The Fisherman

A fisherman stands in a shallows of the lake.  The water is still, and on such a beautiful day, it reflects its surroundings like a mirror.  He examines his tackle box for the perfect lure...  Ah, but this time he decides to use live bait!  He baits the hook then slowly reaches back, and with a whipping motion he casts it into the water.

Meanwhile, fish beneath the surface take notice of the tender morsel on the hook.  They know it could be dangerous to act, but curiosity gets the best of them; and they reason "We don't know when will see another opportunity like this one!"  Unable to hold himself back, one fish makes his move.  Two onlookers realize that the first fish has gone for it, and they go after it as well.  After a furious struggle, the fish who was the strongest swimmer, snapped up the bait.  For a moment he gloated because three of them darted after it, but he got it...

Well, it's easy to imagine what happens next...  The fish is pulled from the water, and ensnared in the fisherman's net.  There's nothing the fish can do...  It's over for him.

The story above describes what's happening right now to some buyers.  They see what they believe is a once in a life time deal in the current market, perhaps a lender owned home, and make an offer.  Other buyers catch wind of the deal and make offers as well.   In the end, the most qualified buyer, the one with the highest credit score and the most cash, gets the home.  But here's the rub, after a few months the buyer discovers that their good deal is not so good anymore, and it may only be a matter of time before homes are selling for less then they paid.

Here's an example:

A REO is listed for $439K in an area where some homes have sold for as high as $499K.  Buyers pounce on it because it's an additional $60K under market.   The lender receives 5 offers, with the highest offer being $479K.  The buyer reasons, he got a steal because it's still under the $499K that some have sold for.   And this is true, today he did get a deal.  However, 6 months roll by, and homes in the same neighborhood are regularly being listed for $439K.  Do you still think the buyer got a good deal?

The fact is in most areas across the nation home prices are continuing to decline, and most experts seem to agree that this is set to continue for perhaps the next couple of years.  No one can tell you exactly what will happen, thus it's up to you to research and determine when it may be in your best interest to buy.

Just some food for thought...

Housing Market Watch #1

This entry is the first of many installments to come, where I'll focus on what's happening with home prices in Southern California using specific examples from the Multi-Listing Service (MLS).

Today's property is in Escondido, California (San Diego County). I chose Escondido because, as I reported in my post The Biggest Loser, it's the city that fell by the greatest percentage in San Diego County.

Type: SFR
Status: Active
MLS #: 076063664

Square Feet: 1,829
Lot Size: 6,500 sqft
Year Built: 2003

Bedrooms: 5
Full Baths: 2
Partial Baths: 0

Listing Date: 08/06/07
On Market: 266 days

Description

Sllr. will entertain offers btwn. $339,999-$369,999.Can park 6 cars in drive way. Panoramic views, BUILT in 2003.Close to shopping ctrs, hwy 15 & 78 and major st. basically in the harth of Esc. convinient location. Make offers!!!. Motiveted seller most sell QUICKLY!!!Buyer and selling agent to verify all this information before the close of escrow. Sale and commission subject to bank approval. Commission to be split 50% & 50% of the total authorized by the bank.

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Sales History

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Date	Sold Price	Gross Gain	Change ($)	Change (%)
07/11/02	$165,000	N/A	N/A	N/A
02/25/03	$362,000	+$197,000	+$197,000	119.39%
09/19/05	$546,000	+$381,000	+$184,000	50.83%

It's easy to see that this home appreciated by unsustainable percentages during the Housing Boom, increasing by an average of 72.9% per year.

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Pricing History

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Date	Asking Price	Gross Gain	Change ($)	Change (%)
08/10/07	$555,999	+$9,999	+$9,999	1.81%
08/25/07	$599,999	+$53,999	+$44,000	7.91%
12/03/07	$479,999	-$66,001	-$120,000	20.00%
12/28/07	$449,999	-$96,001	-$30,000	6.05%
01/14/08	$399,999	-$146,001	-$50,000	11.11%
01/22/08	$358,999	-$187,001	-$41,000	10.25%
04/01/08	$339,999	-$206,001	-$19,000	5.29%
04/24/08	$309,999	-$236,001	-$30,000	8.82%
04/25/08	$299,000	-$247,000	-$10,999	3.55%

The sales price continues to plummet, falling by an average of 5.14% per month, as the seller desperately seeks a buyer. At this point the current asking price of $299,000 is $247,000 (45%) lower than the last sales price. The only question remaining is how low will it go?

My Thoughts

As prices continue to fall in Southern California, the most prudent course of action is to wait it out. As you can see from the pricing history above, if a buyer had purchased this home before April 1st, that buyer would have lost out on an additional savings of $59,999 (16.71%)!!!

How low will it go? No one knows for sure. However, I recently read that home prices tend to increase at about the same rate as inflation (4%). So, if this home had increased 4% per year since it was purchased in the summer of 2002, the current value would be approximately $208,000, an additional 30% decline from the current asking price.

That's definitely worth considering.

UPDATE 11/04/2008: This property has been sold for $251,636

Some good advice...

Most people don't trust used car salesmen. Why? Because used car salesmen are notorious for saying or doing anything necessary to get you to buy a car.

In fact, the salesman may know that the vehicle you're eyeing is a lemon; however, if they believe that they have a chance of selling you that vehicle, then they're not going to bother mentioning that tidbit of information. The salesman is there for one reason... to make money. You'll have their attention just long enough for them to sell you that car. Afterwards, they may not even remember your name.

I find it interesting that real estate agents aren't viewed the same way. Think about it, an agent is not going to tell you, we're in a downward market perhaps you shouldn't buy right now. They are there for one reason... to make money, and you'll have their attention just long enough to buy or for them to provision the sell of your home.

For that reason, I decided to use some of the information I gathered in researching the post "It's all happened before...", and cross-referenced it with the statements that were made by the National Association of Realtors (NAR) during the corresponding time period to determine how accurate (good) their advice has been.

Year	Analysts/Media	National Association of Realtors
2005	Overheated housing market is cooling. Median prices declined 5.7% in September, one sign that housing is cooling.	[08/2005] After four consecutive record years, home sales should ease but remain close to record levels in 2005, according to the National Association of Realtors. Sales should decline about 2.5% to a total of 6.48 million in 2005.
2006	Continued market slowdown. Prices are flat, home sales fall, resulting in inventory buildup. U.S. Home Construction Index is down over 40% as of mid-August 2006 compared to a year earlier.	[09/2006] Home sales are likely to level out at a lower pace in the months ahead, according to NAR's latest Pending Home Sales Index. The index, which is based on contracts signed in July, is down 7.0% to 105.6 from a downwardly revised reading of 113.5 in June, and is 16.0% lower than July 2005.
2007	California housing: still unaffordable. Year-over-year decreases. Home sales and home prices accelerates [downward] rather than bottoming out, with U.S. Treasury Secretary Paulson calling the "the housing decline ... the most significant risk to our economy."	[01/2007] “2007 will be the fifth best year for housing on record. Places like Houston, the Kansas City area, Indianapolis, and the vast middle section of the United States offer affordable prices and continued job growth."
2008	California home prices freefall. Home prices down 26% in February. Southern California home sales drop to a 20-year low. Ex-Fed Chairman Greenspan admits recession. Doom and gloom.	[01/2008] "Over the next few months, existing-home sales are expected to hold fairly steady as indicated by pending sales activity, then rise later in the year and continue to improve in 2009."

As you can see from the examples above, the National Association of Realtors (NAR) seems to have little credibility when it comes to making market predictions or accurately assessing the current market conditions. So if the NAR can't give you an accurate reading of the market, why would you expect your realtor to be able to do so?

Realtors, buyers and sellers alike look to you for direction and advice. So when you tell them "Buy now or be forever priced out of the market!" or "We're either at the bottom or very close to it", they tend to trust you... Often times to their detriment. Don't you have an ethical, legal and professional obligation to give your clients accurate information to the best of your ability? I think it's even worse when the National Association of Realtors, an organization that has the social responsibility to accurately report housing market conditions, is taking the lead in misleading.

Here's some good advice:

The next time your realtor advises you, research the market yourself, because the typical realtor has no vested interest in telling you anything that doesn't convince you to buy or sell...

Moving Day...

I know it's late...  But I wanted to catch you all before you went to bed...  At least those of you who live in the West...

Today we finally moved into our new townhome in Irvine...



No... We didn't do the unthinkable; we're still holding off on any purchases until around 2010!!!  But I digress, back to the townhome we're leasing...

It's larger, nicer, cheaper, and has more conveniences than our previous townhome in Newport Beach...  But we're no longer a mile from the ocean :-(

I know what you're thinking... Why would you leave a place so close to the pacific blue... Well, we decided the more money we have saved once the market bottoms, the more house we'll be able to afford (sniff sniff sigh...)

Normally, I would've posted something in during the wee hours this morning; however, because as I had no internet connection this wasn't possible.

Worry not though!!!!  Starting Monday, things will be business as usual.

Stay tuned updates soon!!!

How Safe Is Your Money?

There are 76 banks on the troubled bank list. No big deal, after all we are FDIC insured right?

Well, I just discovered something about FDIC insured bank accounts that literally scared me! For years I have heard and read that bank deposits are FDIC insured up to $100,000.

Many people thought (including myself) that if they had multiple accounts at the same bank, such as the following:

• $100,000 in a Checking account
  
• $100,000 in a Savings account
  
• $100,000 in a Certificate of Deposit (CD)
  

They would have $300,000 worth of FDIC protection.

WRONG!

WRONG!

WRONG!

You are only protected up to $100,000 per bank per person!

What could you do? Well, you could move the money in excess of $100,000 to another bank since the limit is per bank.

Another option would be to add another person to the account, if you have someone you could trust.

A better solution is to find a bank that uses the Certificate of Deposit Account Registry Service. Members of the registry distribute large accounts across multiple institutions in a way that is seamless to you, but spreads out the insurance risks.

You could have up to $30 million on deposit, with a single statement and interest rate, but be spread wide enough to be fully covered by the FDIC; in a fashion that is legal and approved by the FDIC.

Remember, it is not the policy of the Federal Reserve or the Federal Government to warn you ahead of time that a bank is about to fail. So please take measures to protect yourself.

Rolling the dice...

Some of you are in a position where you may have decided that it is strategically beneficial to buy a home now, as opposed to waiting for the bottom of the market.

No one can say for certain what's going to happen in the housing market. Conventional wisdom says that housing prices may continue to decline for some time. However, that may be irrelevant to you if you've decided, for whatever reason, to purchase a home now. That being said, here are some tips and tricks that may help you to get the best deal possible in today's market.

Buy a short sale

It generally costs a lender around $40,000 to convert a pre-foreclosure to a real estate owned  (REO) property. Thus, if you find a short sale on the MLS, and you offer the lender $40,000 less than the appraised value of the home, they'll generally accept it, because the numbers make sense.  The downside to buying a short sale are:

• The more expensive the home is, the smaller the discount (in terms of percentages) because the discount is a fixed amount.
 
• It may take some time (weeks perhaps months) to get a response from the lender(s) once you've made an offer.

So, provided you don't need to get into a home right away this could be an option for you.

Buy a lender-owned property

Real estate owned (REO) properties may sell for 10-15% less than their appraised value (which in some areas my be 5-10% less than some asking prices), and thus offer significant savings over conventional home re-sales. Lenders typically use real estate companies to sell their properties, and thus offer an added benefit over short sales, as they do not exhibit the long wait times for a response to your offer. The disadvantage of a lender-owned property is the condition you may find the home is in. You may find that the appliances, furnace, hot-water heater, or even the A/C unit have been removed; sold by the previous owner before the lender was able to take possession of the home.

End of the quarter

If you've decided to buy a lender-owned property or short sale, try to buy at the end of the quarter (at least 30 days before the end). Why? This is when lenders generally have the greatest incentive to sell a property for less than they would have otherwise; to make their numbers for the quarter look better.

Days on the market

Once a home has been on the market 180 days or longer, the sellers may become anxious, and may be more likely to accept an offer that they would have previously rejected.

Thus, if you find a home that has been on the market for 6 months or more, you may be able to pickup that home at a discount. The longer the home has been on the market, the more anxious the sellers may become. So if it's been on the market a year or more, you may be able to purchase it at a steep discount.

Deal directly with the listing agent

Listing agents would much rather deal directly with buyers; as it accelerates the process, cuts down on miscommunication, and the agent would receive both sides of the commission (3% instead of 1.5%). At times, depending on the agent, when price negotiations are breaking down over a small amount (1.5% or less of the sales price), the listing agent may even give up as much as 1.5% to close the deal!

Offer less than the list price

Don't pay the full price!!! Given the continuing decline of home prices, it would be foolish to offer 100% of the purchase price; unless the price is so much lower than the rest of the market that you feel completely confident it's the right thing to do. Generally, one can offer up to 10% less than the asking price and feel reasonably comfortable that the seller will accept it. That's not to say you can't offer less than that, it's just the likelihood of acceptance gets lower as the price does.

Plan to stay put for a while...

If you're purchasing a home now to live in, then you should plan on living in it for at least five years, in the hope that by then you'll be in a positive equity situation. However, if you find that you need to sell it for any reason over the next couple of years, you may lose considerably.

The Biggest Winner

In a previous post, The Biggest Loser, I presented statistics taken from DataQuick on the cities within each county in Southern California that had the largest price declines (for single family residences). This time, I will present the cities in Southern California that have had the smallest price declines or in some cases price increases.

The Biggest Winner (per county)

County	City	Median Mar-07	Median Mar-08	Median % +/-	Sales
Los Angeles	Diamond Bar	$594,000	$568,000	-4.6%	28
Orange	Laguna Niguel	883,500	$950,000	+7.0%	25
Riverside	La Quinta	554,800	$545,000	-1.8%	84
San Bernardino	Lake Arrowhead	$410,000	$410,000	-0.0%	23
San Diego	Rancho Bernardo	580,650	$553,000	-5.0%	29
Ventura	Simi Valley	593,850	$535,000	-11.0%	39

Disclaimer: Cities with less than 23 sells within the period measured were omitted. The percentages for larger cities are for specific postal codes and may not be reflective of the entire city.

Conclusion

No matter how bad the market seems, there will always be those who manage to make money, and the current Housing Crisis is no exception. As you may have noticed above, that at least one city had a price increase when comparing the median price from March 2007 to March 2008.

Now is the time to pay close attention to the cities that are fairing well in the current economy, because these may be the cities that do extremely well when the market rebounds.

The Biggest Loser

As notices of default and foreclosures continue to skyrocket unrelentingly, it's natural to wonder how low prices are actually going to go. I think this is something both buyers and sellers alike want to know, yet obviously for different reasons.

Potential buyers have a vested interest in seeing prices continue to decline as it will mean better buys in the future. While sellers would prefer to see the prices either flatten or start an upward trend, because as prices decline, so does their personal wealth.

Below is a comparison of the median prices (per county) from March 2007 to March 2008 across Southern California (for single family residences).

County	Median Mar-07	Median Mar-08	Median %+/-
Los Angeles	$540,000	$440,000	-18.5%
Orange	$629,000	$506,000	-19.6%
Riverside	$420,000	$306,250	-27.1%
San Bernardino	$369,000	$265,000	-28.2%
San Diego	$490,000	$395,000	-19.4%
Ventura	$566,750	$430,000	-24.1%

The numbers above are probably not a surprise to most of you. But the obvious question is, "Are prices stabilizing or will they dip any lower?" The truth is no one knows for certain... However we can make educated guesses. In a previous post, The 'F' Word, I presented the foreclosure numbers from RealtyTrac, as well as what the media and analysts are saying. Given the information provided by that report, I created the comparison below as my educated guess as to where I think the market will be in one year from now in Southern California.

County	Median Mar-08	Median Mar-09	Median %+/-
Los Angeles	$440,000	$341,000	-22.5%
Orange	$506,000	$384,500	-24.0%
Riverside	$306,250	$214,375	-30.0%
San Bernardino	$265,000	$186,825	-29.5%
San Diego	$395,000	$292,300	-26.0%
Ventura	$430,000	$318,200	-26.0%

My educated guess (prediction) is that price declines will accelerate, falling by the indicated percentages across Southern California by March 2009. The percentages of decline are based on the factors below (NOTE: the percentages below are based on information provided by DataQuick for the month of March 2008):

• Notices of default (which may eventually become new foreclosures) are on the rise.
  
• Analysts expect a peak in adjustable rate mortgages (ARM) will reset in May and June.
• Sales were down 38.3% compared to the previous year
• Almost 40% (38.4%) of the homes that actually did sell were foreclosures.
  
• The median price paid for a home last month was $358,000, a 4.0% decline from $373,000 in February, and down 26.0% from $484,000 compared to a year ago.
• The typical mortgage payment that home buyers committed themselves to paying last month was $1,606 (down from $1,665 in February), down from $2,230 a year ago.

I also believe that the additional time it will take to move new foreclosures and short sales (at the current rate of sales) out of the market will drive further price decreases. 

That's all fine and good, but some of you are still skeptical. You're likely saying to yourself, "Prices have only fallen an average of 26% in California within the past year, and could be starting to pickup..." If you are one of these individuals, please reserve judgment until you've read the entire post.

The Biggest Loser (per county)

County	City	Median Mar-07	Median Mar-08	Median %+/-
Los Angeles	Palmdale	$325,000	$185,000	-43.0%
Orange	Santa Ana	$611,000	$378,000	-38.1%
Riverside	Riverside	$457,000	$225,000	-50.8%
San Bernardino	Twentynine Palms	$151,000	$73,000	-51.5%
San Diego	Escondido	$803,000	$339,000	-57.8%
Ventura	Oxnard	$538,000	$300,000	-44.2%

Above are the areas that have fallen most on average in each county, based on data gathered from DataQuick News. As you can see, once you start examining specific areas, the numbers are far more interesting. It's easy, when looking at averages across the county, to miss the fact that some cities or areas within a city may have greater price declines than that of the whole.

Disclaimer: Cities with less than 25 sells within the period measured were omitted. The percentages for larger cities are for specific postal codes and may not be reflective of the entire city.

Conclusion

We haven't seen the last of the price decreases yet; however, not all cities or areas within a city, will be affected the same.  The most affluent and highly sought after neighborhoods, usually those along the coast and/or in close proximity to employment opportunities, will fair the best.  Thus, if you've been waiting patiently to buy, you will be handsomely rewarded if you stay the course.  If you've been waiting to sell, and your circumstances allow you to do so, you may want to act now as your equity will only dwindle further if you continue to wait.

Housing Bubble vs. Great Depression

The embedded video contrasts the crash of the recent Housing Bubble vs. The Great Depression.   I must admit the video's author did a fantastic job of contrasting the two, and thus it's really worth a watch...

The video is similar in concept to an article posted on this blog last week called 'It's all happened before...', which contrasts the Housing Boom of the 1980's and 1990's to the most recent Housing Boom. Please read it if you haven't already.

The Roubini interview

I've been saying for sometime that the current administration has been downplaying the severity of the economic issues we're facing.  Embedded within this post is an interview conducted by Steve Paikin of The Agenda, a Canadian public affairs television show, featuring Nouriel Roubini, a professor at NYU.   In the interview, Roubini discusses the U.S. economic recession and is very candid about the economic outlook.   

Roubini argues that the current recession will not be short and shallow, as some economists have claimed, but it will be the worst recession we've seen since the Great Depression.  He goes on to talk about the financial sector and that we'll see the collapse of more financial institutions (e.g. Bear Stearns), and further price declines in the housing market.  Unfortunately, Roubini's proclamations of the impending financial crisis to come have earned him the name of Dr. Doom among some of his peers.

The full interview is about 30 minutes long (broken into 3 separate videos), but I encourage you to have a look.

Part 1 of 3


Part 2 of 3


Part 3 of 3

The 'F' Word

It's difficult to read the news these days, and not see that dreaded F word, foreclosure. But the fact is, there's no escaping it. Unfortunately, the housing market may continue in it's downward spiral for some time as a result of all of the foreclosures.

The Statistics

For the third month in a row U.S. foreclosure activity registered at more than 50% above the level it was at a year ago.

For the month of March:

• Foreclosure activity was up 57% to 234,685 , compared with 149,150 properties a year ago.
  
• Bank repossessions were up 129%.
  
• March marked the 27th consecutive month of year-over-year increases in national foreclosure filings.

RealtyTrac, a company who provides mortgage default information to subscribers, released their foreclosure activity report for March 2008, which provides foreclosure statistics across all 50 states. Nevada, California, Florida, and Arizona make up the top 4 foreclosure states for March. These were highly speculative markets, thus declines in home prices are likely to be most severe in these areas.

Nevada has been hit hard in March with 3.9 times the national average of foreclosures, and the highest foreclosure rate for the 15th consecutive month.

California holds the highest number of foreclosure filings in March, and has had the most of any state for the 15th consecutive month. California's foreclosure filings more than doubled (compared to a year ago) increasing by 21% in February, and 20% in March.

Although Arizona has had a 5% drop in it's foreclosure filings this month, it has posted the nation’s fourth highest state foreclosure rate for the 3rd consecutive month.

Top Ten States For Foreclosures - March, 2008



Rank	State	Total #	%+/- Feb 08	%+/- Mar 07	Ratio
1.	Nevada	7,659	24.19%	61.65%	1 in 139 homes
2.	California	64,711	20.66%	105.86%	1 in 204 homes
3.	Florida	30,254	-6.76%	111.52%	1 in 282 homes
4.	Arizona	9,199	-4.67%	105.52%	1 in 283 homes
5.	Colorado	6,180	-8.27%	-1.39%	1 in 339 homes
6.	Georgia	11,047	44.76%	63.20%	1 in 351 homes
7.	Ohio	11,273	8.54%	37.11%	1 in 448 homes
8.	Michigan	9,494	-13.35%	10.27%	1 in 475 homes
9.	Massachusetts	5,573	42.68%	59.37%	1 in 486 homes
10.	Maryland	4,275	6.45%	343.01%	1 in 538 homes
	United States	234,685	4.93%	57.35%	1 in 538 homes
Click image below to enlarge

The Media's Reaction

On Tuesday, April 15th, Bloomberg, seeking to expand upon the RealtyTrac report, posted their own report U.S. Foreclosures Jump 57% as Homeowners Walk Away. To illustrate how truly dire the current situation is, I have quoted the most relevant portions of the article below:

About $460 billion of adjustable-rate loans are scheduled to reset this year, according to New York-based analysts at Citigroup Inc. Auction notices rose 32 percent from a year ago, a sign that more defaulting homeowners are "simply walking away and deeding their properties back to the foreclosing lender'' rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in the statement.

"We're not near the bottom of this at all,'' said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. "The foreclosure process will accelerate throughout the year.''
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About 2.5 million foreclosed properties will be on the market this year and in 2009, Lehman Brothers Holdings Inc. analysts led by Michelle Meyer said in an April 10 report. U.S. home price declines will probably double to a national average of 20 percent by next year, with lower values most likely in metropolitan areas in California, Florida, Arizona and Nevada, mortgage insurer PMI Group Inc. said last week in a report.
.
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The percentage of homes currently in foreclosure is similar to that of the early 1980s and early 1990s, Rosen said. [Sound familiar? See It's all happened before...]

"It's comparable to the peak levels of those periods, but my guess it will be the worst since the 1930s when it's all over,'' he said.
.
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"I've had people sitting in my office in tears because there are no loans available,'' said Goldman. "There are no loans for someone who's upside down on their house.''

On the same day, MSN produced it's own report Foreclosures continue to soar, worst is not over; expanding on the RealtyTrac data. Below is a quote from that article:

And the worst isn’t over: The wave of adjustable-rate loans resetting to higher rates will crest in May and June. And that’s expected to push more homeowners into default and foreclosure in the third and fourth quarters of this year, according to RealtyTrac Inc. of Irvine, Calif.

On the following day, Wednesday, April 16th, the LA Times posted Foreclosure glut further depresses housing prices; their thoughts and findings on the foreclosure epidemic. Again, I have quoted the most relevant portions of the article below:

The traditional spring home-buying season is off to its worst start in 20 years, data released Tuesday show, with sales so weak that foreclosures now account for more than one-third of all market activity.

Nearly 38% of Southern California homes sold in March had been foreclosed at some point in the prior year, up from 8% in March 2007, DataQuick Information Systems said.
.
.
The median price for a Southern California home fell below $400,000, to $385,000. Homes are now typically selling for what they fetched in April 2004, with the median price 20% below the market peak of $505,000 last year.
.
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Homeowners who aren't facing foreclosure, meanwhile, often cling to outdated notions of what their properties are worth, real estate agents say.

The Federal Government's Reaction

There are many stimulus initiatives currently being proposed. Some bipartisan and others are not. However, the one constant is that everyone in the Federal Government has ideas about what is needed to fix the economy.

The Senate has recently passed a bill which would offer a $7,000 tax credit to buyers for purchasing a home in foreclosure.

The benefits, as they see it, are two fold:

• It helps to resolve the issue with the glut of foreclosed homes that have entered or are preparing to enter the market.
  
• The tax credit may act as additional stimulus money, that may be spent to upgrade, repair, or perhaps decorate the newly purchased home.
  

The Consequences for Walkaways

The two largest U.S. sources of mortgage money have reacted to the growing issue with walkaways, where homeowners stop making payments and months later give the house keys back to the lender. The result... You will feel the pain.

On March 31, Fannie Mae sent out new guidelines to lenders targeting walkaways, and other foreclosure situations. Borrowers who have filed for foreclosure will be prohibited from obtaining a new mortgage through Fannie Mae for 5 years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition will be limited to 3 years.

However, even after 5 years, borrowers with foreclosures on their records will be required to come up with at least a 10% down payment, and have at minimum a 680 FICO score.

Freddie Mac (the alternative to Fannie Mae) counts foreclosures against borrowers for 7 years, and a senior official stated the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.

Conclusion

Foreclosures have hit this country hard, and are at the core of the Housing Crisis. So it should be no surprise that both Fannie Mae and Freddie Mac are seeking to ease the pain of lenders by reducing what they deem as non-hardship (or walkaway) foreclosures.  There is a possible unintended consequence here though...  If a significant number of borrowers don't have enough cash, high enough credit scores, or are prohibited (as a result of walkaway, foreclosure, or bankruptcy) from obtaining mortgages for 5 to 7 years, who will buy all of these bank-owned homes?

It's clear that the Federal Government is trying to do all they can to repair our fragile and damaged economy. However, The Senate's recent bill has two potential downsides I see... One for buyers and one for sellers. The problem for buyers is that this bill also asks them to take the inherent risk of buying in a market where prices are continuing to free fall. The problem for sellers is that it puts them at a further disadvantage in terms of selling their homes, because now not only will they compete with foreclosures on price, there's the extra $7,000 tax credit a buyer gets for buying a foreclosure instead of a normal resale.

The good news is, eventually this will pass. The bad news is, it may get worse, before it gets any better...

The Dream

Once upon a time, we were young, and our parents were in control of our lives. They told us what to do, and how to do it. We thought a lot about what our lives would be like once we grew up, and looked forward to the day when we would become masters of our own destinies; allowing us to make the important decisions that would shape our lives.

Collectively, we dreamt about becoming doctors, lawyers, secret agents, superheroes, football, baseball, and basketball stars.

Girls dreamt about the perfect guy, her prince charming, the beautiful engagement ring he would give her, and the fairytale wedding that would follow. She would be the envy of all of her girl friends.

Boys dreamt about growing up and making a lot of money; enabling them to buy expensive cars, travel to exotic places, and own fabulous homes. They also thought of meeting their dream girl. One so beautiful that nothing would need to be added or taken away from her. She wouldn’t need to be altered in any way. She is perfect.

The years came and went; we found ourselves adults. We got jobs, married, and bought homes… We were living the American Dream.

One day, we noticed all of the new subdivisions being built around the country; large beautiful homes that we simply could not afford. But our friendly financial institution saw an opportunity to make ungodly amounts of money. With interest rates being amongst the lowest in history, the banks and mortgage companies devised ways to make sure anyone could buy a home.

They used the following products:

1. Adjustable rate mortgages (ARM) are loans in which the interest rate on the note is periodically adjusted via a variety of indexes.
   
2. Interest-only mortgages are loans in which for a set term the borrower pays only the interest on the principal balance, yet the principal balance remains unchanged.
   
3. Sub-prime mortgages, which use the borrower’s Fico score and loan to value ratio (LTV) to determine the type of loan that a borrower would qualify for.
   
4. Liar loans, when all else failed, the banks would simply accept undocumented earnings to allow you to qualify for the mortgage.

We soon found that we could buy more home than we could have otherwise afforded.  Yes, we were truly living the dream.

The dream became a nightmare…  

With all this money available housing prices began to reach unsustainable levels, interest rates began to rise, loans began to reset, people began to default by the thousands.

But not to worry, we will dream again.  However, this time we will be smarter.

The benefits of this nightmare

Remember, any time there is adversity, there is also opportunity.  Have you thought about contacting lenders about cleaning up their foreclosed properties; perhaps keeping the grass cut and the property free of litter. The more affluent the area is, the more important this point is, and the more potential money one could make providing this service.  Sometimes these homes may need painting.  How about offering to keep a daily or weekly watch on these homes to make sure vandals do not strip them.

As more and more people fall victim to foreclosure, they begin to strip their own homes before deeding them to the bank; selling light fixtures, ceiling fans, hot water heaters, and even the A/C unit!  If you're skilled in this area, you could offer to reinstall these things.

If you sit down and really think, I'm sure you will come up with many more ways to profit from the housing crisis.

The Verdict is in...

This post is a follow-up to 'The Price is Right?' from last week, where a couple from North San Diego County were suing their real estate broker for his role in that fact that they paid too much for their home (to the tune of about $150,000!).

Below is the jury's ruling [from Friday, April 11, 2008] :

A jury sided Thursday with Carlsbad real estate broker Mike Little in a closely watched lawsuit that pitted a local couple against the agent that helped them buy a home. The couple, Vern and Marty Ummel, claimed that Little neglected to mention recent sales in their neighborhood, leading them to overpay by about $150,000 for their home in July 2005.

The case attracted national attention as it posed a hot question: What are the responsibilities of a real estate agent? The real estate camp was concerned that if the plaintiffs won Thursday, it would catalyze and focus a growing urge around the country to find someone to blame — and to hold financially responsible — when houses aren’t worth as much as their buyers once paid. Those who sided with the Ummels worried their case would be chalked up to rich people problems, a matter of a measly $150,000 in the scope of a million-dollar tract home near a golf course in North County.

With an enthusiastic and unanimous response, the jury found that Little had executed a reasonable standard of care when he showed his clients, Vern and Marty Ummel, more than 80 homes in a house hunt that began in May 2005, ultimately leaving them to their decision to pay $1.2 million for their house two months later.

Why did the jury decide to find in favor of the defendant (the real estate broker)?

At least in this specific case, the Realtor was found to have exercised sufficient care in helping the Ummels find their house, including helping them negotiate other offers they made on houses before they settled on this one. That made an important part of the case Vern Ummel’s admission on the stand that after looking at so many homes, he had a good sense of value in the neighborhood.

Conclusion

I was watching this case closely, because of the implications it could have had given the current state of the housing market. I have no doubt if this case had been found in favor of the plaintiffs, a slew of new lawsuits would ensue, where buyers alleged they were duped by their respective agents/broker.

In the end, let this be a lesson to all... As I've said many times, do your own research so that you can make the most informed decisions possible.

Difficult choices are ahead...

As oil prices continue to rise, it's easy to look around and take note of the effect. Most obvious, is the pain you feel at the pump. However, the cost of oil-based fuels touch almost every good we buy. Food costs increase because the trucks that deliver foods (and other goods) run on diesel fuel. Air fares increase because jet fuel becomes more expensive. Potentially all petroleum-based products (e.g. asphalt, kerosene, plastics, and even tar) may rise in cost.

Gasoline

It's not difficult to imagine that soon the cascading effect of rising oil prices (and by extension gasoline) will cause us to make other difficult choices. Perhaps you'll reconsider the purchase of that SUV you've been eying. Or maybe you already own an SUV, and you're thinking about trading it for a sub-compact. Hybrid vehicles are growing in popularity because of their improved fuel economy, and the high cost of gasoline; however, there seems to be a premium for those types of vehicles as well. Some Analysts predict that gasoline will exceed four dollars per gallon before the end of summer. Something has to be done...

So what, if anything, can we do as a nation? Well, there are alternatives to gasoline...

Biodiesel

Biodiesel refers to a non-petroleum-based diesel fuel consisting of short chain alkyl (methyl or ethyl) esters, typically made by transesterification of vegetable oils or animal fats, which can be used (alone, or blended with conventional petrodiesel) in unmodified diesel-engine vehicles.

Ethanol

Ethanol fuel is ethanol (ethyl alcohol), the same type of alcohol found in alcoholic beverages. It can be used as a fuel, mainly as a biofuel alternative to gasoline, and is widely used in cars in Brazil. Because it is easy to manufacture and process, and can be made from very common materials, such as sugar cane, it is steadily becoming a promising alternative to gasoline throughout much of the world.

Conclusion

 
We could start building vehicles that burn fuel that is totally independent of oil production. So why don't we? Good question... The answer is... Greed. Oil companies, who seem to report record profits when oil prices are up, are making too much money from oil to allow any alternative fuel to be used. Oil companies are notorious for buying patents for vehicles that could free us of our dependence on oil, and burrying them.

The sad truth is, that until we reach a critical point, where the world's oil supply is so diminished that there is no choice but to pursue alternatives, we'll be paying those high fuel prices.

It's all happened before...

It's truly amazing to me to see how many people ignored (or didn't recognize) the patterns in the housing market. Even analysts seem to sway back and forth as to whether we we're in a housing bubble; a type of economic bubble that is characterized by rapid increases in valuations of real property, such as housing, until they reach unsustainable levels relative to incomes and other economic elements.

I recognized the bubble early on, and took steps to profit from it, while watching carefully so as not to end up upside down. I warned friends and family about the impending danger. Unfortunately, most believed that the market was going to continue to climb indefinitely.

Click image below to enlarge.
Interestingly, the current Mortgage Crisis is not much different from the collapse of the Housing Bubble of the 1980's. The timeline below details the boom, collapse, and recovery of the last housing bubble, as well as the boom and decline of the current bubble. (NOTE: This article focuses mostly on the impact of the bubble on Southern California. Most of the headings are the titles of news articles from the So-Cal Metro within the corresponding time period.)

1985-1986	Housing is booming, inventory is low. Housing starts surge 14.9% during January, best gain in 20 months. Inventory of housing dips in Southland, unsold new homes declined by 3.2% from end of l984.
1987	Housing still booming, prices increasing, inventories low. High-end home sales push up the median price. California June Housing Starts Up 12.5%.
1988	People start to question the boom. Realtors assure us the boom will continue. Houses aren't like stocks afterall.
1989	Prices are very expensive; affordability an issue. Sales slow and prices drop. Mention of risky loan types.
1990	Prices take a serious plunge. One article claims that housing booms are a bad thing and we should hope prices stay low. Increasing mortgage rates are blamed for the bust. The word "recession" is mentioned. Doom and gloom.
1991	A "dead cat bounce"? Some folks wondering if the bust has bottomed out or not. Sales are abysmal (e.g., -42%). Other parts of the country showing some signs of recovery.
1992	No one is buying; housing is an investment that no one will touch. Desperate political efforts being made to encourage house buying. Rock bottom prices and lower mortgage rates encourage some purchasing. The year ends with some buying. Another "dead cat bounce"? It's not clear.
1993	It's definitely a buyer's market. Some people are saddened by the fact that current prices are 50% of what they were in the 1980's. The housing bust in Southern California is clearly negatively impacting the California economy and the national economy at large. Sellers are desperate to sell (and some people taking extreme measures like putting huge "for sale" signs on their lawns for passing planes to see). Folks who waited out the boom to buy at the bottom are being handsomely rewarded for their patience. Proof-positive of the contrarian investing style -- be greedy when everyone is fearful and fearful when everyone is greedy. The "slump" may be ending.
1994	Housing begins its comeback. Home Sales Up 24% From Last Year (June). Lenders scramble to keep housing comeback alive. People who had the intelligence to wait for the bottom are buying now at great values. Even rising mortgage rates are not shaking the recovery.
1995	Some parts of the Southland are recovering others are not. Home Sales Rise 10.5% in State, Hit 5-Year High in Feb. County Home Sales Slide 20.4% in May. People with "negative equity" are in despair. Study of Homeowners Finds `Negative Equity' a Problem.  Real estate: Nearly 5% owe more than homes are worth. Impact hinders the state's economy, experts say.
1996	A tentative recovery is still in the making. Ready to fly? Region's housing prices on rise, moderately. State's housing market finally in turnaround. O.C. homeowners more confident.
1997	Finally, housing has recovered. Southland Home Sales Are Unseasonably Hot Real estate: In O.C., October sales were 46.5% higher than last year. Median price of $208,000 was highest since 1994.
2001	Home Is Where the Market Stability Is; Housing: Aging baby boomers, immigrants, limited supply--and even the stock market--are fueling the buying trend.
2002-2003	Mortgage denial rate of 14% for conventional home purchase loans, half of 1997. Annual home price appreciation of 10% or more in California, Florida, and most Northeastern states.
2004	Housing Market To Remain Economic Cornerstone. U.S. home-ownership rate peaked with an all time high of 69.2%.
2005	Overheated housing market is cooling. Median prices declined 5.7% in September, one sign that housing is cooling.
2006	Continued market slowdown. Prices are flat, home sales fall, resulting in inventory buildup. U.S. Home Construction Index is down over 40% as of mid-August 2006 compared to a year earlier.
2007	California housing: still unaffordable. Year-over-year decreases. Home sales and home prices accelerates [downward] rather than bottoming out, with U.S. Treasury Secretary Paulson stated "the housing decline ... the most significant risk to our economy."
2008	California freefall. Home prices down 26% in February. Southern California home sales drop to a 20-year low. Ex-Fed Chairman Greenspan admits recession. Doom and gloom.

Most would agree the market bottomed sometime in 1993, during the collapse of the bubble in the 1990's;  however, even in 1994 or 1995 prices hadn't moved much.  That being said, don't overly concern yourself about buying at the absolute bottom.  So where are we in the cycle? Are we where we were in 1990, 1991, or 1992? The truth is, no one knows exactly. The best one can do is be prepared financially for what may come.

Conclusion

At this point, it should be abundantly clear that the current housing crisis looks more than suspiciously similar to what happened almost two decades ago. You may have also noticed that once the market did collapse, there was a lasting impact on housing prices. I believe history will repeat itself here, albeit on perhaps a much larger scale.

Yet, If you managed to identify the signs and profited from the bubble, then you're in a very good place, congratulations. However, if you didn't, don't beat yourself up about it. Instead, learn from this experience, so that you don't make the same mistakes in the future. Start to prepare yourself for the next cycle. 

Remember, it's all happened before, and it will happen again!

The sources for this article are here and here.