Deflating the Bubble...

In an effort to subvert the current Housing Crisis the Bush Administration is planning a bail out of home owners whose mortgage balances are greater than the value of their homes. Details are sketchy, but essentially the bank would reduce the principle balance of the mortgage, so that the home owner would no longer be in a negative equity situation.

It's unclear at this point whether this deal would extend to those who are negative as a result of using home equity to live the american dream, which for many has become a personal nightmare. It's also unclear whether only sub-prime mortgages will be targeted, or whether the bail out will extend to home owners who are negative as a result of short-sales and foreclosures in their neighborhoods.

One thing is clear, a consumer bail out of this magnitude is unprecedented, and we'll all be eager to see what happens.

Read the article here.

Buy in bulk and save...

Banks are holding so many foreclosures in Detroit, that instead of selling homes individually, they've begun to offer them to investors in bulk.  

The following is a quote from the Detroit Free Press:

Sales were up dramatically in Detroit in February, rising 49% from a year before, and realty watchers say foreclosure properties played a key role in the increase.

Some see significant risk to investors who could get low-end properties without being familiar with pitfalls of the market. “Real estate is not a commodity. You have to know what you are buying,” said Mark Nagy, a broker and consultant for RE Investments Inc. in Southfield. “What typically ends up in bulk sales is stuff that has sat on the market for more than six months.”

Banks see Detroit as a sore spot, Nagy said, because they cannot move the properties and there are so many. “Bulk buying will become more commonplace by the end of the summer,” Nagy said. “Right now, so many properties in Detroit are like a hot potato. Whoever ends up with it will be crushed.”

My Take

This is a tremendous opportunity for the savvy to pickup homes for a song and a dance.  And eventually when the market swings back, these homes could be worth a lot of money.  The problem is, you'll have to actively guard those properties to keep them from being either vandalized or stripped to the bone.

Another revolution is brewing in Philly...

I found the information below extremely interesting, and thought I'd share it with all of you:

PHILADELPHIA (Reuters) - Authorities in Philadelphia will suspend foreclosure sales of homes whose owners have fallen behind on adjustable-rate subprime loan payments — potential relief for tens of thousands of struggling debtors.

Sheriff John Green said on Friday he would halt sales of foreclosed properties in April and would seek a court order extending a moratorium for an unspecified period.

Wish you were here...

With all the negative press about the housing market, it's nice to hear some good news for a change.  Below are CNN's Top 10 Fastest Growing Metropolitan Areas.  It's interesting that 4 out of 10 of the fastest growing areas are in Texas.

Dallas: Fort Worth, Arlington – Texas     162,250

Atlanta: Sandy Springs, Marietta – Georgia     151,063

Phoenix: Mesa, Scottsdale – Arizona     132,513

Houston: Sugar Land, Baytown – Texas     120,544

Riverside: San Bernardino, Ontario – California    86,660

Charlotte: Gastonia, Concord – North Carolina     66,724

Chicago: Naperville, Joliet – Illinois     66,231

Austin: Round Rock – Texas     65,880

Las Vegas: Paradise – Nevada     59,165

San Antonio – Texas    53,925

My Take

Good news is always welcomed...  However, I am curious to know why CNN used data from  July 1, 2006 to July 1, 2007 for an article that was published just a few days ago.  I also wonder what the results would have been had they chosen more recent dates, for example Feb 1, 2007 to Feb 1, 2008.

Read the full article here.

Homes prices free fall in California

According to the California Association of Realtors (CAR) home sales decreased by 28.5% and the median home price fell by 26.2% in February (compared to one year ago).

Below is a quote from CAR President William E. Brown:

Although sales rose for the fourth straight month in February by 9.5 percent compared to the previous month, they continue to be dragged down by the ongoing effects of both the credit/liquidity crunch and tighter underwriting standards that have reduced the pool of qualified buyers who can obtain a loan ...

My Take

If you were thinking about taking the plunge and buying a home in California, read the article (linked below) and reconsider...

Read the full report here.

Bitten by the Bear (Part 2)

Following up on the "Bitten by the Bear" entry that I posted last week, I decided to post the video below which describes what happened to Bear Stearns.

Please watch the video below before reading "My Take".

My Take

I think Jim Cramer is a great investor, and he has a great sense of the financial markets. So what I'm attempting to illustrate here is this: if Jim Cramer can't see these things coming, then how can any of us mere mortals feel confident about the markets or the economy?

Staying put... for now...

After careful re-examination of the real estate market, my wife and I have decided to renew our lease for another twelve months.  

Why?    

In looking at the market, we've made a few key observations:

Prices are still falling

This is really the most critical point of waiting.  Buyers still do not feel secure about purchasing at the current "reduced" market prices.  The fear is, you buy today, and the same house is available a year from now, at a substantial discount (See "A Good deal, today...").

Interest rates aren't favorable

Although the FED has lowered the FED Funds Rate and the FED Discount Rate, banks are still not passing on the savings to consumers; opting instead to replace some of the money they lost in the Credit Crunch.  So although the rates aren't what most would consider high, they are likely not as low as they eventually will be.

We're in a recession

Although most politicians aren't willing to admit it, we're in a recession.  And the severity of the recession still has yet to be seen.  I believe the picture may be clearer within the next six to twelve months, and see no urgency to reconsider buying before then.

Conclusion

For all of the reasons above, we're staying put... for now...

Disclaimer

The statements above are based on my personal observations.  You must do your own research to determine whether you agree with these observations, and whether or not they may affect you.

Sales up... Prices down...

CNBC reports today that home sales were up 2.9% for the month of February (compared to last month), breaking a six month streak of falling sales; while home prices had a record fall.  The inventory of unsold homes fell by 3% to 4.03 million; which would require 9.6 months to deplete, assuming no additional homes were placed on the market.

My Take

Since it generally takes 30 days to close, these numbers actually represent sales activity from January not February itself.  It's not surprising that during that period the numbers are higher because interest rates were lower at the time.  I believe that the numbers for February and March will be considerably lower.

Read the full CNBC article for yourself here.

The Housing Bubble Song

I found the video below, while perusing the Internet for housing bubble-related news.  I decided to post it here because I think it does a great job describing the events that led up to the housing bubble and it's subsequent collapse in a concise manner, with an entertaining song to boot.

Click here to watch the video directly from the YouTube website.

Are "traditional" real estate agents going the way of the Dodo?

I was discussing some of the research I'm doing on various properties with my father yesterday, and he made an interesting comment.  He said that "the days of a traditional real estate agent may be short".  And if you ponder on that comment, it doesn't take long to realize that he may be right.

Consider that everyone (who has internet access) has the ability to look at the MLS (via their favorite real estate site) and see what's on the market, how long it's been on the market, and (on some sites) what the seller originally paid for the property.  One can also research the comps for a property (using Zillow or Eppraisal).  These are all things that tweenty years ago, we would have had to have an agent research for us, but no longer.  

So why do you need an agent?

Well, at present, the only way to access a home via the lockbox is through the use of a broker or agent... but imagine a system that would allow you to register for an access card that would allow you to view a home on your own. A system where you would use the internet to schedule an appointment (with the seller) to view the home.  This way, the seller always knows who's coming and when.  The only thing left to do is negotiate a price and sign the contracts... Well, the negotiating can also be done over the internet, and the contracts could be signed using a third party.

What would you do with all that money you'd save?

That's right.  For the grand privilege of using a real estate agent, the seller pays a 6% commission.  Half (3%) goes to the seller's broker/agent and the other half goes to the buyer's broker/agent. In the future, perhaps you'd have only a fixed cost for the contracts and paper work that could be accomplished by the title company or some other agency.

Are "traditional" real estate agents going the way of the Dodo?

(Pictured above is a Dodo, a flightless bird that is now extinct)

Is it safe to go into the water?

Everyone wants to know how far we are from the bottom. Buyers are eager to know when it will be safe to purchase a home. Sellers are eager to know how long it'll take to weather the storm. Is it safe to go back into the water? 

Perhaps not... And here's why. When the market started showing signs of collapse (mid 2006), many homeowners who were already in adjustable rate mortgages (ARM) quickly refinanced their homes into new ARMs that were fixed for 3-, 5-, or 7-year periods.

Since then, mortgage interest rates are up (slightly), and home prices are falling (significantly). So, when the interest rates on mortgages that were refinanced for a 3-year fixed period adjust (mid 2009), there may be a new wave of foreclosures. Why? Because the homes will not be worth the outstanding loan balance, which means you can't (without coming up with a lot of money) refinance the home. Two years later, when the 5-year fixed period mortgages adjust (2011) you may have another wave of foreclosures. The cycle could continue, and affect the 7- and 10-year fixed period mortgages as well in 2013, and 2016 respectively.

Does this mean I'm saying don't buy until 2016? Absolutely not... There's no way to know whether the Federal Government will be able to stop this from happening, or whether the number of foreclosures will be enough to push prices down further in 2009 or beyond...

It is worth considering though...

Bitten by the Bear...

It's official. Bear Stearns is being bought by JP Morgan for roughly $2/share (0.05473 shares of its stock for one share of Bear Stearns' stock). This is a huge win for JP Morgan; however, the big losers in this deal are Bear Stearns employees as most of their compensation is in the form of stock, which has fallen over 97% in the last few days as panicked investors fled the stock.  Literally, some of the employees were millionaires just days ago...

For more detailed information, look here

03/17 UPDATE #1: An estimated 7,000 jobs will be cut (approximately 50% of the current workforce at Bear Stearns)

03/17 UPDATE #2: Joe Lewis the second largest share holder (9.4%) in Bear Stearns has lost $1 billion!!!!

03/20 UPDATE #3: JP Morgan is offering (some) Bear Stearns employees bonuses to stay on and support the acquisition.

03/24 UPDATE #4: Bear Stearns stock climbs to $10/share; JP Morgan increases it's offer to $10/share for the acquisition for Bear.

The Effects may be felt Countrywide...

Many of you are already aware that Bank of America is acquiring Countrywide for a fraction of it's value.  I took some time to think about the ramifications of this, and here's my take:

The obvious

Bank of America is trying to salvage the recent $2 billion equity investment they made in Countrywide, whose stock has recently suffered as a result of the sub-prime fallout. For more detailed specifics, look here.

The tragedy

Many of the residents of the city of Simi Valley (where Countrywide's presence is dominant) are employed by Countrywide.  Thus, if Bank of America closes down those facilities (and they likely will), we could be looking at a devastating blow to that local economy.  First, home prices are likely to drop, as residents preemptively try to get out before the effects are fully felt.  Next, current residents (those who are Countrywide employees) will experience difficulty finding new employment, as job growth has been negative, and they will be competing against colleagues who share their plight.  Finally, foreclosures may follow as the unemployed residents are unable to make their mortgage payments.

The disclaimer

It is total speculation [on my part] that the city of Simi Valley may suffer a financial hardship as a result of the acquisition of Countrywide by Bank of America.  Please take the time to investigate and determine for yourselves if your investments there are in jeopardy.

A good deal, today...

Many of you have heard that it's a buyer's market, and buyers are offering 10 to 20% below the asking prices.  The real question is,  are sellers accepting such offers?  Well friends, I have a real world example for you.  Not hearsay, but a first hand account.

A couple of months ago, my wife and I decided to test the waters to see if perhaps instead of waiting for the bottom of the market, we could get something now, that would be priced low enough to weather the storm.  

We found a large townhouse in Irvine that we liked.  At the time it was priced at $649,900.  We decided to offer $560,000, 13.8% less than the asking price.  The seller promptly said no.  We followed up with a second offer of $575,000,  11.5% less than the asking price.  Again, the seller was quick to reject this offer.  We decided not to make any additional offers, and opted instead to continue to wait because we weren't confident even at $575,000 that we would have been future-proofed from falling prices.  Ironically, about a few weeks later, the agent called us back and said the seller was ready to consider our offer of $575,000!!!  We had the sad duty of informing her that we've decided to wait, and explained why.  She understood.

Friends, sellers are highly motivated to sell.  However, they have a number in mind that they were expecting, and sometimes it takes a while to digest the thought of getting significantly less.  Many of them have not yet come to grips with how significantly the market has changed in such a short time.  Some unfortunately understand the state of the market, but just can't afford to accept lower offers, as there's already no equity.  The circumstances of the seller will dictate how much less they are willing to take (if any at all).

The moral of this blog entry is this.  Don't be afraid to offer lower than the asking price, because remember friends, a good buy today, may not be a good deal tomorrow...

A smarter kind of buyer...

Lately I've had discussions with a number of individuals (and arguments with real estate agents) about the current housing market and whether it is a repeat of various points in history.  I believe we're going through a similar correction to the Housing Crash of the 1990's.  But certain aspects of the market are completely different, and for a two key reasons:

Buyers are smarter

Buyers now have the same information as real estate agents do.  The resourceful buyer may also have a deeper understanding of the market than the average agent.  With tools like Realtor.com, Zillow.com, eppraisal.com, and others, buyers have the tools to make more educated choices.  Most buyers are also aware that the home prices are continuing to slide in  downward trend, thus buying a home at the current "market" price may not be a wise move.

The mortgage/credit crisis

The other major factor that differentiates this market from other times in history are the unfathomable number of foreclosures created by the mortgage/credit crisis.  I think some of you (real estate agents especially) are down playing the effects of the mortgage/credit crisis.  In truth, as long as banks continue to dump record numbers of bank-owned properties (due to foreclosures) into the market, and distressed sellers attempt to short sell, the prices will continue to slide downward.

Conclusion

Folks, it's up to you to make up your own mind about whether you feel this market is reminiscent of the 1980's, 1990's, or something altogether different.  The fact that you're thinking about it at all is a very good sign.

Water is the new gold...

Due to droughts over the last couple of years, Californian Farmers are being forced to conserve water.  This means they either have to scale back their crops, or face being fined for over-use of water.  Many have started to sell their water rights instead of growing crops because it's more profitable.

My father used to always say that the next great war will be over water...  

Maybe he's wiser than he knows.

We're watching you...

The CEO's of Countrywide, Merrill, and CITI Group are currently being investigated by the House Oversight Committee (Live on CNBC).  The committee is examining the high compensation packages of these CEO despite the loss that shareholders have suffered as a result of the falling stock prices due in part to sub-prime mortgage fallout.

It leaves a particularly sour taste in the mouths' of shareholders, when the CEO (of the company they have invested in) is dumping his shares as the stock price continues to plummet.

Friends, these are interesting times...

UPDATE #1: The issue at the heart of the investigation is why the CEO's sold millions (in some cases hundreds of millions) of dollars in stocks during a time when their companies were losing billions.

UPDATE #2: The source for the information presented below is the Committee on Oversight & Government Reform Memo

Countrywide

CEO Angelo Mozillo's 2007 Total Compensation: 

$143M

Countrywide's 2007 Losseses:

$1.6B in Write-Downs

Stock down by 90% 

CITI Group

 CEO Charles Prince's 2007 Total Compensation:

$10.4M Bonus

$28M Stock

CITI Group's 2007 Losses:

$18B in Write-Downs

Stock down by 48%

Merrill

Former CEO Stan O'Neal's 2007 Retirement Package:

$161M

Merrill's 2007 Losses:

$18B in Write-Downs

Stock down by 45%

Flipped out!!!

A few years ago when the market was good, many people bought 2nd (and 3rd) homes as investment properties.  Many of these "investors" were flippers.  Buy low...  Sell high...  Make a boatload of cash!!!  

Well, the market isn't so pretty anymore, and those who were unable to sell before the market crashed, are having to rent out the homes that they intended to flip, and usually at a loss.  

Folks, be aware that there are those who know they are losing a property, so they rent it out, and pocket the money until the property gets foreclosed by the bank.  At that point, the renter, who may have been paying rent for six months or more, is evicted!!!

Be careful not to get flipped out!!!  ;-)

It's a jungle out there...

I've been speaking with friends and family, and what seems resoundingly clear is that most agents are not being completely honest with you about the state of the market.   

Folks remember, if you don't buy, they don't eat, so stop expecting them to give you unbiased view of the current real estate market!!!  Yes, prices are lower than they've been for the last two years or so.  However, will your purchase now, be fodder for buyers a year from now, in your mad panic to get back out of a market that you just entered?  I'm not saying there aren't some good deals out there.  I'm saying do your research so that you know the good deals from the bad.

Be careful, it's a jungle out there...  ;-)

The Conforming Loan Limit

Well, finally after much to do, the Federal Housing Administration (FHA) has just increased the conforming loan limit.  The amount is different for each market, so you'll have to check the HUD website for your area (http://www.hud.gov).   This was done as part of the "Economic Stimulus Package" and is intended primarily to try to spur home sales.  

What does it all mean?

For me, it changes nothing...  The housing market is still very inflated (at least here in the OC), and allowing me to borrow more money (either at a lower rate or without having to resort to breaking the loan into a first and second mortgage) doesn't sound tempting.   For some, who plan to buy homes that are $600K and above, this will be of benefit as they can get a lower overall mortgage rate than they would have been able to before.  

But the question that begs to be asked is:  Will a good deal now, be a good deal a year from now?

UPDATE #1: The new limits will take affect on March 17th.

UPDATE #2: The new limit (single unit) for Orange County is $729,750 (up from $417,000)

Uncharted Waters

While watching CNBC this morning, one of the commentators made the statement that the dollar is in "Uncharted Waters" right now.  Inflation is on the rise, and the dollar has fallen to a level that has never been seen in this country.  Prices for gas, food, and other goods are on the rise...  However, once we get through this crisis, how much will those prices fall?

Are we there yet?

What's on everyone's mind who wants to either buy or sell a home?  

Are we at the bottom of the market?  

What's interesting is, most people [that I've talked to] who own a home believe we're currently near or at the bottom of the market.  

Most people who are looking to buy a home (myself included) either think we're not at the bottom or just aren't sure.  Analysts say that prices will fall between 20% and 35% by the end of 2009.  

I'd like to take the pulse of the community, and hear what all of you have to say.