Foreclosures Are Rising

Foreclosures are on the rise, and that is a fact. The question is, what does it mean for you and your family? Economists are starting to claim that we'll see a bottom this year (see the embedded video). I'll write up a full detailed report soon.

Whitney: Consumers Still in Trouble: Worse, not better

The Coming Collapse of the Middle Class

We know where the money went...

As Wall Street and the financial markets continue to suffer there is one segment that is actually doing quite well, and getting better as the housing market continues to contract. To which market segment am I referring? Forensic Accounting.

Forensic accounting is the practice of utilizing accounting, auditing, and investigative skills to assist in legal matters. It encompasses 2 main areas – litigation support, investigation, and dispute resolution. Litigation support represents the factual presentation of economic issues related to existing or pending litigation. In this capacity, the forensic accounting professional quantifies damages sustained by parties involved in legal disputes and can assist in resolving disputes, even before they reach the courtroom. If a dispute reaches the courtroom, the forensic accountant may testify as an expert witness.

Investigation is the act of determining whether criminal matters such as employee theft, securities fraud (including falsification of financial statements), identity theft, and insurance fraud have occurred. As part of the forensic accountant’s work, he or she may recommend actions that can be taken to minimize future risk of loss. Investigation may also occur in civil matters. For example, the forensic accountant may search for hidden assets in divorce cases.

During the Great Housing Boom, many americans were leveraging the equity in their homes for home improvement, buying cars, taking vacations, and in some cases making down payments on investment properties. Here's where it gets interesting, some banks have already begun to use forensic accounting firms to investigate where the money was used for some of the home foreclosures that are hitting the market.

So, for those who used the money to buy tangible items such as cars and homes, listen closely. If you decide to walk away from your home allowing it to go into foreclosure, the bank may be able to make a case that the equity within those tangible items belong to them!

Consider the following scenario:

A homeowner bought their home for $200,000 before the Great Housing Boom. During the boom, they acquire a Home Equity Line Of Credit (HELOC) for an additional $200,000!!! Now, the homeowner uses the money to buy a new BMW for $40,000, and applies the rest toward the down payment of a second home, and moves into it. What this all means is, if the homeowner walks away from there first home, the bank may make a case that the equity in the new home belongs to them!

Currently there is no legal precedence for doing so; however, with banks taking huge losses as a result of the staggering number of foreclosures, it's inevitable that the laws will be massaged to allow them to recover some of that money.

The Economy is Broken

The embedded video actually has nothing to do with the housing market or the economy. However, the title of this posting will make complete sense after you've watched the video. Enjoy.

Calling the "Bottom"

Lately, I haven't posted nearly as many articles as I used to, mainly because most of the insights that I've written about in the past have not changed. In this article, I've decided to comment on what analysts commonly refer to as "the bottom" of the housing market.

I've been reading and watching (on television) these analyst struggling to call a bottom for the current economic turmoil we're experiencing. Some of the more optimistic analysts claim we'll see a bottom at the end of 2009, others claim 2010 or 2011. So which of them are right? I say, it doesn't really matter... And here's why:

Once we've hit the bottom, we'll stay there; for a while... There won't be any upward movement in home prices, and there will still be enough distress situations that it will be difficult to estimate the exact value of homes in certain areas. Homeowners will still be walking away from their properties because they'll be so upside down that they see no other way out. Rents will continue to decline, forcing make-shift landlords into foreclosure, and you'll only know we were at the bottom in hindsight once the recovery starts. The ugly truth is there is still a long way to go, and government intervention will only prolong the inevitable, not prevent it.

So what if anything can you do?

Be smart. You'll hear the National Association of Realtors (NAR) claim time and again that the market is turning around, that sales are way up. The truth is, every summer sales will increase (even as home prices continue to dwindle), and every winter there will be huge price declines! So you may be growing weary of the rental you're in, but you may not want to buy yet!!! The time is not right.

If you own a home and you've been thinking about selling, then you've got a more difficult road ahead. For those who are not severely upside down in terms of loan to value ratio, there's no harm in attempting to sell!!! Prices will continue to fall, so if you can cut your losses, you should probably do so.

For those who are seriously upside down, if you can afford your mortgage, hang tight! One of the programs to help "save the homeowners" may be of help to you, but most of them require you to be in good standing with your mortgage! Keep making the payment, light may be at the end of the tunnel for you.

For those who are seriously upside down, and having difficulty affording your mortgage, work with your lender! Believe me, the lender doesn't want to go through the foreclosure process on your home anymore than you do. If  you've lost your job, or taken a pay cut call your lender and tell them about your situation. In some cases they can temporarily suspend your mortgage payments (although you may still be responsible for the interest, which will continue to accrue).

Finally, I'll leave you with one thought: No one can absolutely call the bottom as it is happening!!! Watch the signs, and you'll know when the time is right to act.

A profound observation...

While pondering how the current economic crisis has affected family, friends and co-workers, I've had an epiphany. The people that have faired the worst, have done so because of a genuine lack of humility. I recall certain individuals bragging about the expensive homes, cars, and jewelry that they were planning to buy, or vacations they were planning to take; presumably with their home equity. For many, it just never occurred to them that home prices would stop going up; or heaven forbid, go down. (Even some of the analysts refused to see it!)

In the aftermath, many of these "individuals" have had their homes foreclosed and/or filed for bankruptcy, or are currently struggling to keep from doing so. The question that remains is:

Have we, as a society, learned anything from this?

I would so like to answer that question with yes; however, I'd be lying... The truth is, this has all happened before, and it will happened again.

The Sweet Spot

Did you sell your home before the housing crash, or are you planning to buy an investment property, and now you're just waiting for the bottom of the market to re-buy? Well, so am I... And I experienced something recently that I think is worthy of consideration...

Recently, Circuit City went out of business; discounting all of their inventory as they got closer to their store closing deadline. While this was happening I visited the store frequently, waiting for the deals to be "just right". What was I interested in? Video games!!! So, toward the end, I happened to stop into the store, and all video games were 50% off!!! Despite this steep discount, there were still many of the titles I was looking for on the shelf; however, there was a well known pattern that every week they increase the discount by 10%. The prices were going to fall to 60% off, and I absolutely considered that the sweet spot. Well, the evening Circuit City reduced the video games to 60% off, I visited a few stores. All of the good games were gone. All of a sudden, that 50% off that I could've gotten didn't seem so bad, and I longed to be able to pick up one of those titles at 50% off... But it was too late.

So, at this point, I'm sure you've guessed where this is going... I believe in similar fashion, at the bottom, the type of property you're looking for may be in short supply as everyone else who was waiting for the bottom will be bidding, perhaps over-bidding, for those same properties. Thus, if you find a property now that has everything you're looking for, you may want to consider making a bid for it for an amount you can live with; because the alternative may be taking what you can get once the good stuff is gone.

L.A.'s Westside succumbs as housing goes south

Even the elite areas in Los Angeles aren't immune to the worsening housing market. The embedded video illustrates that point.

Are they laughing now?

The embedded video illustrates how even the analysts refused to see the obvious truth of what was to come (the television program aired in 2006). Some of these analysts even laughed at Peter Schiff as he warned of what was then an impending mortgage crisis.

The Slot Machine

A guy is walking through the casino, and stops in front of a slot machine because he noticed a silver dollar on the floor. He picks it up, places it in the slot machine, and pulls the lever. The machine goes crazy!!! He hit the $1,000 Jack Pot!!! People start clapping, whistling, and yelling. He feels like a super star. Although he could collect his winnings and move on, he decides to continue playing; reasoning, I won $1,000 in one roll, who knows how much I could win! The man continues playing for a few hours until finally, the money is all gone. He walks away from the machine disappointed, saying "I can't believe I lost $1,000." But did he really lose $1000? Or was it all funny money?  Remember, he found a silver dollar on the floor which he simply put into the machine and won cash.  Had he not played he'd be no better or worse off.

This analogy has direct applications to the current housing market. How often have you heard statements like: "I've left so much money on the table" or "I've lost so much equity"? But the question is... Did they really lose money? Real money? Or was it funny money?

In many cases, although not all, it was funny money.  Consider that most non-first time buyers sold a home and used the equity as a down payment for their new home. So, although the market has fallen substantially, you must take in account that if you sold a home at an inflated price, then bought a new home at an inflated price then all you've really done was exchanged the debt you had in one home toward that of another. And in many cases, if the homeowner did not choose a risky mortgage loan they're no worse off. I realize it's hard coming to grips your home not being worth what homes were listing and selling for during the Great Housing Boom, but hey, it was the casino's money anyway right?

Housing Market Watch #13

This is the 13th episode of Housing Market Watch (see the previous episode here), where I 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 the uber exclusive city of Malibu... Yes Malibu! (Los Angeles County) .

Description

REO/BANK OWNED FORECLOSURE!!! LET'S SEE THOSE OFFERS! EXCELLENT, PRIVATE LOCATION IN THE HILLS OF MALIBU, JUST MINUTES TO PCH & THE BEACH. NEWER BUILT CONSTRUCTION W/LARGE ROOMS, OPEN FLOOR PLAN & HIGH CEILINGS. SPECTACULAR CANYON, MOUNTAIN, & PEEK-A-BOO OCEAN VIEWS FROM NEARLY ALL ROOMS & BALCONIES. LUXURIOUS MASTER SUITE W/FIREPLACE, PVT. BALCONY, DUAL VANITIES, LARGE WALK-IN CLOSET, & A LIMESTONE BATH W/SEPARATE STALL SHOWER & SPA TUB. ALL BEDROOMS EN-SUITE W/EUROPEAN STYLE BATHS. SPACIOUS COOKS KITCHEN & MUCH MORE.

The Specs:

Type: SFR Status: Active MLS#: F1754027

Sq. Ft.: 2,637 Lot Size: 5,990 Sq.Ft. Year Built: 1999

Beds: 2 Baths: 4 Stories: 2 On Market: 246 days

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Sales History

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Date	Sold Price	$/SqFt	Gross Gain	Change ($)	Change (%)
10/29/07	$903,795	342.74	N/A	N/A	N/A

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Pricing History

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Date	List Price	$/SqFt	Gross Gain	Change ($)	Change (%)
02/13/08	$1,299,900	492.95	+$396,105	+396,105	43.83%
03/18/08	$1,275,000	483.50	+$371,205	-24,900	1.92%
04/19/08	$1,174,900	445.54	+$271,105	-100,100	7.85%
09/02/08	$1,099,000	416.76	+$195,205	-75,900	6.46%
??/??/08	$975,000	369.74	+$71,205	-124,000	11.28%

This episode's home is currently listed for 17.76% more than it was purchased for in October 2007. However, it is clear that the lender owned property's price will have to be reduced significantly in order to get this property off the bank's books.

UPDATE (date unknown): Price reduced to $975,000.

Do you see what I see?

Previously, I wrote an article entitled Explosive Opportunities, that discussed my prediction that there would soon be numerous opportunities to buy very affordable homes and perhaps one's dream home over the next few years.  I've decided to write a follow up to expand upon what I previously said. 

Do you see what I see? Lately, I've been discussing where we may want to purchase a home with my wife. It's actually a tough decision because the housing market has dropped by such a large amount that cities that were previously unaffordable are now becoming within reach. As a result, we've decided to be very calculated in terms of our decision of what to buy.

On the one hand, there may be an opportunity to purchase a home and have a very small mortgage payment which is definitely preferable. This would afford us the opportunity to enjoy higher quality of life, save more money and concentrate on retirement planning. At the same time we're mindful that once the market recovers, not all areas will increase in value by the same rate. Some areas will increase by large percentages compared to neighboring cities that may soon be very close in price. So the challenge ahead is to balance how much to spend versus buying in cities where one will get the largest return on investment (ROI).

If you don't currently own a home than you potentially share in our plight; however, I would caution you not to take the decision lightly. There is no crystal ball that can predict the future, and no way to guarantee that the purchase you make will yield the intended result. That being said, RESEARCH, RESEARCH, RESEARCH!!! Do your homework before running head long into one of the biggest financial decisions one can make.

The domino effect

Back in April, I wrote an article discussing the property tax problem that the Great Housing Boom created. Yesterday, CNNMoney.com published an article entitled "Home prices may plummet, but taxes won't", where they discuss in detail what this means for home owners.

Consider the quote from the CNNMoney.com article:

"For my first 25 years [as an assessor], nobody ever asked me to lower the assessment based on a home selling for less down the street. There are many such inquiries this year," said Ken Wilkinson, the tax assessor for Lee County Fla., which includes Cape Coral and Ft. Myers.

He estimates that 80% of county residents have seen the value of their homes decline. The median price of existing homes fell more than 25% in the 12 months ending June 30, according to the Housing Opportunity Index compiled by Wells Fargo (WFC, Fortune 500) for the National Association of Home Builders.

The article goes on to say:

But even if local prices are way down, taxpayers may not win a lower assessment, because there can be a big lag time between when the home sales used to calculate them take place and when the assessment is actually issued.

To calculate 2009 assessments, for example, assessors will use home sale prices from 2008 or even earlier, according to Sepp. Usually this works to taxpayers's advantage, since price increases take a while before they are fully reflected in assessments.

This is becoming a very serious issue as many homeowners struggle to just pay their mortgages; thus, relief there would be welcomed. One thing is certain, you won't get any decrease if you don't demand it! So, if you've bought a home in the last three years, when you receive your property tax bill, be ready to site examples of sold homes in your neighborhood to contest the amount. You may be very glad you did.

Times have changed...

Over the last four years, I have noticed significant changes in the socioeconomic climate of this country. The Great Housing Boom Crash is causing record numbers of foreclosures, which is driving housing prices back to what they were in the late 1990's (see It's all happened before). The Credit Crunch has all but crippled the credit markets, and at this point only those with the best credit scores can even attain mortgages (see The Good, the Bad, and the Ugly). But that's the obvious stuff, what I'd like to discuss today are the changes that have been more subtle.

So what's different?

Recently, it seems that companies have changed their view of what makes a good job candidate. This can be seen in a number of ways:

• Having a bachelor's degree are more important than ever, and as the number of candidates for any given position increases, so does the necessity to have what the other guy doesn't.
  
• For management positions, employers are increasingly insistent on managers that can act in a hands-on capacity if the situation calls for it.

For over a decade, I have been employed as an Information Technology professional, and I like to keep a close eye on what's happening in the employment market for my area of concentration. What I've noticed is that there is a growing trend for Software Engineering Managers and Directors of Technology to have recent hands-on experience developing software. Why is this significant? Because traditionally, at the manager level, and especially at the director level, there has not been a requirement for them to participate in the actual coding of an application, even at times when the company is short-staffed.

So what does this mean for you and me?

As the economy worsens, there will be fewer jobs available; meaning more competition for each available position. This means the better your educational background and experiences, the better your chances will be of getting the job. So, For those of you who don't have a Degree of any kind, you may want to consider one of the schools with accelerated degree programs for working adults. For those of you that have finished an Associates Degree, go back to school for two years, and finish your bachelors. Finally, for those of you who've completed a Bachelor's Degree, you may want to consider a Master's Degree if your circumstances allow it.

Just some food for thought...

Congratulations

Congratulations Corporate America,

You've received the bailout you've been waiting for, and I'm sure it will allow you to continue in the lifestyle you've become accustomed to. Many homeowners will still lose their homes, due to the toxic mortgage products you sold them, but hey, nobody's perfect. Best of all, you don't even have to pay the money back, the U.S. tax payers will gladly pick up the bill for you. Why? Because we understand that you can't be held accountable for your actions.

Why so sarcastic, you ask? It's because once again the American people are burdened with paying off either the Government's or Corporate America's mess.

What would I have proposed?

I would have proposed low interest rate loans to the banks, which they'd have to pay back over let's say 30 years. This way, the banks learn a lesson, and would be far less likely to have something like this happen again. As it stands, what will they take from what just happened? Honestly, the government just indicated that they can go out and do whatever they want, and if they get in trouble, "we're here for you."

Housing Market Watch #12

This is the 12th episode of Housing Market Watch (see the previous episode here), where I 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 the family friendly community of Simi Valley (Ventura County) and has a private pool.

Description

Remarkable Value! One of the BEST priced homes in ALL of Simi !! Large 6+3 with surprising privacy in front and back yards! Private gated front yard with brick-lined planters and fruit trees! Well landscaped! Brick lined walkway to newer double door entry! 2 master suites! Large balcony overlooking yard! Tile floors and smooth ceilings! One bedroom/bath downstairs! Updated kitchen and baths! Indoor laundry! Private entertainers yard with blue-bottom pool, gazebo, fruit trees and side yards! Home enlarged nearly 1000 permited sqft by pushing out the family room and upstairs master!

The Specs:

Type: SFR Status: Active MLS#: F1779006

Sq. Ft.: 2,616 Lot Size: 7,600 Sq.Ft. Year Built: 1964

Beds: 5 Baths: 2.5 Stories: 2 On Market: 139 days

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Sales History

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Date	Sold Price	$/SqFt	Gross Gain	Change ($)	Change (%)
07/09/90	$236,500	90.4	N/A	N/A	N/A
07/25/05	$650,000	248.5	+$413,500	+413,500	174.48

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Pricing History

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Date	List Price	$/SqFt	Gross Gain	Change ($)	Change (%)
05/20/08	$495,000	189	-$155,000	-155,000	23.85%
08/13/08	$459,900	176	-$190,100	-35,100	7.09%
09/05/08	$449,000	172	-$201,000	-10,900	2.37%
09/12/08	$448,900	172	-$201,100	-100	0.002%
09/20/08	$448,500	171	-$201,500	-400	0.009%
10/02/08	$448,200	171	-$201,800	-300	0.007%
12/18/08	$420,000	160	-$230,000	-28,200	6.29%

This episode's home is currently listed for 31.05% less than it was purchased for in July 2005.  This home has fallen in price by a whopping $201,800!!! For some the current asking price of $448,200 may look like a deal, but I believe these homes will fall into at least the low $300,000's before we're at the bottom of the market. 

UPDATE 09/20: Price dropped to $448,500
UPDATE 10/02: Price dropped to $448,200
UPDATE 12/18: This property was sold for $420,000

An Open Letter to Mortgage Borrowers Waiting for a Bailout

I found the letter (quoted below) while searching for housing market related news. The statements are so timely and powerful, that I decided to repost it here:

This open letter is addressed to all of the struggling mortgage borrowers (and their lenders) who are sitting on their haunches waiting for the government to come to their rescue.

BY PAT SUMMERS

Dear Mortgage Borrower:

I understand that you have gotten yourself into some trouble. As someone who has made more than a few mistakes, I sympathize with you. I really do.

However, I am more than a little concerned by how eager our government is to intervene on your behalf. They want to bail you out with taxpayer-backed programs and loans. They also want to violate the sanctity of U.S. contracts by allowing courts to alter terms on mortgages. While this may seem like good news to you, it feels terribly unjust to me.

Unlike you, I didn't ride the wave of insanity and buy more house than I could reasonably afford with a loan that I couldn't feasibly pay back. Nor did I sign a legally binding contract to claim responsibility for your questionable real estate transaction. Nevertheless, there is a good chance that I will be forced to resign myself to the risk you wholeheartedly accepted not that long ago.

In fact, I am already paying for your mistakes. The Federal Reserve has made the unethical decision to weaken our dollar so that they could give discounted money to struggling banks, a.k.a. your partners in crime. If something isn't done soon, who knows how far they will take their unethical plan.

Now, you may be asking yourself: why doesn't this nutter just write to the government--the shady folks who are forming and allowing all of these diabolical plans. The truth is that like many people I have already wrote numerous letters to my representatives to let them know how I feel about mortgage bailouts. But until you do the same, I'm afraid that they will continue on with their destructive, election-year plans to intervene on your behalf.

You must know that it is morally irresponsible for you to expect other people to pay for your mistakes. Please do the right thing. It's not too late to take responsibility for your own actions.

Sincerely,

Pat Summers, Frustrated Taxpayer

Who can you trust for investment advice?

The embedded video demonstrates how successful you would been if you followed Jim Cramer's investment advice to the letter, starting before the current declining economy.

May Foreclosure Numbers

Below are the ten states that had the highest number of foreclosures for the month of May.  Our Foreclosure Report for the month of April can be found here.

State	# of Foreclosures	% +/- Apr '08	% +/- May '07	% of Total
United States	261,225	7.36	48.32	100.00
California	71,930	11.20	81.37	27.54
Florida	37,364	5.96	72.15	14.30
Arizona	12,959	11.52	118.98	4.96
Michigan	12,792	24.57	35.21	4.90
Ohio	12,295	5.27	-6.95	4.71
Georgia	10,241	11.45	23.47	3.92
Texas	10,063	-11.77	4.25	3.85
Illinois	9,670	15.35	41.71	3.70
Nevada	9,009	23.82	72.09	3.45
New Jersy	7,430	44.47	89.15	2.84

Click on the image below to enlarge


For those who have been activity reading the articles on this blog, May's foreclosure numbers should be no surprise.  We will follow up shortly with an analysis of the last 3 months of reported foreclosure activity.

See the complete foreclosure report here