Chuck Ponzi May 31st, 2009

Today I came across a detailed analysis of the mortgage meltdown in California along with detailed graphs, long-term analysis, and an indepth look at where we are in the overall housing bubble.

The T2 Partners paper provided by More Mortgage Meltdown can be downloaded here:

I recommend looking over the entire presentation, as it provides a play by play of where we have come in the last 3 years, and what to expect for the coming 3 years.  I agree with the general assessment that we are in the middle innings of the overall price declines (perhaps in Inning 5 of 9), but the real movement is yet to come in the middle and high-end price tiers.  Of course, there is no way of accounting for significant outside involvement that might change that outcome, however any change must be structural and permanent (such as offering citizenship to anyone purchasing real estate, offering 20% of the purchase price, no questions asked by the government, or total global thermonuclear war.  I doubt many can understand what those outcomes would look like, so we’ll focus on the most likely scenarios.

The key is really what is happening and will continue to happen California. Their assesment, given by Mark Hanson, is in my opinion spot on to how I expect the next 2 years to play out:

California housing — at the low end — is ‘bottoming’ mostly because: a) median prices are down 55% from their peak over the past two years, thereby making the low end affordable; b) foreclosures have temporarily been cut by 66% through moratoriums reducing supply; and c) demand is picking up going into the busy season.
But the moratoriums are ending and the number of foreclosures in the pipeline is massive — they will start showing themselves as REO over the near to mid-term. The Obama plan held the foreclosure wave back, creating a huge backlog and now the servicers are testing hundreds of thousands of defaults against the new loss mitigation initiatives. We presently see the Notice of Defaults at record highs and Notice of Trustee Sales back up to 9 month highs — there is no reason for a loan to go to the Notice of Trustee Sale stage if indeed it wasn’t a foreclosure. However, the new ‘batch’ are not only from the low end but a wide mix all the way up to several million dollars in present value.
Because the majority of buyers are in ultra low and low-mid prices ranges, the supply-demand imbalance from foreclosures and organic supply will crush the mid-to-upper priced properties in 2009. We already have early seasonal hard data proving this. As the mid-to-upper end go through their respective implosions this year and the volume of sales in these bands increase as prices tumble, the mix shift will raise median and average house prices creating the ultimate in false bottoms. We also have data proving this phenomenon.

You can find this narrative (and much more) on slide 62.

• Credit Bubble , Dead Cat Bounce , Foreclosures , Housing Crash , Investing
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Chuck Ponzi May 21st, 2009

Barry Ritholtz had this up, and it’s interesting how this country has become entranced by what appears to be becoming a cult of personality.

There is serious potential for federal crowding out of private enterprise.  That was one of the reasons that the Great Depression lasted as long as it did.  The federal stimulus was so unevenly applied that it distorted natural incentives.

Here’s another visualization of part of the problem (added later).

• Debt
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Chuck Ponzi May 20th, 2009

California’s budget problems just got bigger with the failure to pass outrageous legislation that came out in the special election.

Some good reads come from Yahoo!’s California One Step Closer to the Brink.

I’ll summarize the gist of the problem:  We spend more than we make as a state.

There are many culprits:

1.  We have a large immigrant population.

2.  We have a lot of crime

3.  We give a lot of entitlements to elderly and poor. (which we have a lot of)

4.  The rich can sidestep many of the taxes in California, or it’s not graduated enough to capture a meaningful percentage of their earnings.

5.  The Poor cheat the system and overtax it by bringin in more poor who do the same.

The failure of these ballot measures is not a surprise, though.

Prop 1A would have capped state spending, kept in place a tax hike for two years, while also establishing a so-called rainy day fund. That was the big one and it went down 65%-35%.

The one measure which did pass, comfortably: A rule limiting pay hikes for state politicians.

So now the onus is back on the legislature and the Governor to close the deficit, which stands at $21 billion. It’s going to be brutal. The only real areas to get those kind of savings are in core services like education, prisons, health. You know, the big things.

This state is screwed.  Its residents already pay some of the highest total taxes of any state.  Couple that with the high cost of living and you’ve got serious trouble brewing in the middle class (or what’s left of it).

But, if California defaults, other states won’t be be unscathed.  Or at least that’s how most see it.

And, Felix Salmon of Reuters weighs in on the topic.

And indeed the really nasty unintended consequences of a Californian default might well be felt outside the state, with the closing down of the municipal bond market nationally. Once California defaults, it’s hard to see any other state raising private general-obligation funds at any kind of interest rate it would consider acceptable.

Which brings us back to the moral-hazard play: maybe the Feds would bail out California, not for California’s sake, but rather for the sake of the municipal bond markets as a whole. But it’s hard to see where they would get the money, or how Congress would ever approve such an appropriation.

Although, I wonder how that might work when Californians just voted to NOT raise the money needed to pay it down?  In the end, it seems like voters and legislators have come to an impasse.  Legislators want to continue spending, while the citizens are done paying for it.  It is the epitome of what goes wrong when a liberal society votes on taxes.  It will never be able to pay for its own generosity.

Which brings me back to the crisis.  California cannot continue because it can’t pay its bills.  California cannot raise taxes (at least in the present formula) because it will not pass (and if it did, it would drive more of the actual taxpayers out).

So, the only thing left is to start cutting services and expenses.  That’s gonna be tough, and painful for some.  And, counterintuitive in a recession.  You see, accepted economics practice is to save some during your fat years so that in your lean years you have something to survive on and spend more to stimulate the economy with.  We have squandered our wealth in the fat years, and like the prodigal son will come back to Uncle Sam to save our fat butts.

We have to either permanently slow state spending or permanently raise taxes.  That’s bearish to owning real estate and living here in the long run.  If you decide to buy a house here, be sure you have an exit strategy.

“There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for you.”  – Robert A. Heinlein

• Delusion
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Brad_Davidson May 18th, 2009

Realtors are on the march again, chanting that you had better hurry up and buy.  It’s déjà vu all over again.

I had an offer in on a Buena Park home last week that was listed for $299,000.  My client offered $330,000 and didn’t even get a counter offer.  Found out there were 70 offers.  A house in Menifee was listed at $159,000.  They had 35 offers and it went for over $190,000.

My clients who go to open houses tell me the agents are in full “pump and dump” mode telling people the worst is over, we’re at the bottom and they had better hurry up and buy.

I’m a member at Trulia.com and thought you would find some of the Realtor posts entertaining.  These are all California agents.  Enjoy.

First up, Daniele from Anaheim Hills-
“Hello… time for the mid-month check on the market. It was my experience over the weekend that there was WAY WAY more buyers than there are properties to buy right now. I was all over Southern California and it was a zoo everywhere. Not to mention… my listing in Chino Hills had about 19 showings over the weekend.

She goes on to tell how low the REO inventory is without talking about moratoriums or new foreclosure notification requirements.

“I want to end this by saying… if you have been thinking of selling to move up, down-size, or move away… NOW is the time. Time to cash in on this “craze” of activity right now. Buyers are OUT and they are looking for homes. If you or someone you know would like to know just how many buyers are looking for a home like yours…. let me know. I have exclusive tools that I can use to show you how many buyers are actively searching the internet for homes and it can show me…how many are looking for a home like yours!

Helping you build your dreams!”

I bet she ruined a few dreams in her day

Next, from San Jose-
The Market is Changing… You have to Move now!
“I have been helping my partner this weekend with his clients and showing houses and believe it or not it’s been a crazy experience. On all of the houses that I show, we have to wait in line so we can go ahead and look at the property. Is this a sign that the market is changing? Is this next BOOM? bare in mind that the last time I experience this was 2003 till 2005 and that was the boom time.

What is good is that buyers are now qualified based on their true income and that they are really putting a down payment or collateral on the house and last the houses are now priced below what the previous owners have bought it and that is a bargain. (As if that fact makes it a good deal)

I include a link talking about the real estate market and that it’s starting to move and it’s moving Fast.

http://abcnews.go.com/Business/Economy/story?id=7564649&page=1

I hope this will give the potential buyers a clue of what’s happening in our Market here in San Jose. Together we can change this economy back to good one.”

From Santa Clara comes Michael (complete with spelling errors).  This is my favorite.

The bottom is…here! IMHO
“Ok!  I am suffering from too many numbers, quotes and opinions.  Cap Rates, Cap and Trade, Carpet Tiles, Carbon and Tire Piles.   From Obama’s economic plan and Bush’s mistakes to Barney Franks…too much clutter!  Maybe writing three offers and viewing nine homes today or the Starbucks at 9pm has me fired up!

Like Obama said yesterday ” The stars have aligned…”  He was referring to the congress and white house being on the same side, I know.  Who cares!   I only care about the residential housing segment!  In my 28 years of working in the residential housing market has made it clear to me…The Stars Have Aligned..NOW!!!!

The market has bounced around, the housing segment has free fallen, like a trolley car going down Lombard street without a break man.  The job losses are about to level off.  The truth is the housing market is preparing to make a surge big time, in my opinion.  The morgage finance rates are so low they are nearly free considering the 5-7year equity upside that is certainly coming.  Especially the fixed rates.  It is bringing tears to my eyes!..or is it the coffee?

I have been writing offer after offer for buyers, lately (today),  and homes are seeing multiple offers like 2003.  It is amazing how many best buys we are finding for everyone…. I hope you are one.   The inventory is down from 16 months worth to 4 months worth.   Some communities are at 3 months worth of inventory.  The big question….Where is the bottom?  Ummm…I think it is about to go on sabatical.

If anyone is waiting…they are going to be like those in 2005 and “wanting”.    rev.(spurred by great comments to this post)  ~ The difference between 2003-2005 to the present is that in 2003- 2005 we were not aware of the derivitive debacle and the total slide it created.  Today, at least we have more of the facts and can make better decisions moving forward.~ end rev. Market conditions have never been better.   Find a savvy Realtor, mortgage professional and your calculator and get moving on the Foreclosures and Short Sales available.    Where?  Wherever YOU want to buy a home in Santa Clara County or an investment out of the area.  Your Realtor is licensed to sell in California!  Everywhere in California!.

Don’t believe me!   Call your freinds…Call your Uncle, the Realtor…Go to open houses this weekend!  Then come back here and tell me what you learned!”

From Mandy in WestLake Village-
“Buyer’s Beware!

The market has begun to change and the buyers are the last to know.  Great homes are moving fast- clever agents are pricing them below market value which draws a feeding frenzy of multiple offers and bidding wars.  The final selling price is likely higher than anyone would have previously thought.  However, a good portion of buyers are laboring under the mistaken impression that prices are continuing to drop in all market areas and they can name their price.  Educating these buyers as to the reality of the market is proving difficult and sellers and agents alike are getting frustrated with ridiculously lowball offers.  The tide has begun to turn and a home in good condition in a desirable area is under contract before some buyers are even able to view it.  So many homes that can’t be shown because of a renter or some other situation, have multiple offers before anyone has viewed them based solely on the listing details, price, and location.  Watch out for the bottom- if you are diving in to the market now you might strike your head on it.”

Finally from Bob, right here in Coto De Caza responding to my contention that more foreclosures will hit the market soon-

The “so-called” shadow inventory of foreclosures, that you allude to, is a myth. It is falsely based on years old data that has NOT been updated in the past few months, during which a new administration has stepped in and put numerous programs into effect which – along with lenders working MUCH harder recently to modify or refinance troubled mortgages – has taken GIGANTIC strides to mitigate the problems which WERE on the horizon.

I looked up some of the local agents doing this puffing and see they haven’t closed a sale in two years.  It’s sad the things they’ll say to try and drive the market. 

Brad Davidson

Real Estate Commission Rebates

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Guest_Blogger May 18th, 2009

Every year, Californians find themselves contending with wildfires. These fires burn thousands of acres of land annually, often destroying homes, as well, but there are fire prevention steps that people can take. While there is no absolute way to prevent your home from standing in the path of an oncoming wildfire, the proper preventative measures can increase the chances that your home will not become a statistic.

Protecting Your Home

Having enough home insurance in California is one of the most important things you can do to protect yourself from wildfires. But there are steps you can take around your home to help keep approaching fire at bay, or at least to prevent it from rapidly spreading. Start by keeping the following tips in mind:

• Always follow California law by having 100 feet of defensible space around your home. This will help protect your home, and also makes it easier for firefighters to get close to it with their trucks and equipment.

• Make sure that there is at least three feet of open space immediately surrounding your home. If you have bushes or other plants, cut them back to ensure they are not up against your home. Also, avoid having any vines on the walls.

• Keep your lawn mowed on a regular basis.

• Provide spacing between plants, which can be very effective in stopping or slowing the spread of a wildfire as it approaches your home. The ideal space between plants will depend on the slope and size of the plant.

• If you have large trees, avoid letting them become a vertical “fire ladder” by keeping their bases free of any other plants.

• Keep your gutters and roof free of any pine needles, leaves or debris.

• Tree limbs should be trimmed back at least 8 – 10 feet from your home.

• Twice a year, you should have your chimney inspected.

Keeping at It

It is also a good idea to have water sources in mind so that, if you see a small fire, you can try to put it out. Keep buckets and a hose in a familiar place, and make sure all family members know why those items are there.

To protect your home from wildfires, insuring your property in California is the first place to start. Then, look around at what you can do to your home and land to help make it less flammable. Small efforts that you put forth today can make a huge difference tomorrow, should a fire come your way.

• Insurance
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Chuck Ponzi May 13th, 2009

CNN Money today gives us our money shot for the day while interviewing Realty Trac for insight into the April foreclosure numbers:

Foreclosures in April exceeded even March’s blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.

“April was a shocker,” said Rick Sharga, a spokesman for RealtyTrac. “I would have bet on a dip because March foreclosures were so high.

Instead, filings inched up 1% from March and rose 32% compared with April 2008.

Indeed, for those who do not keep up with the lingo, you may want to google what a shocker is.

For those wondering, I’ll give a visual:

Shocker!

If this is in bad taste, let me know, but the foreclosure numbers are definitely a surprise.  Sometimes, I’m not sure if living in SoCal has warped my sense of humor.

And, for those seeing green shoots in the economy, I doubt you”ll be seeing a corresponding positive report out of housing.  We may very well be in a strong dead cat bounce this year (much like California experienced in 1993) as housing prices realign themselves.

There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007.

The increasing foreclosures will force RealtyTrac to rethink its forecasts, according to Sharga. “We had been predicting 3.4 million filings for the year,” he said, “but we’ll blow those numbers out of the water.”

With so much uncertainty, I can only stand by my predictions for 2009.  There will be some up and some down areas.  Overall, the direction is down.

• Dead Cat Bounce , Deflation , Foreclosures
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Chuck Ponzi May 12th, 2009

For loyal long-time readers, you may remember this one.  It was my very first Happy Birthday Socal post.  And, one of my favorites.

Yes, the SCREBC-famous Pepto Bismol House in San Clemente.

My assertion at the time was that there were several problems in order of increasing stupidity:

1.  Terrible Marketing, pictures, etc.

2.  Terrible Pricing… one year on the market, chasing it down and never being close enough to reality

3.  Terrible Location.  I’ll let the picture speak for itself:

Well, if you wondered what happened… it’s back up for sale.

Yes, a scant nearly 2 1/2 years on the market hasn’t deterred this delusional seller from trying to sell for higher than market prices.  It’s listed today for 649K, probably a full 150K higher than what it would take to move the property.  At least they came down from 875K in December 2006.  If they had been aggressive then, I believe they could easily have gotten 750K to 775K at the time.  Unfortunately, greed got the better of the owner, the listing agent, or both.

The post is a “What Not to Wear” for home listings.  And, remember in September 2007 when the bubble was still a debateable topic?  Yeah, I warned the sellers then that the next year was going to be tough.  It was.

And, it doesn’t seem to be getting any easier.  Keep in mind that one of the properties that I compared it to last time seems to have been foreclosed on and appears to presently be in shadow inventory land.  It (a 2700sq ft sfr built in 2001 with much better curb appeal) appears to have gone back to the bank in January at $568.5K.  That doesn’t bode well for the area.

Besides, I think the realtor must not have changed or learned much in the intervening 2 years about property marketing:

I think she learned to turn the camera on its side this time… projects height.

Luckily, the buyer bought in 2000 for $402K.  They’re almost assured a gain on the house unless they already spent it.  Let’s hope they didn’t.  If this doesn’t sell, it’ll always be shadow inventory, waiting for prices to tick back up.  Unfortunately, there are many better prices in the area this time around.  Even though the listing is now 225K lighter, I’m afraid it’s still in fantasy land.

Thanks and come again to Fantasy Island.

• Delusion , Denial , Housing Crash
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Chuck Ponzi May 8th, 2009

California recently took the steps to reduce government deficits by raising taxes:  1% on sale tax , and raising income taxes.

It doesn’t seem that this worked out too well.

From the information that came out, California is pretty much KlusterF*(ked. With a kapital K.

From the May 09 Summary from the state controller’s office.

Compared to April 2008, General Fund revenue in April 2009 was down $6.3 billion (-39%). The total for the three largest taxes was below 2008 levels by $6.3 billion (-40.3%). Sales taxes were $452 million lower (-50.9%) than last April, and personal income taxes were down $5.7 billion (-43.6%).

That’s gotta hurt.  This recession is going to make things even more difficult.  California is wanting to start talking about legalizing pot.  Some ideas have been floated of putting a $50/oz tax on recreational use.  Nice.  At this point, California needs to do something big.  Look to have even higher taxes and even more people leave if they do.

• Debt , Deflation , Unintended Consequences
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Chuck Ponzi May 6th, 2009

Don’t think it can happen in prime areas?

This Newport Beach residence sold for 2.5M in August 2006.  It’s now for sale for $781,000.

One might consider buying this just to rent it out and sell it later on to a developer.

Contrary to my first thought, it’s not trashed inside:

Better like some traffic noise, though.  It backs to Newport @ Via Lido.  Nice weather, too bad you won’t want to open your windows.

• Housing Crash , Speculation
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