So Cal Real Estate News

Woke up this morning to one of those stories that makes you thankful for what you have. Even if it is going down in value.

Worth a read:

“Pride in A Paycheck”

There’s more to life than money. Way more.

Apparently the majority of the Federal Reserve’s Directors were afraid things might get a lot worse when they approved last month’s 3/4% rate drop, according to minutes released today from that meeting.

Here’s the top of the AP’s report on it:

Worries about a deep recession–not a shallow one–drove Federal Reserve policymakers to slash interest rates again last month, according to minutes of their closed-door meeting.

Even as the Fed battled in almost unprecedented fashion to stem a widening credit and housing slump, some Fed members fretted over the possibility of a “prolonged and severe” business downturn.

It was in that environment that they voted–with two dissents–to cut this important interest rate by three-quarters of a percentage point, to 2.25 percent.

That action capped the most aggressive Fed intervention in a quarter-century.

Some Fed policymakers thought that such a widening recession could not be ruled out given the further restriction of credit availability and “ongoing weakness in the housing market,” according to the meeting minutes that were made public Tuesday.

That doesn’t mean we will fall into a prolonged & severe recession. In fact, it means policy makers are doing all they can to prevent one. But it does mean that’s one possibility that must be considered, as we’ve been saying for months.

To us, it’s just more evidence that nobody really knows what’s going to happen next (See last Friday’s “A Change In Our Projections?“. Maybe “What to do when nobody knows what’s next“)

April 10 update: In the week since writing this post, the roller coaster ride of hopeful and negative news has continued unabated.

One thing that concerns us is this week’s release of California’s Foreclosure stats for March, however (see “So Cal Defaults Up Again & What it Means”). has got us reconsidering. But there are a couple hopeful possibilities we’re also keeping our eyes on. We’re watching to see what Congress might do next, and keeping another eye on the ever-surprising Fed.

So stay tuned for further developments. In the meantime, we still think this is as accurate a description of where we’re at & where we’re going as we can write. For now.

We concluded our last post (”Two Problems with DataQuick’s Median Prices,” with our observation that the actual drop in So Cal home values from top to current bottom is about 25 - 30% (less in higher end areas, more in condos, starter areas, and areas with lots of new construction).

The obvious question is, “How Much More Should So Cal Prices Have to Correct?”

25 - 30% may well be about the right amount of correcting–nobody knows for sure, as we keep saying (see “How Low will Prices Go?“).

But the market will almost certainly overcorrect, especially with all the current negativity, all the foreclosures still in process, and the difficulties getting mortgages continuing.

Ben Bernanke, the Fed Chairman, thinks governmental actions already in place will begin to kick in later this year, and things will slowly begin improving from there. He hopes, but he’s not sure. (See “Bernanke predicts bottom later this year” for excerpts from his Wednesday testimony with our English “translation”/summaries.) Remember, however, that part of his job seems to be keeping an optimistic spin going.

But UC San Diego’s Nobel Prize winning economist, Clive Granger, thinks the U.S. economy has already been in a recession for about four months. He expects the current recession to last an additional 2-6 months, depending on what occurs in the housing and financial markets. Like Bernanke, that puts the bottom later this year.

Slightly more pessimistic is Freddie Mac Chief Economist Frank Nothaft. (He was also the panelist from last October’s CAR Expo who formed the basis for our belief that nobody knows what will happen next with his remarks that “we’re in uncharted territory.”) (Obviously, that belief hasn’t stopped us from making our best guesses at what’s next.)

Maybe Dr. Nothaft now thinks the picture’s becoming a bit clearer. Last week he told a lunch audience that he expects that life should begin to return to the housing sector late this year or early next but says prices may not recover significantly until 2010.

Then this morning DataQuick released figures for OC showing prices were still dropping but sales volume is continuing to rise, as we’ve been predicting (see the Register’s R.E. blog for details). (Also bear in mind what we said yesterday about DataQuick’s numbers being several months behind, among other things.

Then this afternoon the Register blog put up another post quoting a South OC Realtor who does a lot of number crunching saying what we basically said a month ago, that activity’s picking up.

Now remember what we said about those two So Cal real estate market cycles on Wednesday. Annual cycle: up in the spring, down in the fall. Add in these predictions that the economic cycle may be nearing a bottom, and what do you get? Could it be we’ll hit bottom this winter, not a year later as we had been thinking?

Maybe, but what about today’s increase in unemployment to 5.1%, with economists particularly worried because the drop was so broadspread, no longer limited to housing and construction.

This morning I spoke with one broker I’ve known for 30 years about activity in his office. Yeah, he said, sales (opening of escrows) were up in February, but then they dropped a bit in March, and the last few weeks have been especially slow. The March slowdown he attributed to actual competition for houses, citing one agent who had presented 8 offers for one buyer who needed help with closing costs. There were enough competing offers and enough buyer activity that the sellers were no longer making those concessions.

The cause of the slowdown over the last two weeks , however, was harder to figure out. “Dave, there’s just so many cross currents,” he told me. “The market’s just in flux.”

That flux may mean that we’re nearing a bottom. Or it may mean the mini-upturn we saw in February and March is turning down.

Or it may just mean it’s still too early to tell what’s going on.

This post was intended to update our projections. So I looked up our most recent forecasting post, March 24’s “What’s Next for Southern California Housing.”

Here’s what we said in summary back then:

“We continue to expect a window of opportunity for sellers for the next several months, followed by opportunities for buyers through this winter. We still thing there’s a significant chance (20%?) of a major price collapse of an additional 15 - 25% , but there’s also a possibility that the worst is behind us.”

“Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something. up”

Looks like there’s not a whole lot to update, although there are some things I might tweak:

• That window of opportunity for sellers may already be starting to close.
• An additional price decline of 5% - 10% through this winter is probably the most likely scenario, but by no means a certainty.
• There’s a significant possibility that the market will bottom this winter, but it’s still to early to really know.
• There’s also evidence that real estate’s woes may spread through the economy and pull prices down much further, into a recession that might last for years.
• Washington is becoming increasingly proactive, which could be good. . . or bad, depending on what specific steps are taken.
• One thing hasn’t changed at all:

Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something up.

What to do? Guess it’s time to again refer to our December 1 post, “What to do when nobody knows what’s next.”

Sorry the picture isn’t clearer, but we’d rather tell you the truth than make something up.

We’d love to hear your thoughts, especially what you see happening in your corner of So Cal.

April 10 note: As of this morning, we’re beginning to think the bottom’s probably at least 20 months off, rather than the 8 we’ve been hoping for recently. Those foreclosure stats we mentioned really have us concerned, but we may be overreacting to one item. Because you never know for sure what’s going to happen next!

Talk about being out in front of a story!

Early April 1, before I went to the Westminster Justice Center for a day of Jury Duty (details later this week), we put up our most popular post yet, “Major Housing Breakthrough Near?”

“It looks like our leaders may finally be setting aside their egos and personal agendas to work together for the common good,” we wrote two days ago.

“Behind-the-scenes discussions between Congressional leaders and the Bush administration may be about to bear fruit. And that fruit would be a pragmatic Housing Relief Act of 2008 which combines the best ideas from partisans of all stripes to provide both immediate relief and long term reform.”

So guess what’s the top story on Los Angeles Times‘ website this morning? “Senate advances mortgage relief plan.”

Here are the first two paragraphs of today’s Times’ article:

WASHINGTON — Senate Democratic and Republican leaders reached agreement Wednesday on a multibillion-dollar package to address rampant foreclosures and other problems stemming from what may be the worst housing slump since the Great Depression.

The compromise measure, placed on a fast track by the election-year desire to mollify voters, could be approved by the Senate as early as this week. It would be the first significant intervention by federal lawmakers to aid victims of the mortgage crisis.

Looks like you heard it here first!

Now, we’re pleased with our reputation for honesty. Really (see Redfin’s post, “A Realtor We Can Trust“). So we’ll also have to disclose that we got a couple of “minor” details wrong near the end of our April 1 prophetic post.

Like Congress eliminating earmarks and passing a line-item veto and Bush cutting back on Iraq spending to help fund the bill. And the AARP agreeing to support a one year suspension of social security’s cost of living increase. And McCain picking Obama as his running mate in the midst of all the bipartisan unity.

But it was posted on April 1.

By that we mean, it took a couple of days for all the details to come out. Right?

Shoot, our first report on a pending bipartisan breakthrough on housing was posted on March 31 (”Pragmatic White House Ready to Help Out?“).

“We think it could be a major step in the right direction–or a major disaster. As always, “the devil is in the details.” We just hope & pray that our employees in Washington (yup–we pay their salaries!) will finally put special interests, dogma, and party politics aside long enough to work for the common good, ” we wrote back then.

Who knows, maybe they were listening in Washington.

So maybe that post coming out on April 1 was just a coincidence? What are we going to do if we get some unbelievable, hot info on April 1? Sit on it until April 2, and let the big boys get ahead of us?

In any case, the devil is still going to be in the details, which range from federal mortgage relief bonds to tax breaks for homeowners, builders, and people who buy and occupy foreclosures.

There’s still time for partisanship to kill the bill, with hearings in the house scheduled for next week. Wouldn’t it be nice if our representatives will use that time to make the bill better for the nation as a whole, rather than to grandstand or advance partisan interests.

Otherwise, the joke might just be on us.

Only we wouldn’t be laughing.

Excerpts from his prepared remarks to Congress today, with my attempts at decoding and summarizing in italics preceding each segment:

We’re not out of the woods yet:

Although our recent actions appear to have helped stabilize the situation somewhat, financial markets remain under considerable stress. Pressures in short-term bank funding markets, which had abated somewhat beginning late last year, have increased once again.

It’s harder to get any loan because of all the losses due to the mortgage mess:

Credit availability has also been restricted because some large financial institutions, including some commercial and investment banks and the government-sponsored enterprises (GSEs), have reported substantial losses and writedowns, reducing their available capital. Several of these firms have been able to raise fresh capital to offset at least some of those losses, and others are in the process of doing so. However, financial institutions’ balance sheets have also expanded, as banks and other institutions have taken on their balance sheets various assets that can no longer be financed on a standalone basis. Thus, the capacity and willingness of some large institutions to extend new credit remains limited.

Even “conforming” loans (Fannie Mae & Freddie Mac) have gotten pricier, and non conforming loans are almost non existent:

Another market that had previously been largely exempt from disruptions was that for mortgage-backed securities (MBS) issued by government agencies. However, beginning in mid-February, worsening liquidity conditions and reports of losses at the GSEs, Fannie Mae and Freddie Mac, caused the spread of agency MBS yields over the yields on comparable Treasury securities to rise sharply. Together with the increased fees imposed by the GSEs, the rise in this spread resulted in higher interest rates on conforming mortgages. More recently, agency MBS spreads and conforming mortgage rates have retraced part of this increase, and conforming mortgages continue to be readily available to households. However, for the most part, the nonconforming segment of the mortgage market continues to function poorly.

The housing market remains weak, and that’s hurting everyone:

These developments in financial markets–which themselves reflect, in part, greater concerns about housing and the economic outlook more generally–have weighed on real economic activity. Notably, in the housing market, sales of both new and existing homes have generally continued weak, partly as a result of the reduced availability of mortgage credit, and home prices have continued to fall.¹ Starts of new single-family homes declined an additional 7 percent in February, bringing the cumulative decline since the early 2006 peak in single-family starts to more than 60 percent. Residential construction is likely to contract somewhat further in coming quarters as builders try to reduce their high inventories of unsold new homes.

Things are worse than we thought, but we think they’ll start getting better later this year. But nobody really knows. [We've been telling you that since November!]

Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

We think inflation will start dropping later this year, but we’re not really sure about that either:

We expect inflation to moderate in coming quarters. That expectation is based, in part, on futures markets’ indications of a leveling out of prices for oil and other commodities, and it is consistent with our projection that global growth–and thus the demand for commodities–will slow somewhat during this period. And, as I noted, we project an easing of pressures on resource utilization. However, some indicators of inflation expectations have risen, and, overall, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully in the months ahead.

We think we’re finally on the right track, and expect to turn a corner during the second half of this year. (”Things will turn out fine in 2009?”)

Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year. I remain confident in our economy’s long-term prospects.

At least, that’s what I think he said. Click here for Bernanke’s complete prepared text.

Click here for the L.A. Times’ report on Bernanke’s remarks.

And feel free to use the “comment” option to express your opinion, but in relatively polite language, please.

We sure hope he’s right. Could be.

Note: Most of our market predictions are based on So Cal’s two market cycles: the annual cycle and the broader economic cycle. It’s basic stuff, but if you understand both cycles, you’ll be miles ahead of 90% of the population and 50% of the agents in trying to figure out what’s going to happen next.

Yesterday Peter Viles had an interesting post on who’s buying in So Cal today in his L.A.Times’ blog. That got me thinking about writing a post on “Time to Buy?”

But I’m going to save that post for the near future. Instead, I’m going to “set the stage” for that with the first post in our new “back to basics” Real Estate 101 series.

1: The “Economic Cycle”

In any real estate market, there are at least two basic cycles. We’ll call the longer cycle the “real estate economic cycle” It roughly corresponds with the boom-bust-boom-bust business cycle we’re all too familiar with. 20 years ago I used to say these cycles generally take about 4 - 7 years. In other words, it usually takes 4 - 7 years to go from bottom through peak back to new bottom.

Well, the current So Cal real estate “economic cycle” last hit bottom around 1995, so it’s already gone about 13 years. But we were heading for a bottom before the Fed began their “life support” intervention after 9/11 in 2001 (see “How We Got into this Mess”). That would have been about an 8 - 9 year cycle, at least.

2: The Annual Cycle

We’re not going to insult your intelligence by telling you how long the annual cycle lasts, but we will say it’s much more predictable then the longer “economic cycle.”

All things being equal, the annual cycle has both prices and activity bottoming in December, then gathering steam through the winter, peaking in late spring, leveling off in summer, and heading down in fall.

In what we used to consider a “normal” market, prices only went down in the fall about half as much as they went up in the spring. As we near the peak of a booming economic cycle, prices go up year round, but they go up faster in the spring and slower in the fall. Outside events, like the Fed lowering rates on 9/12/01 or Bush I invading Iraq in 1989 impact both cycles.

By “activity” we’re talking about homes going into escrow, which is what the average Californian means when she says “Our house just sold!” (Not that the average Californian is saying that much right now. But she would if she’d read our post on “How to Sell Your So Cal Home for Top Dollar in 30 Days in Any Market.”)

DataSlow’s median pricing statistics report homes closing escrow, which is usually about 30 - 60 days after they opened escrow. And DataSlow reports those stats about a month after the median closing date, so it’s 2 - 3 month old “news” when you read it in the paper. So DataSlow’s charts would indicate that prices peak in the summer, but that’s just the homes that went into escrow in the spring closing in the summer.

Why . . .

do prices usually peak in the spring and drop in the fall here in So Cal? 3 reasons:

1. Income taxes. Many buyers are brought into the market each year when they have their taxes done and realize they need more tax shelter, and that begins early in the year as those with simple returns file in January. For other’s, buying a home becomes a new year’s resolution.

2. Honey Do Lists. Many sellers also make a new year’s resolution to sell and move up or down. But all it takes for a buyer to “get on the market” (start looking) is to stop at an open house or get online (see “A Better Way to Search for Home Listings“). And first time buyers usually one to get into that home of their own by summer.

But it takes a lot of work for most sellers to get on the market! Work they’ve been putting off for years. And if it ain’t happened in the last decade, it ain’t gonna happen real fast now. For most sellers it takes 4 - 7 months to realize they’re not going to get everything done and call a Realtor for advice on what to do & who to hire. So must sellers are getting on board the real estate train right when most buyers have already gotten off. That affects supply and demand, which affects price.

3. School, Vacation, Weather & Holidays.

O K, that’s really 3 - 7, but we’ll lump them together. Buyers with school age kids want to get into their new home before school starts in the fall, and they want to have it in escrow before school gets out in June. That’s so they can get their kids signed up at the new school before the staff takes off.

Once summer hits, buyers have other things on their plate the rest of the year. Summer vacation, back to school, then Thanksgiving and Christmas. (Despite the weather, Christmas in California begins in September or October. As my pastor, Chuck Smith of Calvary Chapel Costa Mesa, says, “When you see those Christmas decorations going up in the stores, you know Halloween is just around the corner.”)

So buyers are pretty much too busy to buy from when the kids get out of school on. Sellers, however, tend to be at least one generation older than their buyers. They’re less apt to have school age kids, they take their vacations off peak, & they’re often just getting their home ready to put on the market when summer hits, as we said.

Selling a home is frequently a less discretionary decision than buying. Divorce, death, foreclosure, and job transfers occur at a fairly consistent pace all year round. (Actually, death tends to occur in the winter after Christmas, but you really didn’t log onto this blog to hear about my college days working at the Westwood Village Mortuary as a resident manager.)

Local Variations

The annual cycle varies by region somewhat. In areas with brutal winters (which to us is pretty much any place north of Fresno), things continue to drop until the snow starts melting. In resort areas, prices tend to peak during peak seasonl–winter in the desert & in ski areas, summer in most other vacation meccas.

How to Figure Out What’s Next

These two cycles are not synchronized, but they do influence each other. When the economic cycle is in a major downward move, prices may just level off in the spring, or even drop some. But if the downward cycle continues, they’ll drop even faster in the fall.

Our understanding of the annual cycle enabled us to predict the increase in activity that DataQuick and the Association of Realtors reported for February closings. It’s why we think closings will also be reported as up when March figures are released in about a week.

The question is, will the impact of the overall downward cycle overpower the normal seasonal uptick. Remember, it’s still early in the annual cycle: March closings mostly went into escrow in January and early February. Our best guess is that sales will be up but prices down for March closings, but by April or May prices may also be modestly up.

Part of the problem with prices is that DataQuick uses median prices, which can be skewed by differences in which price ranges of home are selling (see Jeff Collin’s summary of a detailed study that proves what we’ve been saying about this for years.)

Well, now you’ve got one of the basics of predictions down. Give it a shot, & see if you can impress your friends. Or shoot us a comment or question, so we can explain it better or add whatever we may be missing.

Good morning! April 1st is over, so I guess we’d better get back to the business of sharing our thoughts and insights about the wonderful world of Southern California Real Estate.

Today we’re kicking off a series on real estate basics. with a post on “So Cal’s Two Real Estate Market Cycles.”

I was working on that post I googled the famous Vince Lombardi football quote above. I was so taken by the story I decided to devote this separate post to it.

The setting was the first day of the Green Bay Packers’ Training Camp, many years ago. Their coach, Vince Lombardi was already a living legend.

I’ll let Bob Kimbrell tell the rest, quoting from his Book on Management:

All the players knew that at the first team meeting, the legendary coach would waste no time getting straight to the point. Many of the men, half Lombardi’s age and twice his size, were openly fearful, dreading the encounter.

The coach did not disappoint them, and, in fact, delivered his message in one of the great one-liners of all time.

Football in hand, the great coach walked to the front of the room, took several seconds to look over the assemblage in silence, held out the pigskin in front of him, and said, “Gentlemen, this is a football.”

In only five words, Lombardi communicated his point: We’re going to start with the basics and make sure we’re executing all the fundamentals. . . .”

We believe a major problem with real estate today is that it’s gotten away from the basics. That certainly was the case for most agents, lenders, and buyers over the last five years. Not to mention the Fed, mortgage bankers, & federal regulators.

Back on St. Patrick’s Day, we posted “When Market Chaos Strikes, Get Back to Basics.”

Today we’ll follow up by “kick offing” our series of “Real Estate 101″ posts on some of the neglected or forgotten basics of So Cal real estate. We begin today with “So Cal’s Twp Real Estate Market Cycles.”

Please let us know what you think.

Pragmatists in the Bush Administration may be gaining the upper hand, according to “Bush Readies Mortgage Aid Plan,” in Saturday’s Washington Post.

According to the article, “The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds.”

The proposal targets at least some of America’s estimated 9 million “upside down” homeowners. Under the plan, the FHA “would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government,” according to the article.

This appears to be a modification of a proposal by Massachusetts Democrat Barney Frank, reminding us all that politics, indeed, does “make strange bedfellows.” (I’m available, Mr. Letterman. )

We think it could be a major step in the right direction–or a major disaster. As always, “the devil is in the details.” We just hope & pray that our employees in Washington (yup–we pay their salaries!) will finally put special interests, dogma, and party politics aside long enough to work for the common good.

In the meantime, if nothing else, it’s one more illustration of what we wrote last November in “How Low Will Prices Go?”–we’re in uncharted territory this time, and nobody really knows what will happen next! (If you predicted a Barney Frank/George Bush recovery plan, please let me know so I can get your input on my stocks & the Final Four next weekend!)

In 35 years of tracking the Southern California real estate market, I’ve never seen anything remotely like the mess we’re in right now. . . but the basic causes are as old as humanity.

Greed, stupidity, and a lack of integrity got us into this mess. But we’re not talking your average, run-of-the-mill greed or stupidity. We’re talking greed and stupidity on a scale unseen since. . . the late 1920s?

Like the rest of our blog, this isn’t the researched opinion of some economist in New York, but the personal perspective of an agent who watched this whole mess unfold from the So Cal real estate trenches.

We could start all the way back with Moses, who laid down some pretty straightforward rules that would have avoided the whole mess (See “Moses’ 10 Rules for Success“) But for time’s sake we’ll start where the last boom went bust back in 1991, which eventually led to another boom, . . .

A Boom that Lasted Way too Long

We’d just finished another furious run-up in prices, fueled by multiple offers and overbidding after a rough downturn (sound familiar?) Then the end of the Cold War led to massive layoffs in our So Cal defense industries, which rippled into the construction business and then through the whole economy.

If you’re over 30, you probably remember the stories of all the U-Haul trucks leaving the state as homeowners and renters followed the jobs across the country. 1991 - 95 were four dramatic years of price and sales declines, a classic overcorrection fed by a massive local recession. In the real estate business, the cry was “stay alive ’til ‘95!” A few of us did. Barely.

In 1995 prices and sales finally started moving upwards again. By September 10, 2001, it looked like we were peaking & due for another correction. Things changed the next day.

Alan Greenspan took action to avert a post-9/11 depression, dramatically lowering short term rates. The long term bond markets, sensing a recession, cooperated & long term rates dropped too. Then the Fed dropped rates again. And again. And again. The real estate market cooperated & just kept moving up. And up. And up.

Late in 2002 Greenspan figured out things had gone too far, and belatedly began raising short-term rates. The long term bond markets, sensing that would cause a recession, failed to cooperate, and kept long-term rates low. Even lowered them a bit. Greenspan suddenly discovered the brakes on his economic sports car weren’t working!

So a correction that should have started in 2001 was put off even more. Eventually the brakes kicked in and real estate started slowing. Prices actually started dropping in the summer of 2004.

But then, for some unknown reason, prices began moving up dramatically in the spring of 2005. Every local economist except for Gary Watts was confounded. Cal State Fullerton’s annual negative Economics Forecast was beginning to look like a broken clock. (Just like a broken clock, it would eventually be right.) And more and more people forgot all about economic cycles and started believing that So Cal real estate really does only go up.

Insane New Mortgage Products

The unknown reason, it turned out, had a lot to do with creative new mortgage products. Creativity can be good, but creativity fueled by greed and aided by stupidity can–and did–create a monster.

Here are some of the parts that went into that monster:

No down: It used to be the only way to get 100% financing was to join the Armed Services or buy Robert Allen’s book, Nothing Down. Then someone figured out that a 13% mortgage for 20% of a home’s value could be “piggybacked” onto a more normal 80% mortgage to allow financing for a purchase with no down payment.

No mortgage insurance: These “piggyback” loans avoided loan review by those darned underwriters at the Private Mortgage Insurance companies by charging a higher interest rate and “self insuring.” But those PMI companies were the ones who kept everybody honest, because they were on the line if the loan went bad.
No documentation: It used to be you had to document your income to get a loan. If you were self employed, that meant tax returns. Which didn’t always tell the full story. So World Savings (I so miss all the old So Cal based S & Ls!!!!) (Pause for a moment of silence for World, Great Western, Cal Fed, Glendale Fed, Home Savings, & any others I forgot. If your old enough, picture those GW commercials with a cowboy riding past El Capitan as John Wayne intoned, “We’ll always be there.”)

Sob. OK, as I was saying, World Savings decided to allow self-employed borrowers with good credit scores and verifiable 20% down payments to get mortgages without documenting their income. “No doc” loans.

Lousy credit’s OK: Well, before you knew it, So Cal mortgage brokers like New Century and Argent were combining “no doc” loans with no down “piggybacks.” Then they decided you didn’t even need good credit scores if you would take a high enough interest rate, which won’t kick in for a year or two. All this after the market should have peaked.

Greedy rookie agents & brokers: At the same time two more trends appeared. The money was so good, everybody and her gardener went out and got a real estate license, which is way easier than getting a beautician’s license. (Some of them even got a broker’s license, because our beloved, “Blow Up the Boxes” governor vetoed a law that would have required real estate brokers to have two years experience as salespeople before getting a license.)

Disclosure about rookies: I don’t hate rookies. I was one once. Long ago, in a galaxy far away. . . .

Both new and experienced agents can be unethical and incompetent. But time does tend to weed out a lot of the worst agents. In a normal market, up to 90% of the newbies are out of the business within two years. In a booming market, they tend to hang around longer. And anyone who got into the business after 1995 did not experience the last big downturn. Some of them actually believed that “real estate never goes down.”

Agent/lenders: Lots of these brand new, do-anything-for-a-buck agents & brokers decided to double their money by acting as their buyers’ Realtor and mortgage broker. So the buyer didn’t have a Realtor looking over the lender’s shoulder, because the agent was the lender.

Bribes for selling bad loans: Interest rates were still low, and lots of people were excited to earn as much as 13% interest on these new “mortgage backed securites.” The investment banks like Bear Stearns that bundled and resold them couldn’t get enough of them. So they started giving bonuses to the brokers and agents for putting their clients into these loans–the higher the rate, the bigger the bonus. My boss says these Wall Street firms were the “pimps” of the whole operation.

Low “teaser” interest rates: Of course, those loans were advertised with their initial “teaser” rates as low as 1.9%. And the ad usually proclaimed “payment fixed for 3 years!” And nobody tried to undo the intended deception that confused fixed payments with fixed rates.

Ineffective or nonexistent disclosures: Of course, all this nonsense–even the negative amortization–was “clearly” explained someplace on the dozens of documents the buyer signed at closing. Whether the buyer spoke English or not. Oh, did I mention that it turns out that these newly minted agents often took the liberty of signing for their clients?

A culture of dishonesty. Unfortunately, lying is pretty much accepted as part of the business by many agents, lenders, sellers, and buyers. Actually, by our society as a whole. Nothing wrong with lying, as long as you don’t get caught, and the “good guys” don’t get hurt. Buyers lie to the lender about their income. Agents lie to the buyers about prices going up forever. Lenders lie to the buyers about the effects of the loan–or at least they neglect to tell the buyer. Investment buyers lie to their investors about the quality of the mortgage-backed security.

Actually, Moses told us not to do this. Over 3,000 years ago he laid down ten simple, straightforward rules for successful living. One of them was, “Don’t lie.” Of course, we’re such a smart, tolerant society that we stopped teaching that rule in public schools over 40 years ago. Too bad. A few moral absolutes would have prevented all this. Moses told us so.

Naive, trusting, desperate buyers: Not necessarily stupid, but unsophisticated. I think of Steve, an independent contractor for JPL who bought near the peak using 100%, no doc financing. We recently completed a “short sale” for him, where his lender absorbed a loss of over $100,000 so we could close the escrow. He simply couldn’t make the payments, which turned out to be $1,000 a month more than his lender/agent promised when he bought the home. “We just trusted her,” he told us.

Government Incompetance: Gee–who’da thunk! From Democrats who over-regulate to Republicans who under-regulate, to a Federal Reserve that drives the economy like my mom drove her car (slam on the accelerator–slam on the brake–slam on the accelerator. . .) nobody in D.C. seemed to be able to get anything right. For some excellent examples, check out SeekingAlfalfa’s excellent comment #1 below.

Let’s review: No down, no verification of income, bad credit, overvalued market, insane belief that real estate will never go down, desperate, naive buyers, brand new agents who got into it for the money acting as Realtor and lender both–and getting bonuses based on how bad the loan was for the borrower, non-English speaking buyers signing disclosure documents in English, everybody thinking it was OK to lie, incompetent government . . .

As my colleague and fellow Realtor Anthony Turner put it, “Any homeless bum could get a loan and buy a house.” And why wouldn’t he–especially if his 22-year-old Realtor cousin knew she’d make up to $20,000 if she sold him a loan & a home? Anybody see any problems with all this??

The Profitability of (Willful?) Ignorance

Jim T., a friend who’s been in the business even longer than me, did. At the time he was a wholesale rep for one of the big lenders. He tells me of pointing all this our to a rich young V.P. in his firm, who had no memory of the 1990’s crash because he was in 3rd grade then. “Relax, Jim,” Mr. V.P. said, “nobody’s ever lost a penny on any of these loans.”

He was right. Then. Because prices were going up faster than the negative amortization, so the houses were either sold for a profit or refinanced.

The biggest pyramid scheme since Social Security. another sad story that’s will eventually to unwind. (The N.Y. Times had an interesting page last year about mortgage backed securities, “Housing Busts and Hedge Fund Meltdowns: A Spectator’s Guide.”)

As long as everybody was making money, everybody had a financial incentive to be stupid. And ignorant.

And everybody in the food change was making money. The flipper or refinancing buyer. The real estate & mortgage salesperson(s). The real estate and mortgage brokers, who were supposed to supervise & train the salespersons. The loan underwriters. The Wall Street Bankers who packaged & sold the loans. Everyone who bought the 13% loans, from Deutschebank to little old ladies. Even the politicians, who bragged about the great increases in home ownership.

Conclusion

Greed, stupidity and dishonesty. A lethal combination. And, unfortunately, a natural product of our materialistic, me-first, live-for-today mentality.

There is a cure. Unfortunately, it’s often ignored. Even those who pay tribute to it often don’t practice it. (warning: the next paragraph could be construed as “religious”–feel free to skip it if you wish.)

Jesus expressed it as well as anyone: “Do unto others what you would have them do unto you.” “Love your neighbor as yourself.” Just treat others the way you’d want to be treated.

This is actually a real estate concept as well: The agent is supposed to be a fiduciary. That means she is to put the client’s interest above her own.

A little Golden Rule or fiduciary-mindedness at any step of the food chain might have kept us out of this mess. But right now we’re right in the middle of it.

For our thoughts on what’s ahead, check out our latest projections post, So Cal home price bottom near? as well as  what you might want to do about it.)

And, next time somebody wants ahead of you on the freeway, wave them in. Put them before your own needs. One small gesture for a man. One giant leap for mankind.

A while back the Sacramento Bee ran a good article on buying foreclosures. It reminded me of a very interesting experience with a HUD auction during the last recession in 1994.

Auctions

I teamed with a fellow Realtor and friend to research and bid on a major HUD auction of repossessed properties. From experience, we knew there would be lots of bidders and lots of competition, so we decided to focus on the least desirable location with the most REOs, which was at that time was Compton, and the least desirable type of property with the most REOs, which was condos.

I spent days researching about 50 Compton properties that were on the auction list. I walked through each property, checked sold comparables and similar homes available on the M.L.S., spoke with neighbors, etc. Most of the properties, although boarded up, had been stripped of heaters, major plumbing fixtures, even light bulbs. They were being sold as-is. I carried abaseball bat as I inspected, being on the lookout for homeless people who might have moved in.

When we showed up at the auction, it was like a circus! Adrenalin-pumping music, thousands of buyers, many sitting in groups with their gold-coated Realtors. (I’m not ridiculing any company here, just reporting what I saw.) The chairs were arranged in sections of maybe 200, each one worked by a smiling, enthusiastic, tuxedoed Texan.

We sat calmly amidst the chaos, opening our large 3-ring binders to our detailed notes on each respective property as it was loudly announced in a southern drawl by the animated head auctioneer. Every single property we had researched was bid up way above our market value. Sometimes there were real pride-of-ownership homes on the market on the same block with an asking price well below what the HUD repo sold for. We were grossly outbid on all 50 homes.

At one point I commented to the Texan working our area, “These homes are going for way above market value.”

“Oh oh!” he said, between prodding buyers to up their bids. “That means most of these deal will probably fall out and not close.” Even auction buyers apparently get remorse and sometimes realize they overpaid.

Our conclusion: There are buyers who are willing to pay any price for a foreclosed “bargain!”

From the Bee article, and others in local papers, I don’t think much has changed.

5/30 update: I spoke today with a friend who is also a former President of one local Board of Realtors. He’s now on the homeowner’s association board where he lives, & he told me that a townhome in his mid-priced OC complex just sold in a foreclosure auction about 20%- 25% below market, so apparently there are bargains out there at auctions right now.

We still recommend that you do your homework, like we did, and be careful of getting caught up in the euphoria of an auction.

By the way, that 20% below market margin is my minimum discount for buying a “flip” in a modestly improving market. I think I’d want 30% or more before I’d buy to flip today. That townhome was apparently bought by a Realtor who does a lot of business in that tract and intends to flip it. I hope he does better than the Realtor whose flip I plan to describe in a new post in the next day or two.

Foreclosure Tips

Now here’s a summary of what the Bee says you need to know in advance about buying bank-owned properties:

- First-time buyers will need to be pre-approved by one or more lenders.
- Don’t be surprised if the bank that owns the home requires that you finance your
purchase with them.
- Expect competition. Many buyers bid on multiple properties.
- Banks won’t accept offers that are contingent on selling your home.
- The best deals generally are those homes with the longest time on the market.
- Bank-owned homes typically sell for 10 to 20 percent less than their listing price.
- Be sure to pay for an inspection and consider the cost of repairs or damaged or
missing appliances when bidding on a foreclosure.
- The bank is likely to make a counter-offer. Be sure to consider this when submitting
your first offer.
- Some banks will not accept an offer unless it is submitted by a REALTOR®.
- Banks generally are looking to close quickly, within two weeks to 45 days.

Note added 4/9: From today’s release of SoCal stats on homes beginning the 4 - 8 month foreclosure process in March, it looks like we’ll have lots more foreclosure auctions in the months ahead. (See “So Cal Foreclosures Up Again & What It Means“)

late June update: for our latest projections post, check out So Cal home price bottom near?

For our view on how we got into today’s foreclosure crisis, check out “How we got into this mess“

For seven options for homeowners trying to avoid foreclosure, see “Trouble making your mortgage payment? 7 ways to get back on track“

For what a seller should do in today’s market, there’s “Top 5 ways NOT to pick an agent and “How to sell your So Cal home for top dollar in 30 days.”

Buyers might be interested in see “Time to buy?“

If all this down market is depressing you, that means you’re a homeowner and not a buyer. To keep things in perspective, consider any of the posts in our “perspective” category in the column to your right.

Today’s market presents many challenges and opportunities. Each cycle is different, but they all come to an end. That’s one reason they’re called cycles. The sun will come up tomorrow. Especially in Southern California!