Through a combination of falling prices and low down payment mortgages, many buyers of the bear rally of 2009 find themselves underwater. When you figure in the transaction costs of selling a home, the numbers are really grim. Despite the negative circumstances, few of this buyer cohort will strategically default. Most are only slightly underwater, and since most also have a cost of ownership at or below rental parity, it’s more costly for them to rent, so most will stay put and wait out the remaining decline.
Insight: Falling home prices drag new buyers under water
By Tim Reid
Thu Apr 26, 2012 1:12pm EDT
(Reuters) – More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.
That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.
In other words, it is not representative of how bad the problem really is. Since 2008, the FHA has underwritten loans for between 13% and 19% of the total US housing market. Many of those loans were refinances. When looking at the purchase market, the FHA share ballooned to 24% to 33% of that market. A quarter to a third of all purchases were FHA loans. FHA loans are considerably more expensive than conventional financing; therefore, the majority of people using FHA loans did so because they only had the minimum 3.5% down and could not obtain a conventional loan. Since prices have been tunneling to new lows, nearly all of the FHA buyers over the last four years are underwater. When considering the transaction costs of sale, every FHA buyer who put less than 6% down is effectively underwater.
It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.
As of December 2011, the latest figures available, 31 percent of the U.S. home loans that were in negative equity – in which the outstanding loan balance exceeds the value of the home – were FHA-insured mortgages, according to CoreLogic.
Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.
How much responsibility to realtors have in trapping those poor souls. realtors call the bottom every year, in the past with absolutely no compelling data or justification for their bottom call. It was pure bullshit intended only to dupe buyers into believing the bottom was in so they would buy with a false sense of security. The self-serving realtor community did this to generate commissions irrespective of the hardship it inflicted on the buyers they ostensibly serve.
Even for loans taken out in December – less than four months ago and the last month for which data is available – nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.
“The overwhelming majority of the U.S. is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.”
The problem is not uniform around the country. In some areas, such as Washington, D.C., Miami and parts of northern California, prices are on the rise.
CoreLogic predicts the overall U.S. housing market will finally bottom out this year.
If the lending cartel can sustain its grip on the supply, and if they are content to meter homes out at a very small rate, then prices may indeed bottom. In most markets, prices are affordable, at least at the entry level (Orange County’s move-up markets are still overpriced). If the downward momentum can be reversed, there is a chance the bottom formed this year will be the true bottom. However, it’s rare in financial markets that engineered price supports form a durable bottom because the overhead supply does not clear out. If we do bottom at this higher level, the market will pay the price in years of tepid appreciation.
And the number of homeowners falling under water each month has decreased significantly since the peak of the financial crisis in 2008 and early 2009.
Still, Khater said, since October 2010 average home prices have fallen 7.4 percent. Overall, CoreLogic data shows that 11.1 million, or 22.8 percent, of U.S. residential properties with a mortgage are in negative equity, unchanged from the summer of 2010.
The numbers have remained the same but the composition has changed. As lenders foreclose on delinquent mortgage squatters, the remove one underwater loan owner from the statistics. However, as prices fall, a new one submerges beneath his debts to take the place of the former loan owner put out of his misery by foreclosure.
… “This is creating a new wave of underwater borrowers,” said Gary Shilling, a veteran financial analyst and well-known housing market bear. “We have all three branches of government trying to keep people in four bedroom houses who can’t afford chicken coops.“
Notice the dismissive language describing Mr. Shilling? The fact that he is a well-known housing market bear is intended to make him look biased and lack credibility. It should do the opposite considering he has been correct for the last six years now. BTW, is rather colloquial description of the situation is correct. The government, the federal reserve, and the banking cartel (the three modern branches of government) are doing everything they can to keep people paying on houses they could never afford.
… CoreLogic’s Khater said: “Low down payment lending in a weak housing market and weak economy begs the question whether we are setting up the FHA to have a multitude of failures down the line.”
Of course we are, but nobody really cares about that. The banks simply want their money, the loan owners want to stay in their houses, and politicians want to make both groups happy. The renters and true homeowners who are paying the bills be damned.
… “I’m at least $80,000 under water,” Opalka told Reuters. “We never expected to go under water. We never expected prices to fall like they have. We definitely didn’t see this coming. If I’d known this, we probably would have rented.“
Again, if their realtor had not promised them the world, they would have had a different outcome.
… In January 2009, the minimum down payment for an FHA loan rose from 3 percent to 3.5 percent, and the upfront premium for mortgage insurance has also been raised.In October 2010, only borrowers with a credit score of 580 or above could get a loan with a 3.5 percent down payment. Those with credit scores between 500 and 579 faced a 10 percent down payment. Those with credit scores below 500 do not qualify for an FHA loan. …
A Fair Isaac Corporation score – known as FICO and the standard evaluation of creditworthiness in the United States. – of less than 620 is usually considered sub-prime.
People falsely complain current lending standards are tight. Judge for yourself from the above information. The FHA will allow people with a 500 FICO score to borrow 90% of the value of home. Does that seem particularly tight to you?
“Most of the people I have dealt with have ended up paying less on their monthly mortgage payments than they were when they rented. The good thing is, we have got lots of young families into these homes.
“And if they stay put, they will eventually get equity.”
The only reason we won’t see significant strategic default among borrowers from the 2009 to 2011 era is that their cost of ownership was most often less than the cost of a competing rental. Strategic default really doesn’t make much sense for the borrower if their alternative is to pay more for housing. It’s the group who have no equity and are paying a premium on their housing costs who benefit the most from strategic default. Most bubble-era borrowers fall in this category. So despite so many of the new buyers being loan owners, most will hold on and not contribute to the downward spiral through strategic default.
First-time homebuyer training Wednesday, May 2, 2012, 6:30 PM
Sign up for first-time homebuyer training. First Wednesday every month at 6:30 PM. Or RSVP to sales@ochousingnews.com
The FHA worked for these people
Many buyers get their first property using FHA financing because it takes too long to save up for a 20% down payment. For those who did so at the bottom of the last real estate cycle, their return on investment was astronomical.
- Today’s featured property was purchased for $179,500 on 7/29/1994. The owners used a $170,000 first mortgage and a $9,000 down payment. They pulled out more than 44 times what they put in. How many other investments can do that?
- On 4/17/1997 they obtained a $30,000 stand-alone second. After less than three years, they already got their down payment back, and they more than tripled their investment. And this property had only just begun to reward them.
- On 2/20/2001 they obtained a $199,950 first mortgage.
- On 8/7/2001 they opened a $50,000 stand-alone second.
- On 9/26/2002 they refinanced with a $290,000 first mortgage.
- On 9/22/2003 they refinanced with a $308,000 first mortgage.
- On 4/30/2004 they opened a $68,000 HELOC.
- On 7/23/2004 they obtained a $90,000 HELOC.
- On 6/2/2005 they got a $125,000 HELOC.
- On 8/28/2006 they opened a $170,000 stand-alone second. Don’t you think a lender could see by this point these borrowers were Ponzis? How much more obvious does it need to be?
- On 2/14/2007 they refinanced with a $480,000 first mortgage and obtained a $90,000 HELOC.
- There is no way to know if they maxed out the HELOC, but based on their previous pattern, what would you guess.
- Total property debt is $570,000.
- Total mortgage equity withdrawal is $400,000.
- They got to squat for at least a year and half too.
They cleared $400,000 in untaxed income from a $9,000 initial investment. That’s why California real estate is so highly prized.
La Habra Overview
Median home price is $273,000. Based on a rental parity value of $414,000, this market is under valued.
Monthly payment affordability has been worsening over the last 3 month(s). Momentum suggests worsening affordability.
Resale prices on a $/SF basis declined from $209/SF to $208/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $115 last month from $1,631 to $1,746.
Rents have been falling for 6 month(s). Price momentum suggests falling rents over the next three months.
Market rating = 5
Proprietary OC Housing News home purchase analysis 
521 MARTINEZ Dr La Habra, CA 90631
$341,200 …….. Asking Price
$179,500 ………. Purchase Price
8/29/1994 ………. Purchase Date
$161,700 ………. Gross Gain (Loss)
($14,360) ………… Commissions and Costs at 8%
============================================
$147,340 ………. Net Gain (Loss)
============================================
90.1% ………. Gross Percent Change
82.1% ………. Net Percent Change
3.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$341,200 …….. Asking Price
$11,942 ………… 3.5% Down FHA Financing
3.82% …………. Mortgage Interest Rate
30 ……………… Number of Years
$329,258 …….. Mortgage
$87,559 ………. Income Requirement
$1,538 ………… Monthly Mortgage Payment
$296 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$85 ………… Homeowners Insurance at 0.3%
$343 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,262 ………. Monthly Cash Outlays
($235) ………. Tax Savings
($490) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$105 ………….. Maintenance and Replacement Reserves
============================================
$1,658 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,912 ………… Furnishing and Move In at 1% + $1,500
$4,912 ………… Closing Costs at 1% + $1,500
$3,293 ………… Interest Points
$11,942 ………… Down Payment
============================================
$25,059 ………. Total Cash Costs
$25,400 ………. Emergency Cash Reserves
============================================
$50,459 ………. Total Savings Needed
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599……
sales@ochousingnews.com…..
We're sorry, but we couldn't find MLS # K12052617 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$350,000 2531 UNION Ave |
0.08 miles 3 bd / 1.75 ba 1,200 Sq. Ft. |
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$302,200 2141 SIDON Ave |
0.25 miles 4 bd / 2 ba 1,493 Sq. Ft. |
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$417,000 2271 CANTERBURY |
0.49 miles 3 bd / 1.75 ba 1,259 Sq. Ft. |
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$342,000 330 RIGSBY St |
0.51 miles 3 bd / 1.75 ba 1,193 Sq. Ft. |
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$215,000 913 GLENCLIFF St |
0.53 miles 2 bd / 2 ba 1,140 Sq. Ft. |
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$369,000 2321 GREENBRIER Ln |
0.63 miles 3 bd / 1.75 ba 1,202 Sq. Ft. |
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$379,900 2511 GREENBRIER Ln |
0.63 miles 3 bd / 2 ba 1,167 Sq. Ft. |
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$364,999 640 MARDINA Way |
0.73 miles 3 bd / 2 ba 1,448 Sq. Ft. |
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$345,000 2381 FOXDALE Ave |
0.82 miles 3 bd / 1.5 ba 1,395 Sq. Ft. |
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$325,000 16053 MARLINTON Dr |
0.91 miles 3 bd / 1.75 ba 1,373 Sq. Ft. |
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19 Responses to “Home price double dip added 1 million underwater loan owners”
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At this point, a true bottom will NEVER materialize in OC as long as income shortfalls continue to be supplemented by debt.
“Bottom”? Things are crazy right now. We toured the Lambert Ranch development this weekend – large homes small lots $900K-$1.4M+! Houses in my neighborhood are now listed at their 2007/2008 prices!
I’m following this very closely. A home like mine just listed at its 2008 price, after going months without a comp for sale. If it sells near asking, I’ll finally apply for a refi, because then the appraisal should come in high enough, that we wouldn’t have to drain our entire savings to refi.
I was at Lambert Ranch this weekend too. The models are beautiful, but with a lack of a move-up market, I don’t know who they are going to sell those houses to. If the Irvine Company thought there was a market for homes in this price range, they would take Orchard Hills out of mothballs.
I would not be a bit surprised if the withholding of inventory will give you a few comps to help out your appraisal. I would take advantage of it without delay because lower comps may appear after lenders start releasing more inventory or approving more REOs.
Shevy told me yesterday he had a listing in Costa Mesa he thought would get $270K to $280K based on recent comps. He had multiple offers, and he is currently in escrow at $330K. I feel bad for the buyers who are reacting out of fear right now. The banks are manipulating them ruthlessly.
I would love to see to whom the Lambert Ranch homes are selling. How much cash are they putting down? What’s the source of the downpayment? How much do these families earn? What do they do to earn this much? Are they all extended families using parent’s income/savings to assist the purchase?
I guess with 4% 30Y rates, a $200K household could finance $900K reaching the highest DTIs (assuming no other debt)?
Shevy’s Costa Mesa example mirrors my friend’s who’s lost five bids on Floral Park homes in the last few months.
Irvine is the new Switzerland/Swiss Bank. Lot of homes are cash buy by international investors. Even the new constructions by Irvine company are being advertised in Mainland China, Hong kong, South Korea first.
Property prices in Orange county will increase/stabilize due to Asian money flowing in. This happened in the 80s and will repeat again.
Sam Mike;
You really need to look below the surface to quantify why US homeownership has been way way way over-rated, ie.,
http://s.wsj.net/public/resources/images/OB-SU071_smhous_NS_20120430170815.gif
Also, foreign cash buyers who rush-in (falling for sell-side international marketing campaigns) are merely absorbing mispriced inventory that locals don’t want or who’re simply unable to aquire the debt capital needed to buy. Why do you think availability of PRIVATE CAPITAL to fund mortgages has been in such short supply? LOL
BTW, the Japanese absorbed mispriced OC inventory thru the 80′s and were wiped-out accordingly by the early 90′s.
This development is targeting that clientele. Most floorplans have options for master suites on the first floor, in addition to second floor masters, so that parents/grandparents can live with you. A couple floorplans have casitas (separate/detached rooms with mini kitchens. Two models are “joined” – in that the side courtyards face each other creating one big space because there’s no fence between the two houses (mom & dad’s house next to kids’ house). There are also option separate wok kitchens (butler’s pantry enlarged with industrial vent).
el Oracle,
You are right. But the Asians want to park their money for the next few years in US Dollars. Even though the housing may/may not go down, in terms of currency conversion and next 10 years US Dollar is Safe and Strong relatively. Remember the UK Pound was strong even though their economy went down.
The Irvine Company already tapped the pent-up demand from Asian buyers when they relaunched in 2010. They had about 400 cash sales from overseas, but once the initial push was over, the number of all-cash buyers from Asians slowed to a trickle along with the rest of their sales. If Lambert Ranch is targeting this demographic, they will be forever selling homes in there.
Simply, ‘trial balloons’ are being floated. Nonetheless, current 30yr money can be attained @ 225 bsp’s lower than in Apr 2008 = malinvestment rages-on along with capital destruction.
A true bottom requires true fundamentals in-play
Will the bankruptcy (for lack of better term) of the FHA program finally end the easy credit by this program? At some point the government runs out of money. At some point the US has to decide what do to with FHA. What is the end game for FHA?
As long as Uncle Ben can print money I doubt FHA has anything to worry about. Weren’t Fannie and Freddie given an unlimited line of credit courtesy of tax payers…I don’t see this being any different. We’ll hear the usual buzz words…unexpected, unprecedented, perfect storm, once in a lifetime, etc, etc. etc……….
Yes, the government can never run out of money. The government is a currency issuer, not a currency user. Whereas a household can run out of money and become insolvent, a currency issuer like the US Government cannot. The only real limitation on the government’s ability to print money is inflation, and as long as we are destroying currency through debt destruction, monetary inflation is very unlikely. We may still see price inflation as the currency loses value, but right now, the printing press is only matching the debt destruction and maintaining a balance.
Totally agree – and this inflation will help prop up home owners and screw over renters. I look forward to paying my 2012 mortgage in 2042 with 2042′s highly inflated dollars. I predict I will look back and laugh at this payment.
Public policy is always designed with the homeowner in mind.
I heard Peter Schiff joke to an audience that if you took out a 30-year mortgage today, the stamp on the envelope 30 years from now will cost more than the final payment.
As a consequence of restricting inventory, lenders are obtaining more money for each REO.
REO Prices Increase, Fair Market Prices Drop, Home Values Stabilizing
According to data from Clear Capital, over the last year, REO prices have increased 5.5 percent, while fair market prices dropped 2.9 percent. The real estate data provider explained that demand for REOs is most likely causing the increase in prices and named Carrington Holding Company, Amherst Securities Group, and Waypoint Financial as examples of investors purchasing single-family REOs with the purpose of converting them into rental properties.
“There has been quite a bit of buzz in the housing industry surrounding turning REOs into rentals. Our data suggests early activity from these programs could be starting to take effect, with national REO-only home price gains on a price per square foot basis vastly outpacing fair market prices on a national level,” said Dr. Alex Villacorta, director of research and analytics at Clear Capital.
According to data from the Census Bureau, rental vacancy rates have also seen a steep decline, with the rate at 8.8 percent in the 2012 first quarter, a significant decline from the 2010 first quarter, when the vacancy rate was 10.6 percent.
Villacorta also added that if investor interest continues to expand the REO-to-rental programs over the next several months, this could lead to a significant impact on the market in terms of increasing home values.
REO saturation, or the portion of REO sales relative to total sales, increased on a quarterly basis in April for the third straight month. Nationally, REO saturation increased quarterly from 25.3 percent in December 2011 to 27.9 percent in April 2012.
The Midwest regions saw the greatest quarterly increase of REO saturation, increasing to 37.1 percent in April compared to 31.1 percent in December.
In the West, REO saturation increased from 31 percent to 33.3 percent during the same quarterly period, and in the South, saturation increased from 24.2 percent to 25.3 percent. In the Northeast, REO saturation remained low compared to other regions; the region posted a quarterly increase from 8.4 percent to 10.2 percent.
Presenting further evidence that the housing market may be stabilizing, Clear Capital released its Home Data Index (HDI), which showed that overall, home prices fell 0.2 percent on a quarterly basis, and 1 percent year-over-year.
The data gathered was good through April 2012, and the HDI includes both fair market and REO transactions.
Based on regions, the Midwest was the only one that posted quarter-over-quarter losses, declining 2.7 percent. The West (+0.5 percent), Northeast (+0.2 percent), and South (+0.6 percent) all posted small quarterly gains. Year-over-year, all regions posted loses except for the Northeast, which saw a 0.7 percent increase.
Compared to the March 2012 report, the West and South posted improvements, decreasing their year-over-year losses by 1.4 and 0.3 percentage points, respectively.
The Midwest was the only region not following the positive trend and posted a yearly loss of 0.2 percent compared to the previous month’s report.
Hard hit market Phoenix posted the greatest quarterly price gains and yearly increases at 8.4 and 12.5 percent, respectively.
Miami posted the second highest quarter-over-quarter increase at 4.6 percent, closely followed by Tampa (+4.4 percent); Richmond, Virginia (+4.4 percent); and Washington, D.C. (3.6 percent).
On a yearly basis, Orlando posted a 9.8 percent increase, while Miami saw a 9.1 percent gain.
Milwaukee saw the greater quarterly drop in prices, decreasing 12.5 percent. Columbus had the second greatest quarterly drop in prices at -7.5 percent, following by Birmingham, Alabama (-6.1 percent), Memphis (-5.4 percent), and Detroit (-4.2 percent).
Year-over-year, prices in Birmingham, Alabama fell 13 percent, Memphis 11.4 percent, Milwaukee 9.4 percent, Philadelphia 8.3 percent, and Columbia 6.2 percent.
WSJ today: Plenty of Money for Junk…some great quotes in the article how utterly loose and in essence, out of control, lending has become again. (Snide comment: thanks to the FED and its print-print-print zero interest for favorite rich people policies). Security? sound banking? Hah, not for OUR banks. (in theory, this loose lending permits massively marginal companies to keep hiring, while these junk debt and bonds are again sold to a willing public, directly or indirectly). Some of these jobs created by loose lending will be in Orange County, so that’s a help.
As to Orange County demographics mattering to future population/home sales/values: the utter plunge even in number of children born to teens (wed and unwed) is summarily chronicled by the California Public Health: http://www.cdph.ca.gov/Pages/NR12-012.aspx
Of interest: the 13-19 year olds of all California women teens seems to have drastically undergone a rapid semi-racial/economic class shift in only ten years, and to think this won’t have massive impact on Orange County over the next ten years…well, fair warning. These present teens are almost all there is to work with to buy homes in the next ten years or so as first time home buyers. There is no large group of teens elsewhere who will suddenly all move to Orange County or elsewhere in California over the next few years enough to make huge differences in those who buy homes (illegal aliens may be at or close to peak numbers now).
“California’s teen population appears to be leveling-off, however changes in its composition can influence the teen birth rate. In 2000, nearly equal proportions of female teens were Hispanic (39%) and White (38%); by 2010, Hispanics comprised 47% and Whites 33%” NOTE: many so-called “hispanics” are racially white, so this is not a racial division, not sure how each county decides who is “hispanic” or “white” when the person is often both! I am still digging around trying to find the “first marriage” rate over the last few years for Orange County, if families are going to form to make households (to buy homes!), then if there are semi-reliable numbers for true marriage rate, that may or may not show trends.
As long as there is employment and wage growth, someone will move in to Orange County and want to buy a home. But once a market gets drastically overpriced (anywhere in Coastal California) there is significant pressure on those born in the area to leave. Many simply can’t afford it.
[...] These are not new standard, but pre-bubble standards that are coming back into use. The tight lending standard reduced housing bubbles and prevented a lot of strategic defaults in the past. Standards are not really that tight. [...]