This is not a political agenda and has nothing to do with the Housing Bubble popping, but I’m glad someone finally said something about the deceptive, destructive, and unfair practice of Naked Short Selling.
For those of you who complain about the federal deficit, we could pick off the low-hanging fruit of this problem and recover as much as $1T (Yes, trillion) in taxes. Think it doesn’t happen? You haven’t seen enough of what Wall Street does, then. I have heard estimates as high as 50% of all trades on Wall Street are naked short and FTD related. What a deceptive piece of crud! Preventing a fledgling company from being able to offer open market issuances to raise funds is choking off small cap America.
To be more specific, this loophole benefits market makers, hedge funds and maybe even the funding of terrorist cells. Our national debt and the Iraqi war could have been paid for with the elimination of naked short selling or a mandated stock buy-in after shorting.
The current sales environment seems to have come to a grinding halt in the outer lying areas of the Southland. There will always be exceptions, but those areas are not likely far behind what we are seeing.
Basically, Jim the Realtor dealt with the same issue recently in his post titled “State of Foreclosures“. Banks are not competitively priced as some people might assume.
Jim said:
Once the bank gets them back, they list them with a realtor, and in almost all cases, are looking for close to retail price (or more!). In the 1990s the banks figured it out at the end to install carpet and a coat of paint to help their chances, but I haven’t seen much of that yet this time around. If you’re looking to buy one of these you will definitely be underwhelmed at the value.
No Joke.
It doesn’t take much looking to find a some examples of this exact problem. The first one we’ll bring to you is a bank owned property in San Marcos. I love that area, the weather is great, traffic is excellent, and there’s a fantastic Fry’s Electronics Superstore there!
Unfortunately for many families, the local economy does not alway support the kind of housing valuations we have see in recent years. While these numbers may seem low to those currently living in LA or OC, there’s a reason, the employment options are not the same.
The first one is 517 Avenida Ortega, San Marcos, CA 92078. It’s a beautiful home comprising 2,585 sq feet of pure family living. This house is BANK OWNED. None of the others featured here are. You would think that you would get a better deal with this house, right?
Perhaps its most glaring fault is that it shares its driveway with the neighbor.
The kitchen is bone stock from the builder:
All in all, a decent bare-bones home. The Price: $593K
Remember that when we compare the neighborhood.
Nearly their neighbor, another house is for sale. This house is 523 Avenida Ortega, San Marcos. It’s a model match, and you’ll notice the resemblance right away:
But, this is where the similarities end. No shared Driveway, and look at the kitchen:
Granite no less, and wood (or at least faux wood) flooring through much of the downstairs.
What would you expect this listing to be at? Higher than the previous one… the previous was, after all, a foreclosure and bank owned property with some small cosmetic issues.
Not a chance. $575K. A full 18K lower than the bank-owned foreclosure.
Well, you say, this must be a motivated seller, the comps must at least support these prices, right?
Another house on the same street, same model match (514 Avenida Ortega, San Marcos) sold in November 2006 for $582K, and that’s not counting any incentives the seller might have given away.
While the second seller has figured out that the market is declining and willing to get out, the bank is still in denial or clueless. Either way, you’ll get a better deal, a better house, and have more bargaining power with normal sellers than you will with banks right now.
What will it take to change this? What will make banks want to get rid of properties? It’s all about volume. Until banks are holding enough nonperforming assets to awaken the ire of regulators, they will continue to sit on properties hoping that the market will come up to their wishing prices. While banks often have a prescribed formula for price reductions, they will eventually sell the homes. When regulators force banks to expedite the shedding of houses, then we’ll see some serious price reductions.
Until then, everyone’s still wishing, hoping, and praying.
****Update 4:45 PM****
After already publishing this one, I see that there is actually another property on the same street for sale that even drives the point home:
518 Avenida Ortega is also a model match, as you can see from below:
Man, these were stamped out like from some kind of cookie cutter:
Here’s the kitchen:
Anyone care to guess the price on this one?
This price blows both of them out of the water: $555K
This house is in slightly better shape than the bank owned property, and it’s nearly 40K lower priced. Foreclosures are not yet a good deal.
I recently saw a home go up for sale in my area. It sat for a reasonable amount of time and then sold (maybe 2 or 3 months). It was priced well.
I decided to check out Zillow to see what it sold for.
BTW, it was listed for 629K.
Zillow says it sold for 650K.
FirstTeam’s archived page said it sold for 620K.
Wayback time machine says it was listed for 628.9K
Which one do you believe?
It’s possible all of them are right. House sold for 620K with a kickback to buyer for 30K, not including other concessions. Buyer gets financing based on 650K.
Who was helped by this: Buyer, Seller, Agent
Who was (could be) harmed by this: Bank (bagholder)
And people wonder why credit will be restricted. The same house sold for 620K in February 2005. We’re already back to February 2005 pricing in February 2007. Not a great moneymaker when the same house model can be rented for less than half of the after-tax equivalent of buying. It depends on how much tolerance you have for fraud. Cash back at closing not stated in the escow document is a good place to start.
Still, you’ll say, Chuck, this is just one house out of many. True. There are many, many more which did not get sold in February and will need to compete in a restricted credit environment. These owners got out by the skin of their teeth. The next ones may not be so lucky.
There are plenty more where that came from. Throw a stone nowadays and you’ll hit real estate fraud.
Anyone who knows Murphy’s law, knows that it pertains to many of life’s experiences. The law simply states, “If something can go wrong, it will.”
Developers, architects, engineers, and a host of other professions deal with this by over-developing, over-architecture, over-engineering, or over designing what they are working with. If the professional does not, a high rate of failure is assured. It seems that the sub-prime loans (add Alt-A loans to this pile, and most assuredly a good portion of prime loans as well) had some built-in defects with reset shock and delaying of consequences.
The most difficult (and one could argue impossible) event to plan for is one that is unforeseen when the system was designed. It had never happened before, and no one could imagine that it could happen, so how could the designers have planned for it?
With all of the talk of bailouts lately, it seems that many humans have forgotten that many actions have unintended consequences.
Today, an article crossed my desk that highlights that exact problem. Housing bears, hold your breath, you’re going to need it.
Civil rights groups called Wednesday for a six-month moratorium on foreclosures resulting from high-risk loans given to people with shaky credit, arguing that lenders should help borrowers refinance their mortgages or face lawsuits.
A coalition of advocacy groups said mortgage lenders should immediately halt foreclosures on so-called subprime mortgage loans made at high interest rates to people with weak credit histories.
Oh, man this one has disaster written all over it, even when stepping aside from the morality of bailing out gamblers, and the inherent Moral Hazard created by it.
Moral Hazard is defined by Investopedia as:
The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
Ah, that about sums it up.
This is an important discussion to have. In a previous discussion, I argued about the problems of moral hazard with a government-led bailout scenario, and how that fallout would likely bury incumbent politicians and create a large enough issue related to our fiscal budget. (Sen. Dodd, anyone?)
This bailout is of a different type for the following reasons:
1. It shifts the responsibility of payment from the homeowner to the bank, not the government.
2. The bank now has to account for even greater risk than just payment ability, but to also account for moral hazard.
Based on this, the only logical thing for banks to do is to restrict credit even FURTHER. That would help some current house-debtors, for sure, but would virtually eliminate any semblance of risk taking by banks. They would have to ensure that substantially greater credit conditions would need to exist and greater buy-in (down payments) by borrowers.
Not surprisingly, the smart guys over at the banks said:
James Ballentine, director of housing and economic development at the American Bankers Association, said the call for a six-month moratorium is an “overreaction” to problems in the mortgage market.
Very true, markets are much better at sorting out risks than consumer advocate groups.
Basically, if consumers know that they will get leniency whenever they have problems with loans, they will engage in riskier behavior than without that assurance. The banks know this, so they will only lend money to those who they are SURE that will not engage in risky behavior, or who also have something to lose by engaging in risky behavior. (Insurance companies use co-pays to reduce moral hazard)
Basically, banks will cut off funding to at-risk parties, which is exactly the opposite of what these consumer advocacy groups are trying to do. It’s cutting off the nose to spite the face. Since banks would never know when they would be required to provide such assistance, they would have to assume that it would always happen.
Therefore, I have created the new Chuck Ponzi’s Law of Unintended Consequences which marries the concept of Murphy’s Law and the Law of Unintended Consequences. Basically, it states:
If there is any chance that someone can get bailed out by someone else, they will, and you will have to pay for it from your own pocket.
It may seem that the escalating prices of homes has made many of us rethink exactly what we’re working for.
For those of you who are already independently wealthy, you can tune out now.
For the rest of us, this is critical to our understanding of the housing/credit bubble, if we are to understand it at all.
Imagine for a moment that your purchases are not measured in dollars, but in after-tax time. For example, if my after-tax time were measured in $25 per hour, purchasing a sweater might cost me 1 hour of time. Similarly, a house priced in $25K dollars would be 1000 hours of my working time, or roughly 25 weeks working 40 hours per week, or roughly 6 months. Similarly a house priced at $250K would be roughly 10 times that or 60 months (5 years). Double that again, and you’re talking about 10 years.
The median household income in Orange County is roughly 75K. This typically translates into about $25 per hour after-tax.
Anyone see where I’m going here? Basically, the typical home costs more than 10 years of the median household in much of Southern California (give or take a bit). After that, you need to add in an additional 15 years to pay for interest (typical for a 7% loan) Or, in other words, their house is taking 25 years for them to buy using their entire current income.
Let’s assume for a minute that this is normal. Let’s not look at history, but rather see what our personal tolerance for risk is. A couple of assumptions one would need to make is that you don’t eat, wear clothing, need medical attention, own or drive a car, experience a divorce, childbirth, nor do you plan to go on vacation, take a day off, get sick, or heaven forbid get laid off or quit.
What do you think the likelihood is of working without fail doing these things for 30 years? What about 25 years?
Let’s assume that you have the typical savings here in America… which is frankly zero or nearly zero. You begin to see where the problem is.
While the last few years, we have seen lenders throw caution to the wind in the name of financial innovation, the cold reality seems that these were moneychangers dealing with OPM (Other People’s Money).
The article I ripped the above graphic of the Dollar from iterates well what this blog has been preaching for 2 years now:
1. Trade Deficits and repatriated funds from China/Japan/Et al. matters to our borrowing rates:
Here’s the deal. In 2006 the US bought $800 billion dollars more stuff from overseas than it sold. US dollars left its shores and had those dollars had not been returned and used to buy US Treasury paper (government debt) two things would have happened – the dollar would have weakened (even more) and interest rates would have gone up (possibly by a lot). If you think the housing market is struggling now, just be glad it is not also facing 10% interest rates.
2. Affordability does matter to 90% of us, and that’s who buys the median homes:
My opinion is that the housing crash that is now before us will last far longer and be far worse than is commonly recognized. If we are lucky, the housing market will bottom in 2010-2011. When all is said and done I expect as much as a 90% price crash in some markets and an average of 40%-50% across all markets. I see nothing in the trajectory of this housing bubble to suggest a reason to suspect it will play out any differently financially or psychologically than any other bubble in history. In short, it’s NOT different this time. It’s very probably the same. If, however, we’re unlucky, housing, retiring boomers and peak oil will press their serious demands upon a concurrent stretch of the future and housing will never reclaim the peak seen in 2005.
If I had to boil the main problem down to one issue, what would it be? Affordability.
3. Globalization LOWERS reduces costs (income) through competition
Given that American families have had to endure essentially flat real wage growth for the past 3 decades which do you think is more likely? Will wages suddenly rocket up 100% or will house prices come down 50%? If you are interested in how real wages for average families have been depressed all these many decades you are in luck. Last week Circuit City laid off 3,500 workers in order to hire them all back at a fraction of their prior wage providing you with a textbook example of how it’s done.
4. The Spillover to other industries will be severe
What to watch for? Over the next few months it will become obvious that all the ‘experts’ currently predicting that housing woes will not impact other areas of the economy are dead wrong. When a housing bust happens, it’s not just the carpenters and mortgage brokers that get laid off. It is the people who sold them cars and served them food, and took their vacation reservations. The ripples extend far wider than is being currently acknowledged by an unfortunately large and vocal proportion of our financial marketing infrastructure.
5. We might be seeing the reperformance of a Depression. Trade restrictions akin to the Smoot-Hawley Tarrif Act are the politicians way of “fighting back”, but end up depressing our economy through trade wars and loss of global competitiveness in the short and long term:
The US is utterly dependent on China for a huge proportion of its daily financing and yet we’re slapping sanctions on China. This is not unlike insulting your banker the day before applying for an unsecured loan. It doesn’t seem very wise.
Within seconds of this announcement the dollar took a dive, stock markets swooned, gold launched and interest rates gyrated wildly before some measure of market stability returned.
At this time of great uncertainty, it is perhaps good to consider to whom the dollars are pledged… hint, it’s not the US Government, nor is it the People of the US, but rather the Federal Reserve:
After viewing this, if you don’t remember that the $1.00 is now worth just $.04 from when the Federal Reserve began, consider the following:
There are risks to everything in life. Risks that prices go up (that’s a certainty for some things), risks that prices go down (that’s also a certainty for some things). Risks that you keep your job or lose it, and make more or less than everything now that costs more. Basically, financial matters, it seems, are a crapshoot. Do you then take your money and stuff it in a mattress, or take it and stuff it into a depreciating home? Make the wrong decision, and you can easily face bankruptcy while the right decision can make you rich. Either way, whether you like it or not, risk is a part of life, even doing nothing carries its own risks. Most important to remember however: Past performance is no predictor of future returns. To see where we’re headed, it’s best to look back to where we were the last time these circumstances occured and act accordingly.
As always, I am interested in the impact on the local economy… as it is central to my forecast for Orange County’s housing debacle.
Subprime mortgage lender New Century Financial Corp. filed Monday for Chapter 11 bankruptcy protection, and said it would fire 3,200 workers, or 54 percent of its work force, to better position the company for a possible sale.
And, cutting off the arm to escape:
New Century said it has agreed to sell its loan servicing business to Carrington Capital Management LLC and its affiliate for about $139 million, subject to the approval of the bankruptcy court.
There’s not much left of this company to reorganize. Might as well make it a Chapter 7 and be done with it. I guess all we need now is to sell the new office chairs and give up the commercial office space in Irvine…
I recently heard some rumblings of how commercial RE was going to save our sorry butts in OC… not here, not now.
Just found out that Matthew Padilla has the inside scoop on Layoffs for New Century:
500 from Today.
I suppose many more to come.
Best quote:
Jack Kyser, chief economist with the Los Angeles County Economic Development Corp., which also covers Orange County, said buyers are interested in parts of New Century, but no one is likely interested in the brand or company as a whole.
“What do people think of when you say New Century?,” Kyser said. “There’s no value in the company name anymore.”
You can say that again. New Century has turned into a certain liability for other companies similarly named.
It’s official. I have finally made it another year as the sole blogger of this blog. For those of you who didn’t know, the Blog is now officially 2 years old. I started April 1, 2005. Since that time, we have crested the hill and begun our descent downward. We’ve had our fill of trolls, regulars, one-timers, and old-timers. Some are in denial, and would argue that I am the one in need of getting his head checked.
I guess you can’t please everyone… or it seems anyone for that matter.
Express your
Anger?
Support?
Sadness?
Delight?
Don’t they censor the internet? Who is this Chuck Ponzi guy anyway? Who gave him the rights to write on the most sacred of sacred cows… Southern California Real Estate?
Since the bubble is a long ways from bottoming, count on me being here for a while longer. For those interested, the coming year will include the following:
1. The blog-by-blow of the Spring Smackdown. The Summer Sizzle, The Fall Fall, and Winter’s Chill.
2. The dead cat bounce of Summer ‘07 (may be cancelled due to the credit event)
3. The organization of the Chuck Ponzi Vulture Fund. Yes, I hope to begin putting together some of the best minds (and money) of Southern California for this. (tell your rich friends, yes, the ones with actual money)
