Tuesday, July 12, 2011

Irvine Housing Blog

Irvine Housing Blog

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Distressed inventory to weigh on house prices for at least three more years

Posted: 12 Jul 2011 03:29 AM PDT

A data analyst for the National Association of realtors is projecting it will take at least three years to liquidate the distressed inventory. In reality, it will take much longer.

Irvine Home Address ... 15 CRIVELLI AISLE Irvine, CA 92606
Resale Home Price ......  $449,900


Dreams are my reality
the only kind of real fantasy
illusions are a common thing
I try to live in dreams
it seems as if it's meant to be.

Richard Sanderson -- Reality

On very rare occasions, representatives of realtor associations provide an accurate view of the housing market. Today we have and interview with the OC Register and Jed Smith, the managing director of quantitative research for the National Association of realtors. i disagree with many of his specific points, but he is painting a realistically grim view of the next few years.

3 years needed to clear ‘distressed’ homes

July 9th, 2011, 1:00 am -- Jeff Collins

Jed Smith is managing director of quantitative research for the National Association of Realtors. He says that short sales and bank-owned homes will account for around 35% of U.S. housing deals for the next three years. We asked him how he sees the outlook for housing …

Us: What will the industry’s mood be in November when Realtors gather for NAR’s annual convention in Anaheim?

Jed: Realistic optimism in terms of sales and price expectations may be the important issues. Most sources appear to view the market at or near its bottom with modest recovery in a number of regions. People recognize that the economic and job recoveries are slow, but there is a general belief that we have already seen the worst of the bad news.

IHB: Most sources believe the housing market is not at the bottom, and more bad news is on the way.

There is also recognition, however, that we really can’t predict anything

IHB: Yes, there is widespread recognition that realtors cannot predict anything. Mostly, they will call the bottom at every opportunity and blather on about how now is a good time to buy.

— given that governmental, international, and consumer trends and actions have become increasingly unpredictable with the prolonged Great Recession. Unknown unknowns, frequently mentioned as Black Swans, are increasingly an important factor. Therefore, to the degree that we can foresee and predict, I think the outlook will be one of cautious optimism.

IHB: Cautious optimism indeed.

Us: The housing recovery is on anything but warp speed. How much longer will this downturn go on?

Jed: Sales have fluctuated, ranging on an overall yearly basis between 4.9 million and 5.2 million since 2008. As of May, home sales were in the 4.8 million range annualized, and we expect approximately 5.1 million existing home sales for 2011 and 5.3 million in 2012 as the economy continues to recover and create additional jobs.

Jobs are the key driver of sales, and the disappointing job market over the last few years appears to have impacted the existing home sales market. We now appear to be in a recovery mode.

IHB: Sales have not fluctuated much. Sales have crashed hard, and remain near historic lows. We do not appear to be in a recovery mode. We are in the second leg down of a double dip in home prices.

It looks like home sales will be stronger in the second half of the year,

IHB: To whom does it look like sales will be stronger? Why would sales increase during a time of year when sales and prices typically decline?

but healthy job creation is necessary to ensure a solid recovery in both housing and the overall economy. The job market has sputtered recently, and because variations in local job creation impact housing demand, the housing markets will recover unevenly around the country.

Prices have been a major disappointment in recent years.

IHB: For those of us waiting for the bubble to deflate so we can buy a house at a reasonable valuation, prices drops have been a major satisfaction.

Part of the price weakness in existing home sales has been to the overall deleveraging in the economy,

IHB: Yes, lenders made many Americans insolvent by giving them more debt than they could possibly service. The deleveraging has not finished as lenders still have billions of dollars in bad loans to write off.

and part of the price situation has been driven by the significant number of distressed home sales (foreclosures and short sales) that have driven the markets. Approximately 35% of existing home sales are distressed, and while the number will fluctuate from month to month, we expect to continue to have a distressed property situation for the next three years.

IHB: If the NAr is admitting it will take three years, it's safe to assume it will take five to seven.

We expect price stabilization in the forthcoming years, with modest increases in areas where jobs are created and distressed inventories decrease. Absorption of inventory is the key to price improvement, and we expect this to occur in forthcoming months.

IHB: Eventually prices will stabilize. In a few years, we may see some modest price increases in the areas where the recovery is the strongest. Absorption of distressed inventory is the key, but the total volume is also very important. Since the NAr is unwilling or unable to give us accurate measures of either shadow inventory or the rate of absorption, they have no clue how long the process will take.

Us: What’s holding the housing market back?

Jed: As a result of the Great Recession we have issues of job creation and loan availability.

IHB: Job creation will not happen quickly, and we still have 38% unemployment in the construction trades locally. Loan availability will not improve until those potential borrowers who have gone through short sale or foreclosure are offered loans. It will be quite a while.

We think that there is a significant level of pent-up demand given the overall growth in the number of households in the past 10 years, but pent-up demand can only be realized if there is a meaningful gain in jobs.

IHB: Pent up demand is the bullshit realtors smell when they know they have nothing else.

In addition, low interest rates are not particularly beneficial if financial institutions have unrealistically high credit standards due to excessive risk aversion.

IHB: That statement is true, but those are not the conditions we are facing. Credit standards are still too low. We are arguing over the definition of a qualified residential mortgage because lenders want to shift risk to the US Taxpayer. Lenders may finally reach a point of excessive risk aversion, but since we are exiting a period where lenders had no risk aversion whatsoever, any tightening of credit standards feels excessive. Lenders will continue to tighten standards until they stop losing money.

Finally, some additional recovery of consumer confidence, which will probably occur as people realize that the Great Recession is over, will help to facilitate the housing markets. We are already seeing modest improvements on a local basis in home sales and prices, and hopefully the recovery will gather steam.

IHB: What local market is he talking about? Orange County home sales just hit a three-year low.

Us: Can the market get back on its feet with so many underwater and defaulting homes out there?

Jed: The existing home sales market is absorbing distressed properties as they come onto the market. Unfortunately, distressed properties tend to sell at discounts of 20% to current market prices.

IHB: Distressed sales reset market pricing. Delusional sellers with WTF asking prices don't count. Further, if sales were robust and demand were strong, distressed properties would not need to be discounted in order to sell. In a weak demand market, all sales will be below recent comps. Lowering price is the only way to generate sufficient buyer interest to sell property.

By implication, Jed is leading us to believe that prices will rebound 20% when distressed sales stop. That isn't necessarily the case. If demand is low, any seller would be required to lower price to sell. The must-sell inventory of distressed sellers is leading prices lower now, but anyone who wants to sell is facing the same dynamic of low demand.

The total level of foreclosures and short sales has been in the neighborhood of 35% of overall existing home sales for the past several years, sometimes more, sometimes less on a monthly basis.
The outlook for the immediate future is for moderately rising sales and increasing price stability, with modestly rising prices in areas with good job recovery and loan availability. We would like to be able to forecast a booming recovery; however, the realistic outlook is for modest improvements on a continuing basis.

IHB: The realistic outlook is is for stagnant sales and moderately falling prices, perhaps steeply falling this fall and winter. Perhaps next year we will see some stabilization in pricing and sales, but not in 2011.

Us: Most say the market is hampered by tight lending standards. Has the pendulum has swung too far?

Jed: Interest rates continue to be near historic lows, but credit availability is limited. Many consumers are simply unable to obtain loans — even with substantial down payments in hand and credit scores in the 800 range.

IHB: Complete and utter bullshit. Lenders are competing with each other to get loans from borrowers with large down payments and high FICO scores. There aren't very many of those people. The borrowers who can't obtain credit are those with little or no money to put down and low FICO scores. To suggest otherwise is to perpetuate a self-serving lie endorsed by the NAr.

We get approximately 1,000 comments every month in response to our Realtors Confidence Index survey, and our members cite numerous examples of responsible potential buyers being unable to get mortgages.

IHB: Yes, unqualified borrowers are not getting loans. They shouldn't. Giving unqualified borrowers loans is one of the causes of the epidemic of foreclosures after the collapse of the housing bubble.

realtors from the bubble era are not accustomed to lenders turning down anyone, so they whine and complain when their unsuitable borrower cannot get a loan.

Financial institutions appear to have become unduly risk averse. This has a major negative impact on the housing markets.

The pendulum has indeed swung too far. Dr. Bernanke has recently noted that credit availability is an issue — and he should know, being chairman of the Federal Reserve Board. Our view is that if banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we’d get a much faster recovery in the housing sector.

The pendulum has not swung back too far. Banks are returning to normal sound underwriting standards. That's why credit availability is an "issue." Credit availability is supposed to be an issue. It is supposed to be a barrier to entering the housing market. Borrowers are supposed to demonstrate they can repay the loan to sustain home ownership. We abandoned those standards during the bubble, and now the market must adjust to the sane lending standards of 20 years ago.

Us: Any final thoughts?

Jed: There is a tendency to focus on prices and housing as an investment when discussing the existing home sales markets. However, people buy houses because of lifestyle preferences — the desire to own a home for personal and family reasons.

There is a tendency of realtors to pimp the market by promising delusional returns for those who buy homes. They should stop. People do want to own for lifestyle preferences, but that doesn't mean they should be forced to pay a huge premium over renting to do it.

In addition, NAR surveys indicate that homeowners currently own a home, on average, for approximately 8 years; monthly or even yearly fluctuations in value are actually of no significance to most homeowners.

IHB: LOL! "yearly fluctuations in value are actually of no significance to most homeowners?" I can't believe he actually said that. Everyone in California lived for the yearly fluctuation in home values so they could go back to the housing ATM for more money. Changes in home values are an obsession with most California homeowners.

Although there are clearly financial benefits to owning a home, the clear benefit of homeownership is the actual enjoyment of the home as a place to establish roots, build a future, and live your life — not the maximization of a financial portfolio strategy.

On that we can all agree.

Double the mortgage, double the fun

The market peaked more than five years ago, and lending standards have been much tighter since then. However, there is still no shortage of HELOC abusers to profile on a daily basis. The owners of today's featured property more than doubled their mortgage in the twelve years they owned this house. Whatever equity they had was spent.

  • The owner's paid $271,000 on 10/15/199. They used a $257,450 first mortgage and a $13,550 down payment.
  • On 1/10/2001 they refinanced with a $257,600 first mortgage and a $48,300 stand-alone second. They obtained their first $35,000 in HELOC booty.
  • On 5/22/2003 they refinanced with a $316,500 first mortgage.
  • On 1/13/2006 they obtained a $100,000 HELOC.
  • On 4/15/2008 they managed to get the Credit Union of Socal to give them a $500,000 first mortgage and a $25,000 HELOC. What was the credit union thinking?
  • Total property debt is $525,000.
  • Total mortgage equity withdrawal is $267,550.

Perhaps doubling the mortgage wasn't a good idea. I think adding to a mortgage is a bad idea. Doubling it... well, I still can't believe how common it was.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  15 CRIVELLI AISLE Irvine, CA 92606
Resale House Price ......  $449,900

Beds:  3
Baths:  2
Sq. Ft.:  1676
Property Type: Residential, Condominium
Style: 3+ Levels, Other
View: Rocks
Year Built:  1990
Community:  Westpark
County:  Orange
MLS#:  S635431
Source:  SoCalMLS
Status:  Active
The best Townhome living has to offer! Private location, with Tons of natural light, formal living room, dining room and living room. Tile Entry, 10 Ft+ High Ceilings W/ rounded Corners, Winding Staircase, Miniblinds & Valences, Mirrored Wardrobes, Closet Organizers. 2 car garage with a huge storage area under the home, plus the carports in the area are reserved for owners but are not assigned. Walking distance to the movie theather, shops, target etc. 
Proprietary IHB commentary and analysis

theather? Since photons have no mass, I don't know how one gets "Tons of natural light."

Resale Home Price ......  $449,900
House Purchase Price … $271,000
House Purchase Date .... 10/15/1999

Net Gain (Loss) .......... $151,906
Percent Change .......... 56.1%
Annual Appreciation … 4.3%

Cost of Home Ownership
$449,900 .......... Asking Price
$15,747 .......... 3.5% Down FHA Financing
4.59% ............... Mortgage Interest Rate
$434,154 .......... 30-Year Mortgage
$95,274 .......... Income Requirement 

$2,223 .......... Monthly Mortgage Payment 
$390 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$94 .......... Homeowners Insurance (@ 0.25%)
$499 .......... Private Mortgage Insurance
$340 .......... Homeowners Association Fees
$3,546 .......... Monthly Cash Outlays

-$359 .......... Tax Savings (% of Interest and Property Tax)
-$562 .......... Equity Hidden in Payment (Amortization)
$27 .......... Lost Income to Down Payment (net of taxes)
$76 .......... Maintenance and Replacement Reserves
$2,728 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$4,499 .......... Furnishing and Move In @1%
$4,499 .......... Closing Costs @1%
$4,342 ............ Interest Points @1% of Loan
$15,747 .......... Down Payment
$29,086 .......... Total Cash Costs
$41,800 ............ Emergency Cash Reserves
$70,886 .......... Total Savings Needed

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