Friday, December 07, 2007

'Would you ruin the economy just to be moral?'

From the Sacramento Bee:

Almost from the start when struggling Dunmore Homes announced in September it was selling its assets to a loan consultant, rumors started in the home building industry that the deal involved an unconventional sales price and had something to do with a big tax refund. The gossip was on the money. The newly sold company filed for Chapter 11 bankruptcy protection in November. Now, documents filed in U.S. Bankruptcy Court in New York show that Sid Dunmore sold his Granite Bay firm to Sacramento-based loan consultant Michael Kane for $500. And there is an expectation that Sid Dunmore will receive an $11.2 million federal tax refund from selling the company his late father founded in 1953.
From the Wall Street Journal's Developments blog:
Median household income in the Sacramento metropolitan area, measured earlier in 2007 by the American Communities Survey, is $56,950. Realistically, if you don’t want to spend more than 33% of your take-home pay on a mortgage and you earn the median, you should pay no more than about $1,570 towards your mortgage and taxes. That caps your mortgage loan at $240,000 (which still leaves you a modest $150 a month to put toward taxes) at a 5.85% interest rate (this week’s going rate for a 30-year fixed). But the median single-family home price in the third quarter was $375,400 in Sacramento. That’s a $135,000 gap. What’s more, the median income to sales price ratio balloons to 6.6 in this equation. There’s nothing affordable about that.

You’d need to have a median income of at least $70,000 — or nearly 25% more than the median — and a 20% down payment to buy the same home in the Sacramento area. This situation plays out in dozens of pockets of the country every day, even as housing prices soften.
From the Modesto Bee:
Levitz is the second Northern San Joaquin Valley home retail store to announce this week that it's closing. On Tuesday, the owners of Youngdale's, a Turlock store that specialized in home appliances, announced they would close within the next month.
From the Redding Record Searchlight (hat tip Suzanne):
Chalk up another casualty to the housing slowdown. 84 Lumber closed its Redding store Wednesday after less than five years in business. The store catered to professional contractors and had five employees.
From the Sacramento Bee:
Q: Will this give a lift to the Sacramento-area real estate market?

A: ...Carey Covey, a Sacramento real estate agent who sells homes repossessed by banks, had one word when asked if the Bush plan will help here: "No." Covey's opinion: "There is a very small percentage of people who are going to be eligible."

Alan Wagner, president-elect of the Sacramento Association of Realtors, worries that borrowers with good credit who got in over their heads still account for more area foreclosures than subprime borrowers. Still, he called the move a "step in the right direction."

Q: Is this a bailout for irresponsible borrowers who took out loans they couldn't afford?

A: There are many who believe that's the case. Bush argued Thursday that no taxpayer funds are involved in this initiative. But many who bought their homes by saving their money, using down payments and getting fixed-rate loans believe a new generation of careless buyers is being rewarded for being foolish.

Lincoln retiree Steven Smith sums up the argument: "My wife and I drive 10-year-old cars, have zero credit card debt, and when we put new flooring in the house, we paid cash. That's what you do. You don't habitually live beyond your means and expect to have a good outcome."

Others, however, contend many borrowers were duped by mortgage lenders who took advantage of their inexperience. They say loan agents inflated their incomes on their applications without their knowledge and told them not to worry: They could refinance into a better loan when the value of their house appreciated – as it certainly would.
From the LA Times:
Ed Skebe of Manhattan Beach would agree that even if some people were duped by shady mortgage brokers or loan officers, many knew they couldn't afford the homes they bought and rolled the dice anyway in hopes that the boom had enough life left to shower them with profits. "They hurt everyone. They drove the prices up," said Skebe, a 61-year-old program manager at an air-freight company, who said the booming housing market prevented him from trading up to a larger home. "It's hard for me to believe that someone didn't realize they couldn't afford a $600,000 home."
From the Vacaville Reporter:
Tim Kearns, owner of Fairfield-based First Priority Financial, said he's seen more adjustable rate mortgages written in the past few years than were necessary. He believes that while the relief plan will help some property owners, it may hurt the housing market overall. "The backlash is that lenders and investors alike will likely be much more skittish about investing in adjustable rate loans in the future," he said.
The average client doesn't go into foreclosure because they don't understand their loan, according to Kearns. "Most people had an assumption that the future was going to be better. They knew the loan would get a lot more pricey. But they thought that would be OK, because hey, real estate always goes up in value. And that's the misnomer they were told."
From the Washington Post:
The agreement has sparked bitterness and anger among those who either sat out the housing boom or endured friends' snickers when they stuck with a traditional mortgage and a smaller house. To some who watched prices rise out of their reach or who moved to cheaper cities, the agreement looks like a penalty for those who didn't gamble. "What about those of us who played by the rules? Can we get six months of free gasoline? Isn't there something for the rest of us?" asked Tim MacKinnon.
From the SF Chronicle:
Despite the fact that the value of his 1955 bungalow has fallen $50,000 to $75,000 from its peak two years ago, Sacramento resident Gene Totten would rather see the housing market correct itself further on its own than see the government step in to halt the freefall. "When you're buying a house, it's a big deal, a big decision, and you need to read the fine print and know what you're getting yourself into," said Totten, an operations manager at a construction company. "I wouldn't consider myself a fiscal conservative politically, but this is tinkering with the free market."
GU Krueger, economist with Irvine's IHP Capital Partners, one of the nation's largest investors in residential development,...brushed aside concerns that the plan rewards irresponsible behavior by both lenders and borrowers. "Now's not the time to be prudent. It's too late for that," he said. "We're all morally outraged over what's happening. But would you ruin the economy just to be moral? What's the point in that?"


Patient Renter said...

Why is it that journalists seem to mistake Realtors (people who sell homes) for housing economists when deciding that it's a good idea to interview Realtors about the state of the housing market? When journalists report data on food prices or cars or many other things, they don't interview grocery store clerks or car dealership salespeople. Last I checked, most Realtors didn't know a damn thing about economics, as their knack for inaccurate housing market predictions would indicate.

Am I missing something?

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...

"The backlash is that lenders and investors alike will likely be much more skittish about investing in adjustable rate loans in the future"

I think the word he's looking for is "decimate". Telling investors, sorry, we're not going to let you have that rate you were expecting when you bought these securities, is going to decimate the secondary market. Anyone who wants to buy a house in the future and doesn't think this "freeze" will not effect them need look no further than that previous sentence.

David said...

Moral? The whole economy isn't moral so what the ????

Diggin Deeper said...

"When journalists report data on food prices or cars or many other things, they don't interview grocery store clerks or car dealership salespeople"

PR.....LOL...but right on the money! Let's not give the media any new idea's now...

sacramentia said...

I love the price reference to Sac market. Now were going to have all these Bay Area people driving up here this weekend looking for $75,000 bungalows to invest in.

anon1137 said...

PR - exact same thing I was thinking when I read the post. The RE agents I've known were as dumb as doorknobs.

Tyrone said...

Here's a typical Realtor response to affordability:
Question: When will the average list prices get in-line with average incomes?For example, you wrote the average price of those duplexes was $381,133. Assuming 20% down, that leaves a loan of $304K. Using 4x gross income as the affordability factor means you need an income of $76K. Does the average person is Sacramento earn $76K? I thought the median income in Sacramento was $42K.
Purva: Maybe never. As long as someone can buy a house at a certain price, that will remain the list price and sold price. The average person does not shop at Nordstroms, for example, but it's still around. Sometimes we get all caught up in averages and statistics when really we need to ask ourselves the question of does it make sense to me?
The ignorance is sickening. Too many realtors refuse to acknowledge it was lax lending standards that drove prices upward. Ability to repay the debt was NOT a consideration. All of those being foreclosed upon arrived at the wrong answer when asking, "does it make sense to me??"

SacramentoCrash said...

What a crock of BS:

Sid sells his company for $500 and gets a $11,200,000 tax refund.

Well duh, he has a $44,000,000 jet plane to pay for!

Did he work as a Mortgage Whore before becoming a DevelopWhore?

From the Bee.

"One people looking at this business deal between Dunmore and Kane are missing the real picture as to what is going on in this $500 transaction. Dunmore is selling his business for $500 because he can then claim a loss versus his familys investment in the company and this is how he is able to get his $11 million tax refund. If he would have sold his $250 million company for what it really is worth, that would have greatly cut down on his tax return, possibly nullifying it altogether.I know this because of being a previous business owner myself. When you sell a corporation, you figure out the taxes owed or refunded based on your total investment into the company while you ran it versus the money you get paid in the sale of it. Sid Dunmore is just a smart businessman used the system setup to his benefit. It is his company and ultimitly he can sell it for what ever he wants too. Dunmore homes will be back."

watchingthebubble said...

Doesn't anybody in the government understand that, no matter how you try to finagle the financing, most of the people who bought these homes probably couldn't afford them?

Unless the holders of mortgage-backed securities are willing to give up some principal in the form of lower prices after the fact, I don't see how freezing the rate on a home that the buyer couldn't afford to begin with is going to keep the buyer in the home. I only have sympathy for owner-occupiers who were defrauded by their mortgage brokers.

Is this a Baby Boomer thing or what -- the inability to comprehend the phrase, "I can't afford it"?

Maybe all the potential homebuyers -- many of whom contribute to this blog -- should form a national homebuyer's cartel. Members would have to pledge, "I will not buy a home that is more than 2.5 times my gross household income."

Regardless of whether current buyers are able to keep their homes with government intervention or not, home prices, at least those in Sacramento, simply cannot be sustained even at their current levels. Nobody's taking a hit on the "I'm going to be priced out forever" bong or drinking the "Real estate always goes up" purple Kool-Aid anymore.

HOUSE2008 said...

I read elsewhere on this site that a previous Broker basically gave the economy three choices

1. Pay for everyone goes up 100%
2. Those crazy loans come back
3. Price of homes drop 50%

Hmmm...My money is on...

Diggin Deeper said...

About a year and half ago, when I started posting on this blog, we had a real estate bubble that was beginning to correct. As months passed, we heard all the commentary, predictions, all the simple-minded answers, most of which were based on some past event or data point that had no no bearing on why we got where we were.

In July of this year things abruptly changed. We're now beginning to see that the real estate bubble was not the cause or root of the problem, but the beneficiary of something that still remains somewhat unknown in scope.

Now we're beginning to see the shadows of a bubble much larger, more pervasive, and far reaching than real estate could hope to achieve. What we do know is that national, state, and local government officials are scrambling because, for the first time since the Depression, "full faith and credit" really doesn't mean that anymore. Credit IS the backbone of this country and debt is it's master...and we've got a ton of both. Have we seen all there is to this issue? Maybe, maybe not.

I've always maintained that the bigger picture will dictate what happens locally. We are seeing price declines escalating as the rest of the economy begins to falter. People are beginning to realize its better to get something if they can... or just get out before the pain gets any worse. Does it make it good time to buy? For some maybe, but for me, I'd really like to know the full scope of this shadow bubble. When it's revealed, culled through, and rebalanced, I'll be a buyer, because a bottom in real estate cannot be far behind.

norcaljeff said...

That WSJ article is excellent, a point we've all tried to make about median income v. median home price. The only issue I have with that is most households have two incomes so if that median income figure only includes one income of the household then you have to account for the spouse’s income. I wouldn't say both make the same incomes but it could impact that $52K figure. I would also argue most people don't have or simply won't put down 20% and that puts a downward pressure on home prices. Can anyone confirm what the median income comprises of?

Also, I hate the argument of people talking high and mighty about paying cash for new flooring or even a home. You can still over pay with cash instead of the banks' money. I mean come on here folks, if you pay $500K cash for a home that is now worth $300K you still LOST $200K in cash. Does it make it better? It might even be more stupid than with credit.

Jacob said...

Well the point about the cash for the floors was that they saved and could afford it.

If you pay 10k cash or finance and pay it off there is no difference, in fact financing is better since you can get 0% interest for a time and still earn interest on your cash.

But if you buy stuff on credit that you can't afford (as many people do) then that is the problem.

Cow_tipping said...

WTF ... why is it runing the economy ??? and again why is it "Lose" a house to foreclosure.
I choose to think of that as gaining a house in my list of bargains ... and economic ruin is only an opportuniy for me to buy cheap with cash and an opportunity to screw china by letting their crap roil in the containers they send them over here ...
BTW a recession or a depression will get factories humming again in the US. See the unemployed RE agents, the flippers and wanna be millionaires have to own up to the fact that they ahve no marketable skills and go to work counting cans in a factory.

Cmyst said...

Norcaljeff -
Per the WSJ article, "Median household income in the Sacramento metropolitan area, measured earlier in 2007 by the American Communities Survey, is $56,950."

norcaljeff said...

I guess that makes sense as long as two single households of $56K don't move in together. :) this makes it even more mindboggling with the number of homes over $500K with those low median incomes.

sacramentia said...

Some median income data (from city-data)

95820 32,300 tahoe park/oak park
95832 34,300 meadowview
95616 51,800 davis
95834 51,900 natomas
95819 70,872 east sac
95630 78,955 folsom
95762 112,800 el dorado hills
95746 106,000 granite bay
95758 92,000 stone lake/elk grove

And then I was wondering what the median asking price is for each of the areas (went with ask since the market is going down)

95820 32,300 199k tahoe park
95832 34,300 255k meadowview
95616 51,800 625k davis
95834 51,900 325k natomas
95819 70,872 495k east sac
95630 78,955 470k folsom
95762 112,800 699k el dorado hills
95746 106,000 985k granite bay
95758 92,000 320k stone lake/elk grove

If you throw out anything over 1.25 M ($1M mortgage+20% down) since you lose the mortgage interest deduction after that and I think the dynamics change.

95762 drops to 669k.
95726 drops to 750k.

The 500k homes are generally in the areas that have higher median incomes than the median for the entire area.