In the short term, prices of any asset are determined by fluctuations in the balance between supply and demand. The manipulation of the housing market by lenders is taking advantage of this phenomenon by restricting supply and forcing the demand from buyers to be concentrated on fewer properties thus bidding up their value. This can only continue as long as supply can be controlled and restricted. In a normal market supply is controlled by millions of individual sellers operating without a collective will. In our current market, millions of sellers are unable or unwilling to sell due to circumstances related to their mortgages. For various reasons, loanowners are in no hurry to list and sell their houses. This leaves the banks in charge, and they are intent on restricting inventory to drive up prices.

The short-term uptick in demand is being driven by investors. We know from the oft-repeated chart on new mortgage originations that owner occupants are not big participants in the current housing rally. Some of the investors are speculators, but most of them are hedge funds buying for cashflow. Investors focused on cash returns will only pay so much, and when prices push beyond what they are willing to pay, they stop buying. Corelogic anticipates this threshold price will be reached in many markets in 2013 where hedge funds are currently active.

In the long term, house prices are driven by wage growth and household formation. As I pointed out last week in Can a housing market rally by sustained with fewer homeowners?, wage growth and household formation are very weak. The banks are praying that their short-term manipulations can carry them through until the long-term factors favor continued price increases. It may or may not work out that way.

Housing Bubble Unlikely, Home Price Appreciation Should Slow – CoreLogic

by Jann Swanson — May 16 2013, 11:10AM

CoreLogic said today that home prices are projected to increase 3.9 percent on an annualized basis between the fourth quarter of 2012 and the same quarter in 2017. However, a new housing bubble is not likely as market dynamics shift for both supply and demand. Prices rose 7.3 percent in 2012.

The CoreLogic Case-Shiller Index report notes that the increase in 2012 was the strongest rate of appreciation in nearly seven years and projected that prices will continue to improve in 2013 and beyond in the more than 380 U.S. markets it tracks. The company’s current analysis says that, “Cities at epicenter of housing bubble/crash are clocking highest rate of appreciation, largely driven by investor demand.”

“Home prices were up in seven out of every 10 metro areas in 2012. By comparison, in 2011 prices appreciated in fewer than one-in-five markets,” said Dr. David Stiff, chief economist for CoreLogic Case-Shiller. “We expect strong buying activity this spring will lead to stabilization of home prices in most lagging markets, resulting in rising home prices in nearly every metro area by the end of 2013.”

I think the markets of the Northeast where foreclosure processing is increasing will see continued weakness. The bubble was not allowed to deflate through foreclosure there, and as a result, millions of squatters are getting free housing until lenders get around to booting them out.

Some of the cities that were hit the hardest by the housing crash and resulting foreclosure epidemic are also recovering the fastest. Phoenix saw a year over year price gain of 24 percent, Miami 14 percent, and Las Vegas 13 percent. Dr. Stiff observed that demand in Phoenix is being driven primarily by investors. As prices rise, the profitability of investment properties will erode, dragging down investor demand.

Some areas which have lagged in their recovery saw price declines slow. These included Long Island, (-4 percent), Virginia Beach, Virginia (-2 percent), and Philadelphia (-1 percent).

CoreLogic said that while the data point to continuing price appreciation, the overall national rate of home price increases is projected to decelerate in 2013 from 2012 levels. The CoreLogic Case-Shiller Indexes project a 2.5 percent home price increase in 2013, as the market dynamic shifts again in bubble/crash metro areas. While homes in these markets are still significantly undervalued, the strong investor demand for foreclosed properties, record levels of housing affordability and other demand factors that have driven recent double-digit price gains are unlikely to persist throughout the year.

Anecdotal reports of investor demand will persist much longer than the actual demand from cashflow investors is really there. Once the market starts to have momentum, the foolish amateurs enter the game, and coffee shop discussions of these blowhards will drown out everything else. As cashflow investor demand weakens, owner occupants will need to step up to replace this lost demand. With prices 20% to 30% higher in some of these markets, and with continuing weakness in the economy, this new demand may not materialize, and price appreciation may slow significantly.

Price appreciation is also expected to contribute to an increased supply of available homes as owners who have been locked into their current homes due to negative equity or were just unwilling to sell at existing prices begin to list their homes for sale. This will tend to curtail the portion of price increases that have been fed by unmet demand.

The appearance of this new supply is a wildcard. It may or may not appear. As I pointed out last weak, just getting back above water is not enough to prompt owners to list. Until the cost of ownership for these borrowers goes up, which it will when the temporary conditions of their loan modifications expire, there is nothing pushing these people to sell. New supply will come back in a trice, not an avalanche.

Dr. Stiff tamped down concerns of another housing bubble.”Even if double-digit price appreciation were to continue in the former bubble metro areas, there is no reason to believe that new home price bubbles are forming. That’s because single-family homes in these markets are still very affordable, even after last year’s large price gains. Consider Phoenix, where home prices rose 27 percent since the market hit bottom in 2011, making it the strongest residential real estate market in the U.S. Yet, home prices there are still 45 percent below their 2006 peak,” Stiff continued.

To say there is no reason to believe this is another bubble is overstating his case. The only reason affordability is so good is because interest rates dropped from the 6.5% of the bubble to 3.5% today. This is an artificial stimulus engineered by the federal reserve. It’s not the conditions of a free market. This price rally today could easily turn out to be another bubble if interest rates were allowed to rise.

Stiff said some of the rebounding areas like Phoenix will likely see price volatility as all cash sales and investor demand retreat. “It is not clear if demand from first-time and trade-up buyers will immediately fill the void,” he said, “as mortgage lending standards are still very strict and many consumers remain risk-averse. If non-investor demand ramps up too slowly, then recent double-digit price appreciation could decelerate suddenly or even turn negative for a few months.“

That is exactly right. Owner occupants must step into the void if price appreciation is to continue.

Most market forecasters were caught by surprise with the sharp reversal in 2013. Even those who thought 2012 would be the bottom didn’t anticipate it would reverse so strongly and post double digit price increases. Perhaps 2013 will also be a surprise. Conditions today favor a continued rally in prices, but if Corelogic is correct, and I think they will be, then the price appreciation should moderate in 2013.

$165,000 plus FIVE years squatting

The former owner of today’s featured property was a Ponzi who extracted $165,090 with three different refinances over a four-year period. That amounts to about $40,000 per year in free money.

What do you say about five years of squatting?

I can safely say that if I had known I would be able to squat for five years, I would have bought a house with no money down in 2006 and lived payment free for five years. Five years saving $2,500 a month in rent is $150,000. It’s not a good as HELOC money, but an extra $30,000 per year is quite a free bonus, wouldn’t you say?

12849 Willowood Avenue, Garden Grove, CA 92840 (MLS # OC13089141)

corporate owned home ready for occupancy,new paint inside and out.lARGE 7250 SQFT LOTGREAT INSIDE TRACT LOCATION .lrge driveway for more cars .needs work and has alot of potential

Property Type(s): Single Family, Residential

Listing information deemed reliable but not guaranteed. Read full disclaimer.

(view all details for MLS #OC13089141)

Proprietary OC Housing News home purchase analysis

12849 WILLOWOOD Ave Garden Grove, CA 92840

$399,000 …….. Asking Price
$350,000 ………. Purchase Price
10/14/2003 ………. Purchase Date

$49,000 ………. Gross Gain (Loss)
($31,920) ………… Commissions and Costs at 8%
============================================
$17,080 ………. Net Gain (Loss)
============================================
14.0% ………. Gross Percent Change
4.9% ………. Net Percent Change
1.3% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$399,000 …….. Asking Price
$13,965 ………… 3.5% Down FHA Financing
3.65% …………. Mortgage Interest Rate
30 ……………… Number of Years
$385,035 …….. Mortgage
$101,554 ………. Income Requirement

$1,761 ………… Monthly Mortgage Payment
$346 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$83 ………… Homeowners Insurance at 0.25%
$433 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,623 ………. Monthly Cash Outlays

($355) ………. Tax Savings
($590) ………. Principal Amortization
$17 ………….. Opportunity Cost of Down Payment
$120 ………….. Maintenance and Replacement Reserves
============================================
$1,814 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,490 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,490 ………… Closing Costs at 1% + $1,500
$3,850 ………… Interest Points at 1%
$13,965 ………… Down Payment
============================================
$28,795 ………. Total Cash Costs
$27,800 ………. Emergency Cash Reserves
============================================
$56,595 ………. Total Savings Needed

The property above is available for sale on the MLS.

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Click on the book cover for more information.

Nearby Foreclosures

Whether or not this is a good idea depends on your perspective. If you’re a renter whose tax dollars are being diverted toward this endeavor, these efforts are not particularly welcome. Renters receive no benefit from this intervention, and the resulting high home prices make it more costly for renters to become homeowners, so it’s a double whammy. If you’re a homeowner, it’s a very welcome government intervention. It costs homeowners nothing, and they get all the benefits.

Whether or not we think its a good idea, policymakers do, and these efforts will continue until the bubble is fully reflated and the banks are no longer in danger of insolvency or bankruptcy. However, making home prices go up quickly to peak bubble levels is not easy. The first round of government interventions in 2009 and 2010 failed. The tax-credit stimulus merely pulled demand forward, and when the tax credits expired, house prices reversed and fell for 18 consecutive months and ultimately made new lows.

The second round of market manipulations have so far been more successful. Banks went “all in” betting on success of loan modifications. By changing from a policy of foreclosure to one of endless and repeated loan modifications, banks managed to dry up the MLS inventory and force the few active buyers to concentrate their bidding activity on a much smaller number of houses. This bidding pressure combined with low interest rates that allow buyers to increase their bids has caused prices to go up sharply, which is exactly what the banks want.

There are many challenges to maintaining such an artificial set of market conditions which favor bubble reflation. There are a number of obstacles the powers-that-be must contend with. Changes in any of the key conditions could easily cause prices to falter or reverse. After all, this is not a market recovery based on fundamentals. It’s a market manipulation based on government and lender policy.

The 5 biggest threats to the housing recovery

By Ilyce Glink — MoneyWatch — May 16, 2013, 8:42 AM

… Despite large gains in home prices, foreclosures drying up and millions of homeowners recovering the equity they’d lost during the subprime crash, a few lingering risks are worth keeping an eye on.

This was not a subprime crash. It was a total market collapse caused by dodgy loans given to all borrower classes. To characterize it as a subprime crash makes it seem like only that one segment of borrowers were to blame. The housing bubble was a massive systemic problem that was clearly not isolated to subprime loans.

And the question with some of these threats isn’t if, but when, they will actually occur, and what the reaction will be.

Here’s a look at the top five threats to the housing recovery:

1. Interest rates will rise

Super-low interest mortgage rates are driving buyer demand, so it’s no surprise that a rise in these rates will at least change the pace of the recovery.

“As interest rates begin to increase again, that will probably have the single most visible impact on the housing recovery,” said Jacob Frydman, CEO of United Realty, a real estate investment and advisory firm. “I don’t have a crystal ball. I can’t tell you when rates will increase, but I can tell you with certainty they will increase.”

Note the very long duration of interest rate cycles. In my opinion, we are likely to embark on a 30-year cycle similar to what we witnessed between 1950 and 1980.

Historically, interest rates have hovered in the 6 to 7 percent range, and when they return to those levels homes will instantly become less affordable. Pricier loans obviously make buying a house more expensive, curbing demand and how much buyers can spend. That’s a recipe for falling prices.

That analysis is right on. My monthly reports on housing affordability convert current pricing to monthly payments which takes into account interest rates. Affordability based on that measure is very good because interest rates are so low. However, once interest rates begin to rise, loan balances begin to fall, and that will put pressure on home prices.

2. Employment is not growing fast enough

You need a job to buy a house. Trouble is, employment growth in the U.S. is still slow and uncertain.

“While unemployment rates have been improving marginally, the real number to watch is job-creation,” said Rick Shargas, executive vice president of Carrington Mortgage Holdings. “Until we see steady, sustainable job growth, hundreds of thousands of would-be borrowers are unable to participate in the housing market.“

Slow job creation combined with credit impairment are the primary reasons owner-occupant demand is moribund.

Excitement over the U.S. economy adding 165,000 jobs in April stemmed not from a sign that the economy is ready to soar, but that it’s not set to slide over the edge, as the March job numbers seemed to suggest. The economy only generated enough jobs to tread water — it’ll still take about five years of this kind of growth to return the economy to unemployment levels last seen in 2008. The reality is that millions of Americans remain out of work, and many of them may never find some.

3. The government’s role in the mortgage market will change

The U.S. government currently backs about 97 percent of mortgages though the Federal Housing Authority, Fannie Mae and Freddie Mac. That’s unlikely to continue. It may take years, but the feds will eventually start edging out of the mortgage market. Private mortgage financiers will have to fill the void. But exactly how that will happen and what effect it will have on borrowers remains to be seen.

For the government to reduce its footprint in housing finance, private money must be able to make a risk-adjusted profit. The government gurantees eliminate risk for mortgage investors, so they are willing to pay a high premium for these securities, which keeps interest rates low. If the government guarantee were removed, investors would demand better returns to compensate for the risk. That will inevitably drive up interest rates, the effects of which were described above.

“The entire lending industry needs [government] leadership as to what the bulk of the market is going to look like in the long run,” said David Reiss, professor at Brooklyn Law School and editor of real estate finance industry site REFinBlog. “How tight or loose will credit be? The Federal Housing Finance Agency will decide this to a large extent, as seen by the recent announcement that Fannie and Freddie will no longer buy interest only mortgages.”

4. Another bubble bursts

The rate at which home prices are increasing — about 9 percent year over year — is growing at rates not seen seen since the last bubble.

“The rate of price increase seems unsustainable,” said Glenn Kelman, CEO of real estate brokerage firm Redfin. “There are traffic jams outside of listings where there are 20 or 30 offers on a home.”

The steep competition for a limited number of homes is driving these price increases. And what happens if more homes hit the market as demand begins to ebb? Prices stagnate or drop.

If prices keep rising much faster than wages are increasing, or if interest rates rise, the demand for housing will flag. The higher the prices on houses go, the fewer the number of people who can afford them. And even if demand remains strong, once prices near the peak and loanowners start facing increasing housing costs from expiring loan modifications, more inventory will hit the market. More supply or less demand will slow appreciation. Given the nature of cloud inventory, it doesn’t seem likely that prices would reverse, but they could stagnate for a very long time.

5. Student debt is weighing down young buyers

There’s a total of $1 trillion in outstanding student debt, and the delinquency rate for borrowers who started repaying their loans is more than 30 percent, according to Bankrate.com. Even buyers who are current on their student loans are having trouble repaying their loans.

“Often, potential borrowers are told they don’t qualify for a mortgage because their monthly student loan payments are too high compared to their income,” said Polyana da Costa, senior mortgage analyst at Bankrate.

First-time homebuyers — financially stable singles, newlyweds and young families — are having trouble establishing credit and saving a big enough down payment to please lenders. That means the next generation of homebuyers may be stuck renting rather than buying homes of their own.

Student loan debt is going to be a long-term drag on housing demand. When buyers try to qualify for a loan, lenders look at both their capacity to make housing payments (front-end ratio), and their capacity to cover all debt service (back-end ratio). Student loan debt impacts the back-end ratio. Perhaps the lucky few that don’t have car payments or credit card debt may be able to finance a house purchase, but the normal 20-something with maxed-out credit cards and a leased car has no chance.

6. The bond bubble bursts

The elephant in the room with interest rates is the huge bubble in bonds caused by the federal reserve’s zero interest rate policy. At some point, interest rates will not be zero. When the federal reserve starts to raise rates, it will have a cascading effect across all asset classes. One of the first assets to get whacked will be longer duration bonds, such as the 10-year Treasury and the highly correlated mortgage-backed security pools. A sudden pop in the bond bubble would send mortgage interest rates soaring and cause housing to crash — hard.

7. Government regulators reinstate mark-to-market accounting

This rather esoteric issue is what’s enabled banks to avoid widespread foreclosure processing. Lenders are currently allowed to show loans on their books at values much greater than the mortgage market would actually pay. These artificial values make their capital ratios look better than they really are and disguises their insolvency. If government regulators were to go back to the mark-to-market accounting model — and force banks to tell the truth about their financial condition — banks would begin processing foreclosures to recover their capital, and the market would again be hit with a wave of foreclosures.

It’s unlikely government regulators will do this because they also know it would cause the housing market to crash and imperil our banking system.

8. Banks increase foreclosure processing

At some point, the stronger banks may start processing more foreclosures to finally boot out all the squatters and put their financial house in order. This would actually be a wise strategy for stronger banks to weaken their competition and make them ripe takeover targets. Right now, none of the banks have the strength to do this, but at some point in the future, one or more of the stronger banks may consider it in their own best interest to process their remaining foreclosures. Cartels typically don’t endure forever.

9. Continued credit impairment

Millions of people have damaged credit due to losing a home during the crash and even for missing a few payments to get a loan modification. The lingering effect of these issues will last for another decade.

There are some that believe we should just waive a magic wand, forgive these borrowers their sins, and let them get another loan. This overlooks one basic fact; many of these people can’t handle making loan payments.

The culture of Ponzi borrowing has taken hold. Ponzis should never be given loans because they won’t pay them back. People who live on mortgage equity withdrawal are lender parasites, and now that we are backing their loans, they are taxpayer parasites.

Lenders have created an entire generation of debt-dependent irresponsible Ponzis. We know these people will default as soon as the next creditor fails to come along. Giving these people loans is a game of Russian Roulette where the final lender is the one who takes the bullet. Until we purge this style of financial management from the system, and re-educate them on how to property manage their finances in a sustainable way, they shouldn’t be extended more credit, and they certainly shouldn’t be given massive home loans.

10. Economic recession

As consumers and business continue to deleverage, the economy sputters. We have delayed this inevitable consequence of an out-of-control credit orgy, and with record low interest rates, we have made these debts more manageable, but until consumers have paid for the sins of the past, they won’t have money to spend in the present. The lack of discretionary spending makes for a weak economy, and even the slightest disruption could tip us back into recession. Any economic contraction could increase unemployment and put the housing market back into a tailspin.

Right now it looks as if lenders will be successful in reflating the housing bubble; however, it may not be the orderly and permanent reflation lenders and homeowners hope for.

The type of homeowner we don’t need

The former owner of today’s featured property was a stereotypical OC Ponzi. She had an average house in an average neighborhood that she mortgaged to the maz to sustain a lifestyle that was out of her grasp. If she is given a home loan again in the future, she will undoubtedly expect to reap the same benefits and live like a Ponzi, except next time you and I as taxpayers may have to pick up the tab.

• This property was purchased for $169,000 in 1993. I don’t have her original loan information, but safe to say, it was less than $169,000.
• On 12/16/1998 she obtained a new $131,500 first mortgage.
• On 8/30/2000 she got a $30,000 stand-alone second.
• On 7/30/2003 she refinanced with a $185,000 first mortgage.
• On 5/27/2004 she refinanced with a $256,000 first mortgage.
• On 6/24/2005 she refinanced with a $369,750 first mortgage.
• On 9/18/2006 she refinanced with a $411,200 Option ARM with a 1.29% teaser rate. She more than doubled her original mortgage.

She quit paying and let the bank have the property. There wasn’t much reason to keep paying. The house wasn’t paying her any more.

We're sorry, but we couldn't find MLS # PW13086564 in our database. This property may be a new listing or possibly taken off the market. Please check back again.

Proprietary OC Housing News home purchase analysis

7188 SANTA CRUZ Cir Buena Park, CA 90620

$389,959 …….. Asking Price
$189,000 ………. Purchase Price
1/15/1993 ………. Purchase Date

$200,959 ………. Gross Gain (Loss)
($31,197) ………… Commissions and Costs at 8%
============================================
$169,762 ………. Net Gain (Loss)
============================================
106.3% ………. Gross Percent Change
89.8% ………. Net Percent Change
3.5% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$389,959 …….. Asking Price
$13,649 ………… 3.5% Down FHA Financing
3.65% …………. Mortgage Interest Rate
30 ……………… Number of Years
$376,310 …….. Mortgage
$99,253 ………. Income Requirement

$1,721 ………… Monthly Mortgage Payment
$338 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$81 ………… Homeowners Insurance at 0.25%
$423 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,564 ………. Monthly Cash Outlays

($340) ………. Tax Savings
($577) ………. Principal Amortization
$16 ………….. Opportunity Cost of Down Payment
$117 ………….. Maintenance and Replacement Reserves
============================================
$1,781 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,400 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,400 ………… Closing Costs at 1% + $1,500
$3,763 ………… Interest Points at 1%
$13,649 ………… Down Payment
============================================
$28,211 ………. Total Cash Costs
$27,200 ………. Emergency Cash Reserves
============================================
$55,411 ………. Total Savings Needed

The property above is available for sale on the MLS.

OC Housing News FREE Guides!

Click on the book cover for more information.

Nearby Foreclosures

As the Southern California housing market comes back to life, existing inventory is running low. That means new homes will be built, which is good news for the area’s planners, architects, builders, real estate agents and loan providers. However, who will buy those homes? Recent data indicates the majority of new home buyers will not be the same as those before the recession. Rather, it will be Millennials, and they don’t want the same old features as the previous generation.

In its April 29 cover story, Barron’s magazine published, “…Widely dismissed as a lost generation with few job prospects, towering student loans, and a bleak future, the so-called Millennials, most of whom have reached adulthood since 2000, could surprise America and the world in coming years with their economic might and spending power.” The article went on to say that industries from housing and autos to retailing and financial services could be transformed by their collective demands and desires.

So, what do Millennials want? Given that they came of age amidst two U.S. wars, mass shootings, terrorist attacks, the financial crisis and lean years, it’s more likely they will gravitate to similar features as those desired by the Great Generation of the post-depression/World War II era, i.e.: smaller homes that are relatively inexpensive to maintain, albeit with the latest high-technology that will enable their social media connections while conserving energy—electricity, water and gas.

Thankfully, an impressive group of researchers and visionaries has agreed to present a day-long conference, called the “No Place Like Home Conference: The Past, Present and Future of The American Dream,” to address the future of homebuilding, at least in Southern California. For those lucky enough to be in Anaheim on June 3, they can attend a day-long, $99 conference packed with more than a dozen speakers detailing what new home buyers want in this post-recession rebirth. For more information, go to: http://www.noplacelikehomeconference.com.

Now banks in conjunction with Fannie Mae and Freddie Mac are giving defaulted loanowners virtually an automatic enrollment into a new loan modification process. So, why is it opposite from a few years ago, because it’s in the best interest of the banks to keep these borrowers in their homes. 1) the banks can keep the 5,000,000 defaulted loanowners off the market. 2) they don’t have to potentially record the over $1 trillion in underwater debt losses after the foreclosure sale 3) Hopeful that these loanowners will pay some sort of payment on a underwater mortgage but with a lower payment. 4) the banks want to perpetuate the false assumption to the loanowner that not only will their homes will be above water but will appreciate and generate a return for the loanowner.

GSEs Make New Simplified Mod Program Available Immediately

Conversation with a loanowner

I recently had an extended conversation with a loanowner who doesn’t make enough money to afford the house he currently owns. We talked about his situation and options, and here is what he told me.

First, like most loanowners, he and his family are emotionally attached to their property. They want to stay because it’s a nice home they’ve decorated and customized to their tastes. They don’t want to move, and if given the chance, they will stay in their family home.

One of the reasons many loanowners don’t want to sell is because they will endure the unceremonious fall from entitlement. People who can’t afford their homes are living beyond their means. If they sell and find a rental, they will be forced to live within their means in a property they can afford. For most loanowners, that means taking a step down the property ladder, and nobody wants to do that. So unless they are forced to, people won’t voluntarily sell a nice house to move into one they consider substandard. When combined with the emotional attachments of home ownership, most people will chose to struggle and fight rather than capitulate and sell.

Another reason this loanowner doesn’t currently plan to sell his house is because he couldn’t buy another one. His credit is trashed because in order to get his loan modification, he had to stop making regular payments. The missed payments ruined his credit score. If you extrapolate that circumstance to the millions of borrowers who applied for a loan modification, and you begin to understand why owner-occupant loan applications have been so low for so long.

This from a recent Calculated Risk post:

There are 2,626,480 seriously delinquent borrowers who have suffered a lowering of their FICO score. Plus, there were many more in prior years. Keep in mind, this is not ordinary credit problems that typically keep potential homebuyers out of the market. This issue is directly caused by the housing bust, and each of these delinquent borrowers is unlikely to have a good enough credit score to qualify for a home loan.

I thought many loanowners were keeping their properties off the market to avoid the negative credit implications of a short sale. Perhaps not. They already have low credit scores, so the short sale won’t make that much of a difference. A big reason these listings aren’t coming to market is because these sellers won’t be able to buy again.

Second, this loanowner wasn’t being compelled to sell due to the cost. With his loan modification, his monthly cost of ownership is lower than a comparable rental. With his 2% temporary teaser rate, his payment is very low. As long as his monthly costs are lower than a comparable rental, it doesn’t make sense for him to sell and rent.

When I asked him what happens when his interest rates starts to rise back up to the contract rate, he said one of two things would happen. Either he would be offered another loan modification, or he would be able to refinance into a low-interest rate mortgage. I didn’t press him on the how realistic that was.

It’s not very likely he would be offered another loan modification unless the property were still severely underwater. The serial refinancing of one teaser rate to another died with the collapse of the housing bubble. Banks are willing to deal now because the property has no collateral backing, but the loan modification entitlement will be rescinded as prices near the peak.

If a loanowner has equity again, even a tiny amount of it, and the terms of the loan modification increases the borrowers costs, the borrower can ask for another loan modification, but it’s unlikely they would receive one. Why would the bank cut them a deal once they bank can get paid in full from a sale? It would be better for the bank to force the old owners out in favor of a new one who will pay the full current rate on a home loan.

This loanowner also thought he could get a low-rate mortgage. Given his bad credit, it’s unlikely he will be given any mortgage much less a low-rate one.

Basically, he is in denial. He is living on borrowed time, renting from the bank, and reacting to temporary circumstances and hoping something will work out. Right now his incentive is not to sell, so he doesn’t. However, his cost of living will continue to escalate over the next few years, and as the value of his property is nearing the amount he owes, the rising cost of his housing will ultimately push him out. Either that, or he will endure a lifetime of bank servitude with every available penny going toward debt service on a house he really can’t afford.

My conclusion is that inventory will be slow to come back to the market. It will be predicated less on loanowners getting above water and more on them facing increasing borrowing costs due to changes in the terms of their loan modifications. That will happen slowly and be staggered over time, which is what the banks want. Perhaps some of these borrowers will hold out long enough to recover their credit scores or even obtain equity, but since many of these borrowers got in trouble with excessive mortgage equity withdrawal, a sale and repurchase will not be a move up.

Expect low MLS inventory to be the new normal.

HELOC cash cow

Usually, when one calls a property a cash cow, they’re referring to the rental income stream. However, Ponzis learned another way to extract ready cash from a property; mortgage equity withdrawal. If you go back to the bank regularly and extract the equity, it’s even more lucrative than rental income, and when the Ponzi scheme collapses, you can leave the mess for the bank to clean up.

The former owner of today’s featured REO put almost nothing down in 1997, at the bottom of the last cycle, and he extracted equity at regular intervals on the way up. By mid 2007, he had a $340,000 first mortgage and a $75,000 HELOC. That more than doubled his initial mortgage. He quit paying in early 2010, and Fannie Mae foreclosed in late 2011. They sat on the property for a year and half before deciding to sell now.

14226 Alta Place, Westminster, CA 92683 (MLS # PW13084374)

This is a spacious 1246SF single level 3 bedroom 1-3/4 bath home in a wonderfully convenient location on the border of Huntington Beach. Minutes to Fwy access, 15 minutes to the beach, and close to schools and shopping. It has recently been painted inside, has newer flooring and new appliances. The private backyard benefits from large shade trees and cool breezes. Lots of room to relax or expand for more room in the future.

Property Type(s): Single Family, Residential

Listing information deemed reliable but not guaranteed. Read full disclaimer.

(view all details for MLS #PW13084374)

Proprietary OC Housing News home purchase analysis

14226 ALTA Pl Westminster, CA 92683

$499,900 …….. Asking Price
$198,000 ………. Purchase Price
12/18/1997 ………. Purchase Date

$301,900 ………. Gross Gain (Loss)
($39,992) ………… Commissions and Costs at 8%
============================================
$261,908 ………. Net Gain (Loss)
============================================
152.5% ………. Gross Percent Change
132.3% ………. Net Percent Change
6.0% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$499,900 …….. Asking Price
$17,497 ………… 3.5% Down FHA Financing
3.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$482,404 …….. Mortgage
$125,872 ………. Income Requirement

$2,172 ………… Monthly Mortgage Payment
$433 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$104 ………… Homeowners Insurance at 0.25%
$543 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,252 ………. Monthly Cash Outlays

($506) ………. Tax Savings
($757) ………. Principal Amortization
$20 ………….. Opportunity Cost of Down Payment
$145 ………….. Maintenance and Replacement Reserves
============================================
$2,153 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$6,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$6,499 ………… Closing Costs at 1% + $1,500
$4,824 ………… Interest Points at 1%
$17,497 ………… Down Payment
============================================
$35,319 ………. Total Cash Costs
$33,000 ………. Emergency Cash Reserves
============================================
$68,319 ………. Total Savings Needed

The property above is available for sale on the MLS.

OC Housing News FREE Guides!

Click on the book cover for more information.

Nearby Foreclosures

I’ve covered the merits of the home mortgage interest deduction in many posts. The bottom line is that the HMID does nothing to improve home ownership rates, it inflates the values of houses in neighborhoods dominated by high wage earners, and it’s very costly to the federal government. The only reason we still have it today is because lobbyists for realtors and homebuilders have fought successfully to maintain their subsidies. Politicians in Washington want to cut back this subsidy, but they need political cover to justify their decision. Trimming the budget is a good reason, and now with this report, they can also argue that the subsidy hurts the economy by increasing unemployment.

Challenge to Dogma on Owning a Home

By FLOYD NORRIS — Published: May 9, 2013

Homeownership is a good thing, for the individual and for society. Or so American governments, whether Republican or Democrat, have long believed. The benefits have been cited repeatedly in justifying the existence and expansion of the tax breaks given to home buyers.

But maybe it isn’t nearly as good as had been thought.

A new study by two economists concludes that rising levels of homeownership in a state “are a precursor to eventual sharp rises in unemployment in that state.” As more homes are owned, in other words, fewer people have jobs.

That’s a remarkable conclusion. Identifying the actual cause is a challenge because it’s difficult to conceive a reason why owning anything, stocks, bonds, gold, real estate, would cause unemployment.

The study, by David G. Blanchflower of Dartmouth and Andrew J. Oswald of the University of Warwick in England, does not argue that homeowners are more likely to lose jobs than are renters. But it does argue that areas with high and rising levels of homeownership are more likely to be inhospitable to innovation and job creation and to have less labor mobility and longer commutes to work.

Why would this be so? I can see how labor mobility would be hindered because it’s much more difficult to sell and repurchase a house than it is to change rentals, but how would home ownership stifle innovation?

“We find that a high rate of homeownership slowly decimates the labor market,” Professor Oswald said.

At the simplest level, the authors of the study, released by the Peterson Institute of International Economics, point to the fact that the five states with the largest increase in homeownership from 1950 to 2010 — Alabama, Georgia, Mississippi, South Carolina and West Virginia — had a 2010 unemployment rate that was 6.3 percentage points higher than in 1950. The unemployment rates in the five states where homeownership went up the least — California, North Dakota, Oregon, Washington and Wisconsin — rose 3.5 percentage points during the period.

Such statistics are not persuasive by themselves, and the professors know it. Many factors obviously influence unemployment rates in any given state. North Dakota’s current boom stems from energy deposits, which would have been there no matter who owned the land.

Is it just random chance that the states with the largest gains in home ownership had the highest rates of unemployment while the states with the lowest gains in home ownership had some of the lowest? Correlations that strong are difficult to ignore.

But they say that the statistics show those patterns no matter how much they control for other variables and that the same picture emerges if they look at employment growth rather than unemployment rates. They say that the pattern existed before the crash of the housing market that began in 2007 and that the statistics are not dependent on including the more recent period.

That sounds like a statistically robust analysis.

If that is true, why have few noticed it before? “The time lags are long,” they write, up to five years before a rise in homeownership hurts an area’s unemployment rate. “That gradualness may explain why these important patterns are so little known.”

Nobody wanted to face this truth either. It’s not like the NAr is going to sponsor a study that might turn up conclusions like that. This analysis will undoubtedly be challenged by economists sponsored by the NAr, and it will be interesting to see how they explain this correlation — with bullshit no doubt.

Nonetheless, the idea is not new. Professor Oswald pointed to some of the data as far back as 1996, saying that in Europe as well as the United States a higher proportion of homeownership seemed to be associated with a higher level of unemployment. But other researchers soon concluded that the evidence did not support the thesis that homeowners were more likely to be unemployed than renters, and the correlation was largely ignored.

If the correlation is real, what could be the cause? The professors say they believe that high homeownership in an area leads to people staying put and commuting farther and farther to jobs, creating cost and congestion for companies and other workers. They speculate that the role of zoning may be important, as communities dominated by homeowners resort to “not in my backyard” efforts that block new businesses that could create jobs.

This conclusion argues against their main point. California is an extreme anti-growth state with nimbyism running rampant. If restrictive zoning and efforts to block new businesses were the cause, California would be a basket case.

Perhaps the energy sector would be less freewheeling in North Dakota if there were more homeowners.

Homeownership, in economists’ jargon, creates “negative externalities” for the labor market.

In Finland, there was something of a test of the thesis, the professors say. Finland changed its housing laws in the 1990s in ways that discouraged homeownership, putting the changes into effect at different times in different regions. “While homeowners are less likely to experience unemployment,” concluded Jani-Petri Laamanen, an economist at the University of Tampere who analyzed the Finnish housing market, “an increase in the rate of homeownership causes regional unemployment to rise.”

This phenomenon is international. It makes it much more difficult to say its caused by the unique circumstances in the few states analyzed here in the US.

Until the credit crisis, homeownership was generally viewed in the United States as an unquestionably good thing. President George W. Bush, like his predecessors, boasted of a rising homeownership rate in his administration. He summarized the consensus in 2005 when he proclaimed June to be “National Homeownership Month.”

Homeownership was certainly desirable in 2005, but it wasn’t the best idea.

“The spread of ownership and opportunity helps give our citizens a vital stake in the future of America and the chance to realize the great promise of our country,” he wrote. “A home provides children with a safe environment in which to grow and learn. A home is also a tangible asset that provides owners with borrowing power and allows our citizens to build wealth that they can pass on to their children and grandchildren.”

Homeownership, the president concluded, is “a bedrock of the American economy, helping to increase jobs, boost demand for goods and services, and build prosperity.”

That has been the dogma in Washington embraced by both Democrats and Republicans as far back as the 1920s.

The benefits of homeownership were said to go far beyond the obvious ones. A document distributed by the National Association of Realtors pointed to positive externalities.

Oh boy, here we go.

Homeowners’ children were more likely to do well in school and less likely to drop out. They were more likely to be well behaved.

Homeowners tend to be higher wage earners who place higher value on education because they believe it’s how they got their high-paying jobs. Parents who are concerned and involved with their children’s education tend to have children who preform better in school. The positive outcomes touted by the NAr are caused by good parenting, not home ownership.

Teenage pregnancy rates were lower, and the children of lower-income homeowners were less likely to wind up on welfare as adults than were children of similar renters.

Lower income homeowners have mastered the discipline of saving money and making consistent housing payments. This requires a greatly level of financial acumen than many who end up on welfare. Again, this has nothing to do with home ownership and everything to do with the character of the family.

I’ve seen the commercials from the NAr where they spout this nonsense. As a renter, I find it offensive. As a person who’s not a complete buffoon, I find these commercials an insult to my intelligence.

The credit crisis damaged that consensus as millions of homeowners lost their homes. Rather than creating wealth, homes had enabled people to gain cash by refinancing mortgages and live beyond their means until the crisis sent them into bankruptcy. The percentage of Americans owning their own homes is now the lowest since 1995.

I always enjoy seeing reporters talk about the housing ATM machine. Most ignore the issue or gloss it over.

But the good reputation of homeownership largely survived. Lawrence Summers, the Harvard economist and former Treasury secretary, complained in a Washington Post article earlier this year that not enough mortgage loans were being made. “The clearest evidence is the growing number of lower- and middle-income families paying rents to the private equity firms that own their homes at rates far above what a mortgage would cost,” he said, taking it for granted that owning a home was a good idea.

Home ownership is not always a good idea.

The professors’ paper could turn out to have appeared at a particularly inappropriate time for the interests that have long promoted homeownership and reaped bountiful subsidies for it. With the federal budget under pressure, reducing the tax benefits for homeownership might be easier if the halo around homeownership were to sag.

There have been proposals thrown around to limit those tax advantages by limiting or even eliminating the deductibility of mortgage interest.

I believe this paper will be used by politicians seeking political cover. Reducing the HMID subsidy will not be popular. Prior to publication of this paper, only the need to trim the deficit was a justification. Now politicians have something more substantial to offer as defense.

Renters, after all, receive no such deduction.

Nope. We’re just called upon to pay the subsidy.

“The mortgage interest deduction is one of the largest tax subsidies in the Internal Revenue Code,” Eric J. Toder, the co-director of the Urban-Brookings Tax Policy Center, noted in Congressional testimony last month. “Achieving a revenue-neutral tax reform that reduces marginal tax rates significantly would be difficult or impossible to achieve without cutting back the mortgage interest deduction or some other equally popular and widely used provisions.”

There is no political argument that is more potent now than one that says jobs will be created by whatever is proposed. That claim was used last year to pass a bill making it far easier to raise capital from investors despite warnings that it also made investment fraud more likely. Imagine what might happen if politicians came to believe that encouraging homeownership was reducing employment.

It really doesn’t matter whether or not the politicians believe it. The only thing that matters is whether or not they can convince their constituents its true. If they believe they can deflect constituent criticism, the home mortgage interest deduction is toast.

Reverse Mortgage Foreclosure

The former owner of this property refinanced three times with larger and larger reverse mortgages. The property went back to the bank in March.

I didn’t realize a reverse mortgage could lead to foreclosure. Here’s what I found:

A reverse mortgage loan becomes due and payable when one of the following circumstances occurs:

All borrowers have died. When this happens, the heirs have several options. They may choose to:

• fully repay the loan and keep the property
• sell the property and use the proceeds to repay the loan
• deed the property to the lender, or
• abandon the property and let the lender foreclose.

The property is sold or title to the property is transferred. If the home is sold or title transferred, the loan becomes due and payable. Generally, if the property is sold, the escrow company will accept the purchaser’s money and pay off the reverse mortgage along with any other liens on the property. If there are surplus funds, they will be distributed to the seller.

The borrower no longer uses the home as a principal residence. The homeowner can be away from the home (for example, in a nursing home facility) for up to 12 months due to physical or mental illness; however, if the move is permanent, then the loan becomes due and payable.

The borrower fails to meet the obligations of the mortgage. For example, the terms of the mortgage will require the borrower to pay the property taxes, maintain adequate homeowners’ insurance, and keep the property in good condition. If the borrower does not pay the property taxes or homeowner’s insurance, or if the property is in disrepair, this constitutes a violation of the mortgage and the lender can call the loan due. (The lender must allow the borrower to cure the default to prevent or stop a foreclosure.)

The property was turned over to the lender with a Deed In Lieu, so perhaps the owner passed away. The property had $495,756 in debt on it, so the heirs had no equity. They handed the keys over to the bank.

32451 Via Los Santos, San Juan Capistrano, CA 92675 (MLS # NP13085860)

Beautiful 3 bedroom 2 bathroom home in a gated community. Ready to move in! This home, with your own personal touch, will give the greatest feeling of comfort and security.

Property Type(s): Single Family, Residential

Listing information deemed reliable but not guaranteed. Read full disclaimer.

(view all details for MLS #NP13085860)

Proprietary OC Housing News home purchase analysis

32451 VIA LOS SANTOS San Juan Capistrano, CA 92675

$495,000 …….. Asking Price
$323,000 ………. Purchase Price
6/10/2002 ………. Purchase Date

$172,000 ………. Gross Gain (Loss)
($39,600) ………… Commissions and Costs at 8%
============================================
$132,400 ………. Net Gain (Loss)
============================================
53.3% ………. Gross Percent Change
41.0% ………. Net Percent Change
3.9% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$495,000 …….. Asking Price
$17,325 ………… 3.5% Down FHA Financing
3.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$477,675 …….. Mortgage
$127,425 ………. Income Requirement

$2,150 ………… Monthly Mortgage Payment
$429 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$103 ………… Homeowners Insurance at 0.25%
$537 ………… Private Mortgage Insurance
$72 ………… Homeowners Association Fees
============================================
$3,292 ………. Monthly Cash Outlays

($498) ………. Tax Savings
($749) ………. Principal Amortization
$19 ………….. Opportunity Cost of Down Payment
$82 ………….. Maintenance and Replacement Reserves
============================================
$2,146 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$6,450 ………… Furnishing and Move-In Costs at 1% + $1,500
$6,450 ………… Closing Costs at 1% + $1,500
$4,777 ………… Interest Points at 1%
$17,325 ………… Down Payment
============================================
$35,002 ………. Total Cash Costs
$32,800 ………. Emergency Cash Reserves
============================================
$67,802 ………. Total Savings Needed

The property above is available for sale on the MLS.

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Nearby Foreclosures

Housing Headlines Mask Unsettling Trends

by Jann Swanson — May 13 2013, 10:35AM

In its April Housing Data Wrap-Up Wells Fargo’s economists summarize the nation’s housing picture: ”While most of the housing-related headline numbers continue to improve, the underlying details give us some pause.”

The housing headlines are dominated by a chorus of financial reporters who specialize in telling people what they want to hear. The Pollyanna’s have ignored all the underlying problems with the housing market in their quest for ever more bullish headlines.

One headline, the surprising spurt in housing starts in March. A 1.04 million unit annualized rate marked the highest pace since June 2008. Rising above one-million units was a significant milestone, however the increase was totally in the multi-family sector, and single-family starts fell 4.8 percent.

The continued increase in multi-family housing is troubling. The federal reserve is inflating a bubble in the apartment market.

Another headline is rising prices and tightening inventories. The most recent figures from both S&P Case-Shiller and the National Association of Realtors reflect around 10 percent annual appreciation and as a consequence the percentage of homeowners with negative equity has declined. But much of the impetus behind the rising prices and shrinking inventories, especially in troubled markets like Atlanta and Miami, are sales to investors and cash purchases. Rising prices have outstripped appraisals in some markets, making it tougher for buyers needing a mortgage to buy a home.

The increased demand is not the real story. Demand overall is only up slightly. The real issue is the 50% reduction in inventory causing the demand to be concentrated on fewer properties. If the market were not being manipulated by the banks, the rising demand would be met with increased liquidations of distressed properties.

Wells Fargo points to other recent causes for concern. One is the recent slide in the Builders Index, a reflection of homebuilders’ perceptions of the new home market. After climbing into near positive territory for the first time in six or seven years in early 2013, it has slipped five points over the last three months.

Builders in Southern California are doing well because the inventory restriction is more severe here. In other parts of the country, new home sales are mixed, and builders are not able to push prices higher.

Mortgage originations for home purchases are also flat.

I’ve pointed out the lack of movement in loan originations over and over again. This is the real indicator of the future health of the housing market. Mortgage originations are both low and flatlined. This is a very bad combination. The number of new home starts is low, but at least people can point to improvement. With mortgage originations, there is nothing positive for the bulls to grasp onto.

The Bank says another disconcerting signal comes from the growing divergence between the homeownership rate and the recent spike in prices. Rising home prices usually coincide with rising demand as more households form or people’s preferences swing toward homeownership. The Banks says neither trend appears to be present today. Household formation rose 980,000 in 2012, compared to the long term annual average of 1.28 million between 1965 and 2001.

Household formation fell off a cliff during the recession. Many people doubled up, and many young people moved back in with their parents. realtors like to point to this as pent-up demand, which is nonssense, but this potential demand will remain pent up as long as unemployment remains high.

Moreover, the overwhelming majority of new households are choosing to rent rather than own their home. The homeownership rate fell 0.4 percentage points during the first quarter to 65.0 percent and is now at levels last seen in the mid-1990s.

That is perhaps the most troubling sign of all. Some of the preference toward home ownership may not be by choice. Many potential homebuyers may not have the credit, the income, nor the savings to buy. And those barriers cannot be overcome with financial innovation.

If new households chose rental over ownership, there simply won’t be enough demand from owner occupants to sustain pricing. Perhaps banks will kick-the-can and allow squatting indefinitely? It’s the only solution when the demand simply isn’t there.

The report points out, “It is hard to imagine a sustainable housing recovery taking place with fewer homeowners.”  This point, it says, “appears to be lost in all of the celebration over soaring home prices and bidding wars for the scarce inventory of homes currently available for sale.“

It is certainly a point that is lost in the mainstream media.

It is important to balance enthusiasm over soaring prices with the knowledge that most of the housing market is still healing and the sharp increases in prices driven partially by both individual and investor purchasing. In contrast to prices, home sales are following a more modest trajectory, one in line with mortgage purchase applications.

That’s not entirely true. Home sales are up slightly, but its entirely due to the activity of investors. Mortgage applications are flat reflecting no increase in demand at all from owner occupants.

One point which tends to be overlooked, the report says, is that a full-fledged housing recovery will require a normally functioning mortgage market and we are nowhere close to one. The Federal Reserve is buying $40 billion in mortgage securities every month, the futures of Freddie Mac and Fannie Mae are uncertain and there are questions related to employment and job creation which have potential ramifications for homeownership.

Reporters rarely mention that the reason buyers can bid more for property is due to record low interest rates and unprecedented federal reserve stimulus to housing.

Is supply restriction the answer to all problems in housing?

Last week I wrote that The housing bears are rightfully frustrated. Without continued stimulus and policy manipulation, conditions in the housing market would not favor rising prices or new construction. The demand simply isn’t there. However, with supply manipulation rivaling the success of OPEC in the 1970s, lenders have created “house lines” where people camp out for the opportunity to overbid each other on what’s become an artificially created shortage.

If any of you remember the 1970s, you remember how much OPEC was hated for the inconvenience and the economic recession their supply restriction created. Most people today don’t recognize that lenders have engineered the same type of artificial shortage for the same self-serving reasons. If they did, perhaps people would be angrier at what the banks are doing. Banks have earned the scorn they receive.

The high end hasn’t reached the peak yet

For all the talk about the great rally and the strength of the market, when lenders foreclose on one of their many delinquent mortgages at the high end, they are forced to discount the price severely to sell the property. Today’s featured property is being offered for more than 30% less than its peak purchase price. But who knows, perhaps s bidding war will break out and someone will bid 35% over asking, right?

We're sorry, but we couldn't find MLS # PW13084161 in our database. This property may be a new listing or possibly taken off the market. Please check back again.

Proprietary OC Housing News home purchase analysis

4005 HUMBOLDT Ln Yorba Linda, CA 92886

$1,247,400 …….. Asking Price
$1,810,695 ………. Purchase Price
9/26/2012 ………. Purchase Date

($563,295) ………. Gross Gain (Loss)
($99,792) ………… Commissions and Costs at 8%
============================================
($663,087) ………. Net Gain (Loss)
============================================
-31.1% ………. Gross Percent Change
-36.6% ………. Net Percent Change
-54.6% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$1,247,400 …….. Asking Price
$249,480 ………… 20% Down Conventional
4.02% …………. Mortgage Interest Rate
30 ……………… Number of Years
$997,920 …….. Mortgage
$239,356 ………. Income Requirement

$4,776 ………… Monthly Mortgage Payment
$1,081 ………… Property Tax at 1.04%
$67 ………… Mello Roos & Special Taxes
$260 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$6,183 ………. Monthly Cash Outlays

($1,476) ………. Tax Savings
($1,433) ………. Principal Amortization
$349 ………….. Opportunity Cost of Down Payment
$332 ………….. Maintenance and Replacement Reserves
============================================
$3,955 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$13,974 ………… Furnishing and Move-In Costs at 1% + $1,500
$13,974 ………… Closing Costs at 1% + $1,500
$9,979 ………… Interest Points at 1%
$249,480 ………… Down Payment
============================================
$287,407 ………. Total Cash Costs
$60,600 ………. Emergency Cash Reserves
============================================
$348,007 ………. Total Savings Needed

The property above is available for sale on the MLS.

OC Housing News FREE Guides!

Click on the book cover for more information.

Nearby Foreclosures

Since the credit crunch of August 2007, lenders clamped down on their foolish underwriting standards. The stopped making all sorts of loans nobody would ever repay. Unfortunately, that also meant prices would need to come down significantly, so even though their underwriting improved immeasurably, the loans from late 2007, 2008, and part of 2009 still performed very poorly. Many of those loans were made with very little money down, and the borrowers quickly submerged deeply underwater and strategically defaulted.

Since 2009 loan performance on new loans has steadily improved, largely because the buyers didn’t fall deeply underwater. The loans from 2012 are performing very well because most of those borrowers have new-found equity. Unfortunately for lenders, the crappy loans from the bubble linger on like a bad odor. Lenders attempted to cover this pungent aroma with the perfume of loan modifications. What they’ve got now is a compost pile of bad loans they keep turning over with loan modifications that redefault over and over again at rates of between 41% for prime loans and 65% for subprime.

Lenders made no progress on their resolution of legacy loans over the last year. The delinquency rate of all loans inched down from 6.8% in March of 2012 to 6.59% in March of 2013. Given the improvement shown by recent vintages, that means the delinquency of legacy loans is unchanged, and itt may have gotten worse. As lenders kick the can with loan modifications, borrowers are redefaulting faster than lenders can remodify their loans. The only net reduction in legacy loan delinquencies is coming from the trickle of foreclosures. As a result, legacy loans now account for 62% of long-term delinquencies.

Lenders are committed to a policy of can kicking until prices come back. They are foreclosing on a handful of committed squatters in an attempt to spook the herd and prompt them to agree to loan modifications. From their perspective, the plan is working. Remember, negative equity is another lender euphemism. It disguises the fact that lenders have a huge exposure to loans without collateral backing, and it makes borrowers feel like they have hope of actual equity again while they rent from the bank. (Notice the deception in the chart below that cuts off the bottom 10% to make the improvement look better than it is).

Delinquency rate rises, but inventory eases in Q1: MBA

NEW YORK | Thu May 9, 2013 10:04am EDT

(Reuters) – The delinquency rate on U.S. home mortgages rose in the first quarter as more homeowners fell behind on payments for the first time, data from an industry group showed on Thursday.

The seasonally adjusted delinquency rate on all loans rose to 7.25 percent from 7.09 percent in the first quarter, but was down from 7.40 percent a year ago, according to a report from the Mortgage Bankers Association.

The number of loans that were 30 days late on payments rose to 3.21 percent from 3.04 percent at the end of last year. Mortgages that were 90 days or more past due, which are considered less likely to get back on track, edged down to 2.88 percent from 2.89 percent. …

Among the different types of loans, subprime fixed and adjustable rate mortgages saw the largest increases in delinquencies, though there were fewer subprime loans sitting in the foreclosure process.

The two categories make up more than 10 percent of overall mortgages, MBA said.

Lenders are keen to paint a picture of an improving housing market and improvements in loan performance. However, their track record with regards to legacy loans leaves much to be desired. Their can kicking is helping as it’s restoring collateral value behind these bad loans, so I expect lenders to continue the same. However, these loans will not be resolved in the next 3 to 5 years, at their current rate of cure on legacy loans, they will be dealing with squatters for another decade or more.

I still believe the final resolution of most of these loans will be either a foreclosure or a semi-distressed sale by a struggling borrower that sells the moment they are above water. Lenders will push for the latter resolution because they don’t have to recognize any losses. Loan modification entitlement will be rescinded as prices near the peak, and lenders will finally resolve these pesky legacy loan issues.

They turned a profit without selling

One of the beauties of cash-out refinancing is that you can stick the lender with the loss if prices go south. Lenders should be rightfully worried about this and limit cash-out refinances to a safe percentage of home equity. However, during the bubble, lenders would do cash-out refinancing at as much as 125% of the house’s value. At that point, it’s wise for a borrower to put the home to the bank and keep on living there. They can extract cash all the way to the peak of home prices, keep living in the property, and let the lender absorb all the losses. It’s morally bankrupt, but lenders seem to want to lose money this way, so you might as well take advantage, right?

The former owners of today’s featured property were not Ponzis, but they did refinance one time right at the peak. They extracted $203,000 with an Option ARM and let the property go back to the bank when the payments increased. It worked out well for them, and I imagine others will learn from examples like this and really imperil the banking industry during this next cycle. Hopefully, we won’t have to bail them out when it happens.

27692 Via Rodrigo, Mission Viejo, CA 92692 (MLS # OC13085172)

Popular Narciso floor plan in this 55 plus gated community. Den could be a third bedroom. Freshly painted interior (neutral colors) and new carpeting in both bedrooms! Quiet location very near gate one and the adjacent Casta Del Sol golf course. Upgraded wood laminate flooring in kitchen and spacious living room. Upgraded kitchen with granite counter tops! Retractable patio awning. Move in ready! Other amenities of the community include central clubhouse, Olympic size pool, rose garden, library, community gardens and more!

Property Type(s): Single Family, Residential

Listing information deemed reliable but not guaranteed. Read full disclaimer.

(view all details for MLS #OC13085172)

Proprietary OC Housing News home purchase analysis

27692 VIA RODRIGO Mission Viejo, CA 92692

$449,900 …….. Asking Price
$323,000 ………. Purchase Price
6/10/2002 ………. Purchase Date

$126,900 ………. Gross Gain (Loss)
($35,992) ………… Commissions and Costs at 8%
============================================
$90,908 ………. Net Gain (Loss)
============================================
39.3% ………. Gross Percent Change
28.1% ………. Net Percent Change
3.0% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$449,900 …….. Asking Price
$15,747 ………… 3.5% Down FHA Financing
3.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$434,154 …….. Mortgage
$126,444 ………. Income Requirement

$1,954 ………… Monthly Mortgage Payment
$390 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$94 ………… Homeowners Insurance at 0.25%
$488 ………… Private Mortgage Insurance
$340 ………… Homeowners Association Fees
============================================
$3,266 ………. Monthly Cash Outlays

($424) ………. Tax Savings
($681) ………. Principal Amortization
$18 ………….. Opportunity Cost of Down Payment
$76 ………….. Maintenance and Replacement Reserves
============================================
$2,255 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,999 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,999 ………… Closing Costs at 1% + $1,500
$4,342 ………… Interest Points at 1%
$15,747 ………… Down Payment
============================================
$32,086 ………. Total Cash Costs
$34,500 ………. Emergency Cash Reserves
============================================
$66,586 ………. Total Savings Needed

The property above is available for sale on the MLS.

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There is a limit to how much buyers can raise their bids. Gone are the days of liar loans, so now borrowers much qualify based on their verifiable income. Also gone are the affordability products including interest-only and negative amortization loans with teaser rates that allowed borrowers to leverage many times more than what their incomes can support. That leaves us with a market with a true barrier to affordability based on borrower incomes and prevailing interest rates applied to conventionally amortizing loans.

The monthly reports I publish each month delineates where these limits are. Below is the most recent readings on Irvine, California. The chart contains three lines all buyers should pay attention to: median resale, rental parity, and historic value. The purple line is the median sales price. As you can see, Irvine prices are rising rapidly and quickly approaching peak valuations.

The green line above is rental parity. It represents the price point where the cost of ownership equals the cost of a comparable rental. Not every neighborhood trades at rental parity. Some neighborhoods are more desirable, and people will bring equity from previous sales and bid prices up. Also, many are motivated to pay more to own than the cost of a rental. Many justify this additional expense as an “investment” that will be recouped based on appreciation. It’s a foolish belief. In reality, the additional cost is a consumptive use, and for those willing to pay the extra price for consumption, at least they are not deluding themselves with fantasies of great investment returns based on appreciation.

Since some neighborhoods trade at a premium and some trade at a discount, to really determine if a property in a given neighborhood is a bargain or overpriced, the current premium or discount must be compared to a stable historic value. I use the period from 1994 to 1999 as it represents the stable bottoming period between the two most recent housing bubbles. If you look at the chart above, you can see Irvine homes traded within a very tight range around this price level for many years (purple line matches orange line).

During that stable period, Irvine traded at a 15% premium to rental parity. If past is prologue, then Irvine should again trade at this premium once market values stabilize at the affordability limit. The affordability limit is represented by the orange dashed line in the chart. It plots the price point where prices are at their historically stable values relative to rental parity. As you can see, Irvine is no longer trading at a discount to rental parity (green line) and is quickly approaching the limit of affordability (orange dashed line).

When prices hit the limit of affordability, appreciation will wane. Buyers simply won’t be able to raise their bids any higher. Perhaps with the limited inventory and increased activity of all-cash buyers, prices might get pushed higher for a while, but that would represent the inflation of a new housing bubble, and those all-cash buyers, mostly investors, will get burned. Even now, many of those investors are expecting the steep slope of the purple line to continue to infinity. That simply isn’t going to happen.

Home Prices Jump but Affordability Remains in Buyers’ Favor

By Robbie Whelan — May 9, 2013, 1:03 PM

Home prices in 150 U.S. cities saw their biggest year-over-year gains in over seven years in the first quarter of 2013, but affordability still remains high in most markets. …

The biggest gains in home prices were in boom-bust markets that were hard-hit by the housing crisis, depressed Midwestern towns and markets in California benefitting from robust job growth.

Job growth and new household formation has nothing to do with this market rally. The bulls wish it were because that would reflect stronger underlying fundamentals; however, the price rally is entirely predicated on interest rate stimulus and changes in lender foreclosure policy favoring can-kicking over foreclosure.

Akron, Ohio, saw prices rise 32.7% to $108,300, the widest median price increase in the country. It was followed by the San Francisco Bay area, where prices rose 32.6%; Reno-Sparks, Nev. (32.1%); the Silicon Valley area surrounding San Jose (31.7%); Atlanta (31.1%); and Phoenix (30.1%).

Prices are still falling in Kankakee-Bradley, Ill. (-18.8%); Edison, N.J. (-8.6%); Allentown-Bethlehem-Easton, Pa. (-8.3%); Champaign-Urbana, Ill (-5.5%); and Erie, Pa. (-5.0%).

The judicial foreclosure states which avoided early bubble deflation are finally getting their comeuppance.

“The supply/demand balance is clearly tilted toward sellers in a good portion of the country,” said Lawrence Yun, NAR’s chief economist, in a statement. “Some of the previously hard-hit markets like Phoenix, Sacramento and Miami continue to experience a dramatic turnaround, while a new set of areas like Atlanta, Minneapolis and Seattle have begun to show strong signs of upward momentum.”

The NAR’s quarterly reports on median pricing are a good measure of where prices in certain markets are headed generally, but their results can sometimes overstate the magnitude of price gains because they don’t control for shifts in the number of low-priced homes versus high-priced homes that are sold each quarter.

Those price changes mentioned above sound remarkable, but the prices of individual homes did not rise nearly that much. Prices are certainly up, but the change in mix distorts the value upward just as it distorted the value downward in 2009.

A companion study showed that despite the economic downturn of recent years, low mortgage interest rates and consistent wages have given home buyers in the U.S. “ample buying power” in the current market…

Still, credit remains tight for some buyers, especially those with damaged credit scores and those who are not able to save enough for a large down payment.

That describes a much larger percentage of the potential buyer pool than ever before. Millions lost their homes to foreclosure, so they are broke and have bad credit. Millions more are Ponzis or recent college graduates who also don’t have savings, but more importantly, they don’t have the back-end qualifying ratio to take on more debt. Millions more were wiped out during the recession and don’t have the huge down payments necessary to buy at inflated prices. None of those people will contribute to a push higher.

Prices have also risen in large part because inventories of homes for sale have plummeted. The number of homes for sale in March totaled 1.93 million, the lowest level of inventory for the month of March—typically the first full month of the spring selling season—since 2000. Low inventories in some markets have sparked bidding wars among buyers and bolstered sales of newly built homes, which rose in March to their second-highest monthly sales pace in three years.

Low inventories are the key. Low interest rates give buyers the ability to raise their bids, but if large numbers of competing sellers are on the market, buyers don’t have to raise their bids. Inventory is being withheld from the market by banks who are can-kicking and underwater borrowers who are waiting until they reach the surface. This won’t change any time soon. As we get nearer the affordability limit, we also approach where borrowers can sell without a short sale. That will bring more sellers to the market — at WTF prices — who want to get out from under the debts they can’t really afford.

Banks getting peak pricing in Huntington Beach

My monthly reports still show Huntington Beach as undervalued, but based on some of the individual property transactions in the market today, I suspect future reports won’t. Today’s featured REO was purchased at the peak for $650,000. The borrower defaulted, and the bank bought it back at auction for $605,000. They are currently asking $709,500 which is almost 10% above peak pricing. They may not get it, but they probably will get more than peak pricing on this property. I hope the buyer of this property isn’t expecting rapid appreciation. It won’t happen. It looks like the bubble has been fully reflated in Huntington Beach.

19592 Roderick Lane, Huntington Beach, CA 92646 (MLS # PW13082296)

Great, two level home in lovely Huntington Beach neighborhood. Just minutes to downtown Huntington Beach shops, restaurants and pier. Upgraded kitchen with dark cabinetry, granite counters and recessed lighting; dining area with tile flooring; fireplace in living room; spacious family room that can easily be converted back to additional bedrooms; upstairs master bedroom has private bath with dual sinks and mirrored wardrobe doors; attached two car garage with laundry area and direct access; entertainers backyard features pool with spa; no HOA or mello roos; repairs in progress including interior paint, carpet and section I termite; property sold as is.

Property Type(s): Single Family, Residential

Listing information deemed reliable but not guaranteed. Read full disclaimer.

(view all details for MLS #PW13082296)

Proprietary OC Housing News home purchase analysis

19592 RODERICK Ln Huntington Beach, CA 92646

$709,500 …….. Asking Price
$650,000 ………. Purchase Price
2/11/2006 ………. Purchase Date

$59,500 ………. Gross Gain (Loss)
($56,760) ………… Commissions and Costs at 8%
============================================
$2,740 ………. Net Gain (Loss)
============================================
9.2% ………. Gross Percent Change
0.4% ………. Net Percent Change
1.2% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$709,500 …….. Asking Price
$141,900 ………… 20% Down Conventional
3.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$567,600 …….. Mortgage
$128,432 ………. Income Requirement

$2,555 ………… Monthly Mortgage Payment
$615 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$148 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,318 ………. Monthly Cash Outlays

($468) ………. Tax Savings
($890) ………. Principal Amortization
$159 ………….. Opportunity Cost of Down Payment
$197 ………….. Maintenance and Replacement Reserves
============================================
$2,316 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$8,595 ………… Furnishing and Move-In Costs at 1% + $1,500
$8,595 ………… Closing Costs at 1% + $1,500
$5,676 ………… Interest Points at 1%
$141,900 ………… Down Payment
============================================
$164,766 ………. Total Cash Costs
$35,500 ………. Emergency Cash Reserves
============================================
$200,266 ………. Total Savings Needed

The property above is available for sale on the MLS.

OC Housing News FREE Guides!

Click on the book cover for more information.

Nearby Foreclosures

May 06, 2013|Reuters