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.

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.

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.

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.

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

Housing Market Watch #11

This is the 11th 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 a newer home located in the city of Harbor City (Los Angeles County) .

The Specs:

Type: SFR Status: Active MLS#: Y803183

Sq. Ft.: 2,057 Lot Size: 3,000 sqft Year Built: 1992

Beds: 4 Baths: 3 Stories: 2 On RedFin: 23 days

Description

THIS IS A *SHORT SALE* SUBJECT TO LENDER'S APPROVAL This is a nice and well-mantained PUD. It does not have HOA! Huge master bathroom with nice jacuzzi tub. Walk in closet in master bedroom *****NO MORE SHOWINGS UNTIL FURTHER NOTICE*****

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Sales History

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Date	Sold Price	$/SqFt	Gross Gain	Change ($)	Change (%)
03/30/94	$290,000	141	N/A	N/A	N/A
06/22/05	$549,000	267	+$259,000	+$259,000	89.31%
10/20/05	$580,000	282	+$290,000	+$31,000	5.65%

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Pricing History

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Date	List Price	$/SqFt	Gross Gain	Change ($)	Change (%)
04/30/08	$380,000	185	-$200,000	-$200,000	34.48%

This episode's seller decided to be aggressive right out of the gate in listing their home. Unfortunately, given the current slow home sales market, and buyers' fear that they too could end up underwater, additional price cuts will likely be necessary to sell this home.

Housing Market Watch #10

This is the 10th 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 prestigious community of Coto De Caza (Orange County) on the golf course with a private pool.

Description

A Beautiful home on the Golf Course the South Court #3 even with the Tee-Box located on a Quiet Single Loaded Street. Very bright and open floorplan with Plantation shutters thru-out. Perfect size Loft area for relaxing or entertaining. Office downstairs has custon built-ins. Stone flooring through out the downstairs. Entertaining backyard with Pool and Spa, Built in BBQ Island and Gas Firepit. Child proof pool gate is removable. A Must See and Priced to sell!

The Specs:

Type: SFR Status: Active MLS#: S523392

Sq. Ft.: 2,200 Lot Size: N/A Year Built: 1997

Beds: 4 Baths: 3 Stories: 2 On RedFin: 92 days

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Sales History

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Date	Sold Price	$/SqFt	Gross Gain	Change ($)	Change (%)
04/03/97	$309,500	141	N/A	N/A	N/A
05/18/98	$399,500	182	+$90,000	+90,000	29.08%
09/21/99	$425,000	193	+$115,500	+25,500	6.38%
04/27/01	$479,000	218	+$169,500	+54,000	12.71%
03/02/07	$810,000	368	+$500,500	+331,000	69.10%
09/18/08	$660,000	300	+$350,500	-150,000	18.52%

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Pricing History

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Date	List Price	$/SqFt	Gross Gain	Change ($)	Change (%)
02/29/08	$839,900	382	+$29,900	+29,900	3.69%
03/18/08	$819,000	372	+$9,000	-20,900	2.49%
04/12/08	$749,000	340	-$61,000	-70,000	8.55%
04/27/08	$709,000	322	-$101,000	-40,000	5.34%

This episode's home is currently listed for 12.47% less than it was purchased for in March 2007. If this home had increased naturally along the mean (4%/year) since it's sale in April 1997, it would be worth approximately $476,000 ($216/sqft), or 32.86% ($233,000) less than its current asking price. If an unwitting buyer were to have purchased this home for the asking price before April 27th, they would have lost $40,000 (5.34%) of real money. To put those savings into perspective, one could purchase a loaded Infiniti FX35! As I've said before, very few areas have remained unaffected by the Great Housing Crisis.

UPDATE 09/18: This property has been sold for $660,000.

California Housing Inventory... the Real Story

Highlights

1. The total loss, over the past 9-months, of most ‘affordable/exotic’ loan programs relied upon so heavily over the past five-years.
   
2. Out-of-control supply with Foreclosure and Bank REO inventory surging to levels that now make the foreclosure market, ‘the real estate market’. In CA in April, 2008 Total Sales equaled 31,250, banks took back 22,328 homes from foreclosure auctions, and Foreclosure Resale’s were 38% of Total Sales. In April 2007, they were 5% of Total Sales.
   
3. The ‘mortgage crisis’ moving up the credit spectrum from subprime to alt-a, and finally to a much larger percentage of the prime market than ever before thought…the latter primarly being due to the ‘negative equity effect’ and what was considered ‘Prime’ over the past five years, being far from it.
   
4. A catastrophic 27% fall in CA median housing prices in the past 11-months, pushing a massive amount of home owners into a negative-equity position and increasing their likelihood of loan default across all borrower types.
   
5. New home buyers not having a large enough down payment or income/credit level to be able to qualify for new-vintage fixed-rate, fully documented mortgages.
   
6. Potential, qualified buyers not being able to sell their present home to raise the down payment; not wanting to rent or yielding enough from renting their present home to buy a new home; or just not wanting to enter the market due to depressed confidence levels. Remember, most home buyers are existing home owners and not first-time home buyers or renters.
   
7. A large percentage of home owner who used second mortgages or high-LTV single-lien financing to avoid a down payment and existing home owners who leveraged-up their homes by pulling cash-out to maximum LTV/CLTV levels having no ‘skin in the game’, defaulting and moving to the rental pool.
   
8. Homes are still too expensive and it is still cheaper to rent in most cases. Buy vs rent ratios are still closer to peak levels than historic norms in many major metropolitan areas around the nation, especially in the bubble states.
   

Housing Crisis Over Seas

Believe it or not, the United States was not alone in the Housing Boom of the new millennium, nor is it alone in its Housing Crisis. Below are two videos (8 minutes in duration each) of news program in Northern Ireland, which is reporting the current housing market conditions there.

Video 1 of 2


Video 2 of 2

Ground Zero

USA Today has called Las Vegas 'mortgage fraud ground zero', and by briefly examining the percentage of total homes in foreclosure there, it's easy to see how they could come to this conclusion. Please read the following quote taken from their article on the subject:

In the shadow of Sunrise Mountain, where Rolling Hills Drive turns into Gold Mine Drive, a plain two-story home sits unoccupied, like thousands of other houses here in southern Nevada.
Some of these empty homes have "for sale" signs. Others bear signs saying "foreclosure." Authorities say hundreds of them, including this one on Rolling Hills Drive, should have a different sign out front, one that reads "fraud."

Prosecutors contend this house was sold last year to a straw buyer as part of a sprawling mortgage fraud perpetrated by a husband-and-wife team involving 277 properties in greater Las Vegas.

Prosecutors have charged Eve Mazzarella, 30, and Steven Grimm, 45, with bank fraud, alleging the two caused banks to make more than $107 million in dubious loans and netted a profit of at least $15 million. Both defendants pleaded not guilty to the charges. A trial has been scheduled for October.

To the untrained eye, the size, scope and sophistication of the alleged scheme is noteworthy. But to the FBI in Las Vegas, the problem is the opposite: In recent years, there have been so many mortgage fraud cases, the bureau and local prosecutors have had to establish a special task force to combat the problem.

Read the full article here.

Homes: Buy One, Get One Free!

As the housing market continues to worsen we'll see more ads from builders and distressed sellers alike to unload their increasingly devalued properties.  The image below is from an actual ad by a builder in Escondido (San Diego County), and is a firm reminder that we are not at the bottom of the market yet.

Below is a direct quote from the advertisement:

Michael Crews Development is offering new, 2000-square foot cityscape row-homes worth $400,000 in Escondido for free -- if you buy one Royal View Estate home in San Pasqual Valley starting at $1.6 million.

Ghost Towns

The decline of home prices seems set to accelerate as the number of vacant homes across the United States has increased by 1 million over the past year, up to a record setting 18.6 million, according to recently released government data.

Below is a quote from the Market Watch article which reported the news:

The vacancy rate for homes usually occupied by the owners rose to a record 2.3 million homes from 2.2 million in the fourth quarter, and was at about 1 million more than was typical before the housing bubble burst.

Analysts say the housing market won't recover until the glut of vacant homes on the market can be worked down. "There is clearly still substantial excess housing supply that will take time to work off," wrote economists for Goldman Sachs. "We think it unlikely that prices begin to stabilize until vacancy rates start declining."
.
.
For all owner-occupied buildings with two to four housing units, 9.4% were vacant, up from 8.1% last quarter. In all owner-occupied buildings with five to nine housing units, the vacancy rate was 15.2%, up from 12.2% last quarter and double the rate of two years earlier.
Vacancy rates in larger condo buildings have fallen from 8.7% a year ago to 6.3%.

My Thoughts

I've read that entire subdivisions in parts of California (Stockton was among the cities mentioned) are literally ghost towns; where no one lives there. It's funny, I've frequently been called a doom sayer for some of my thoughts on this blog. One friend even went so far as to nick name me Dr. Doom; however, the more news like this that comes out, the less I think those comments will be made.

Housing Market Watch #9

This is the nineth 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 located in the city of Camarillo (Ventura County) , and is part 2 of a two part series called Something Old and Something New. Since this home was built in 2006, it should be obvious that it's the Something New. Additionally, if you've been following this series, you'll notice the new layout beginning with this episode.

The Specs:

Type: SFR Status: Active MLS#: 80005721

Sq. Ft.: 1,858 Lot Size: 6,621 sqft Year Built: 2006

Beds: 3 Baths: 3.5 Stories: 2 On RedFin: 69 days

Description

Beautiful Plan II 3 Story townehome in Village at the park. One of the best locations just a few yards from entrance to the new proposed 55 acre park! This is an end unit in a 3-plex, which means lots of light and space around you! Granite countertops, high ceilings, recessed lighting, all bedrooms wired for overhead lights, jacuzzi tub, walk-in closet, fiber optic high speed internet, and lots more!Walking distance to new elementary school and YMCA. Show cold-- It's immaculate.

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Sales History

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Date	Sold Price	$/SqFt	Gross Gain	Change ($)	Change (%)
02/23/06	$557,000	299.78	N/A	N/A	N/A
05/27/08	$442,000	237.89	-$115,000	-115,000	20.65

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Pricing History

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Date	List Price	$/SqFt	Gross Gain	Change ($)	Change (%)
03/20/08	$489,000	263	-$68,000	-$68,000	12.21%
04/18/08	$429,900	231	-$127,100	-$59,100	12.09%

Today's home is currently listed for $127,000 (22.82%) lower than it sold for in February of 2005; thus, it seems the seller has been made very aware that the market is a much different place than the one they bought in. Unfortunately, looking at what's available on the MLS, that home is still priced to sit as opposed to priced to sell.

UPDATE 05/27: This property has been sold for $442,000