About as crazy as ever

[livinincali]

[quote=SD Realtor]Those are good questions Scarlett. I don’t really have many answers for you. Agreed that we have seen strong price recovery, especially over the past 6 months. Yes there are still alot of people underwater but nowhere near as many as there were in 2009. Furthermore that number is being whittled down daily. No the banks are not holding onto foreclosures as well. The supposed tsunami believers who I always said were grasping at straws are totally empty handed. I didn’t quite get your last 3 lines. The low inventory is bad, as bad as it has ever been. Even in the bubble days we didn’t have inventory like this. It becomes challenging for everyone. It makes the decision making process border on irrational for some. Buying becomes fed by fear rather then logic. Appraisals become much harder becaue prices gap up rather then appreciate normally. It is just a situation that most buyers should not participate in unless they are adequately prepared.[/quote]

I don’t think the banks that made loans back in 2005 and 2006 have much to foreclose on anymore. The only private loan I can think of during the bubble years that might not have defaulted yet is the 10 year Option ARM that Wachovia was offering (now it’s Wells). Most of the private sector bubble year loans were 5-7 option ARMs.

Most of the sales in the past 3-4 years are all cash investors (30-40%), FHA/VA (30-40)%, and then traditional 20% down loans (maybe 20ish%). Most of the recent defaults are FHA loans so if your going to see new foreclosure inventory that’s where it’s going to come from. I found this link which indicates 7K FHA loans in San Diego County that have been foreclosed already or are in some stage of foreclosure. Looks like around 300 so far in April.

FHA Foreclosure San Diego

[SD Realtor]

A prime example of the craziness. This was not happening in the prime bubble years.

Intensity Rising

[zk]

[quote=SD Realtor] Yes there are still alot of people underwater but nowhere near as many as there were in 2009. Furthermore that number is being whittled down daily.[/quote]

[quote=utcsox]
JTR had a post yesterday of CV heading for +20%.. Is that fairly close to what you are seeing also? I think the house on the post yesterday is either on Torrey Hills area or Carmel Country Highlands. South of 56, 4+ bedroom with one bedroom down stair.
If this is true, you will not be underwater if you bought it in 2011, 2012 time frame.[/quote]

This is the house JTR was talking about:

http://www.redfin.com/CA/San-Diego/11220-Corte-Belleza-92130/home/6293649

It sold in March ’04 for 1.15M. March ’04 was a bit before the peak, but was fairly close to it, pricewise. So, if they get 1.2, which JTR says on the video he thinks they might, that’s peak pricing.

Here’s another one:

http://www.redfin.com/CA/San-Diego/10777-Spur-Point-Ct-92130/home/6315926

This one sold in Jan ’06 (two months after the peak) for just under 1.2M. The owners upgraded somewhat, and got 1.3M this month. The upgrades might’ve cost 100k, but wouldn’t be worth that much in resale. So, again, we’re at least at peak pricing for this house.

Are these outliers, or are we at peak pricing in Carmel Valley?

SDR, what are you seeing in CV and the other areas you’ve been talking about in regards to current pricing vs. peak pricing?

Once we’re at peak pricing, the only people left underwater are people who borrowed more than their house was ever worth. Are there very many like that?

[bearishgurl]

[quote=livinincali]I don’t think the banks that made loans back in 2005 and 2006 have much to foreclose on anymore. The only private loan I can think of during the bubble years that might not have defaulted yet is the 10 year Option ARM that Wachovia was offering (now it’s Wells). Most of the private sector bubble year loans were 5-7 option ARMs.

Most of the sales in the past 3-4 years are all cash investors (30-40%), FHA/VA (30-40)%, and then traditional 20% down loans (maybe 20ish%). Most of the recent defaults are FHA loans so if your going to see new foreclosure inventory that’s where it’s going to come from. I found this link which indicates 7K FHA loans in San Diego County that have been foreclosed already or are in some stage of foreclosure. Looks like around 300 so far in April.

FHA Foreclosure San Diego[/quote]

Nice link, livinincali, although some of these REO’s may have already been sold (I haven’t checked any MLS aggregators to see). Not sure if they’re all FHA loans, however, as “FHA.com” is not a government agency website.

I perused all five zip codes in Chula Vista on the site and found 44 REOs (SFRs AND condos) with 25 of them currently listed from $91,900 to $704,900.

I also perused same in all three zip codes in El Cajon and found 45 REO’s with 36 currently listed from $67,900 to $599,900.

The large amount of NODs is predictable, but in recent years usually did not result in foreclosure.

What is shocking to me is the HUGE amount of bankruptcy filings (doesn’t say whether Chapter 7 or 13s) in both cities. The vast majority have to be personal (individual and joint) BK filings, because they emanate from SFRs and condos, most of them no doubt from the same addresses (we can’t see exact address, just street) which are currently in default. A lot of home”owners” behind in their payments use a BK filing as a delaying tactic in foreclosure, but in CA, this seldom buys them more than 2 months more occupancy and eff’s up their credit even more.

A spot check in cities all over the county will reveal whether this (BK) phenomenon is widespread or just confined to some cites or communities within the City or County of SD.

If these 44-45 foreclosures in each city I ran a list on are truly FHA (HUD) foreclosures, it is a sad testament to a how the current FHA “guidelines” are way too lax. If this is the case, then all these properties were likely purchased in the last four years. In Chula Vista, the list of 44 REOs reveals that 5 of them (SFRs) are clearly executive-type homes situated in move-up and “luxury” areas.

The FHA has absolutely no business whatsoever “guaranteeing” a mortgage for this type of purchase, IMO. That’s not what the FHA was put in place for. The FHA was formed to serve moderate income purchasers shopping for a roof over their heads, the vast majority being FTB’s buying starter homes and/or in underserved areas.

The current FHA loan “ceiling” of $697,500 for a one-family SFR in SD County is turning out to be a bad joke … as predicted by a few of us here over the years. The joke is on ALL taxpayers, all over the country.

[earlyretirement]

[quote=bearishgurl][quote=livinincali] . . . The fear of inflation and search for yield are significant driving factors in today’s market. There’s plenty of people hiding out in real estate as a safe haven that would probably rather be invested in something else. I honestly think investor speculators looking for yield are probably much weaker hands than traditional owner occupiers. It will be the perfect storm when rates rise. Not only will mortgage rates go up but at the same time those that were looking for yield are going to try to exit.[/quote]

livinincali, I disagree that free-and-clear RE owners are “weaker hands.”

It doesn’t matter that these “investors” were/are seeking yield. If it is not a good time to sell, they don’t have to. If rates go up, they can continue to rent their propertie(s) out in lieu of investing in something more passive. I just don’t see CD’s, MM funds and bond yields going so high as to rival rental income from an investment property purchased right and with all cash.

“Traditional owner occupiers” didn’t buy to “make the numbers work.” They bought what they liked where they personally wanted to live (within the confines of their qualifications).[/quote]

I agree with BG on this point regarding cash buyers. I have a lot of experience dealing with cash buyers. I’ve purchased literally hundreds and hundreds of properties for investors in the past decade (all 100% cash). I’m speaking about hundreds of millions of dollars worth of properties.

These people are NOT “weak hands” for the most part. As BG correctly mentioned, they can ride out any ups OR downs. They aren’t forced to sell. The only few exceptions I’ve seen are people that had major life events that are not in the norm (i.e. finding out they are going to die and want to liquidate to make it easier on their family, major medical illness of them or a spouse/kid/etc, major loss from some uncommon event like their house or business burned down). And out of over 500+ people it’s only been probably 10 that I’ve known that were “forced to sell”.

But these things are VERY rare. Cash buyers are typically the total opposite of “weak hands” that would be forced to sell if prices dipped.

I agree with the various distinctions mentioned of “hedge fund, private equity fund, venture capital, etc”. Many of these funds ARE buying and much of it isn’t leveraged at all.

Also, it’s almost impossible to figure out what % is owner occupied vs. rentals in many cases. Many investors hire third parties to assist them purchase and the properties are put in the buyer’s own name most of the times. You’d think that if you were buying in cash you’d always use an LLC but many people don’t bother with this.

I own several properties in 5 different countries and some of them have had turmoil, high inflation, corrupt leaders and politicians, ups and downs but as a cash buyer I don’t care what happens locally and not having a mortgage I could care less what the “sales value” is. I just ride out any ups and downs and rent it out. Sure, cash flow can be reduced at times but no need to be “forced to sell” being a cash buyer.

I avoid all the “noise” mentioned above and just try to buy in the best areas and typically there is ALWAYS some demand for rentals. My main goal is cash flow not capital appreciation. (sure it’s nice and icing on the cake but that isn’t my goal) and probably it can be said of many cash buyers.

[SD Realtor]

zk I am a bit to busy to go back and gather the data to determine what was peak pricing and then compare it to comps.

I prefer to think of the direct bottom line. Speculating about who is and who is not underwater is useless. People cling to the notion of the underwater inventory for reasons that elude me. Even if there is the vast underwater inventory that these people hope, for the govt has already shown us that there is no moral hazard and that these people will be bailed out through programs already in place.

So what does it matter?

I am seeing exactly what Jim is writing about. It is sheer carnage in the middle pricing tier under 1M.

The only real mystery is why the lack of inventory.

[bearishgurl]

[quote=livinincali]… Most of the sales in the past 3-4 years are all cash investors (30-40%), FHA/VA (30-40)%, and then traditional 20% down loans (maybe 20ish%)…[/quote]

livinincali, I think the “buying pool” in SD County in the last four years was a little stronger than you make it out to be here. I agree with the ~40% cash-buyer part, but do not agree that they were all “investors.” A percentage of this category of buyers – I’ll take a stab at it and say 8% (or 20% of cash purch) paid all cash for a personal residence.

With the other two categories, I think the answer lies somewhere in the middle. I personally know a few people who purchased a residence in SD County in the last four years and they put 25-80% down. Not everyone wants an 80% mortgage. A lot of people who know they will just work a few more years take out a 15 yr mortgage which will yield only as much MID tax writeoff for their current and projected taxable income as they know they will need in the coming years and not a penny more. For a lot of these people, that magic number is somewhere between a $5K and $12K annual interest writeoff. Beyond that size of mortgage, they’re just throwing money away on interest. At the time of retirement from their W-2 job, they typically plan to pay their mortgage balance off and remain in the property or sell their residence and move elsewhere.

So my rough (educated) guess is that the SD County buyer pool in the last ~4 years is comprised of 40% all-cash purchasers, 30% FHA/VA purchasers and 30% conventional purchasers of which 25% (83% of conv purch) put 20-80% down and 5% (17% of conv purch) put <20% down and used PMI.

[livinincali]

[quote=bearishgurl]
The FHA has absolutely no business whatsoever “guaranteeing” a mortgage for this type of purchase, IMO. That’s not what the FHA was put in place for. The FHA was formed to serve moderate income purchasers shopping for a roof over their heads, the vast majority being FTB’s buying starter homes and/or in underserved areas.

The current FHA loan “ceiling” of $697,500 for a one-family SFR in SD County is turning out to be a bad joke … as predicted by a few of us here over the years. The joke is on ALL taxpayers, all over the country.[/quote]

FHA default rates are up around 10% right now. FHA MIP has been skyrocketing as that default rate has increased and FHA reserves have gone negative. The reason FHA got so popular is it was the only high leverage game in town when the bubble popped. The saving rate in the nation is a record lows. At some point you need the underlying economy and wages to push housing up. You can game it high with increasing amounts of leverage and lower rates but that only lasts so long.

That’s why I’m of the belief that right now or in the next year might be a really good time to sell. Almost every market condition in terms of rates, leverage, constrained inventory, etc. is in the sellers advantage right now. You’re looking for an improving wage and employment situation without any impact in rates to really push it higher on fundamentals.

[zk]

[quote=SD Realtor]zk I am a bit to busy to go back and gather the data to determine what was peak pricing and then compare it to comps.

I prefer to think of the direct bottom line. Speculating about who is and who is not underwater is useless. People cling to the notion of the underwater inventory for reasons that elude me. Even if there is the vast underwater inventory that these people hope, for the govt has already shown us that there is no moral hazard and that these people will be bailed out through programs already in place.

So what does it matter?

I am seeing exactly what Jim is writing about. It is sheer carnage in the middle pricing tier under 1M.

The only real mystery is why the lack of inventory.[/quote]

I wasn’t asking you to pull comps. Just your general perception.

I disagree that speculating about who is underwater is useless. I know several people personally (so I’m sure there are a lot of them out there) who would sell if they weren’t under water. Whether it makes sense or not for them to be worried about it in light of the government’s willingness to bail them out is irrelevant. They don’t want to sell until they’re no longer underwater.

I’d be interested to hear other opinions on current market prices vs. peak prices.

[bearishgurl]

[quote=livinincali]FHA default rates are up around 10% right now. FHA MIP has been skyrocketing as that default rate has increased and FHA reserves have gone negative. The reason FHA got so popular is it was the only high leverage game in town when the bubble popped. The saving rate in the nation is a record lows. At some point you need the underlying economy and wages to push housing up. You can game it high with increasing amounts of leverage and lower rates but that only lasts so long.

That’s why I’m of the belief that right now or in the next year might be a really good time to sell. Almost every market condition in terms of rates, leverage, constrained inventory, etc. is in the sellers advantage right now. You’re looking for an improving wage and employment situation without any impact in rates to really push it higher on fundamentals.[/quote]

livinincali, I could understand why the Kansas City market has to cater to “high-leverage” borrowers in most areas there, but I don’t understand why CA coastal markets do. Why do “very desirable” markets with a “captive audience” (such as SD Co) need to cater to “high-leverage” borrowers? Before 2000?, FHA loans only represented <5% of overall purchases in SD County. Back then, the local FHA ceiling was set in line with the likes of SFR pricing in Spring Valley, Lemon Grove (just barely) and other similarly-situated communities in the county .... as it should be.

I don't understand why the ceiling EVER rose beyond $300K in SD County. Certainly, with the recent run-up in local home prices everywhere (2013), $400K should be the current max FHA mortgage available in SD County ... the absolute max. $400K is a HUGE mortgage for a moderate-income buyer.

In a nutshell, why is the FHA attempting to serve households with more than the "average income" in a particular county? It doesn't make sense. That is the sole purpose of fannie, freddie, portfolio lenders and the VA (for eligible vets only, regardless of income). It was never and is not today the FHA's role to provide this level of leverage.

[bearishgurl]

[quote=zk]…I’d be interested to hear other opinions on current market prices vs. peak prices.[/quote]

I agree with SDR that whatever “peak prices” were (during the millenium boom) has no bearing on prices today. The two periods of time are not related. And if they were related, “peak pricing” would be irrelevant as “peak pricing” was only obtained through the copious issuance of NINA mortgages to unqualified buyers.

Even though some homeowners made a (ill-gotten-but-perfectly-legal) killing off the sale of their properties between 2004 and 2006 (to the detriment of their buyers), the sold comps in this period of time should never be “studied” or used again for comparison purposes as they were all derived from “funny money.”

Peak pricing certainly happened but it wasn’t based on reality in any way, shape or form.

If you want to use past sold comps for comparison values, go back to 2002/2003 (depending on area). Homebuyers still had to traditionally qualify for their mortgages up until late 2003/early 2004.

[livinincali]

[quote=bearishgurl] I could understand why the Kansas City market has to cater to “high-leverage” borrowers in most areas there, but I don’t understand why CA coastal markets do. Why do “very desirable” markets with a “captive audience” (such as SD Co) need to cater to “high-leverage” borrowers? Before 2000?, FHA loans only represented <5% of overall purchases in SD County. Back then, the local FHA ceiling was set in line with the likes of SFR pricing in Spring Valley, Lemon Grove (just barely) and other similarly-situated communities in the county .... as it should be.

I don't understand why the ceiling EVER rose beyond $300K in SD County. Certainly, with the recent run-up in local home prices everywhere (2013), $400K should be the current max FHA mortgage available in SD County ... the absolute max. $400K is a HUGE mortgage for a moderate-income buyer.

In a nutshell, why is the FHA attempting to serve households with more than the "average income" in a particular county? It doesn't make sense. That is the sole purpose of fannie, freddie, portfolio lenders and the VA (for eligible vets only, regardless of income). It was never and is not today the FHA's role to provide this level of leverage.[/quote]

The entire bubble was built on increasing the available leverage. Back before 2000 you could save money at a bank by getting 5, 6, 7% CD rates that beat the 3-4% inflation and save your way to a down payment. Real household income was still increasing relative to inflation. Banks kept loans on their own books and actually had to price risk. It was when the banks figured out that they could move the risk onto investors and lie about the credit quality of the borrowers that 0 down came about.

The fed helping to drive investors into higher yielding riskier assets through suppression of rates helped as well. In essence they didn't want you to save, they wanted you to spend to "boast" the economy. It did boast the economy in the short term but now the long term impacts are being felt. People that didn't get into the system before the easy money policy of 2000's have had a hard time building the savings it would take to go back to the old system. Now that we're use to near 0 down it's hard to go back since building savings in ZIRP sucks.

So the people buying the hot markets right now with cash or decent down payments likely are older and enjoyed the benefits of the 1990's or happen to be in the top 20% of income. It will probably stay that way in certain areas of north county coastal for while as a wealthy retirement destination, but I don't expect it to apply to most of San Diego.

[SD Realtor]

zk I don’t think we are at peak pricing but I don’t like to speculate on something that can be verified with data. I know plenty of people who are underwater as well. Again, that is fine anecdotally but it doesn’t matter. Back in 2009 and 2010 there were WAY more people underwater and people who could have bought back then but did not were foolish. However back then we DID know that the govt would backstop the entire real estate market. I posted that routinely as well as argued back then and well before that the tsunami was a pipe dream.

If you think it is relevant then that is okay, we are all entitled to our opinions. Mine is that it absolutely has no bearing on the market and I have been consistent in that opinion.

[zk]

[quote=bearishgurl][quote=zk]…I’d be interested to hear other opinions on current market prices vs. peak prices.[/quote]

I agree with SDR that whatever “peak prices” were (during the millenium boom) has no bearing on prices today. The two periods of time are not related. And if they were related, “peak pricing” would be irrelevant as “peak pricing” was only obtained through the copious issuance of NINA mortgages to unqualified buyers.

Even though some homeowners made a (ill-gotten-but-perfectly-legal) killing off the sale of their properties between 2004 and 2006 (to the detriment of their buyers), the sold comps in this period of time should never be “studied” or used again for comparison purposes as they were all derived from “funny money.”

Peak pricing certainly happened but it wasn’t based on reality in any way, shape or form.

If you want to use past sold comps for comparison values, go back to 2002/2003 (depending on area). Homebuyers still had to traditionally qualify for their mortgages up until late 2003/early 2004.[/quote]

Whether peak pricing was based on reality or not isn’t relevant. What’s relevant, in my opinion, is the restriction on inventory due to underwater potential sellers. And if prices are back at their peak (I’m not saying they are; I’m asking if they are) then there would be very few underwater sellers. Regardless of what peak prices were “based on.” This would remove the restriction (if there is one. I think there is, but I could be wrong) on inventory caused by potential sellers who don’t want to sell if they’re underwater.

Edit: I guess they’d need what they paid (possibly peak) plus 5% or more for real estate commissions.

[outtamojo]

I never could understand this fascination with underwater owners as potential sellers without at the same time attempting to quantify potential buyers who held back/ or are still holding back buying to avoid bubble prices.Seems like they came out to be somewhat of a wash, no?
At this point in time, for those held off buying, the move off the bottom came too quick.
I wonder what the current frenzy will do to the psychology of home buyers/real estate investors. Will they view housing the same way many viewed stocks in the 90’s, buy the dips because prices ALWAYS come back?

[Author]

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