was very rewarded, so he will be eager to do that again. Second, the borrower from 2006, although she lost her down payment, she still got more than two years of squatting which would have cost her almost as much in a rental. The consequences of that will not turn her off home ownership. Third, the bank probably sold the loan into a ABS pool, so they profited on the origination and servicing. The bank will be ready to do it again.
The only real loser was the investor. If the loan was part of an ABS pool backed by credit default swaps from AIG, then the government is absorbing that loss. If this loan was purchased by the GSEs -- and they were big ABS purchasers at the peak -- then the losses have fallen to them. The GSEs get to pass their losses on to the government, so no lessons are learned there either. The government... well, they never learn anything.
I conclude we will likely repeat this disaster based on the lessons learned.
------------------------------------------------------------------------------------------------------------------------------------------- This property is available for sale via the MLS. Please contact Shevy Akason, #01836707 949.769.1599 sales@idealhomebrokers.com
Beds: 2 Baths: 2 Sq. Ft.: 1350 $309/SF Property Type: Residential, Condominium Style: Two Level, Mediterranean Year Built: 2001 Community: Oak Creek County: Orange MLS#: S660419 Source: SoCalMLS Status: Active On Redfin: 85 days ------------------------------------------------------------------------------ PRICE REDUCED! A MUST SEE!!Beautiful 2 Bdrm Townhome Virtually All On One Level Over 2-Car Garage With Upgrades Throughout Including Beautiful Hardwood Flooring, Plantation Shutters, Fireplace, Convenient Inside Laundry, Kitchen W/ Breakfast Bar, Built-in microwave & Handsome Wood cabinetry, Spacious Living And Dining Area With Large Private Balcony, Master Suite With Large Private Balcony, Just Steps To Resort-Style Amenities. ------------------------------------------------------------------------------------------------------------------------------------------- Proprietary IHB commentary and analysis Resale Home Price ...... $416,900 House Purchase Price … $588,000 House Purchase Date .... 3/23/2006
Net Gain (Loss) .......... ($196,114) Percent Change .......... -33.4% Annual Appreciation … -6.2%
Cost of Home Ownership ------------------------------------------------- $416,900 .......... Asking Price $14,592 .......... 3.5% Down FHA Financing 4.19% ............... Mortgage Interest Rate $402,308 .......... 30-Year Mortgage $124,213 .......... Income Requirement
-$309 .......... Tax Savings (% of Interest and Property Tax) -$560 .......... Equity Hidden in Payment (Amortization) $22 .......... Lost Income to Down Payment (net of taxes) $72 .......... Maintenance and Replacement Reserves ============================================ $2,433 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $4,169 .......... Furnishing and Move In @1% $4,169 .......... Closing Costs @1% $4,023 ............ Interest Points @1% of Loan $14,592 .......... Down Payment ============================================ $26,953 .......... Total Cash Costs $37,300 ............ Emergency Cash Reserves ============================================ $64,253 .......... Total Savings Needed -------------------------------------------------------------------------------------------------------------------------------------------------------
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Government intervention in financial markets is typically a bad idea. The usual result is to shift the consequences (losses) from those who deserve to bear the brunt of their mistakes -- in this case lenders and borrowers -- on to those who don't deserve to pay a price -- in this case renters and ordinary taxpayers. What compelling reason is there to force renters who did not participate in the bubble mania to pay the bills?
That criticism is wrong on many levels. First, the basic premise that foreclosures should be reduced is wrong. Foreclosure are key to the financial recovery. If policymakers continue to define the problem incorrectly, they will continue to come up with solutions to the wrong problem which will inevitably create other problems.
