A New Voice On The Bubble Blog
Brad_Davidson June 20th, 2008
Greetings fellow real estate watchers. I appreciate this opportunity to share my thoughts on the Southern California Real Estate market. I know real estate agents are not held in the highest esteem here but please, give me the benefit of the doubt before passing judgement.
You can go back and read my initial interview with Chuck Ponzi (then known as John Doe) about my We Help-U-Buy Realty concept from June 2006 and see my thoughts from then on “The Bubble”. I prefer my crow medium well please, because I was wrong , wrong, wrong. I knew the market couldn’t keep going up and that there would be a correction but I didn’t understand the implications of the ridiculously lax credit standards and what would happen when banks stopped handing out free money. At the time I thought there would be a softer landing.
The Option ARM loans made me see the light. I was still dabbling in the lending business 18 months ago and when the lenders started offering up to 4% commissions to sell people negative amortization loans I could smell trouble. By last summer, before the credit crisis, I was telling clients to not buy houses. It tends to have a significant impact on sales when you start telling your clients not to buy what you sell. However, I sleep very well at night and have a very loyal client base.
There are still storm clouds on the horizon as foreclosures continue to rise, the median price continues to fall and sales gains are driven by low priced bank owned properties. I do see some stability in prices at the levels at which banks are selling their REO properties. People are lining up to buy the REO’s and if they continue to show up and buy these properties a base will be established. If sales die off, as they usually do at the end of summer, inventory will rise again and prices could fall some more.
With the banks foreclosing on over 2,000 Orange County properties in May and June, REO’s are piling up in the banks inventories faster than they can be sold. Even though I see considerable pent up demand, and I’m busier than I’ve ever been, prices will be stagnant at best through next year. It’s going to take at least that long to work through all the distressed properties that will come onto the market.
I hope I’m better with my predictions in June 2008 than I was in June 2006. These are very interesting times and I look forward to passing along what I see in the marketplace and getting your opinions about real estate in Southern California.
Brad, welcome. I can appreciate your ability to publically admit mistakes and move forward and also protect the interest of your clients.
Here’s the thing. There are 10’s of thousands of people in the U.S. alone who accurately foresaw what would be a huge global unwinding of the credit (and therefore) asset bubbles. The most apparant of which is housing.
I would say the majority of these people, myself included, do not see anything other than a false bottom at current REO prices. Why? Frankly, folks can be easily tricked. It’s like the store that’s going out of business marking prices up by 40% and then dropping it by 50% to give the apperance of a great deal.
I guess what this boils down to is that many of us have a better track record on calling the future than you do. If you’re going to come to a housing bubble blog, as a realtor, as someone who wrongly predicted the market you’re paid to understand, and (probably) miss your next prediction by a wide margin, I would hope in the future you use some hard evidence to back up the claim.
Ignoring the hype and looking at histrocial data made the bubble bust an easy call. While calling the bottom is more difficult, it’s fairly easy to get close and mine says we’re a longggg way away.
Best of luck to you.
Ouch! Bitter much DM.
I have previously taken Brad to task but be a little gracious.
He admitted he was wrong and we are getting to the bubble unwinding period where it is going to get a lot harder to be right (for the bears).
The more data sets the better.
I offer an olive branch to Brad for having the courage to come to a bubble blog as a realtor and admit he was wrong.
How many realtors have done that?
“Ouch! Bitter much DM.
I have previously taken Brad to task but be a little gracious.”
I dunno. All I saw was a first post by a real estate professional ostensibly calling a bottom… on a bubble blog.
I’ll second the comment that if he demonstrates a non-BS view of the market I’d be more than happy to send business his way.
Hell, if Brad turns out to be anything like Jim Klinge in his assessments of the market, I might actually use his services.
Greetings.
As other people said, it’s going to be tough to establish yourself as credible, but I think admitting error is a good first step.
I’d be curious to hear your reasoning for thinking there’s stability of prices even in the REO space. As I see it (casual observer), people may be jumping in at bargains because banks are pricing below comps to unload, but REO inventory is still increasing, and shadow inventory (delinquent but not yet re-possessed) is also increasing. If banks continue to price below comps to unload, and REO inventory is still going up, and falling prices will push more people into distress, how can the current stability be anything more than a false bottom created by speculative buying?
As I see it, we have a long way to go to get to parity with income and traditional affordability (2-3x income). I don’t think the market is in free-fall yet; there are still plenty of people speculating (evidence the number of mortgages for REO purchases which are 97% LTV, which are likely to be underwater in a year, if not sooner). Historically, I wouldn’t think the market was at bottom until “everyone” thought RE was a bad investment, and we’re far from there. However, I’d very much like to hear your take on if/why the bottom might be close.
PS: What’s your take, as a RE insider, on Countrywide’s decreasing REO inventory, as everyone else’s goes up, and by all accounts their delinquency rate is increasing at least as fast as the industry average? Sandbagging until BofA goes through, nobody working on it there any more, or something else?
The only wild card is inflation. I’m sure everyone would like a raise. Is anyone getting it? If not then Nick has it right.
The reason I see possible price stability in the REO market is that:
1. All the decent properties are selling as fast as they come on the market for above the asking price. It boggles the mind but I see bidding wars, ala 2004, on properties every week. A property on Begonia in Costa Mesa was listed at $486K recently. The had 20 offers and it’s in escrow for over $600K (according to the agent). That’s an extreme case, but I write on average 5 - 10 offers a week and few of them are much below asking price. It’s amazing that I get so few offers accepted considering how many clients I have actively trying to buy properties. In the past month I’ve only written offers on 2 REO’s that didn’t have multiple offers. One was in Murrieta and one was a dump in Tustin that I told my client not to buy.
Buyers are going to have to keep showing up for the price stability to hold, but as long as they do, the sellers have no reason to lower prices any further. If the buyers don’t keep showing up the prices will fall. The other market killer might be interest rates. They have jumped in the past few weeks and some clients are telling me that they are re-thinking their plans to buy.
2. Some of these REO properties are starting to make sense to buy and hold. I see decent 3 bedroom 2 bath homes in Anaheim listed at just over $300,000. If you could get that property at $300K, my rebate pays for the closing costs, you put 20% down and your interest only payment is $1300/month at 6.5%. Taxes and insurance are going to add $350/month for total monthly payment of $1650. You can rent that house for $1800 to $2000 per month, get some cash flow plus a nice depreciation allowance and in the future make money on appreciation.
That is a scenario that investors are buying into and I’m seeing them buying up the cheap REOs. It is not however, a scenario I am touting to my clients and while I could buy a few of those cheap REO’s I’m waiting on the side lines. The advise I give my clients, and that I am following myself, is that if we are at or near the bottom, the bottom is going to be with us for a while and there will be plenty of opportunities to buy. If the market keeps falling, BONUS, you’ll get more for your money.
Please don’t think I’m trying to hedge my bets here. I see the market from a different perspective than looking at Data Quick sales numbers that are essentially two months old. The median prices is going to keep falling and individual home sellers are going to have a hard time selling against the lower priced REO competition.
I’ll agree that “some” are okay for buy and hold.
However, there are a couple of general problems that most “investors” have forgotten these past few years.
1. Downpayments are dead money in a house. I can not earn anything on it unless the house goes up in value, or I get positive cash flows. Also, houses are very illiquid so you had better not need that money (don’t get laid off, don’t get hurt, and for the love of pete, have 6 months of ALL expenses including your rentals saved up).
2. Maintenance, vacancy, and management fees will easily eat up most if not all the after tax cash flow mentioned above. Especially renting in areas like Anaheim.
3. Most REOs require rehab. Unless they are less than 3 years old, you will have to spend 30 to 50K fixing up that place you mentioned to make it rentable comparable to the other properties, now requiring 100K+ to get into “the rental game”.
4. Non owner occupied rates are much higher right now than owner occupied, in most cases half to a full percentage point which pushes this to a money loser.
After you factor everything in, buying real estate as an investment is still a pretty poor comparison with most other investments, which is why prices are still falling.
Just as importantly, most houses are not priced in the 300K range. Most owners are still asking wishing prices of 2005 - 2006 of 550K. Telling them that “we’ve hit bottom” gives them a false sense of hope. In that sense, if they chop 50% off their WTF price, they have “hit bottom”. Of course, most of them could not afford this, so we’ve got large masses of “zombie inventory” that are living dead; they just don’t know it yet.
How many people would you guess are buying with 20% down, vs higher LTV ratios such as the 97% FHA loans? If the majority of the sales are indeed 20% down, I might buy the “attractive to investors” argument, since they are putting real money into the investments. However, if the majority are higher LTV loans (as I have read elsewhere), then most likely the demand is being fueled by speculators and knife catchers, and they too will eventually feed into the REO market [again].
I agree that interest rates are the wild card, and could certainly increase as perceptions of inflation become more realistic. I also agree that the bottom will likely be with us for a while, so there’s very little reason to risk catching a knife.
If I remember correctly, FHA requires you to attest that you will be living in the property yourself. If you already live in a home, there is likely going to be a request to ensure that you are selling, or have sold your primary residence before buying using FHA.
If you’re investing, 20% is pretty much the rule nowadays. Anything else has prohibitively high rates. Even conforming are more like 7.5%
That may be true, but I also remember recently reading that banks were letting REO’s sit for 3 months before even putting them on the market (before the recent FHA rule change), presumably because the vast majority of the potential buyers would be using FHA loans, and thus it didn’t make sense to even list them before that. Between 97% LTV and DAP kickbacks, I would not be at all surprised to see people still speculating in the market; after all, we (the taxpayers) are still willing to sell them options (unlike the lenders, who must be semi-accountable for their losses due to massive incompetence).
Also, I don’t put too much faith in the fact-checking of the FHA to ensure people are not just lying about living in the house. Their lending programs just seem much more concerned with putting people in houses than fact checking, fraud protection, rational lending standards, loss prevention, etc. Besides, it’s not like you’d have to worry about your house actually selling if you put it on the market today, especially at over comps, so it wouldn’t be hard to claim you were “trying to sell.”
That said, I am very curious to get Brad’s take on the current stats, FHA loans vs. conventional 20% down loans. As he said, the generally reported data (which I rely on) is months old, and he might have a better perspective for what’s going on between then and now. I have a suspicion that the recent up-tick in bidding/sales is primarily due to the removal of the 3 month restriction for FHA loans, but that might be confirmed or refuted with recent information about the distribution.
I strongly recommend that Brad take a look at the latest post by Dr. Housing Bubble, and consider that the median home price is still at double the historical proportion to the median income in SoCal.
Are local incomes going to be increasing dramatically sometime soon? Economic signs point to “no.” Will banks loan money to fund home purchases at 9x income rather than 3x anytime soon? Doesn’t seem likely either. And if not, prices still have a long, long way to fall.
I think that Brad should take a long look at what he defines as banks. He has put ALL banks in the same category. As an advisor to community banks, I find it objectionable to classify the well run community banks in California as being those guys that did the esoteric loans that he disusses. Point the blame directly at WAMU, Countrywide, Bof A, Wells Fargo….and the investment BANKS e.g. Bears Stearns, Merrill Lynch’em etc. The smart community bankers forsaw your too late view of the real estate market. In your case, hind sight is better than foresight! A vast majority of them did not deal in the illogical paper that the above “BIG BANKS.”
All financial institutions are going thru a distressed time, but comunity banks are doing quite well. If you look at FYE 2007 for California, the biggest losers were not community bnaks…..but Countrywide and its likes. Most of the community banks that lost money FYE2007 are new denovo banks that are establishing themselves in a difficult market at best…but with good management, they will persevere.
“Even though I see considerable pent up demand, and I’m busier than I’ve ever been, prices will be stagnant at best through next year”
I keep hearing this phrase “pent up demand”, but do not really understand what it means. If pent up means a long term unfulfilled desire building up over time, with the means to act on that desire, then I think there is more pent up supply then there is pent up demand.
I would like those using this phrase to try to explain exactly what it means when they use it, because I don’t understand what it means in the context of the above comment.
There’s always pent up demand. the question is if the pent-up demand can be satisfied at the given price. If not, there’s no sale executed.
By the same token, there’s also pent-up supply, at a given price.
Remember, that at the right price, nearly everyone is a buyer or a seller.
It sounds like Brad is really in tune to properties that fall out on searches and are getting the right attention because of the price. It remains to be seen if there is a lot of demand behind houses at those prices. It seems there is. I’m not surprised at all.
However, just because there is demand today does not mean there is demand every day and in all situations. Things like job loss and pessimism can quickly change the mix of buyers/sellers.
And, with ownership at recently at it’s highest historically with extremely accomodative lending, there’s likely to be far more supply than demand at just about any prices. Investors can only spend the 20% bullet so many times. I suspect that there are about 30-50 investors out there in Orange county able to chew up more than 1 property in the next year. Once those are satisfied in the 300-400K range, the next leg down will happen if there is a lot more supply available. Then, we’ll see opportunistic buyers (those that needn’t normally buy but do so because it’s cheaper than rent). I’m confident that when all’s said and done that you will be able to buy a house pretty much anywhere in OC using low down cheaper than rent before taxes or pretty darn close.
Like Brad, I could also be wrong, and not just because I wish it. There is very little information about where we hit bottom since the runup was unprecedented. This is why Brad’s commentary over the next years will be so valuable. He sees on a daily basis what is going on.
Chuck Ponzi.
Chuck,
Thanks for all you do, I believe those that visit your blog have alot to thank you for or at least a beer in Laguna.
Would like you opinion if I may!
Currently renting in Carlsbad ($2,500) Own a house in AZ. was at peak $750k now $550k and owe $159k on it at 6.5% ($1,400 total)which will readjust in 8 months.
All of last yr was rented at $2,200 and just signed a 3 yr lease w/ new tenant at $2,400. Have $600k and I’m thinking about paying it off…but then again why should I since it will continue to be a depreciating asset for a few more yrs..refi makes more sense and hold on to the cash and buy a duplex or sfr here in S Cal in a yr or 2. Opinion, Any better ides or suggestions very much appreciated!
I’m not Chuck, but I’ll offer an opinion. I have a similar situation: live in a condo in LA, considered selling a year ago, I owe more than you do but I have a 30yr fixed, and my total cost per month (mortgage, HOA, taxes, and insurance) is about what it would rent for. I could have made ~150k selling it, but I decided to keep it, and here’s why.
1. Living there, and didn’t want to move into a rental for a few years until the market bottomed out.
2. It would be break even for cash flow currently (discounting the money going into equity, which is positive), and I would expect it to be positive in the future as mortgage payment is fixed. I want to collect positive cash assets, so it’s good to have long-term.
3. I have enough cash assets to be able to afford another property (or multiple properties) when the market bottoms out, and plan to buy then.
If I were you, with those conditions (and lease, especially), I would likely refi into a fixed and plan to hold it long-term. The only mitigating factor would be the location of the property in AZ; if you don’t think you can sustain the rental rate, it might be worth unloading. Sounds like you’re in a good position, though.
Hi Brad,
You wrote:
A property on Begonia in Costa Mesa was listed at $486K recently. The had 20 offers and it’s in escrow for over $600K (according to the agent).
I am curious, since I follow this market, how reliable you think this information is? The only comps I see are 984 Carnation, which sold a month ago for $499, 1091 Visalia @$550, and 1055 Redding @$550 (all with smaller lots, but the last two larger sf).
Is this talk of “20 bids to $600k” just sales hype?
There will be no sales hype from me.
I believe the other agent that there were 20 offers, people were streaming through that place like an In-N-Out Burger.
The property was listed at $486,900 and my client offered over $500,000 thinking that would get him in the game. When I call the other agent to make sure she had my offer she told me there had been 13 offers so far ( and they were well north of $550,000) and the seller would be reviewing them. The next day she called back to tell me there were 20 offers and seller had instructed her to tell people not to bother re-bidding unless they offered over $575,000. She told me she had one bid as high as $600,000.
Perhaps the $600,000 bid wasn’t very stable because the property closed at $577,000 on June 9th. Here is the closed listing:
925 Begonia
The fact that the escrow period was less than 3 weeks leads me to believe that it was an all cash deal. The tax record hasn’t updated yet but it will be interesting to see.
It’s amazing that people are bidding these properties up in times like this but this one went for $90,000 over asking.
Still waiting on a response to the percentage of FHA “pre-foreclosure” loans vs traditional, 20% down, “can actually pay” loans.
Found an interesting article at: http://www.washingtonpost.com/.....45_pf.html
The article quotes a RE agent as saying virtually all recent loans are FHA loans. What are you seeing, Brad, for southern California?
I only have one client currently writing offers using FHA financing. Out of my 60 active clients 2 others are looking to use FHA or VA loans.
My 5 non-investor escrows are all at least 20% down. 1 of my closed deals this year was 10% down, all the rest were at least 20% down.
There is a lot of competition for well priced properties and sellers, particularly REO sellers, are looking for quality buyers who will close. Some REO listings state “No offers with less than 10% down”. Most REO’s only accept prequal letters from direct lenders.
I have a unique clientelle who are attracted by my commission rebate. They tend to be educated, professional, well qualified buyers. One of my prerequisites is that you must be prequalified and be prepared to show me the letter. People who call me and tell me they have minimum down payments with low credit scores get refered to lenders who never hear from them. When you’re giving away 66% of your commission you have to cull the herd.
I may not be representative of what other agents see because I try very hard not to write offers that don’t have a chance of being accepted. Other agents tend to write any offer just to hook the client.
Gotcha. It does sound like your clientele are substantially different than the majority of people who are buying houses currently, although obviously it’s hard to generalize. The bit about REO sellers wanting a minimum money down is very interesting, though… I’m guessing they want to finance the loans to recoup some losses, but not to people who are going to default (and thus want real buyer money down).
OT: Your rebate is definitely appealing to me as a potential future buyer… and I like to think I fit your general client characteristics.
Thanks Nick.
Refi makes more sense even as the rates continue to rise.
Do banks post the results of courthouse auctions or do the trustees usually post them in the county paper?
Reading all these comments by OCers…makes me feel so good that I left that disgusting human trash sewer! You couldn’t pay me to live in that cesspool among all the smoothie lawyers and real-estate slicksters. OC culture represents the end pinnacle of everything that went tragically wrong with America, with its extreme materialism and easy money real-estate culture. The school system is a drug saturated shamble, medical care admin by avaricious Middle Eastern and Asian shucksters–expert government and insurance company screwers, and done invaded by an illegal immigrant, welfare mother and criminal horde…not to mention it’s filled with nasty, nasty, nasty, over-stressed nasty people who’ve turned social ambiance into a form of sick, art. When the world gets an enema (hopefully soon), OC is where the tube will enter.
Layne, so sorry for your obviously miserable time in OC, although I was surprised to find your comment on a real estate blog. OC wasn’t always a “cesspool” — I grew up there and still visit parents and friends in the area (actually, most of my friends had to move to Riverside or San Bernardino counties out of school — few can afford to live in their old hometown, including me). The cost of living vs availability of good jobs, compounded by traffic and other annoyances, is very stressful down there, and a lot of people are hurting and scrambling to fake a successful look even while the sand is washing out from beneath their feet. Interestingly, maybe due to television shows like the “OC” or “Housewives,” a lot of other communities are striving to be LIKE Orange County. You can see it in subdivisions in the Central Valley with their little Wisteria Lane perfectionism (even while the BANK REPO signs swing in the front yards) and in the clusters of kids at the plaza. All the new growth (and lack of planning) in the once-small town where I now live makes me think, sometimes, that I’m on the 91 on a Friday at 5 p.m. I do hope you have found a place where the people are more real or whatever it is you need, but OC is hard to escape.
I love your blog…really. Did you already hear about water on mars?