In addition, the most startling revelation (which bypassed the host’s attention) was Larry the Liar’s admission that Realtors are bypassing entering direct sales into the MLS.

So, now that the MLS is no longer valid as a data collection tool, what is the next step?  Maybe the NAR will offer an open MLS?

Watch Here.

The first of such series comes to us from Naples, Fl. As expected, this one comes from the super-optimistic realtor via Naples News from November 19 2006.

Joe Ballarino, a Realtor with Amerivest, said except for specific instances, home prices are going “sideways” and he expects them to continue doing so.

Market generalizations are usually off base, he said.

“I am on a kick of discrediting market averages,” Ballarino said. “Pricing is so localized, each property has to be valued separately.”

His view of the market is that buyers already are beginning to come back.

“I think (studies) are off the mark,” he said. “At most I can see prices going down maybe 5 percent in some cases but I don’t see (a) 14 percent (decline) — not in the overall market.”

Surprise. Naples-Fort Myers has fallen 32% in just the last year alone. And the pain isn’t over.

Enemy Combatant

Enemy of the State

Call it what you will, but when she starts handing out MY MONEY to criminals, I get kinda ticked.  This is the worst kind of bailout.  Performed in the shadows.  No regulatory or congressional oversight.  Renegade social experimentation with my money (since the FDIC will not remain properly capitalized through this downturn) has turned an otherwise crappy but benign bank closing into the New Deal II.

Calculated Risk gives us the story:

Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.

This stinks to high heaven.  Makes FEDUPUSA’s message that much more real.  I’m just sick of this.  If I thought it would do any good, I’d be marching on Washington right now.  This is where politics and economics merge.  This country is screwed.

I want my taxes back.

Now that the meltdown is in full force, are there still many reasons for leaving?

Here are a couple I can come up with:

1. Even with prices falling +30%, Southern California is still one of the more expensive places to live in the US.

2. The terrible economy means fewer jobs, the reason most of us came here in the first place.

3. Freeways are still clogged

4. Taxes are still high.

5. The state is undergoing a fiscal crisis, almost assured to mean even higher taxes

6. Maybe it’s my perception, but violent crime seems to be on the uptick

7. We still have the worst school system in the country.

8. Prop 13 ensures the rich a great tax subsidy.

On the flipside, I can think of some reasons to stay:

1. Cali is probably going to come back and have more jobs…

2. You can get a double double protien style with no onion pretty much any time, any where.

3. Housing prices are falling faster than the OC register and Lansner can report that we’ve hit a bottom.

4. The weather, you know. It’s not that bad.

5. Where else can you work for the state and get paid minimum wage?

What do you think?

I remember a story that I read in grade school, Anthem by Ayn Rand. It was the first Ayn Rand book I ever read, and the only one I enjoyed. But, even in my youth, the message was chilling. The story was one of a man with extraordinary talent and physical prowess who lived in a society that believed in equality to an extreme. This society would place handicaps on those who could could see well, think better, or even walk better to the point that noone was better than anyone else in any way. Ironically, the main character I never in my life imagined that this kind of society would exist, much less under a republican president. However, it seems we have become this society:

Our name is Equality 7-2521, as it is written on the iron bracelet which all men wear on their left wrists with their names upon it. We are twenty-one years old. We are six feet tall, and this is a burden, for there are not many men who are six feet tall. Ever have the Teachers and the Leaders pointed to us and frowned and said: “There is evil in your bones, Equality 7-2521, for your body has grown beyond the bodies of your brothers.” But we cannot change our bones nor our body.

I have no flair for the dramatic, but I fear that we as a nation have allowed ourselves to become enslaved by our own political masters. We are therefore, destined for failure much more than if we had celebrated success AND failure as a means of building again something better. In our society, failure is only to include everyone, and everyone fails or succeeds together. It seems like only a little time ago that we were introducing “participation awards”, and now we are covering everyone’s losses. Except it seems that there is a conspiracy afoot.

I’m a died in the wool libertarian, but there is only so much nepotism that I can stand. I am disgusted beyond belief at what I see. What I see is that the only time that people are bailed out is when it affects big business. When the banks collectively went and did the stupidest stuff in the history of the world in the name of “financial innovation”, they get bailed out. When little investors went and did stupid stuff by buying dot coms… not a chance.

I’m mad as hell, but I don’t know what to do. In elections, I get to choose between a giant douche and a shit sandwich. Equally, everyone around me is too busy getting raped by the government to give a rat’s ass. The only thoughts that come to mind are treasonous and illegal, so I won’t write them down, but, I have to ask, at what point do politicians become responsible for their actions? Is it only when we get invaded and conquered do crimes against humanity get punished?

Unfortunately, with all of the absolutely stupid shite that happens in this country, I can’t think of a country where even more stupid shite happens, so there’s no escape. Maybe this is just what being middle class is all about. I’m too lucky to have the government wipe my butt for me, and I’m not lucky enough to not give a rip or find a way around paying for it. So, I’m stuck working for the government 50% of my income going to taxes and no say in the political process. Makes me want to stop paying taxes altogether. If I thought I could get away with it, I would.

I have to say, this housing bill, what a crock of absolute rubbish, and I’m ashamed to live in a country where politicians pander to everyone but their constituency. Everyone would be much better off if housing were cheap. Everyone complains when the prices of things rise… we call that inflation, but when it’s houses, it’s call an ownership society.

From the WSJ:

Anyone who invests in housing already gets a number of political subsidies. Your mortgage interest can be deducted from your income tax. Your capital gains, up to certain limits, can also be tax free. Taxpayers maintain the roads to and from your home. The new rescue package is just one more subsidy for the asset class of housing.

There was no rescue package for all those honest people who lost their savings in the dotcom crash. And there was no suggestion of any rescue package.

Meanwhile the majority Democratic party is agitating, with plenty of popular support, for a “windfall profits tax” on energy companies.

Such a tax, if it should pass, would by definition lower the returns from investment in oil and gas exploration. Inevitable consequence: Less investment in oil and gas exploration. But this is apparently an acceptable price to pay to ensure that…well, that investors in big energy companies don’t make too much money.

So, where does this all leave us?

Among the many ironies: The current economic crisis is largely the result of too much investment in housing, which led to a bubble and then a collapse, and too little investment in energy, leading to fuel shortages and skyrocketing prices. Yet the political class is acting, as far as I can see, to increase investment still further in housing and reduce investment in energy.

Where do our douche and shit sandwich stand on this?

Event number 14383980

I’m predicting whatever lift we saw this summer from decent rates (muting the crash underway), will disappear and the next leg down of prices will continue.  This dead cat bounce is dead!

I will be officially revising my 2008 Socal Real Estate estimates based on recent action.

Foreclosures across the state surged to a 20-year high during the last three months, as tens of thousands of additional Californians lost their homes and more than 100,000 neared the brink.

Notices of default, the first step in foreclosure proceedings, rose nearly 125 percent from a year ago during the second quarter and trustee deeds recorded, which reflect the actual homes taken back, soared more than 260 percent, according to research firm DataQuick Information Systems.

But, this doesn’t even come close to telling the full story. Fact is, it isn’t the highest foreclosures in the last 20 years, which would imply that it was higher 21 years ago. Not so. In fact, these are the highest foreclosure statistics EVER.

Noone demonstrates that better than BubbleTracking in the update to the LA Times graph of foreclosures. Thanks OCRenter!

What’s noteworthy is the backstory to the image. The original LA Times article was somehow attempting to soothe buyers that the real estate market was healthy, in part because foreclosures were at historic lows.

Even more onerous than the picture above is another factoid of the story.

The number of defaults and foreclosures were the highest in DataQuick’s statistics, which go back to 1992 and 1988, respectively. Among homeowners who fall into default, an estimated 22 percent now emerge from the foreclosure process by catching up on their payments, refinancing or selling. That’s down from 52 percent a year ago.

That’s an incredible fact. In other words, 78 Percent of those entering the foreclosure process end up going through foreclosure. Considering that there is a record number of notice of defaults, we are ensuring years worth of upcoming foreclosures to push down prices. Recent report have showed that banks are swamped simply with the volume current in process and unable to expand to the need. Early in the bubble blogging world, more than 90% of those who received a notice of default were able to cure their delinquency due to quckly rising prices. Now, with prices falling 30% or more per year, one misstep is a lucky break for a would-be homeowner to simply walk away.

It’s always blackest before the light. I don’t know exactly when the panic will end, but it always does, just like the euphoric mania that preceded it.

Will they be nationalized?

Does it matter?  Lending is changed forever.

Fannie and Freddie are going to have a threesome with Uncle Sam.  Dirty, ugly, and seemingly unavoidable after 2005.  It just had to happen, the whole world went mad with real estate.  This place seems so F@$&#D up.  I am now worried more about serious social unrest coming in parts of the US.  I’m pretty ticked off and I’ve got a lot, think about those who have lost jobs and have lots of time on their hands.  I’m just sayin’, I think lawmakers need to be careful when they start committing taxpayers’ money.  It is ours, after all.

You’re going to hear it here first. Data Quick will be coming out with their sales figures for June in the next week but I’m going to try and beat them to the punch each month. I don’t know how my numbers are going to measure up in comparison with Data Quick’s far more detailed studies but I’m going to give it a shot. What I think will be very interesting is using pending sales to try and predict future median prices.

Here goes!! According to the totals on the MLS website, June home sales in Orange County totaled 2,176 residential properties. These are mainly resale homes as the majority of new homes are not listed in the MLS. The median sales price of these homes was approximately $475,000.

According to the MLS, May sales totaled 2,135 properties with a median price of $480,000. According to Data Quick and as published in the OC Register, there were 2,266 sales and the median price was $485,000. Given the disparity in the total sales numbers, I’m content with the $5,000 price difference and if the June number is within $5,000 of $475,000 it’s all good.

I’ve always thought that the data provided on homes sales was of marginal value. I’ve long realized that the sales figures as published by the media are a lagging indicator. The 2,176 sales in June are deals that were negotiated in April and May, some I’m sure in March. In essence the median sales figures are two months old.

As of July 7, 2008 residential listings, categorized as pending sales or in back up offers total 4,183 properties. I’ve been tracking this number for the past few months and find it interesting that there are typically twice as many pending sales and back up offers as there are closed sales for the prior month.

A far more interesting number I’ve been tracking is the median list price of the homes categorized as pending or in back up offers.

I wanted to come up with a median sales figure that would be more current and perhaps be a better market gauge than numbers that were essentially two months old. I first tracked the list price of homes in pending sales on April 31, 2008. This is the unscientific part because I’m tracking the price the properties are listed at, not the sales price. While unscientific, my first set of numbers hold up remarkably well. The median listed price of pending sales and back up offers was $475,000 as of April 30, 2008. The same price as I show for closed sales for the month of June 2008!

While I have read that the median sales price number has ticked up a bit, it’s not what I see in pending sales. For the 4,183 pending sales as of July 7, 2008, the median list price is $439,000. If that number were to hold up when the actual sales figures for August are released in September, it would be a continuing slaughter for the OC real estate market. I think the median number will be higher because there are a lot of short sales and REO’s in the pending sales that actually sell for over the list price.

Then again, when I first ran these numbers in April and came up with the $475,000 median, data Quick had just released the March numbers showing a median of $506,000. $475,000 seemed pretty low then too.

I hear Orange County is looking for a new real estate oracle now that Gary Watts has publicly apologized for being wrong. I’ll track these number every month and report here and see how I do.

Brad Davidson
We Help-U-Buy Realty

The funny thing is, I remember less than a year ago, discussions about how Freddie Mac and Fannie Mae were well capitalized, preeminently prepared for any disaster, and frankly, as unsinkable as the Titanic.  Little good that has done.  We may be witnessing a historic crash of epic proportions, greater by far than the crash we have seen to date.  To put it in perspective, FRE and FNM have pretty much been the only thing that have kept the real estate market together in the US over the past year.

Consider for a moment this statement regarding the mortgage insurance statistics from the GSEs.

There are more hard numbers available to support MI’s recent surge. MICA, the trade association representing the private mortgage insurance industry, began reporting rising volume monthly after February 2007. For example, mortgage insurers wrote 190 percent more business this year, through April, than in the comparable period of 2006, when subprime/Alt-A were in their heyday.

To put that sort of gain into proper context, consider that even GSE production is only up 160 percent — and they are doing an estimated 80 percent of all new mortgage lending. By inference, MI providers have made huge gains in market share.

Let that sink in for a moment:  GSEs are doing an estimated EIGHTY PERCENT of all mortgage lending, up 160 percent.  IN AN ACTIVELY FALLING MARKET.  Any implied “worst case scenario” imagined last year of the US government bailing out the grossly irresponsible GSE lending facilities is quickly not only becoming a reality, but would represent a necessity unless the entire lending business  in the US becomes STATE OWNED.

State owned lending?

Is that such a bad idea?  I mean, we pretty much have so many controls that we expend an enormous amount of government money in oversight, what’s so wrong with giving the federal government the right to nationalize the largest lenders as they fail?

I’ll write the next part only partially tongue in cheek.

Lending is perhaps one of the great debatable rights of Americans in the 21st century.  We have become so conditioned by its availability to believe that it is owed to us.  We need it, we want it, we should have it.  If we want to create our own financial ruin, and by extension the country’s entire financial ruin, we should be able to do so.  It is our right as Americans.  By this rationale, we should allow all Americans the right to open access to low-cost lending much like clean air, clean water, food and drugs free of harmful contaminants, and an interstate transportation system.

For example, if free enterprise were required to finance our transportation systems, we would be required to pay for every trip we consume on local and long-distance roads.  This is where economics has a hard time playing the role of moral coach, because, frankly, Economics is concerned with the free market and the most efficient method of delivering the utility people desire.  Governments have typically only concerned themselves with PUBLIC NEEDS.  Therefore, the big question is, is real estate lending a PUBLIC NEED?

I am certain that many could make the argument for and against, but perhaps the question needs to be viewed in a longer timeframe.  Is lending STABILITY more important as an ongoing public need to ensure the ability to liquidate lending and homes in an orderly manner?  What controls and insurances should the government provide?  How should the government handle lending standards and manipulation?  Could there be a cross-control against lying using collaboration with the IRS?  What kinds of manipulations would this open up the home lending business to?  Would the government “crowd out” any potential competitors and therefore stifle competition?  Has the current role of home lending harmed the public more than it has helped?

In any case, the general public perception is that home lenders have harmed America, and therefore must be harshly dealt with.  I don’t agree with that.  I personally believe that the problems is on its way to being fixed by the free market, and frankly I’m not happy with the directors of the GSEs getting away with fat pensions, stock options, and the like while the public swallows the bad debt.  On the other hand, it would end, once and for all, the deceptive practices and level the playing field by nationalizing lending.  Frankly put, the government could recapitalize easier than a private entity or a stock-owned entity.

I have to say that I oscillate between incensed outrage and cold acceptance of the reality.  There is no simple answer to that.  Lending has changed forever (hopefully).

Keep in mind that this advice is free, and you get what you pay for. If I were in the same situation, my actions might be different from what I am currently doing simply because each person and situation (as well as timing) is different.

When we left our friend Boomer yesterday, I had advised him to sell his home in Arizona even though that wasn’t the question. There was no question that the house was overvalued based on normal valuation methods. In addition, rates have remained stubbornly high despite a strong easing campaign by the Federal Reserve Bank. To that point, just over 2 years ago, I wrote about interest rates and what that portended:

1. Why are rates going down over time?
2. Is there a savings glut?
3. Why are risk premiums (spread) so small?
4. Are we about the enter a recession like the other small spreads indicated?

To the last point, if we enter a recession, is there any chance that housing can be saved through inflation? Does this mean 70’s style stagflation, or even worse, Japanese style deflation with ZIRP?

If anyone can provide a coherent way that housing can survive in the next 2 years, please tell us now!

At this point, I think we are out of options from a monetary perspective.

1. We already have inflation. Dropping rates will make it much, much worse.
2. Economic growth is slowing despite the mad dash of construction.
3. The credit market is precariously spread and rates could make a mad dash upward if international investors get spooked and run for the exits. The only way to keep the Dollar from meltdown at this point will be to raise rates even more.
4. Housing speculators will be crushed by negative amortization and high interest rates in this event(which arguably should have already happened by now).
5. The sitting inventory will cause personal financial distress and combined with the mad dash of rates could generate a general credit system event.

Either way, we will be seeing a much more favorable buying environment for housing in 3 or more years due to the general stress and turning of investor sentiment.

The backdrop of investor sentiment is the worst that I can remember, insomuch that you have everyone talking about a financial armageddon:

Buffet Struggles

Todd Harrison is 100% Cash

and, don’t forget the fear du jour:

Oil climbs peak, economies plumb depressions and the future will not imitate the past

While I agree that the next 10 years will not look like the last, I do think that there are plenty of opportunities that can be entered into in the next 6 months.

First, I have a couple of predictions:

1. The DOW should hold somewhere between 10,000 and 10,500. If it breaks that support level, even I’ll admit I haven’t a clue where we’re headed there.

2. I do think we are headed for a U-shaped recession, but that we have entered that recession 6 months ago and that we should emerge sometime in the next 18 months.

3. Oil is a bubble, but like the housing bubble, it is unpredictable. But, whatever you do, do not listen to the experts. They are called the experts because it’s up. If it were down, they’d be called idiots like bubble bloggers were circa 2005.

So, what should Boomer do with his new tax-free windfall?

I am also not quite 50% cash now with some recent purchases, but I do have a major cash position. I won’t recommend specific stocks, but there are some areas that I will generally avoid:

1. Oil-centric energy stocks. This is really dangerous because we learned from previous energy shocks, the seeds of conservation are being planted now and will grow into the future. Oil could very easily crash.

2. Look for investments that provide a cheaper way of performing necessities, or some game-changing technology that reinvents its space in a necessity. (wouldn’t we all like to find them) while avoiding consumer-centric stocks (many of which have already been trounced)

3. Small caps that rely heavily on borrowing for operating expenses. Many of these are already having difficulty obtaining financing, or even maintaining revolving lines.

Personally, I have invested most heavily in individual biotechnology stocks that have previously crashed by have a strong pipeline. Pharmas and biotech are littered with the remains and half-eaten carcasses from failed drugs, but entering after a crash for a company with strong fundamentals can provide some cover for potential falls. Personally, I stay away from pharmas with “lifestyle” drugs such as ED treatments in favor of those with candidates for life extending treatments for cancer, heart disease, and alzheimer’s. With an aging boomer population, I believe that we can still see strong growth in these areas in an attempt to “fix” the medicare problem. The companies I look for are those that don’t just extend life, but prevent deterioration of mental and physical faculties as these will be.

Any way you look at it, even investing in CDs is going to provide a better return for the next 5 years than real estate.

Boomer, sell and find a good place to park that money. Find a few funds that you believe in, or do the research yourself. All of the easy money was made and now it’s down to the nitty gritty of investing… yield, growth, and preservation. Good luck

Our friend, let’s call him Boomer for short, had this to ask of me:

Moved my family to La Costa area (renting) and own a house in AZ which I owe $159k at 6.5% (it adjusted and will again in 8 months) The home was at peak worth $750k now $550k I had it rented last yr for $2200 and just signed a 3 yr lease w/ new tennant for $2,400 . I have $600k in cash..Should I pay this house off?? or should I just refi it and hold on to my cash to buy here in S cal in a yr or two?

First off, I have a couple of thoughts:

1. Whoever Boomer is, he’s in a pretty good position, relatively speaking

2. Without knowing his age, I’d say Boomer is likely Early Xer or Late Boomer.

3. The most important point of all (where he wants or needs to live) is missing from the question. Don’t feel bad, many people forget this little factoid. We’ll assume that he wants to stay in SoCal.

I’ll deal with some important points:

1. What is that house in Arizona really worth long-term?

2. What should Boomer do with the cash?

3. What kind of financing makes the most sense?

What is that house in AZ really worth?

This is the question that wasn’t really asked, but needs to be answered, what is the house in Arizona worth, so we can understand what to do with the money.

Well, Arizona is a big place. It has a varied geography with beautiful vistas, scorching deserts, and some bone chilling mountains. You may not like what I have to say, but I’ll say it anyway. Your perception of the world and finances is the boiled frog syndrome. Not that I blame you. You’ve been raised in a world of ever decreasing interest rates and increasing asset values. The world has been kind to you.

You see, the success of many of the past 30 years (primarily the boomer cohort) is a demographic abnormality. Asset values have increased simply because of the organic demand of the Baby Boomer generation and ever increasing ability to finance that demand. In addition to this, an extremely relaxed monetary policy has increased the value of assets consistently since inflation was trounced back in the late 70s.

Unfortunately for many, that time is over.

In the short run, houses are worth what someone else is willing to pay for it, but in the long run, they are subject to the value of the next best alternative, or substitute pricing. The best substitute for owning a house is renting one. In some cases (such as short-term living), renting is almost always the clear alternative.

There are many formulas for determining the value, but one of the simplest mechanisms is the GRM (Gross Rental Multiplier). Basically, this number is used to multiply the monthly rent to arrive at a fair estimate of rental value. However, this is only a rule of thumb and is not to be taken as gospel; lower interest rates (like I expect we will see for the forseeable future) will increase the GRM, while substitutes (buildable land, locus to employment centers) will decrease it. In certain premium places like Orange County, the upper stretch might be 220 or so, while in places like Las Vegas or Arizona, a more reasonable 120 to 160 is more in line with reality. If we err on the side of optimism (150 GRM), this places the current value based on long-term fundamentals at about $360,000, leaving Boomer with a $190,000 premium over its fair value. If I were evaluating a stock, I’d say SELL! SELL! SELL! Doubly more so if Boomer had lived in the house for more than 2 of the last 5 years since he can walk away with pretty much all of the money tax free. It doesn’t matter what the market is selling at, if there is really that much of a disparity, sell that house and get your money! (of course, it doesn’t help that it was just rented, but there are always ways to let a renter go, if the price is right). At a 229 GRM, his house is badly overpriced. When it was $750K, I haven’t a clue how someone could justify that, since it would have been a GRM of 340. Holy smokes!

The future good in some ways, but bleak in other. The Southwest is largely overbuilt in nearly every city with a real dearth of extensive employment opportunities (unless WalMart is your target), and if energy prices remain elevated (not a given in my mind), the ability to pay will deteriorate along with the economy. Boomer may end up with late (or no) payments from his rental. Rentals are generally difficult to manage from a long distance and I would only advise it if you were planning on returning back to the home at some date. However, that would be hard after living in LaCosta for a few years.

In addition, a house can be valued at the cost of money to purchase it. This is a bit more detailed, but an easy rule of thumb is to take the rental equivalent, figure in future increases in rent, and discount the cash flows based on current borrowing rates. It accomplishes about the same thing as GRM, but removes the variability of borrowing rates (especially if it is held as a long-term investment). Using the inverse calculation, you could figure what the “money rent” on the current place would be given a few variables such as the “current value” and current interest rates. Given a current value of $550,000, the money rent valuation using 7% says that Boomer should be collecting about $3,700 in rent on that money. This leaves out taxes, repairs, rental expenses, vacancy, and many other options, so it is by far the most optimistic. By this reckoning, the house would have an imputed value of $357K, pretty darn close to our above $360K value. Sounds like time to sell this puppy no matter how you look at it.

As another way of thinking of it, as interest rates go down, this increases the ability to pay, but that can only increase so much since the risk of buying on low interest rates and being unable to sell into a similar situation will weigh heavily on others’ minds and prices will need to adjust to handle this uncertainty. Since demand for housing is waning as the boomer generation ages in place or downsizes (or simply dies), it is unlikely that houses will be able to continue their rich valuation long into the future without a substantial demographic to replace them with the ability to purchase.

Any way you look at it, the house is currently valued at more than it is “worth”. I can show houses in Orange County that currently have better GRMs than what this house is showing, and Orange County is one of the most overpriced locales in the US.

Tomorrow, I’ll deal with the question of what Boomer should do with his cash. Any thoughts before then?

What does he blame it on?  Banks.  Duh.  Isn’t that what everyone else is blaming it on?

OK, even in a way, I blame the banks too, but that doesn’t excuse the absolute unbelievable disregard for history, facts, trends, or truth.  However, I will extend an olive branch to Gary:  on one condition.  The condition is that I can get some of his speaking engagements (or at least as a ride along).  I figure that if the real estate industry is so brain dead that it can not only believe his past published crap, but buy it hook line and sinker, I have nothing to lose, and a whole lot of speaking fees to gain.

Some choice quotes from Lansner’s bag:

“I apologize for not knowing what Wall Street did to our mortgages,” Watts told about 360 attendees during the associations annual membership meeting at the Irvine Marriott. “I had no idea how Wall Street restructured these loans.”

No accounting for affordability?  No accounting for sales volume preceding price?   No memory of the written lashings he received publicly on blogs?  Does he have no memory of this?

Didn’t I write some verbal poundings here on this blog?  If searching Gary Watts on Google, my articles and sites linking to my articles were consistently on page 1 in the searches.  Did he really not know what was said about him?

What else?

Watts said today, however, that the tide of foreclosures likely will mean that the housing market will remain soft into 2009. He noted that short sales, or sales with asking prices below the owner’s mortgage balance, are taking at least six weeks to gain approval from lenders, forcing even more homeowners into foreclosure.

“It’s just inevitable that (foreclosures are) going to spill into the 2009 market,” he said. While a rebound still is possible this year, Watts said, he called the market too difficult to predict.

This is one thing that I am agreeing with him on.  The market is in such a disarray that it’s nearly impossible to predict what will happen through 2009.

Despite what the bottom callers are now saying, they are forgetting the achilles heel of housing.  It goes like this:

1.  Banks cannot hold nonperforming assets on their balance sheet.  Regulators will not allow it.  Bond covenants of RMBSs will not allow it.  Noone can hold onto REO property for very long.  They will price it to move, and if it doesn’t move, they’ll cut until it does.
2.  A  recession is a terrible time to sell houses, especially in bulk, or if you have to as above.  Buyers need to be assured they are getting a good deal before they are sure.

3.  Increasing numbers of NODs and NOTs ensures a parabolic supply of future REOs coming on the market for at least another 10 months, possibly as much as 36 months for Orange County because of the impending neg-am crisis about to unfold in 2009 and 2010.

4.  Whatever buyers there are today are still just setting bargaining points for future buyers.  The demographics of the situation does not allow it to be the bottom at this point.

5.  Voila!  The longer to wait will ensure lower prices.  This will likely be the case for the rest of the decade.  We’ll refresh predictions in 6 months.

I’ll part with an analysis of Gary’s assessment:

He also believes that subprime lending gets a bum rap for causing the housing slump. Rising subprime delinquencies merely acted as a catalyst, tipping a range of bundled “structured investment vehicles” into increasing trouble that alarmed Wall Street investors.

“It was so complicated. It’s a nightmare. A real estate credit crunch usually lasts six months, and this one, we’re in it almost a year, and it’s still not straightened out,” Watts said.

Jeebus, this guy is just reams of material.  It wasn’t, and isn’t just subprime.  It’s everything and I’m pretty sure he’s referring to MBS, not SIVs.  Credit crunches have been fairly uncommon, the last one of a similar magnitude in US history might have been the one directly preceding the 1930’s Great Depression.  And, those kinds of credit crunches take years to recover from the immediate effects, but the long-term effects were felt for more than a generation.  It’s likely that Gary Watts will be worm food before we see reckless abandon in lending like that again.  (at least I hope for the sake of all fiat currencies everywhere).

Here are some prime examples of the losses they’re taking.

23 Leeds Ln., Aliso Viejo

3bdr 2ba 1800 sqft. On the market for $489,000. This house sold for $685,000 in May 2004. We weren’t even at the peak yet in 2004. The buyers put $75,000 down when they bought but pulled that same $75,000 out a year later. The bank eats the entire $685,000 plus the 4 to 6 month of payments that weren’t made plus 6% of the sales price going to commissions.

Let’s add it up: (all rough numbers but close enough)

Price difference    $196,000

Missed payments $ 18,000

Commission           $ 29,000

                               $ 243,000

2 or 3 different lenders are losing $243,000 on a $685,000 loan. That’s a 35% loss. And we’re talking Aliso Viejo, an area of relative stability.

Next.

21595 Audubon Way, Lake Forest

3brd 2 ba, 1070 sqft. On the market for $372,500. This house sold for $605,000 in November 2005. 100% financing. Interesting fact…. the Trustees sale date in the tax record is dated 5/29/08. The bank took this property back less than a month ago.

Here’s what the banks lost:

Price difference     $233,000

Missed payments $ 17,000

Commission      $ 30,000

                           $270,000

Lenders are losing $270,000 on a $605,000 loan. That’s a 44% loss. I’m really surprised at how hard hit Lake Forest has been. I’ve always thought of it as a desirable area.

Here is the winner, or loser if you own stock in large lending institutions.

1609 S. Woodland Pl., Santa Ana

3 bdr 2 ba 1290 sqft. On the market for $305,000. Sold for $587,000 in August 2005. 100% financing through New Century. Plus they got a $25,000 equity loan from BofA in 2006.

Bank Loses

Price difference     $ 282,000

Missed payments  $   17,000

Equity loan             $  25,000

Commission            $  18,000

                                 $352,000

Lenders are losing $352,000 on a $587,000 loan. That’s a 60% Hit!!!! That is a big fat red mark on the balance sheet and there are hundreds more in Santa Ana.

1. It seems that Bank of America essentially wrote the Dodd Bailout Bill along with Countrywide (merger expected soon). They have probably the most to gain with a generous bailout bill. It helps noone since it doesn’t resolve the fundamental problem of affordability in house, in fact it makes the problem worse. Ever wonder why the 90’s in Japan were referred to as the “lost decade”? It’s because their banking system did the same thing we’re trying to do here. Anyone else see the problem with not punishing gambling banks and housing speculators?

2. The “Subprime Six” were a group of lawmakers given special treatment in exchange for what? What exactly did Senator Dodd besides favorable treatment in his housing financing? What else could be lurking in his past? If you haven’t read about the “Subprime Six”, follow the link. Investor Business Daily, the Wall Street Journal, and the LA times have picked up the story. It’s a story of insider grift and political pandering. If it weren’t so real and true, it might remind me of one of my favorite film lines:

Stuart: Well, it’s a well-known fact, Sunny Jim, that there’s a secret society of the five wealthiest people in the world, known as “The Pentavret.” Who run everything in the world, including the newspapers, and meet tri-annually at a secret country mansion in Colorado known as “The Meadows.”
Tony: So, who’s in this “Pentavret?”
Stuart: The Queen, the Vatican, the Gettys, the Rothschilds, and Colonel Sanders before he went tits up. Oooh, I hated the Colonel, with his wee beady eyes and that smug look on his face. “Oooh you’re gonna buy my chicken, oooh…”
Charlie: Dad? How can you hate the Colonel?
Stuart: Because he puts an addictive chemical in his chicken that makes you crave it fortnightly, smartass.

3. For all of the crap that our President Bush gets, at least he has the foresight to threaten a veto to said bill. There should be no bailout, not just because it’s not fair and would embolden speculators, but because it’s destined to put our banking system in jeapordy for the forseeable future with taxpayers footing the bill. It’s generally understood that this bill has to be done and voted on by July 4th if it is to carry. Any senator that signs this (if it passes) is hopefully going to be thoroughly trounced in the upcoming elections. This is not only unreasonable, it’s unamerican. This place is going to hell in a handbasket. If something like that goes through, I’ll be posting a list of every person that voted for it and their political affiliation here as a feature story.

So, what do I recommend? I’d say get a year’s worth of food and 6 month’s worth of remaining expenses together, if our politicians have any say in it, this is going to be one whopper of a crash and accompanying recession. On the lighter side of things, our grandchildren will be still paying so that people like this can “keep” their homes (and by homes, I mean plural, because, isn’t every good American not just entitled, but guaranteed to own more than one house?).

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.

If I had followed conventional wisdom and sold in may, I’d be a bit behind where I am now.  It’s not bad that I’m outpacing the S&P500 by 30% this year.  I’m happy with the results so far.

Investing takes a lot of time to get it right, and frankly, I’m just now reaping the rewards of investments made more than 1 year ago.

Thanks for all of you sticking around, and most of all listening to my jack-assed comments about how great I am at market timing.

There’s still room for a fund in the future!

As such, I have asked a friend of mine, Brad Davidson of Help-U-Buy realty to join me as a blogger on the site.

Bear in mind that this was no easy decision.  Brad and I don’t share the same opinions, not in the least.  In fact, we have had very different opinions about what is going on in the local real estate market.  This, I think, however will allow you to have a different opinion about what is going on the local markets.  However, Brad brings a lot of depth to the discussion about what is going on in the immediate market.  He is a licensed real estate professional, and has what I think is a model of the future of real estate sales.

Please be sure to read his analysis when it is presented, since it is a boots-on-the ground reference to the local goings-on in the OC real estate world.

Besides, if he really sucks, I can just revoke his blogging privelidges.  Welcome Brad when he makes his first post.

Ralph Cioffi

Matthew Tannin:

The NYT has a great piece on the indictments of former Bear Stearns Fund managers.

In an April 22 e-mail from Mr. Tannin — which the indictment said was sent not from Mr. Tannin’s account at Bear Stearns, but from his personal account to the personal e-mail account of Mr. Cioffi’s wife — Mr. Tannin wrote:

the subprime market looks pretty damn ugly… If we believe the [CDOs report is] ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire supbrime market is toast… If AAA bonds are systematically downgraded then there is simply now way for us to make money — ever.

Three days later, Mr. Cioffi and Mr. Tannin hosted a conference call for investors in the funds. This time, his tone was very different.

Lying openly like that to garner more money needs to be treated pretty harshly.  Maybe some in the securitization business can get some religion.  If not, they can always find Jesus in the clink.

1. Family - My girls are the best in the world. I am lucky

2. Wife’s business - taking off, and has needed my attention.

3. I have a day job - really?

4. I invest as my “side job” - the market has been difficult to keep up with.

5. The market is crashing whether I watch it or not… it’s like watching grass grow in Iowa.

BTW, here’s the latest message for Gary Watts:

Any interesting listings, thoughts, etc?

Anyone want to be a cob logger like James over at Bubble Meter?

However, if you know someone who tried to flip in Orange County and couldn’t pull it off, or just is having a hard time, Brandy from Flip This House wants to hear from you. Write to her at the following address: realestatenightmares(at)gmail.com Of course, I get no part of this other than the sick satisfaction of seeing the final product like other train-wreck watchers out there. Besides, the way I feel about it is that I warned people publicly as early as April 2005 that flipping was a dangerous sport, so if you falldowngetbooboo, I don’t have any sympathy for you. Pound sand.

On the other hand, if you get some kind of sick pleasure out of watching other people financially crash and burn after they’ve been warned that they’re playing with fire… well, you’re my kind of people.

1. Calculated Risk has a great visual of projected 2008 foreclosures in “1000 Foreclosures per Day in California”

2008 is off the charts. Anyone calling a bottom at this point doesn’t have the facts straight. Notice of Defaults are projected at over 450K based on Q1 data. You may start to see some houses make sense in pricing, but there’s no doubt we’re going to overshoot fair valuation on the way down this time. No doubt at all.

2. The second one is Mr. Mortgage’s videolog and blog where he recieved California Foreclosure stats from Foreclosure Radar 2 days early. You can alternatively read it here
if you cannot access youtube. (at work, anyone?)

Some great excerpts:

we will have approx 122,000 units slamming the CA auctions over the next 4 months.

That’s over 1000 per day. That’s making the 90’s bust look like a walk in the park. However, when one considers that it is likely that more than half of all purchases within the last 3 years were speculative, the toll is likely largely hitting only those who took excessive risk. Boo Hoo.

Remember to visit Angry Renter. Please be sure to check out ways to contact your local representative to voice your opinion against any kind of government intervention. The invisible hand of the market is in the process of sifting the wheat from the chaff.

In California, renters and homeowners with no mortgage outnumber by a wide margin the number of reckless individuals who overextended themselves. Don’t let yourself be duped into inaction. I’ll post more on specifics later.

No mortgage bailout! None at all! Not to striving homeowners, not to the insanely-paid CEOs. Risk has penalties too.

Here’s our typical homeowners:

Here’s the problem with CEOs: