Short The Banks

The Let It Sink way is going to become The Way. It doesn’t take a lot of examination or thought to realize that walking away from an upside down house is going to become the norm. After decades of having pro-business economics and Darwinian capitalism shoved down their throats, Americans have finally figured out that it can finally benefit them somehow. In this case, if they look at their mortgages in the same way that the banks do, which is as amoral business agreements, then rather than beating themselves up about obligations and failure, they will do a little bit of math and dump the houses right in the bank’s lap. This is absolutely going to destroy many banks in the US and around the world. They have always depended on people acting out of moral obligation, while the banks themselves acted out of pure self interest. Now that the playing field is being equalized, many banks will die. Good riddance.

Today’s New York Times has an entertaining article about how the ridiculous loans that banks originated to boost their profits in the short term have made walking away all the more attractive to home owners.

“Facing Default, Some Walk Out on New Homes,” (NYTimes - John Leland – Feb 29, 2008)

Signs of Intelligent Life in America?

Not in the US Government, which plans to write every American a check to give him/her $600 of his/her own money back. What a really dumb idea.

But the public might be getting a clue. According to an LATimes/Bloomberg poll put out on February 27, 2008, only 18% of those polled plan to spend the money. The rest will put it into savings or use it to pay down debt. On an individual level, this is the right thing to do. But the government had assumed that the American public would act like a bunch of drunken sailors on shore leave (the way they’ve been acting for the last 10 years) and squander the money as quickly as possible. This shocking unprecedented common sense frugality will have the effect of making useless the entire check writing exercise, because if people don’t immediately throw the money away on junk, there won’t be any economic stimulus.

More detail from Sacramento

A short update to my previous post. I just found this blog, Flippers In Trouble, which gives house by house price declines. They are brutal. Here are a couple examples (I hope the Flippers In Trouble blogger is cool with this):

11836 Delavan Cir Rancho Cordova, CA 95742

Total Loss: $407,600 Percent Loss: 40.7% Asking Price: $594,900 Bedrooms:6 Baths: 4 Sq. feet:5600 Listing History: Down 45.9% from $1,100,000 On 2006-09-16 Down 12.4% from $679,000 On 2007-06-23 Days on market: 525 # of Times Listed: 3 Previous Sales: Sold on 2006-04-28 for $1,002,500 MLS# 70066337 Google Maps Assessed Value Property Tax Bill

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4359 Maeve Ct Rancho Cordova, CA 95742

Total Loss: $341,500 Percent Loss: 49.4% Asking Price: $350,000 Bedrooms:4 Baths: 3 Sq. feet:3052 Listing History: Down 32.7% from $520,000 On 2007-09-15 Down 29.9% from $499,000 On 2007-12-08 Up 16.7% from $300,000 On 2008-01-12 Days on market: 161 # of Times Listed: 2 Previous Sales: Sold on 2005-11-29 for $691,500 MLS# 70097634 Google Maps Assessed Value Property Tax Bill

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6030 Eagles Nest Rd Sacramento, CA 95830

Total Loss: $330,000 Percent Loss: 36.7% Asking Price: $570,000 Bedrooms:3 Baths: 3 Sq. feet:3039 Listing History: Down 42.7% from $995,000 On 2006-05-04 Down 36.6% from $899,000 On 2006-05-25 Down 5.0% from $600,000 On 2007-08-04 Days on market: 660 # of Times Listed: 3 Previous Sales: Sold on 2006-07-28 for $900,000 Sold on 2006-07-28 for $900,000 MLS# 70081192 Google Maps Assessed Value Property Tax Bill

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5749 Pomegranate Ave Sacramento, CA 95823

Total Loss: $290,100 Percent Loss: 44.6% Asking Price: $359,900 Bedrooms:2 Baths: 2 Sq. feet:1897 Listing History: Down 17.3% from $434,990 On 2007-04-22 Down 10.0% from $399,990 On 2007-09-01 Down 4.0% from $374,900 On 2007-12-01 Down 2.4% from $368,900 On 2008-01-12 Days on market: 307 # of Times Listed: 4 Previous Sales: Sold on 2006-02-23 for $650,000 MLS# 70118267 Google Maps Assessed Value Property Tax Bill

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11999 Mandolin Way Rancho Cordova, CA 95742

Total Loss: $288,000 Percent Loss: 43.2% Asking Price: $379,000 Bedrooms:3 Baths: 3 Sq. feet:2885 Listing History: Down 20.2% from $475,000 On 2007-08-04 Down 17.4% from $459,000 On 2007-09-08 Down 11.7% from $429,000 On 2007-09-29 Days on market: 203 # of Times Listed: 3 Previous Sales: Sold on 2006-03-01 for $667,000 MLS# 70117356 Google Maps Assessed Value Property Tax Bill

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7453 Telegraph Ave Orangevale, CA 95662

Total Loss: $274,128 Percent Loss: 36.1% Asking Price: $485,100 Bedrooms:3 Baths: 2 Sq. feet:1788 Listing History: Down 12.0% from $551,000 On 2007-06-23 Down 10.0% from $539,000 On 2007-08-04 Down 6.5% from $519,000 On 2007-09-29 Down 3.0% from $499,900 On 2007-11-03 Days on market: 245 # of Times Listed: 2 Previous Sales: Sold on 2007-04-27 for $759,228 MLS# 70065303 Google Maps Assessed Value Property Tax Bill

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8477 Jomar Ln Fair Oaks, CA 95628

Total Loss: $269,993 Percent Loss: 32.1% Asking Price: $570,000 Bedrooms:3 Baths: 2 Sq. feet:3200 Listing History: Down 32.3% from $841,900 On 2007-06-30 Down 31.7% from $834,900 On 2007-08-25 Down 28.3% from $794,900 On 2007-09-22 Down 25.0% from $760,000 On 2007-10-27 Down 18.6% from $700,000 On 2007-12-01 Days on market: 238 # of Times Listed: 4 Previous Sales: Sold on 2006-05-02 for $990,000 Sold on 2007-03-09 for $839,993 MLS# 80015578 Google Maps Assessed Value Property Tax Bill

What a bloodbath! Good work on this data. And there is a lot more where that came from if you visit the blog.

Sacramento Home Foreclosures Equal Home Sales

The number of homes sold in the area surrounding Sacramento was almost the same as the number of homes foreclosed upon in January 2008 according to “Foreclosure grip tightens in region” in the Feb 15^th Sacramento Bee.

The data covered Amador, El Dorado, Nevada, Placer, Sacramento, Yolo, and Yuba Counties. In that area there were 1,815 home sales closed and 1,782 homes foreclosed upon. The article goes on to say that in Sacramento County, median home prices have returned to June 2003 levels.

For combined new and existing homes the median price has tanked thusly:

-- Sacramento County’s median price was down 26.8% from January 2007, and is down 34.6% from its high in August 2005;

-- Placer County’s median price was down 14.9% from a year ago, and 31.4% from its peak in August 2005;

-- El Dorado and Nevada Counties were down 9% since January 2007;

-- Yolo County was down 21.2% from January 2007;

-- Yuba County was down 17.1% from January 2007.

I hope my readers are rapidly learning that gambling is bad. Stocks, real estate, interest rates, the US and world economies, hair length, everything moves in cycles. Never never use adjustable rate mortgages to buy a house, or you are gambling. If rates drop, you can always refinance. If rates go up, you are safe. If you can’t afford a 30 year fixed mortgage, then you can’t afford to buy a house. That’s it. There are no exceptions. If you do anything else then you are playing Russian Roulette.

Sacramento is going to be one heck of an experiment by the time this is over, because anyone who is upside down to the tune of 20% to 30% should walk away.

Walking Away Q & A

Today's Special Guest Star

Thanks to reader Russ Dogg who gave me a heads up about our guest contributor, this post writes itself. Actually the Q&A was written by Temecula, California real estate agent Kathy Neilsen in her blog Who Knew? (http://kathyneilsen.blogspot.com/). Remember I said there were two kinds of agents, those who bust their butts for you and those who get your listing and forget you exist? Well Kathy is clearly willing to bust her butt judging by the work she is biting off to help you move from your underwater house to a much cheaper version of your underwater house.

Without further ado, here is her Q & A:

Many people are concerned with the ramifications of the foreclosure. Can the foreclosed lender sue for the difference? Can he attach my new home? And what about the IRS? These questions are whirling around in everyone’s head as they consider this method so let me help you with the answers.

1. Can the original lender sue me for the difference between what my home is worth and what I owe in a foreclosure in California?

California is a non deficiency state which means if you are foreclosed on and the mortgage company sells using a trustee sale which is the most common in California, then the lender has no recourse after the sale. But you must have the original loan you bought your home with. This is called the Purchase Money Loan. You can have a first and a second but the second should not be a HELOC as this is considered a line of credit and is viewed differently than a mortgage.

2. Will the IRS tax me on the difference between what the home sells for and what is owed?

If you have lived in your home for two years or more and considered it your primary residence then you have no capital gains responsibility for amounts $250,000 and under for single people and $500,000 and under for married couples. If you have not lived in you home for two years yet, there are other alternatives and a tax professional should be consulted before you begin this process.

3. Can the old lender take any action against my new home?

The answer to this is easy. NO the old lender has no ties to your new home and therefore there are no options for him to regain any money through your new home.

4. How will my credit be affected?

You will have a bunch of late payments and a foreclosure that will take your credit from the 700s to the 400s within a few months but consider this…you have a home and a new mortgage. If you have any credit cards or car payments these regular and on time payments will help you recover your credit score much more quickly. The new mortgage will have the biggest impact on your credit though. By making your new mortgage payments on time you are raising your credit scores monthly and if you don’t plan on using new credit for a few years then your credit score should have little to no affect of your life.

Now this all may sound too good to be true so my best advice for anyone thinking along these lines is research what you want to do. Talk to a tax professional regarding the aftermath of this scenario. There are many websites dealing with the foreclosure issue and the IRS issue, so take you time and thoroughly research your situation. If you decide this is the best course of action for your situation and you live in the inland empire call me and I’ll help you find the right lender and the right home.

xxx

Now LetItSink readers should remember that this Q&A deals specifically with Foreclosures and not necessarily with Walking Away. It is helpful and informative though, because there is so much similarity and overlap.

Thanks to Kathy Neilsen, and I hope to contribute to her blog soon.

Bad News and Bad Reporting

LATimes (Feb25, 2008 from AP) – “Sales of existing homes hit a 9-year low nationally.”

This story has both bad news and bad reporting. Nationally, home sales dropped to their lowest levels since 1999, and prices declined for the 5^th month in a row according to the National Association of Realtors. Sales dropped .4% last month (it does not say if that was from the previous month or the previous year), and the median price dropped to $201,100, down 4.6% from a year ago (it does not tell us how much it fell from the previous month or from the peak).

Today’s Wall Street Journal clarifies the LATimes’ sloppy reporting for us. The WSJ tells us:

Home resales fell to a 4.89 million annual rate, a 0.4% decrease from December's revised 4.91 million annual pace, the National Association of Realtors said Monday. Originally, the NAR estimated sales at 4.89 million in December.

and

The median home price was $201,100 in January, down 4.6% from $210,900 in January 2007. The median price in December was $207,000.

That’s better, but we still don’t know how much the price has fallen from the peak or when that peak was – just because the year-over-year price has fallen 5 times doesn’t mean that the peak was 5 months ago. The month to month changes may have been falling for more than 5 months.

One more nugget from the WSJ:

Inventories of homes increased 5.5% at the end of January to 4.19 million available for sale, which represented a 10.3-month supply at the current sales pace. There was a 9.7-month supply at the end of December, revised from a previously estimated 9.6 months.

That means that in one month, the inventory of homes increased by .6 months. At this rate of growth there should be a full year’s supply of homes on the market by the end of April. Mind you, the inventory in California is over 14 months already.

Looking to a third source, we go to Reuters (“U.S. existing home sales slip and prices tumble”) only to fail in our attempt to find the peak, and have another mystery added as follows:

The national median home price fell to $201,100 from $210,900 a year earlier, the NAR said. The price of the median single-family home was $198,700 in January, the lowest since $197,700 reported in January 2005.

OK. What is the difference between a home and a single-family home? We don’t know because they don’t tell us. Let’s keep looking for the peak.

Bloomberg (U.S. Economy: Existing Home Sales Decline to Nine-Year Low) clears up some of the Reuters mystery here:

The median sales price fell 4.6 percent to $201,100 from January 2007. The median cost of a single-family home decreased 5.1 percent to $198,700, while that of condominiums and co-ops fell 1 percent to $220,400.

But still no peak.

Detroit Free Press – no peak;

Silicon Valley / San Jose Business Journal – no peak;

Chicago Sun-Times – no peak;

People Magazine - George Clooney's Oscar Date Night with Sarah Larson;

Financial Times – no peak;

Money/CNN – no peak;

New York Times – no peak;

The Irish Times – no peak;

Providence Business News (Rhode Island) – no peak;

National Association of Realtors (press release) – no peak!

Now it’s clear. The NAR didn’t spoon feed the info to the reporters so no news source in America bothered to report the full story. Am I the only person on Earth who wants to know how much prices have fallen from their high point?

After checking with 14 sources, I leave to get my son from daycare, without an answer.

Let's Start A War

This blogger HATES the politicians who are trying to spend my money and your money to financially bail out the very same people who caused the entire housing bubble – careless greedy banks. I hereby declare a Jihad against any politician who cares more their greasy career than about Fairness, Justice, and Fiscal Responsibility – both public and private.

This blog now has a dual purpose. In addition to advocating that upside-down homeowners walk away from their homes, this blog will watch the activities of the disgusting gutless weasels in America’s highest offices who are doing the moral equivalent of shaming rape victims. The tens of millions of people in this country who had the sense to patiently wait for home prices to return to reasonable levels are now being mugged, and their money is going to be given to the criminals who kept them from buying their own homes.

I would like to enlist all of the Real Estate Blogs, Bubble Blogs, and anybody who is sickened by the politicians’ willingness to allow this mess to happen, and their willingness to write checks from your account to keep bank profits and management bonuses as high as possible. Politicians care about their jobs first, and the bribes they receive second (as long as they can keep their jobs they can always find new bribes.) Let’s make it clear to President Bush, to Congress, and to the weasels currently running for President that anybody who wants to shower the banks with tax money will be exposed and tried by the public.

We need to do two things:

First, we need to make a case for why the banks deserve nothing more than bankruptcy, and in the process we need to stop the media's attempt to make every person who took out a stupid loan look like a saint.

Second, we need to deliver our message to the oily stinking bottom feeders in office.

Leave comments and/or suggestions. Email me at LetItSink@gmail.com. If our country is going to go down in flames because of gross fiscal mismanagement, let’s make sure the weasels who destroyed it pay too.

Keep Your Eye On The Card - Bad Real Estate Data

This post is a little bit rambling, but that is because the problem of “Bad Real Estate Data” is broadly based.

Here is an interesting fact. A huge portion of the data that is put out about the housing market comes from real estate agents or people who have a vested interest in the real estate market. If you pay attention, you’ll notice that many of the real estate related news items come from the National Association of Realtors (NAR), the Mortgage Brokers Association (MBA), regional groups such as the California Association of Realtors (CAR), or other such groups. Today’s L.A Times talks about rising rents; the only source of data cited in this article is a “survey of larger apartment complexes by RealFacts, a property research firm.” According to RealFacts.com, RealFacts gets paid by, “owners, developers, brokers, management companies, lenders and trade associations.” So this entire article is based on data from a company that makes its money from real estate interests. Nice reporting L.A. Times. I guess that’s why you didn’t bother to tell your readers about the real estate bubble before it popped.

Here is another interesting fact: the data they put out may not tell the whole story. For example, data on house prices put out by the NAR only covers homes sold by Realtors, which is a trademarked designation. Not all real estate agents are Realtors. And not all homes are sold by Realtors or agents of any sort. As a matter of fact, when housing bubbles pop people are less likely to use an agent or Realtor, and are more likely to sell their homes by themselves (FSBO – For Sale By Owner). Why? Because when people have little or no equity in their homes, they may be forced to write a personal check for the 6% agents’ commission rather than just have it taken out of their huge profits by the escrow agent. When people consider writing a $30,000 check to an agent on a $500,000 house, suddenly that money becomes real.

So following this logic, if people who have little or no equity are more likely to sell their own homes, and are therefore less likely to be counted by the Realtors, then the home price numbers that are put out by the Realtors are likely to be skewed toward homes that have not fallen as much in value. i.e. the Realtors’ sales prices are overly optimistic, and actual average prices are lower.

And here is another wealth of misdirection. According to the California Association of Realtors, in December 2007 the Median Days on Market was 67.2 while the Inventory of Unsold Homes stood at 14.5 months. How, you might ask, is it possible that half of all houses sell in just over 2 months, and yet there is a one year and two month backlog of homes on the market at current sales levels? The answer is market manipulation. Real estate agents will cancel a listing and then relist the same house a day or week later. When they do this, the house shows up as a new listing with zero days on the market. The reason they do this is to deceive buyers into thinking it is a new listing, and to hide the fact that the house may have been on the market for months or years. This happens all the time. Watch in your neighborhood for signs that vanish and return in a few days. Since it is much harder to hide the total number of homes listed, there is a huge discrepancy between Days on Market and Months of Inventory. Days on Market is always rosier, and is the number that real estate agents like to promote. This practice could be stopped by the Realtors’ Associations, or by state regulation, but nobody seems to care about giving buyers the truth.

In your own home research, it is hard to figure out how long a house has actually been on the market, but something you can do is to put quotes around the entire street address of the home and plug it into a Google search (for a favorite of mine, search "1082 10th Street" with the quotes). It is very common that old listings will come up that way. It still might be hard to figure out how long it was on the market, but as in the case of my example, you will learn that this house was listed for at least the following four prices:

$2,099,000

$1,975,000

$1,799,999

$1,749,000

If I was interested in buying this house, I would like to know that the price had been cut by at least $350,000, which probably wouldn’t show up in the listing if the house had been relisted several times with different agents, as this one was. Of course most of us have more modest tastes and budgets, but info like this could help you save a mint.

Now for one last source of intentional misdirection (there is an endless supply, but nobody wants to read an endless post, and I don’t want to write one.) If you pay close attention to the statistics that come out weekly, monthly, quarterly, and yearly you will be frustrated to find out that the powers that be, in order to keep you from keeping track of reality, release fundamentally different numbers at different times. For example, they might release year-over-year changes one month, then release month-over-month changes the next. They might release year-to-date once, and year-over-year next. They might release average (mean) data once, and median data next. They might release existing home numbers, followed by new home numbers, followed by total home numbers. They will report new home starts, new housing permits, days on market, market inventory, mortgage refinance applications, new purchase mortgage applications, new home sales, existing home sales, new home prices, existing home prices, affordability indices. If you mix and match different types of houses, different time periods, and different geographic areas, it is almost always possible to put out a positive, or less terrible, spin. What is frustrating is that newspapers and other news outlets don’t catch on to this. So they report apples/oranges data that you cannot track yourself.

The point of all this is to trust your eyes, trust your brain, do your own research, pay attention to the data sources and definitions, and never fully trust somebody who gets paid a commission to sell you something. And feel free to check my numbers.

Subprimes Blowing Up Early

Subprimes are terrible because when their adjustable rates adjust, the bootstrap borrowers who could barely afford the starting teaser rates really can’t afford the post- adjustment rates. At least that has been the logic thus far. Now it seems that due to our old economic nemeses Moral Hazard and The Agency Problem, these loans were so shaky to begin with that they are blowing up even before the rates reset. The requirements for borrowing were so lax that many of these borrowers are not even able to afford the teaser rates. That’s nice. I’m going to write my Congresswoman and demand that she bail out these lenders and preserve the giant bonuses for the executives that caused this disaster! Won’t somebody throw a benefit concert or start a charity? Bank-Aide would be a nice name.

CNN/Money.com reports in “Subprime loans defaulting even before resets,” (Les Christie, February 20 2008):

For instance, in both 2006 and 2007, well over 40 percent of subprime borrowers were awarded mortgages with either little or no documentation of their ability to pay. With these so-called "liar loans," borrowers did not have to show proof of either earnings or assets.

And even when borrowers did go on the record about their earning power, it didn't bode well. Both 2006 and 2007 saw a large proportion of loans with high debt-to-income ratios (DTI), which indicates the percentage of gross income required to pay debt. In 2007 subprime originations, the DTI hit 42.1 percent, up from 41.1 percent in 2006. Borrowers were simply taking on more debt that they could afford.

But surely these lenders, as sophisticated as the biggest financial institutions in the United States of America are, should have had some warning that there was trouble on the horizon?!

Read on:

By late 2006, lenders knew that the housing market was heading south. Foreclosure filings took off during the third quarter that year, up 43 percent from 12 months earlier, according to RealtyTrac, the online marketer of foreclosure properties. And home prices began to drop.

But instead of cutting back on risky loans, lenders kept lending. Why?

"Because investors continued to buy the loans," said Doug Duncan, chief economist of the Mortgage Bankers Association.

Despite their quality, subprime mortgages were as profitable as any other for lenders like Countrywide and Wells Fargo, who were able to quickly securitize the loans and sell them in the secondary market. The loans sold easily because they carried the promise of high yields.

"As long as you could sell the loan, you made the deal," Duncan said.

Lenders needed the fees that these loans generated because their finances were weakening. Their cost of borrowing money was rising, while competitive pressures were keeping mortgage interest rates low.

"By 2006 many lenders were running into red ink," said Youngblood.

So, they revved up lending to increase short-term profits. And, to outside analysts, there appeared to be nothing wrong with loan quality.

"There were very few overt changes in industry underwriting guidelines," said Youngblood. What did change, he said, was that lenders made more exceptions to their standard practices, approving people with poor work histories or insufficient proof of income.

"These exceptions generally amounted to no more than 5 percent [of subprime loans] before 2006," said Youngblood, "but they represented the majority of these loans issued in 2006 and 2007."

The reason for that shift: Lenders depended on independent mortgage brokers for much of their business, and brokers pushed them to approve subprime loans because they delivered big profits for the brokers.

"Lenders felt they had to take the loans to preserve their access [to the rest of the loan pool]," he said. They accepted some risky subprime loans so that the brokers would also send them safer prime and Alt-A loans.

Of course that's a bet that went bad. And it's likely to get worse as resets for ARMs issued in 2006 and 2007 kick in this year.

And now the LetItSink Soap Box:

Business in America is very big on fighting regulation and wanting the market to police itself when things are going well. Then they cry like little babies when things go badly. Now things are bad and this country needs to deliver a big generous dose of tough love to BofA, Countrywide, Citibank, and all the rest of them. If they vanish, good riddance. If we can brush aside the constitution when it is convenient for the president, then I think we could have some nice kangaroo court antics for the officers of these companies. Let's plan a Perp-Walk Parade to the gallows. FDIC will take care of depositors, and let the vultures take care of the rest.

Are We In A Bubble?

At this point in the market cycle, this might seem like a really stupid question. But a question that is related to this is, “Is now a good time to buy?”

It’s a big country, and each little area has some unique factors. But here is how you sort through the fog of B.S. to figure out if prices are reasonable.

First, what is the P/E ratio of housing in your area? The P/E ratio, or Price to Earnings ratio, is used to measure the price of shares in the stock market. It tells you how expensive a stock is with respect to earnings. In housing we redefine terms a bit to get this. We define Price as the price of buying a house, taking into consideration the payments on a 30 year fixed rate mortgage (the only sane mortgage to ever be involved with), taxes, and insurance. Earnings we define as the amount that we can earn by renting that house out. That’s it. Traditionally, people are willing to pay a little more to own a home than to rent a similar home because people like owning their own homes. So an average Housing P/E Ratio might be something in the range of 1.2 to 1.3. But this P/E ratio shouldn’t change much in your area. I currently rent because this ratio has been out of whack where I live (Greater Los Angeles) for quite a few years. The last time I did the math, it would have cost me 2.5 times as much to buy as to rent. Go ahead and adjust for taxes, pride of ownership, etc.; buying is not worth 2.5 times as much as renting to any sane person. The reason people were willing to bid prices up to the point where the ratios got this ridiculous is that they thought housing prices would go up by 20% per year, tuning this year’s ridiculous price into next year’s bargain. This leads us to the next factor to consider.

Second, somebody has to have money to pay for a house. What are house prices doing with respect to earnings in your area? If earnings in an area are increasing by 4% per year and home prices are increasing by more than 4% per year, at some point in the future nobody will be able to afford a home. Draw the graphs; do the math; that is a fact. People have to pay for homes. If average home prices are increasing faster than average wages, then something may be wrong. If you look at a graph of home prices vs. wages, and those graphs moved together for years or decades, and then they moved apart, you can take an educated guess that they are going to move back together again. As a matter of fact, you might get pretty close to the future price of homes in your area by figuring out where home prices would be if that relationship had not deviated from its long term pattern.

Third, are there any natural limits to population growth in your area? Strict building codes and geography can both limit growth. Limited growth potential may push prices higher, but to repeat, somebody has to pay for the houses. So if you live in a very desirable area with limits to growth, prices may increase, but wages must also increase. This is why the areas that are currently in price freefall are the ones surrounded by tons of open land. The places in the country where homes are tanking the fastest are Las Vegas, Phoenix, the Southern California Inland Empire, the inland areas of Orange County and San Diego County, and the entire California Central Valley all the way north through Stockton and Sacramento. All of these areas have steady wages, and all the land in the world to develop. There are no restrictions on growth.

One more thing to watch out for is the “My community is special because…”. I don’t know where you live, but I can tell you that it is not special. “People like to live:

-- in the Southwest”

-- in California”

-- in Southern California”

-- in Los Angeles”

-- near the beach”

-- near me because I am so fantastic…”

All of these points are true. But they were true last year, and 5 years ago, and 15 years ago, and 35 years ago. Why do any of these things justify prices that suddenly go through the roof? Did some brave new American explorer just discover California? No. Nothing has changes except the insanity of mortgage lenders. This time is not different, and your area is no more special than it has been for the last 40 years. And fyi, during the last housing crash of 1989 to 1994, homes in super spectacular areas like Beverly Hills, the Los Angeles Westside (including the beach areas), and Santa Barbara fell by as much as 50%. That is a fact. Did people suddenly decide they hated nice weather and the beach? No, a bubble popped.

That’s it. Does this sound overly simplistic? It is not. The home sales industry tries to muddy the issues, just as the car sales industry does with the car salesman’s “Four Square” logic, but renting is a substitute for buying, and somebody has to pay for homes. If these ratios are skewed toward higher prices, then it is a bad time to buy, and maybe a good time to sell.

Is Playing Musical Houses Illegal?

LetItSink is lucky to have a reader who has done some nice sleuthing. He wrote the following email to the BankRate.com blogger, and received a good response. We will be analyzing these in coming posts.

Dr. Russ writes:

Could I ask a mortgage question about the opportunities to buy at
distressed prices? Ideas rehashed from the CBS news special house of
cards about borowers thinking about walking away from severely
underwater mortgages...

I was fascinated by seeing recent talk by "calculated risk" (is it a
"bubble blog"?) of the game contemplated by people walking away from
mortgages. After walking away from a mortgage your credit is trash, and I
guess most of these unfortunate people move into apts. But I'd like to
ask- what if you move into a less expensive house that you bought
shortly before you stopped paying the mortgage on your expensive
underwater house? Could a national game of Musical houses may be next?

That's where you walk away from one overpriced house after you buy and move into a foreclosed (or REO) property nearby for a lot less $$. Then your neighbor can move into your foreclosed house doing the same thing, and so on.

When the music stops playing everyone who actually wants to live there has moved a short distance into a probably comparable house at a fraction of their former house price / payment.

In the past apparently opportunities arose to do this in 'mill towns' or 'company towns' when a major negative employment event occurred causing housing prices & demand to drop. and occur they did! Within the span of
a few years everyone shuffled into similar houses at a fraction of the
previous price.

If you have a job, plan on staying, and are not generally dependent on credit scores to finance cars, etc. then it may be worth the potentially enormous savings if you have a large non-recourse underwater mortgage. I guess you have to purchase the second home (at like 50% off) with a good down payment (cash) prior to walking from the first. I don't know how this can be pulled off (the details) but it has happened so i'm told. Like a game of musical chairs.

Anybody know if there will be opportunity for home-debtors to do this again in steeply-depressed priced markets? (040% declines) I have excellent credit and a good down payment! But my house has declined in value tremendously due to foreclosures in the neighborhood.

Thanks, Dr. Russ the rocket scientist

Excellent question Dr. Russ. Here is the response that he received from the gentleman at BankRate.com :

The problem with playing musical houses is that it's against federal
law. I'm not saying that someone playing the game will be prosecuted.
They probably won't. Hardly anyone is prosecuted for mortgage fraud
unless it's to extract cash. People playing musical houses aren't trying
to extract cash; they're just trying to get a better deal on a house.
It's still illegal.

Here's why it's illegal: If you're applying for a mortgage, and you plan
to default on your current mortgage, that is a material fact that you
are legally obligated to disclose when you apply. Withholding a material
fact is deception, and it's just as illegal as lying on the loan
application.

If an applicant *did* disclose the fact that he or she planned to
default on the current mortgage, the application would be denied. So no
one would be able to successfully argue that the deception made no
difference.

Holden Lewis
Reporter
Bankrate.com
(561) 630-2400 x11338
11760 U.S. Highway 1
North Palm Beach, FL 33408
Read Mortgage Matters, the blog about mortgages and real estate:
http://www.bankrate.com/mortgagematters/

We will be looking into the details of this in coming posts. But even if all of this is true and is not up for legal interpretation (and in my opinion, everything is up for legal interpretaion) then that still leaves the huge opportunity to walk away and rent for a couple years at a fraction of what you are paying now. And then there are the rent to own possibilities which are everywhere now.

Stay tuned and we will cover all of these bases.

And thanks to Dr. Russ for his excellent contribution. I look forward to hearing more from him.

Agents Are Not Your Friends

Dear Agents, let me go ahead and start your angry emails for you:

-- “At xyz, our agents are held to the highest …blah blah blah…

-- “How dare you imply that…blah blah blah…

-- “I am watching you right now…I am going to kill you…blah blah blah…

I have worked with good agents and bad agents. The good ones work their butts off, stay in touch, and really earn their commission. The bad ones all seem to be bad in exactly the same way. They take your listing and they forget you exist. They don’t lift a finger, or they do as little as possible. I have listed properties with agents from whom I heard nothing for months. I have seen listings on the internet for million dollar homes that had no pictures and almost no description. What are these fools getting paid for? They get $25,000 to do 4 hours of paperwork? If you pay attention, you will notice these terrible listings all the time.

FYI, to avoid this “Listing Agent Syndrome” (I just coined that phrase – I am on a roll!), the only strategies that I have come up with are to get a reference from someone you trust, and go for a short listing contract. Agents will always want to put you into a contract for at least 6 months. But every single item on the contract is negotiable. Only give the agent a 3 month contract, and tell the agent that as long as he keeps you updated on his efforts, and on what is happening in your local market, you will of course renew if it hasn’t sold. If the agent says that he/she can’t do that for any reason, the agent is a crook and you should find another. They’ll cry about their expenses and time, but that is what they are getting paid for.

Interesting. And now I have come across another reason to forego an agent and go FSBO (For Sale By Owner).

In their study, “The Value of Information in Real Estate Transactions,” Steven D. Levitt (University of Chicago and American Bar Foundation, author of the bestselling book Freakonomics) and Chad Syverson (University of Chicago and NBER), looked into the behavior of real estate agents to try to figure out whether they were doing the best jobs they could for the clients who were paying them. Their conclusion:

Our favored interpretation of the data is that the combination of real estate agents’ information advantage and the form of the commission received combine to create distortions from first best. Homeowners are induced by their agents to sell too quickly and at a price that is too low.

The study is 34 pages long, but in a nut shell, they compared what happened when an agent sold a home for a client against what happened when an agent sold his own home. They found that:

agents sell their own homes for 3.7 percent (roughly $7,600) more than they sell their client’s homes, and leave their (own) houses on the market roughly 10 days (10 percent) longer.

So if we do a little math, hiring an agent will cost you a 6% fee, and another 3.7% because the agent cares more about moving your house quickly than about squeezing the most out of the deal for you. That is a hair less than 10%. On a $500,000 home that means your agent costs you almost $50,000, and on a $1,000,000 home, that is $100,000. If you don’t have much equity in your home, that $50,000 might come in handy for something else.

Up to 50% off on DR Horton Homes in the "Arb-Hood"

Prices Offered Up to 50% Off During D.R. Horton's 'UnAuction' Sale - February 16 and 23 Only!

That's right ladies and gentlemen. Follow the above link to the DR Horton press release.

These homes are in Kern, Ventura, Riverside, San Bernardino and Imperial counties in Southern California. The communities include:

• Bakersfield
• Channel Island Harbor
• Adelanto
• Victorville
• Chino
• Temecula
• Indio
• Desert Hot Springs
• Palm Desert

The sale includes homes in 23 neighborhoods. If you were planning to buy a similar home to the one you live in now, and walk away from your current home, plan faster. But if you can't cover all the bases that fast, don't despair. There will be more sales.

So this means that, in at least 23 neighborhoods spanning all of Southern California, prices will have fallen 50% as soon as the first house is sold at that discount. It also means that if you live in or near any of these communities, your house is probably worth 1/2 of what it was very recently.

I hate the term “jingle mail”. It is horrible. It is a noun that is forced to be a verb. But I do know that any term I coin cannot be any worse. So secure in that knowledge, I hereby coin the term “Arb-hood”, which is short for Arbitrage Neighborhood. An arbitrage opportunity is one where a person can buy an asset and immediately sell it for more than he paid. In this case, an Arb-hood is a neighborhood where people can buy new homes for much less than they owe on their current homes, and can therefore walk away for a profit. This is made possible by plummeting prices and developer desperation (PPDD - I'm coining acronyms too.)

If you live in an Arb-hood, you should look into buying a new home, and walking away from your old one. Have a lawyer go over your existing loan docs to make sure the lender cannot come after you for anything but the house. If everything looks good, and you make the move, you should save a ton on your mortgage.

30 Days Hath Your Lender

The country’s biggest lenders have come up with a plan to give certain borrowers who are in trouble an extra 30 days to work things out.

The Arizona Republic ("Ariz. banks join ‘Lifeline’ to aid homeowners" – Feb13, 2008) reports that:

(Six large home-loan lenders have) joined a White House effort to add breathing room for all types of homeowners facing foreclosure, not just people with risky subprime loans.

The initiative, dubbed Project Lifeline, will offer a 30-day foreclosure reprieve while the lenders intensify their efforts to contact troubled borrowers in hopes of working out payment solutions.

Several hundred thousand borrowers could be affected nationally.

Bank of America, Chase, Citigroup, Countrywide Financial, Washington Mutual and Wells Fargo will reach out to homeowners 90 days or more overdue on payments, provided they haven't filed for bankruptcy, don't have a foreclosure date within the next 30 days, haven't vacated the property and haven't used their loans to fund a vacation home or investment property.

The article goes on to say:

Some Arizona observers question how effective the latest initiative will be.

"I still see pretty significant pressure into summer" on bankruptcies and foreclosures, said Chris Bayley, a partner at Phoenix law firm Snell & Wilmer, citing the slowing economy and slumping real-estate market as overriding factors.

"These programs are like window dressings or Band-Aids that might not stem the flow."

Steve Williams, a principal at Scottsdale bank management-consultant firm Cornerstone Advisors, also labeled the plan as window dressing.

"The fundamental issue is that many Americans have bought too much house and too much car," he said. "Their home values, mortgage rates and personal cash flow are so out of whack that 30 days won't make a big difference."

I have to agree with those who question the point of this. If this 30 days helps you, then fantastic, you’re off the hook. But this seems to have been written by the administrations’ speech writers who produce lots of nice words without an ounce of logic behind them. For example, this plan will allegedly allow lenders to have more time to contact borrowers before they are forced to foreclose? Yet, in every case that I have read about, it is the borrowers who have had no luck contacting or negotiating with lenders, not the other way around. It is beyond absurd to think that the bank, who holds the mortgage on a borrower’s house, and therefore must have his address, is not able to figure out how to get in touch with him. Furthermore, isn’t it part of the foreclosure process that the lender notify the borrower of the situation?

As with the failed Big Bank initiative of a couple months ago to shore up the collapsing subprime market by essentially keeping bad mortgaged backed securities off of the market to fraudulently hide their real market value, this initiative seems like lenders trying to help themselves while taking credit for going the extra mile.

Please email me at LetItSink@gmail.com if you know of homeowners who have been helped by this program. I would like to follow their stories and see how it works. Somehow I don’t expect to be flooded with letters.

Housing Crash Taking a Toll

The daughter of Bruce Toll, the Vice Chairman and co-founder of Toll Brothers, might be a person who knows what is going on in the housing market. So it is interesting to see that she is bailing on the purchase of a condo from Toll Brothers.

Reuter, In a Feb11, 2008 article entitled, “Toll relative walks away from new condo – filing,” says:

Luxury builder Toll Brothers Inc, hurt as many buyers to try to get out of contracts for new homes amid falling prices, says a member of its founding family is trying to walk away from an agreement to buy a new condominium.

The daughter of Vice Chairman and co-founder Bruce Toll informed the company last month that she and her husband "did not intend to make settlement" on a $2.47 million home they had previously agreed to purchase, the company said in a regulatory filing.

Toll Brothers went on to say that it intends to pursue its rights under the agreement of sale with Toll's daughter, Wendy Topkis.

A company spokesman was not immediately available for comment on the filing, which was made public on Friday.

The company, hard hit by the U.S. real estate slump, said last week that it sees no signs of improvement in the depressed housing market. It estimated a 22 percent drop in home-building revenue for its fiscal first quarter, ended Jan. 31.

You don’t often get “insider information” like this. If the other facts haven’t convinced you of the direction of the market, this might.

The Mortgage Forgiveness Debt Relief Act of 2007

In a previous post, I mentioned the change in the law that allows people to have their debt reduced without that reduction being considered a taxable gain. Here is a link to the IRS website with details:

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Here are some details:

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

The amount excluded reduces the taxpayer’s cost basis in the home.

This entry on the IRS website is only from Feb04, 2008. A Q&A fleshes out some of the details, but with the caveat that the examples given predate the new law.

My favorite part is that it applies for up to $2 million in forgiven debt. If somebody is having $2 million forgiven, how big was the total mortgage and what did the house cost? Even if a home fell by 20% in value, and the buyer got a zero down mortgage, then to have $2 million forgiven, the house cost $10 million (and if the home fell by only 10%, then it would have to cost $20 million, which will buy you something pretty nice, even in LA.) It seems that somebody dropping $10 million or $20 million on a house could have the documents perused by an attorney and an accountant to make sure it's a good deal. But I guess Congress needs to think about it's real constituency, the filthy rich, when it makes these laws.

I will try to stay on top of this for you.

Mortgage Rates are Down, But Most Don’t Qualify Anymore

In this Feb08, 2008, CNNMoney tells us “Refinancing: Only for the privileged few.”

The good news: mortgage rates are down. The bad news: it's much harder to qualify for a refinanced loan these days.

What's more, the borrowers who need to refinance the most - because their adjustable rate mortgages (ARMs) are resetting to higher interest rates - are among those having the most trouble winning approvals.

"I'm turning away about 60% to 75% of the clients who come to me for a refi," said Bob Moulton, president of Americana Mortgage Group on Long Island, N.Y. "Some don't have enough equity and others have bad credit scores."

During the boom years, lenders approved most anyone with a pulse. Not so today. Mortgage brokers recognize this and are now being very selective about the clients whose applications they choose to submit to the likes of Wells Fargo or Bank of America.

If an applicant has poor credit, or a home whose value is rapidly deteriorating, they're just not going to bother.

The article goes on to say:

Consider a homeowner who bought in Miami a year ago with 20% down. Home prices have fallen 15% there in the past year, wiping out three-quarters of the equity. Lenders, who want collateral that's worth more than the value of the loan, are wary about having so little cushion. If they have to repossess and resell the house, they're on the hook for a big loss.

"No lender would take that deal," said Marc Savitt, president of the National Association of Mortgage Brokers. "It's a lot different from two years ago."

The bar has also been raised for credit scores when it comes to refinancing, according to Grabel. And sometimes, it's not a matter of whether someone can get refinancing but at what price.

"Those with high credit scores are getting very good rates, but the lenders have heightened the requirements to qualify," said Grabel. Instead of a score of 680 for the best rate, a borrower might need 700 now.

So as home prices fall, the amount of equity, or collateral, that people have in their homes falls, which makes it harder to refinance. And much like Paris Hilton, the lenders have gone from acting like drunken whores to acting like angels. As such, they will no longer lend to the people they lent to before. Having hooked these people on bad loans, the banks have gone through rehab and left the junkie/borrowers out to dry. These borrowers should now decide whether it’s time for them to go cold turkey, and walk away from their bottomless, un-refinancable loans.

It Might Be Better For Your Credit Score To Walk Away

In their Feb 06, 2008 article “Troubled homeowners: Can’t pay? Just walk away”, CNN/Money outlines the growing phenomenon of what they call “jingle mail,” i.e. putting your keys in an envelope and mailing them back to the bank. This is a horrible name. We need to come up with a better one now before this one takes off.

But I digress. Here is some of what the article said:

Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many buyers put little or no money down, so they don't have much invested in them. That leaves them with little incentive to keep making payments when a home's market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores. For some, that's better than throwing away money they'll never recover by selling their home.

And while a mortgage default can savage a person's credit record, trying to pay off a loan they can't afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac.

Credit scores are hurt much more by missing multiple payments - on credit cards, cars and so on - than by a single foreclosure.

"The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy," said Watts.

It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again, he said. After abandoning a mortgage, a person may be able to buy a new house in two years or less.

And now skipping out on a home is easier, thanks to the Mortgage Debt Relief Act of 2007. Previously, if a bank sold a foreclosed home for less than the mortgage balance and it forgave the difference, the borrower had to pay tax on that difference as if it were income. Now the IRS will ignore it.

This article addresses two of the big issues in walking away. Credit Rating and the tax hit on the forgiven amount. As we see now, it might be better for your credit rating to walk away. And the tax issue is gone thanks to a soft brained congress trying to pass populist legislation and only succeeding in making the overall problem worse.

Wachovia Helps Thieves Steal Your Money for a "Fee"

Maybe your money was at a different bank...

Here’s one that’s going to make you feel like going the extra mile for your bank.

Feb 6, 2008 NY Times, Papers Show Wachovia Knew of Thefts.

A pending class action suit and notes from insiders would seem to indicate that Wachovia bank knowingly allowed con artists to steal as much as $400 million from people with bank accounts at Wachovia. Why would they do this? Because if an account holder complained to the bank about being ripped off, the bank would then “fine” (or take a cut of the action from) the thieves. The bank earned millions of dollars from these fines.

So essentially the criminal bank was charging the other criminals a fee to operate within it’s accounts. Tony Soprano would be proud.

This is Enron quality stuff here! So tighten your belt and keep making payments on your house even though it is worth much less than your mortgage and even though you could give it back to Wachovia (or Countrywide or whoever). Keep cutting back so you can send in more money to keep the bank’s profits up. They deserve it, don’t you think? And watch your bank account. Your bank may get sick of the monthly trickle and have Paulie empty it out all at once.

No Good News for Feb 05, 2008

Is this the Russian version?

Today the Dow dropped 370 points. Here are the details.

Dow Plunges on Survey of Business – New York Times
“This is an indication for the first time that the bulk of the economy is contracting,” said Joshua Shapiro, chief United States economist at MFR. “It is sending people into recession panic mode here.”

Las Vegas Tops Foreclosure List – CNNMoney
Unlike depressed Midwestern cities, the 89131 (Las Vegas zip code) is prosperous, with strong employment and income levels well that are above average for the state. The foreclosure problems in Las Vegas stem from the unaffordable terms of the mortgages themselves, rather than from local economic conditions.

Here is a list of the top 100 zip codes for foreclosures.

Recession is here – economists – CNNMoney
Economists took the latest report as a sign that problems are no longer restricted to just housing and manufacturing. "We're definitely seeing conditions spread to more parts of the economy. The big drop in business activity, that's a huge red flag," said Gus Faucher, director of macroeconomics for Moody's Economy.com. Faucher said his firm now believes the economy is in a recession but he believes it's possible that growth will resume in the second half of this year.

Down payments just got bigger

I AM AN AMERICAN - BIGGER IS BETTER!!!

If you like Escalades, McMansions, SuperSized fries, and think bigger is better, then you are in luck. Down payments just got bigger! In this February 3, 2008 LA Times article we learn that banks have grown weary of finding themselves losing their shirts on loans that are larger than the homes that secure them. Countrywide is increasing downpayments from 5% to 10% of the purchase price in many areas.

Mortgage and real estate brokers whine that it's just not fair. Apparently they still think mortgages with really tiny down payments are a really good idea. Hey brokers, why don't you put your money where your mouth is. If it's a good time to buy, and you know better than the lenders that tiny down payments are a good idea, then why don't you counter sign for them? That would be Win-Win, wouldn't it? Unless you're lying, and you think house prices are going to fall more, and you just want to stuff your wallets at everyone else's expense.