Friday, September 05, 2008

"Some Unsolicited Advice"

From the Sacramento Business Journal:

IndyMac Federal Bank has let go 128 employees from its offices in Rancho Cordova, a figure 70 percent higher than previously reported. Many of the employees have been off work since July, when federal regulators took control of failed IndyMac Bancorp Inc. Some employees were able to work through Friday, closing out files and shutting down the office.
From Mr. Mortgage:
For some reason, as purchase volume is rising sharply Mortgage Insurance volume is plummetting. This is a strange phenomenon. First time home buyers and current renters are not the 20% down crowd but investors/speculators are. For one reason, because most non-owner occupied loan programs require more down payment but many speculators also put more down to try to avoid detection if they are calling the purchase a ‘primary residence’ or ’second/vaction’ home.

We know that 45% of all home purchases in the State of CA were from the foreclosure stock and similar numbers hold true in other bubble states around the nation. The largest sales increases are coming directly from the subprime epicenters such as the Central Valley, Sacramento and the Inland Empire. Could speculators be once again in control of the real estate market? For their sake and ours when these buyers find themselves deeply underwater and amidst plummetting rents in the near future, I hope I am wrong. But the MI readings may show otherwise.

They think they are ’investors’, but I call them ’speculators’ because if they really looked at the micro aspects of the market...they would see they are trying to catch a falling knife. This first group of speculators are likely the old-school real estate folk who feel that if you buy at replacement cost plus land value you can’t go wrong. They can.

I personally know a few of these gamblers with offers out on a dozen homes at any time in the Central Valley. Funny, they have been doing this since last year year and every month prices still fall. They don’t seem to get angry but just keep putting in more offers thinking the values are getting even better. That’s subjective. If rents are falling, mortgage rates rising and underwriting guidelines tightening, then homes are becoming even more expensive even if it is not reflected in the price…yet.
From the Sacramento Bee:
Foreclosures are still rising in the region, meaning the supply of bank-repossessed homes will grow for at least another year. But are the number of defaults finally beginning to level off?

Yes, says Alexis McGee, president of Foreclosures.com, a Fair Oaks Web site for real estate investors. McGee's numbers from Sacramento County show that defaults peaked in April and flattened out in May, June and July.
...
"It looks very stable on the pre-foreclosure front to me," she said. "It does not look like things are getting worse." If so, that's an indicator of some stabilization in this battered real estate market. But it's not a certainty. Even McGee hedges a bit, given the tricks that short-term numbers can play.
Interesting that McGee recently pulled foreclosure statistics off her website.

Over the last few months, I've been wondering why Dennis Wyatt, managing editor of the Manteca Bulletin, seemed to be hawking real estate almost daily from the pages of his newspaper. (For example, is this a news article or an ad for Florsheim Homes?) Today's article helps explain why:
Six months ago today I made a major positive change in my life. I became a homeowner once again.
And a word to the wise for the rest of you bubble sitters:
Now for some unsolicited advice. If you think you want to own a home, don't wait for prices to drop...This is arguably a once in a lifetime opportunity. Do not squander the opportunity by dragging your feet.
From Home Front:
I know the tidal wave is coming, a wave of foreclosures, REOs, and auctions that will likely dwarf the subprime reset. So, I am completely shocked at the number of realty-related talking heads who are staring blank eyed at the masses with giant car-salesmen smiles on their faces saying, "We are almost at the end, the end is in sight, the housing market is stabilizing, etc.." And here is the punch line we all heard 5 years ago, "This is the best time to buy!"

13 comments:

Jacob said...

It looks very stable on the pre-foreclosure front to me

But what level have they stablized at? They are very elevated from historic norms, so even if they don't get worse,things are still really bad until the foreclosures drop.

If you think you want to own a home, don't wait for prices to drop...This is arguably a once in a lifetime opportunity.

A once in a lifetime chance to lose a bunch of money? Nah, I'm sure there will be other opportunities for that. lol

Husmanen said...

Jacob, great comment about there are better ways to lose money.

At least betting on 13 black at the roulette table you have a very low probability to win.

Actually, come to think of it I guess a home purchase now is not like gambling at all, short term at least, because you know it will depreciate.

norcaljeff said...

Interesting that McGee recently pulled foreclosure statistics off her website.

This is an old tactic of Communist dictatorships, and police states. If the facts don't meet your agenda, get rid of the facts. Kinda reminds me of the NAR control of the MLS system.

sacramentia said...

"This first group of speculators are likely the old-school real estate folk who feel that if you buy at replacement cost plus land value you can’t go wrong. They can."

Because it *really* is different this time around. Just like the new economy during the dot com boom, and how real estate always goes up in 2006. Throwing out proven fundamentals and arguing it is different is a good contrarian indicator.

The old rules always matter.

smf said...

Uh-oh...

The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend...

http://news.yahoo.com/s/ap/20080906/ap_on_bi_ge/mortgage_giants_crisis

Yeah, we're close to the bottom...

Diggin Deeper said...

Fannie and Freddie are key to real estate's survival in the US.

Their models and subsequent investments are no different than the likes of Bear Stearns and Lehman Brothers investment models... Leverage, package, re-leverage, re-package, and sell as much as the public will buy.

If a mere 2% of their loans fail and they were leveraged 8-10 times loan values, do the math against a $5-6 Trillion mortgage loan portfolio...If they weren't leveraged (which is unlikely), the number is still 4-5 times more than the initial $25B the Treasury estimated it would take to cure the problem.

Some estimates peg this overall crisis at $1.3-1.6 Trillion, not the chump change estimates of $300-400B we were given at the outset. Add to current budget deficits approaching $500B, and our debt becomes unmanageable by any accounting standards.

Maybe a bottom is near, maybe not, but it doesn't take much to guess that it's not a bottom that's important. It will be the long time it takes for us to put these financial problems behind us...if we ever do.

Patient Renter said...

If you think you want to own a home, don't wait for prices to drop...

I love this statement. It implies that prices will drop but makes a pathetic argument for buying anyways. Seems desparate.

If the facts don't meet your agenda, get rid of the facts.

Yep. And it reminds me of when the CAR changed its affordability formula, which the worthless media has somehow managed to forget about.

anon1137 said...

Re: the number of homes being sold to investors, I think DQ reports statistics on that periodically, so maybe we'll see some solid numbers soon. I think investors are into the foreclosure market in a big way.

McGee has a business interest in getting people interested in foreclosed property so I would keep that in mind whenever she makes predictions.

Re: prime ARM foreclosures, McGee said she thinks many prime borrowers will be able to refi or get loan mods to avoid foreclosure. Dean Baker and Jay Brinkmann gave different views on PBS/NBR last night:

. . . First, adjustable rate mortgages, made to people with poor or sub-prime credit, went bad. Now, delinquencies and foreclosures are hitting borrowers with solid or prime credit, but who took out adjustable rate mortgages with payments that shot higher. Mortgage Bankers Association chief economist Jay Brinkmann says it's those loans that are behind the current rise in foreclosures.

JAY BRINKMANN, CHIEF ECONOMIST, MORTGAGE BANKERS ASSOCIATION: For the first time we have seen that the increase in foreclosures is more heavily weighted toward the prime adjustable rate market, rather than the sub- prime, that the prime ARMs actually were equal to sub-prime fixed rate and sub-prime ARM rate loans combined. . . .

DHUE: One out of 10 borrowers with a prime adjustable rate loan is now either late with their payment or in foreclosure. Economist Dean Baker expects that number to rise as more homeowners see their monthly payments increase and their home values decrease.

DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC & POLICY RESEARCH: People are in a situation where many of them are going to give up in the sense that they realize, you know, they owe $400,000 on a home that's worth $350,000 or $300,000, or in some cases even less. So there's just less incentive for people to try to fight it.

DHUE: And fighting to hold onto their homes may be impossible for the growing number of Americans who are losing their jobs.

sacramentia said...

"If a mere 2% of their loans fail and they were leveraged 8-10 times loan values, do the math against a $5-6 Trillion mortgage loan portfolio...If they weren't leveraged (which is unlikely), the number is still 4-5 times more than the initial $25B the Treasury estimated it would take to cure the problem."

DD- This math makes me think they will just start reducing principal balances on loans to stop the prime borrowers from walking. If you can take a 25% write down on 2% of the portfolio, that would be a much smaller loss than foreclosing. Not to mention the downward pressure that more inventory will put on prices.

The power has shifted now that the banks have more to lose by foreclosure than the borrowers with good jobs who can walk and try again.

Perfect Storm said...

And here is the punch line we all heard 5 years ago, "This is the best time to buy!"

Realtors always say it is the best time to buy. They could care less if they screw someone over.

Were right on track for a 50% decline by 2009.

Diggin Deeper said...

"If you can take a 25% write down on 2% of the portfolio, that would be a much smaller loss than foreclosing."

We're about to find out shortly. Keep in mind that a loss is a loss and does not go away. You cannot arbitrarily take a 25% hit, and say that's it if the mortgage products you've sold go to zero based on leverage.

I'm not so sure that people won't walk anyway. When you leave them with penalties they can easily deal with, why not?

Diggin Deeper said...

Prior to the news, here's an account concerning the Fannie/Freddie Bailout

http://finance.yahoo.com/tech-ticker/article/54394/Report%3A-Treasury-Will-Inject-Capital-Into-Fannie%2C-Freddie

There's little doubt shareholders will lose an additional $10B as both stocks become worthless, not to mention the $Billions that will have to be injected into both entities just to keep their portfolios above water.

This is big news for the overall economy and real estate in general. As we've seen a govt solution nearly always ends up costing multiple times more than initial estimates, and I suspect we'll be walked gently into a huge figure before we're done. I'll multiply any figures given for this bailout by 5 and not be certain it won't go twice that high.

Patient Renter said...

I'll multiply any figures given for this bailout by 5 and not be certain it won't go twice that high.

My feeling right now is that I've given up being angry. We're all going to pay for this dearly, and my only consolation is that for having let it happen, most of us deserve it.